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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
2090 MARINA AVENUE, PETALUMA, CALIFORNIA 94954
(Address of principal executive offices and Zip Code)
(707) 778-8638
(Registrant's telephone number, including area code)
Securities registered under
Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the common equity was sold, or the average bid and asked prices
of such common equity, as of June 28, 2002.
$23,429,000
There is currently no trading market for the registrant's stock. Accordingly,
the foregoing aggregate market value is as of June 28, 2002 and is based upon
the price at which the registrant has repurchased its stock as of the last
business day of the registrant's most recently completed second fiscal quarter.
As of March 15, 2003, the number of shares outstanding of the registrant's
Series A Common Stock was 24,158,000 and the number of shares outstanding of the
registrant's Series B Common Stock was 560,000. The registrant has no other
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for Regan Holding Corp.'s Annual
Meeting of Stockholders to be held on June 6, 2003 are incorporated by reference
into Part III of this Form 10-K.
2
TABLE OF CONTENTS
Page
Item 1. Description Of Business...........................................................................4
Item 2. Properties........................................................................................7
Item 3. Legal Proceedings.................................................................................7
Item 4. Submission Of Matters To A Vote Of Security Holders...............................................7
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters.............................8
Item 6. Selected Consolidated Financial Data..............................................................8
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations.............8
Item 7a. Quantitative And Qualitative Disclosure About Market Risk........................................19
Item 8. Financial Statements And Supplementary Data......................................................21
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.............44
Item 10. Directors And Executive Officers Of The Company..................................................44
Item 11. Executive Compensation...........................................................................44
Item 12. Security Ownership Of Certain Beneficial Owners And Management...................................44
Item 13. Certain Relationships And Related Transactions...................................................44
Item 14. Controls And Procedures..........................................................................44
Item 15. Exhibits, Financial Statement Schedules, And Reports On Form 8-K.................................45
3
PART I
Item 1. Description of Business
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties that could cause actual results to differ materially.
General Development of Business
Regan Holding Corp. is a non-operating holding company, incorporated in
the State of California, whose primary operating subsidiaries are Legacy
Marketing Group ("Legacy Marketing") and Legacy Financial Services, Inc.
("Legacy Financial"). During 2002, Legacy Marketing generated approximately 95%
of our consolidated revenues. Legacy Marketing designs, markets and administers
fixed annuity products on behalf of certain unaffiliated insurance carriers in
each of the United States, except Alabama and New York, and the District of
Columbia.
Legacy Marketing has marketing agreements with Transamerica Life
Insurance and Annuity Company, American National Insurance Company, John Hancock
Variable Life Insurance Company, and Investors Insurance Corporation. The
marketing agreements grant us the exclusive right to market certain fixed
annuity products issued by these insurance carriers. Fixed annuity products are
insurance products that are sold to purchasers in the form of insurance
policies. Under the terms of these agreements, we are responsible for appointing
independent insurance producers (who we refer to as "Producers") who have
contracted with us to sell fixed annuity products. For these services, the
insurance carriers pay us marketing allowances and commissions based on the
volume of insurance policies placed inforce. We are responsible for paying sales
commissions to the Producers.
Legacy Marketing sells fixed annuity products through a network of
approximately 26,000 Producers, of whom approximately 4,000 generated business
for us during 2002. Each Producer has entered into a non-exclusive agreement
with Legacy Marketing which defines the parties' business relationship. The
agreement may be terminated with up to ninety days prior written notice by
either the Producer or Legacy Marketing, with or without cause.
Our sales network is built on a multi-level structure in which
Producers may sponsor other Producers. Sponsored Producers are referred to as
"downline" Producers within the sponsoring Producer's network. Sponsored
Producers may also sponsor other Producers, creating a hierarchy under the
original sponsoring Producer. The Producer contract contains a nine-level design
in which a Producer may advance from one level to the next based on sales
commission amounts and the size of the Producer's downline network. As a
Producer advances to higher levels within the system, he receives higher
commissions on sales made through his downline network. This creates a financial
incentive for Producers to build a hierarchy of downline Producers, which
contributes to their financial growth and to the growth of Legacy Marketing. If
a Producer leaves the network, his downline can still receive sales commissions.
Advancements to higher levels can occur as often as every three months.
Producers at the highest levels are called "Wholesalers." We had approximately
500 Wholesalers who generated business for Legacy Marketing during 2002.
We provide tools and services that assist Wholesalers with recruiting,
training and support responsibilities associated with the Producers in their
hierarchy. In addition, we assist Producers with programs designed to increase
their sales and better serve their clients. Recruiting and training programs
include visual presentations, product videos and seminars, advertising material
guidelines and sales flip charts. We also produce product information, sales
brochures, pre-approved advertisements and recruiting material.
Legacy Marketing also assists the insurance carriers in product design
and development. Our marketing and actuarial departments work with the insurance
carriers to design proprietary fixed annuity products to be marketed by Legacy
Marketing. All of these products include guarantees for the benefit of
policyholders. Although the guarantees are known as Legacy's Cornerstone
Guarantees, they are guaranteed by the issuing insurance carriers. Legacy's
Cornerstone Guarantees generally include:
o a contractually guaranteed minimum interest rate,
o a contractually guaranteed maximum administrative fee, and
o the ability to allocate among various cash value strategies.
4
In addition to the marketing agreements, Legacy Marketing has
administrative agreements with each of the four insurance carriers listed above
and with IL Annuity and Insurance Company, whose marketing agreement with us
terminated effective during the first quarter of 2002. Under the terms of the
administrative agreements, we provide clerical, administrative and accounting
services with respect to the insurance policies. These services include billing,
collecting and remitting premium for the policies. For providing these services,
the insurance carriers pay us a fee per transaction, with the amount of the fee
depending on the type of policy and type of service. Administrative services
with respect to the insurance policies are performed at our headquarters in
Petaluma, California and at our facilities in Rome, Georgia.
Neither the marketing agreements nor the administrative agreements
prevent us from entering into similar arrangements with other insurance
carriers. However, the marketing agreements with Transamerica and John Hancock,
in general, prevent us from marketing products with other carriers which are
defined as unique and proprietary under the terms of our marketing agreements
with Transamerica and John Hancock.
The marketing agreement with American National expires on November 15,
2007, and the administrative agreement with American National expires on
February 15, 2008. Both agreements may be renewed by mutual agreement for
successive one-year terms. The agreements may be terminated by either party upon
twelve months prior written notice without cause, and may be terminated by
either party immediately for cause. The marketing and administrative agreements
with Transamerica and John Hancock do not have fixed terms but may be terminated
by either party upon twelve months prior written notice without cause, and may
be terminated by either party immediately for cause.
The marketing and administrative agreements with John Hancock were
entered into in January 2001, and we began marketing and administering products
during the fourth quarter of 2001.
In December 2001, Legacy Marketing and IL Annuity agreed that the IL
Annuity product mix being marketed by Legacy Marketing did not provide a
sufficient rate of return to IL Annuity. Accordingly, Legacy Marketing began
phasing out the marketing of IL Annuity products. The phase-out was completed
during the first quarter of 2002. A number of policyholders continue to hold IL
Annuity products, however, which require certain administrative services. Legacy
Marketing continues to administer IL Annuity products under the terms of an
administrative services agreement with IL Annuity and intends to continue doing
so for the foreseeable future.
In June 2002, Legacy Marketing entered into marketing and
administrative services agreements with Investors Insurance Corporation, an
unaffiliated insurance carrier. Under these agreements, Legacy Marketing will
sell and administer annuity products on behalf of Investors Insurance
Corporation. Legacy Marketