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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2002
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
____________.
Commission file number 0-4366
Regan Holding Corp.
(Exact name of registrant as specified in its charter)
California 68-0211359
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2090 Marina Avenue, Petaluma, California 94954
---------------------------------------- -----
(Address of principal executive offices) (ZIP Code)
707-778-8638
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ______
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes _____ No ___X__
Applicable Only To Corporate Issuers:
Indicate the number of shares outstanding of the registrant's common
stock, as of November 11, 2002:
Common Stock-Series A 24,365,000
Common Stock-Series B 569,000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
Assets
Cash and cash equivalents $ 1,870,000 $ 1,376,000
Trading investments 3,859,000 --
Available-for-sale investments 5,354,000 12,571,000
Accounts receivable 2,239,000 2,500,000
Prepaid expenses and deposits 1,963,000 1,057,000
Income taxes receivable 668,000 76,000
------------ ------------
Total current assets 15,953,000 17,580,000
------------ ------------
Net fixed assets 25,951,000 24,047,000
Deferred tax assets 1,723,000 1,529,000
Intangible assets 1,556,000 1,370,000
Other assets 1,612,000 1,501,000
------------ ------------
Total non current assets 30,842,000 28,447,000
------------ ------------
Total assets $ 46,795,000 $ 46,027,000
============ ============
Liabilities, redeemable common stock, and
shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 8,273,000 $ 8,069,000
Loans payable 1,040,000 4,750,000
------------ ------------
Total current liabilities 9,313,000 12,819,000
------------ ------------
Deferred compensation payable 3,862,000 4,356,000
Other liabilities 262,000 222,000
Note payable 7,333,000 --
------------ ------------
Total non current liabilities 11,457,000 4,578,000
------------ ------------
Total liabilities 20,770,000 17,397,000
------------ ------------
Redeemable common stock, Series A and B 10,224,000 11,124,000
------------ ------------
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:
20,495,000 shares and 20,769,000 shares at September 30, 2002
and December 31, 2001 3,324,000 3,596,000
Common stock committed 25,000 25,000
Paid-in capital 6,496,000 6,424,000
Retained earnings 6,026,000 7,405,000
Accumulated other comprehensive income (loss), net (70,000) 56,000
------------ ------------
Total shareholders' equity 15,801,000 17,506,000
------------ ------------
Total liabilities, redeemable common stock, and
shareholders' equity $ 46,795,000 $ 46,027,000
============ ============
See notes to financial statements.
2
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue
Marketing allowances $ 4,602,000 $ 7,303,000 $ 14,657,000 $ 19,600,000
Commissions 3,913,000 4,584,000 12,223,000 13,211,000
Administrative fees 2,904,000 3,119,000 8,691,000 8,854,000
Other income 86,000 102,000 264,000 244,000
------------ ------------ ------------ ------------
Total revenue 11,505,000 15,108,000 35,835,000 41,909,000
------------ ------------ ------------ ------------
Expenses
Selling, general and administrative 10,468,000 11,676,000 32,761,000 35,382,000
Depreciation and amortization 1,129,000 1,249,000 3,218,000 3,627,000
Other 602,000 646,000 2,169,000 2,466,000
------------ ------------ ------------ ------------
Total expenses 12,199,000 13,571,000 38,148,000 41,475,000
------------ ------------ ------------ ------------
Operating income (loss) (694,000) 1,537,000 (2,313,000) 434,000
------------ ------------ ------------ ------------
Other income
Investment income, net 93,000 85,000 490,000 373,000
Interest expense (26,000) (5,000) (60,000) (33,000)
------------ ------------ ------------ ------------
Total other income, net 67,000 80,000 430,000 340,000
------------ ------------ ------------ ------------
Income (Loss) before income taxes (627,000) 1,617,000 (1,883,000) 774,000
Provision for (Benefit from) income taxes (232,000) 638,000 (688,000) 315,000
------------ ------------ ------------ ------------
Net income (loss) $ (395,000) $ 979,000 $ (1,195,000) $ 459,000
============ ============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.02) $ 0.04 $ (0.05) $ 0.01
Weighted average shares outstanding 24,991,000 25,824,000 25,154,000 25,936,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.02) $ 0.03 $ (0.05) $ 0.01
Weighted average shares outstanding 24,991,000 28,725,000 25,154,000 28,928,000
See notes to financial statements.
3
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Series A Common Stock
--------------------- Accumulated
Common Other
Stock Paid-in Retained Comprehensive
Shares Amount Committed Capital Earnings Income (Loss) Total
------ ------ --------- ------- -------- ------------- -----
Balance January 1, 2002 20,769,000 $ 3,596,000 $ 25,000 $ 6,424,000 $ 7,405,000 $ 56,000 $ 17,506,000
Comprehensive losses, net of tax:
Net loss (1,195,000) (1,195,000)
Net unrealized gains
on investments 6,000 6,000
Less: reclassification
adjustment for gains
included in net loss (132,000) (132,000)
------------
Total comprehensive loss (1,321,000)
Retirement upon redemption (274,000) (272,000) 68,000 (184,000) (388,000)
Non-employee stock option
expense 4,000 4,000
---------- ----------- --------- ----------- ----------- --------- -----------
Balance September 30, 2002
(unaudited) 20,495,000 $ 3,324,000 $ 25,000 $ 6,496,000 $ 6,026,000 $ (70,000) $15,801,000
========== =========== ========= =========== =========== ========= ===========
See notes to financial statements.
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Nine Months Ended September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ (1,195,000) $ 459,000
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 3,218,000 3,627,000
Losses on write-off of fixed assets 243,000 341,000
Losses on equity investee -- 709,000
Common stock awarded to producers -- 50,000
Producer stock option expense 4,000 96,000
Amortization/accretion of investments 57,000 9,000
Realized (gains) losses on sales of investments, net (219,000) 138,000
Unrealized losses on trading securities, net 1,226,000 --
Changes in operating assets and liabilities:
Purchases of trading securities (5,381,000) --
Proceeds from sales and maturities of trading securities 318,000 --
Accounts receivable 261,000 304,000
Prepaid expenses and deposits (906,000) 191,000
Income taxes receivable and payable (592,000) 4,083,000
Deferred tax assets (111,000) (116,000)
Accounts payable and accrued liabilities 204,000 (391,000)
Deferred compensation payable (494,000) 584,000
Other operating assets and liabilities (817,000) (632,000)
------------ ------------
Net cash provided by (used in) operating activities (4,184,000) 9,452,000
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (959,000) (7,626,000)
Proceeds from sales and maturities of available-for-sale securities 8,107,000 7,120,000
Purchases of fixed assets (4,580,000) (14,572,000)
Acquisition of prospectdigital assets (225,000) --
Proceeds from qualified intermediary used for building purchase -- 5,750,000
Equity in and advances to investee -- (283,000)
------------ ------------
Net cash provided by (used in) investing activities 2,343,000 (9,611,000)
------------ ------------
Cash flows from financing activities:
Proceeds from loans payable 4,831,000 5,250,000
Payments toward loans payable (8,541,000) (2,765,000)
Proceeds from note payable 7,350,000 --
Payments toward note payable (17,000) --
Repurchases of common stock (1,288,000) (653,000)
------------ ------------
Net cash provided by financing activities 2,335,000 1,832,000
------------ ------------
Net increase in cash and cash equivalents 494,000 1,673,000
Cash and cash equivalents, beginning of period 1,376,000 1,882,000
------------ ------------
Cash and cash equivalents, end of period $ 1,870,000 $ 3,555,000
============ ============
See notes to financial statements.
5
REGAN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in
conformity with accounting principles generally accepted in the United
States of America and include the accounts of Regan Holding Corp. (the
"Company") and its wholly owned subsidiaries. All intercompany transactions
have been eliminated.
The statements are unaudited but reflect all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the Company's consolidated financial
position and results of operations. The results for the three months and
nine months ended September 30, 2002 are not necessarily indicative of the
results to be expected for the entire year. Users of these Consolidated
Financial Statements are encouraged to refer to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 for additional
disclosure. Certain reclassifications have been made to prior year amounts
to conform to the current year presentation.
2. Investments
The Company's investments are classified as either available-for-sale or
trading securities, and are carried at fair value. For available-for-sale
securities, net unrealized gains and losses are reported as a separate
component of shareholders' equity. For trading securities, net unrealized
gains and losses are reported as investment income or loss.
3. Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted Financial Accounting Standards No.
142 ("FAS 142"), Goodwill and Other Intangible Assets. FAS 142 eliminates
the requirement to amortize goodwill and indefinite-lived intangible
assets, addresses the amortization of intangible assets with a defined life
and addresses the impairment testing and recognition for goodwill and
intangible assets. As of September 30, 2002, the balance of intangible
assets included $1.2 million of goodwill that was being amortized over ten
years prior to January 1, 2002. As required by FAS 142, the Company is no
longer amortizing goodwill. The Company completed a transitional goodwill
impairment test during the six months ended June 30, 2002 and determined
that goodwill was not impaired. As required by FAS 142, the Company will
perform an annual goodwill impairment test by December 31, 2002.
The following table provides comparative net income (loss) and earnings
(loss) per share had the non-amortization provision of FAS 142 been adopted
for all periods presented:
For the Three Months For the Nine Months For the Year
Ended Ended Ended
September 30, September 30, December 31,
2002 2001 2002 2001 2001
---- ---- ---- ---- ----
Net income (loss) $ (395,000) $ 979,000 $ (1,195,000) $ 459,000 $ (348,000)
Adjustments:
Goodwill amortization, net of
tax benefit of $13,000,
$39,000, and $52,000 for the
three months ended
September 30, 2001, nine months
ended September 30, 2001 and
year ended December 31, 2001 -- 20,000 -- 59,000 78,000
----------- ---------- ------------ ---------- ----------
Adjusted net income (loss) $ (395,000) $ 999,000 $ (1,195,000) $ 518,000 $ (270,000)
=========== ========== ============ ========== ==========
Basic earnings (loss) per share:
Reported basic earnings (loss)
per share $ (0.02) $ 0.04 $ (0.05) $ 0.01 $ (0.03)
Adjusted basic earnings (loss)
per share $ (0.02) $ 0.04 $ (0.05) $ 0.01 $ (0.03)
Diluted earnings (loss) per share:
Reported diluted earnings (loss)
per share $ (0.02) $ 0.03 $ (0.05) $ 0.01 $ (0.03)
Adjusted diluted earnings (loss)
per share $ (0.02) $ 0.03 $ (0.05) $ 0.01 $ (0.03)
There was no amortization of goodwill for the years ended December 31,
2000 and 1999.
6
4. Acquisition of prospectdigital, LLC
In January 2002, the Company acquired, through its wholly owned subsidiary,
Imagent Online, LLC, the remaining 67% of the outstanding capital of
prospectdigital, LLC for $225,000 in cash. The Company has accounted for
this transaction as a purchase of assets. Prospectdigital is now a wholly
owned subsidiary. The results of prospectdigital's operations have been
included in the Consolidated Financial Statements since the date of
acquisition. Prospectdigital provides an on-line marketing service to
insurance agents and registered representatives selling annuities and life
insurance. To date prospectdigital has had nominal revenue and has used its
capital to develop software to support its business and incur operating
expenses. Prior to the acquisition, the Company owned 33% of
prospectdigital and its investment was accounted for under the equity
method. The Company recorded 98.8% of the losses of prospectdigital to
reflect a hypothetical liquidation at book value at each balance sheet
date. During 2000, the Company loaned $1.1 million to prospectdigital. The
loan bears interest equal to the Prime Rate. In 2001, the Company extended
a $400,000 line of credit to prospectdigital. The line of credit bears
interest at 8.0%. As of the acquisition date, prospectdigital had drawn
$358,000 from the line of credit. Under the terms of the purchase
agreement, prospectdigital remains liable for payment of $1.5 million of
indebtedness, plus accrued interest, to the Company. This amount is
eliminated in consolidation. The Company is required to pay up to $475,000,
based on a percentage of future profits, to the former co-owners after
prospectdigital has earned in excess of $1.5 million, plus accrued interest
on its indebtedness. The fair value of non-cash assets acquired and
liabilities assumed was $940,000 and $350,000.
5. Loans Payable and Note Payable
From time to time, to better manage cash flows, the Company borrows on its
margin account rather than sell securities that are maturing in the short
term. As of September 30, 2002, the Company had $1 million outstanding. The
loans bear interest at 1/2% above the Call Rate, as published in The Wall
Street Journal, and are collateralized by the Company's investment
portfolio.
During 2001, the Company purchased the office building which houses its
headquarters for $10.6 million. In conjunction with the acquisition, the
Company entered into a bridge loan agreement for $4.8 million. In July
2002, the Company replaced the bridge loan with permanent financing in the
amount of $7.4 million. This note is payable over ten years in monthly
installments of principal and interest based on a 25-year term. At the end
of ten years, the Company must pay the balance of principal due on the
note. For the first five years, the interest rate is 6.95%. Thereafter, the
interest rate is equal to LIBOR plus 2.55%, adjusted semi-annually, subject
to a maximum semi-annual 1.00% increase/decrease in the interest rate. The
maximum interest rate is 10.50%.
6. Commitments and Contingencies
The Company is involved in various claims and legal proceedings arising in
the ordinary course of business. Although it is difficult to predict the
ultimate outcome of these claims, management believes, based on discussions
with legal counsel, that the ultimate disposition of these claims will not
have a material adverse effect on its financial condition, cash flows or
results of operations.
7
7. Earnings (Loss) per Share
Per-share
Income/(Loss) Shares Amount
------------- ------ ------
For the three months ended September 30, 2002
Basic and diluted loss available to common
shareholders $ (395,000) 24,991,000 $ (0.02)
For the three months ended September 30, 2001
Income available to common shareholders $ 979,000 25,824,000 $ 0.04
Effect of dilutive securities-- employee and
producer stock options 2,901,000
----------- ---------- -------
Diluted earnings per share $ 979,000 28,725,000 $ 0.03
=========== ========== =======
For the nine months ended September 30, 2002
Basic and diluted loss available to common
shareholders $(1,195,000) 25,154,000 $ (0.05)
=========== ========== =======
For the nine months ended September 30, 2001
Basic earnings per share $ 459,000
Accretion of redeemable common stock (269,000)
-----------
Income available to common shareholders 190,000 25,936,000 $ 0.01
Effect of dilutive securities-- employee and
producer stock options 2,992,000
----------- ---------- -------
Diluted earnings per share $ 190,000 28,928,000 $ 0.01
=========== ========== =======
The diluted loss per share calculations for both the three months and nine
months ended September 30, 2002 exclude antidilutive stock options of 4.1
million.
8
8. Segment Information
Total Revenue Net Income (Loss)
-------------------------------------------------------- -----------------------------------------------------
Three Months Three Months Nine Months Nine Months Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, September 30, September 30, September 30, September 30,
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Legacy Marketing
Group $ 11,033,000 $ 14,730,000 $ 34,446,000 $ 40,706,000 $ (2,000) $ 1,716,000 $ 157,000 $ 2,873,000
Legacy Financial
Services, Inc. 562,000 492,000 1,607,000 1,433,000 (119,000) (268,000) (485,000) (599,000)
Imagent Online, LLC 20,000 -- 61,000 -- (160,000) (110,000) (491,000) (404,000)
Values Financial
Network, Inc. 2,000 17,000 5,000 24,000 (133,000) (207,000) (421,000) (1,025,000)
Other 39,000 32,000 104,000 124,000 19,000 (152,000) 45,000 (386,000)
Intercompany
Eliminations (151,000) (163,000) (388,000) (378,000) -- -- -- --
------------ ------------ ------------ ------------ ----------- ----------- ----------- ----------
Total $ 11,505,000 $ 15,108,000 $ 35,835,000 $ 41,909,000 $ (395,000) $ 979,000 $(1,195,000) $ 459,000
============ ============ ============ ============ =========== =========== =========== =========
Total Assets
----------------------------
September 30, December 31,
2002 2001
---- ----
Legacy Marketing
Group $ 62,238,000 $61,331,000
Legacy Financial
Services, Inc. 1,213,000 1,631,000
Imagent Online, LLC 1,980,000 1,114,000
Values Financial
Network, Inc. 3,906,000 4,012,000
Other 207,000 244,000
Intercompany
Eliminations (22,749,000) (22,305,000)
------------ -----------
Total $ 46,795,000 $ 46,027,000
============ ============
The Legacy Marketing Group business segment includes the results of
selling and administering fixed annuity and life insurance products and general
corporate expenses not allocated to the Company's other segments. Previously,
general corporate expenses were reported as a separate business segment. The
segment disclosure for the three months and nine months ended September 30, 2001
has been restated to reflect the change in the composition of reportable
segments.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain statements contained in this document, including Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of Regan Holding
Corp. and its businesses to be materially different from that expressed or
implied by such forward-looking statements. These risks, uncertainties and
factors include, among other things, the following: general economic and
business conditions; political and social conditions; government regulations,
especially regulations affecting the insurance industry; demographic changes;
the ability to adapt to changes resulting from acquisitions or new ventures; and
various other factors referred to in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Regan Holding Corp. assumes no obligation to update forward-looking
statements to reflect actual results or changes in or additions to the factors
affecting such forward-looking statements.
Regan Holding Corp. Consolidated
We had consolidated net losses of $395,000 during the third quarter of
2002 compared to consolidated net income of $979,000 during the third quarter of
2001. This decrease is primarily due to an operating loss at Legacy Marketing
Group compared to income during the third quarter of 2001, partially offset by
recognition of income in our Other Segments during the third quarter of 2002
compared to losses during the same period in 2001, and decreased losses at
Legacy Financial Services, Inc. For the nine months ended September 30, 2002, we
experienced net losses of $1.2 million compared to net income of $459,000 for
the same period in 2001. This decrease is primarily due to decreased net income
at Legacy Marketing Group, partially offset by decreased losses at Values
Financial Network, Inc. and recognition of income in our Other Segments during
the nine months ended September 30, 2002 compared to losses during the same
period in 2001.
Legacy Marketing Group
During the third quarter of 2002, Legacy Marketing Group ("Legacy
Marketing") had a nominal net loss, compared to net income of $1.7 million
during the third quarter of 2001. For the nine months ended September 30, 2002,
Legacy Marketing had net income of $157,000, compared to net income of $2.9
million during the same period in 2001. These decreases are primarily due to
decreased revenue, partially offset by decreased expenses.
During the third quarter of 2002, Legacy Marketing commissions and
marketing allowances decreased $3.5 million (30%) compared to the third quarter
of 2001, and decreased $6.1 million (19%) during the nine months ended September
30, 2002 compared to the nine months ended September 30, 2001. These decreases
are attributable to a decrease in sales of fixed annuity and life insurance
policies. Administrative fees decreased $215,000 (7%) and $163,000 (2%) during
the three months and nine months ended September 30, 2002 compared to the same
periods in 2001 primarily due to decreased issuing and other fees, partially
offset by increased maintenance fees.
In June 2002, Legacy Marketing entered into marketing and
administrative services agreements with Investors Insurance Corporation ("IIC"),
an unaffiliated insurance carrier. Under these agreements, Legacy Marketing will
sell and administer annuity products on behalf of IIC. Sales on behalf of IIC
began in June 2002 and were nominal through September 30, 2002. During the
second and third quarters of 2002, Legacy Marketing also sold products on behalf
of American National Insurance Company, Transamerica Life Insurance and Annuity
Company, and John Hancock Variable Life Insurance Company.
10
In December 2001, Legacy Marketing began phasing out the marketing of
IL Annuity products. The phase out was completed during the first quarter of
2002. Legacy Marketing continues to administer IL Annuity products.
As indicated below, the agreements with four of our insurance carriers
generated a significant portion of our total consolidated revenue:
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Transamerica 47% 65% 57% 68%
American National 20% 6% 15% 6%
IL Annuity 11% 22% 13% 19%
John Hancock 12% - 8% -
Although Legacy Marketing markets and administers several products on
behalf of several insurance carriers, our consolidated revenues are derived
primarily from sales and administration of annuity products, as indicated below:
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
SelectMark(R) (sold on behalf of Transamerica) 43% 65% 56% 68%
BenchMark(SM) (sold on behalf of American National) 19% 4% 14% 4%
VisionMark(R) (sold on behalf of IL Annuity) 8% 22% 12% 18%
AssureMark(SM) (sold on behalf of John Hancock) 12% - 8% -
Legacy Marketing expenses decreased $852,000 (7%) and $1.6 million (4%)
during the three months and nine months ended September 30, 2002 compared to the
same periods in 2001. The quarter to quarter decreases are primarily due to
decreases in selling, general and administrative expenses. Selling, general and
administrative expenses decreased $831,000 (8%) primarily due to decreases in
compensation due to a lower number of employees, and decreased professional
fees, partially offset by increased sales promotion and support expenses. The
year to date decrease is primarily due to lower selling, general and
administrative expenses. Selling, general and administrative expenses decreased
$1.5 million (5%) primarily due to lower professional fees.
Legacy Financial Services, Inc.
Legacy Financial Services, Inc. ("Legacy Financial") incurred net
losses of $119,000 during the third quarter of 2002 compared to net losses of
$268,000 during the third quarter of 2001. For the nine months ended September
30, 2002, Legacy Financial had net losses of $485,000 compared to net losses of
$599,000 during the same period in 2001. The reduced net losses are primarily
due to increased revenues and decreased expenses.
Legacy Financial revenue increased $70,000 (14%) and $174,000 (12%)
during the three months and nine months ended September 30, 2002 compared to the
same periods in 2001, primarily due to increases in the volume of sales.
11
Legacy Financial expenses decreased $188,000 (20%) and $48,000 (2%)
during the three months and nine months ended September 30, 2002 compared to the
same periods in 2001. The decrease in quarter to quarter expenses is primarily
due lower selling, general and administrative expenses, and other expenses. The
decrease in selling, general and administrative expenses of $119,000 (16%) is
primarily attributable to decreased rent, sales conference expenses,
professional fees, and decreases in compensation due to a lower number of
employees. Other expenses decreased $69,000 (39%) primarily due to increased
intercompany management fees. The lower year to date expenses are primarily due
to decreases in compensation, as discussed above.
Imagent Online, LLC
In January 2002, Imagent Online, LLC, our wholly owned subsidiary,
acquired the remaining 67% of the outstanding capital in prospectdigital, LLC
for $225,000 in cash. We are accounting for this transaction as a purchase of
assets. Prospectdigital is now a wholly owned subsidiary. The results of
prospectdigital's operations have been consolidated in Imagent's financial
statements since that date. Prospectdigital provides an on-line marketing
service to insurance agents and registered representatives selling annuities and
life insurance. To date prospectdigital has had nominal revenue and has used its
capital to develop software to support its business and incur operating
expenses. Prior to the acquisition, Imagent owned 33% of prospectdigital and its
investment was accounted for under the equity method. Imagent recorded 98.8% of
the losses of prospectdigital to reflect a hypothetical liquidation at book
value at each balance sheet date. During 2000, Imagent loaned $1.1 million to
prospectdigital. The loan bears interest equal to the Prime Rate. In 2001,
Imagent extended a $400,000 line of credit to prospectdigital. The line of
credit bears interest at 8.0%. As of the acquisition date, prospectdigital had
drawn $358,000 from the line of credit. Under the terms of the purchase
agreement, prospectdigital remains liable for payment of $1.5 million of
indebtedness, plus accrued interest, to Imagent. This amount is eliminated in
consolidation. Imagent is required to pay up to $475,000, based on a percentage
of future profits, to the former co-owners after prospectdigital has earned in
excess of $1.5 million, plus accrued interest on its indebtedness. The fair
value of non-cash assets acquired and liabilities assumed was $940,000 and
$350,000.
Imagent had net losses of $160,000 during the third quarter of 2002
compared to net losses of $110,000 during the third quarter of 2001. During the
nine months ended September 30, 2002, Imagent incurred net losses of $491,000
compared to net losses of $404,000 during the same period in 2001. The increased
losses are primarily due to increased start-up expenses for prospectdigital.
Values Financial Network, Inc.
Values Financial Network, Inc. incurred net losses of $133,000 during
the third quarter of 2002 compared to net losses of $207,000 during the third
quarter of 2001. During the nine months ended September 30, 2002, Values
Financial Network, Inc. incurred net losses of $421,000 compared to net losses
of $1 million during the same period in 2001. The lower losses are primarily due
to decreases in selling, general and administrative expenses.
Other Segments
During the third quarter of 2002, combined net income from our other
subsidiaries was $19,000, compared to combined net losses of $152,000 during the
third quarter of 2001. For the nine months ended September 30, 2002, combined
net income from our other subsidiaries was $45,000, compared to combined net
losses of $386,000 during the same period in 2001. This favorable year-to-date
change of $431,000 is primarily due to closing the operations of our LifeSurance
Corporation subsidiary in late 2001.
12
Liquidity and Capital Resources
We require cash for the following purposes: (i) to fund operating
expenses, which consist primarily of selling, general and administrative
expenses; (ii) to purchase and develop fixed assets, primarily internal use
software and computer hardware, in order to increase operational efficiency;
(iii) to fund continued product development; and (iv) as a reserve to cover
possible redemptions of certain shares of our common stock, which are redeemable
at the option of the shareholders. Our primary source of cash is cash flows from
operating activities.
Net cash used in operating activities, which includes a series of
transactions involving investment securities, was $4.2 million for the nine
months ended September 30, 2002 compared to net cash provided of $9.5 million
for the same period in 2001. Excluding the effect of these transactions,
discussed below, cash provided by operating activities would have been $879,000.
During 2002, we sold equity securities that were classified as
available-for-sale. The proceeds from these sales are reflected as cash provided
from investing activities. Subsequently, we purchased equity securities that we
classified as trading securities. These purchases are reflected as cash used in
operating activities. Operating cash flows were also affected by decreased
operating results.
Net cash provided by investing activities was $2.3 million, primarily
due to net sales of equity securities as discussed above, offset in part by
development of internal use software and our purchase of prospectdigital.
Excluding the effect of the transactions discussed above, net cash used by
investing activities would have been $2.7 million.
Net cash provided by financing activities was $2.3 million. This was
primarily due to net proceeds from loans, partially offset by repurchases of our
common stock. From time to time, to better manage cash flows, we borrow on our
margin account rather than sell securities that are maturing in the short term.
As of September 30, 2002, we had $1 million outstanding. The loans bear interest
at 1/2% above the Call Rate, as published in The Wall Street Journal, and are
collateralized by our investment portfolio.
During 2001, we purchased the office building which houses our
headquarters for $10.6 million. In conjunction with the acquisition, we entered
into a bridge loan agreement for $4.8 million. In July 2002, we replaced the
bridge loan with permanent financing in the amount of $7.4 million. The note is
payable over ten years in monthly installments of principal and interest based
on a 25-year term. At the end of ten years, we must pay the balance of principal
due on the note. For the first five years, the interest rate is 6.95%.
Thereafter, the interest rate is equal to LIBOR plus 2.55%, adjusted
semi-annually, subject to a maximum semi-annual 1.00% increase/decrease in the
interest rate. The maximum interest rate is 10.50%.
We intend to continue to retain any earnings for use in our business
and do not anticipate paying any cash dividends in the foreseeable future.
We used $4.2 million of cash in our operations during the nine months
ended September 30, 2002 and incurred consolidated net losses of $1.2 million.
If our consolidated net losses continue, or if requests to repurchase redeemable
common stock increase significantly, a cash shortfall could ultimately occur. We
believe that existing cash and investment balances, together with anticipated
cash flow from operations, will provide sufficient funding for the foreseeable
future. However, in the event that a cash shortfall occurred, we believe that
adequate financing could be obtained to meet our cash flow needs. There can be
no assurances
13
that such financing would be available on favorable terms.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures within 90 days
before the filing date of this quarterly report (November 12, 2002). Based on
that evaluation, the Company's management, including the CEO and CFO, concluded
that the Company's disclosure controls and procedures were effective. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to their
evaluation.
14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of our shareholders at
the Annual Meeting of Shareholders held on May 24, 2002:
For Against Abstain/Withheld
--- ------- ----------------
1. Election of five (5) Directors to
hold office until the Annual Meeting
of Shareholders in 2003 and until
their successors are duly elected.
The nominees are listed as follows:
a. Lynda L. Regan 16,352,218 -- 13,099
b. R. Preston Pitts 16,342,092 -- 23,225
c. Ute Scott-Smith 16,233,923 -- 131,394
d. J. Daniel Speight, Jr. 16,178,739 -- 186,578
e. Dr. Donald Ratajczak 16,178,235 -- 187,082
2. Ratification of the appointment of
PricewaterhouseCoopers LLP as the
Company's independent auditors for
the year ended December 31, 2002. 16,275,350 2,609 87,358
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 2002.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAN HOLDING CORP.
Date: November 12, 2002 Signature: /s/ R. Preston Pitts
R. Preston Pitts
President and Chief Operating
Officer
Date: November 12, 2002 Signature: /s/ G. Steven Taylor
G. Steven Taylor
Chief Financial Officer
CERTIFICATIONS
I, Lynda L. Regan, Chief Executive Officer of Regan Holding Corp., certify that:
(1) I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2002 of Regan Holding Corp.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
16
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
(6) The other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Lynda L. Regan
Lynda L. Regan
Chairman and Chief Executive Officer
I, G. Steven Taylor, Chief Financial Officer of Regan Holding Corp., certify
that:
(1) I have reviewed this quarterly report on Form 10-Q for the period
ending September 30, 2002 of Regan Holding Corp.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
(4) The other certifying officer[s] and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The other certifying officer[s] and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
17
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
(6) The other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ G. Steven Taylor
G. Steven Taylor
Chief Financial Officer
18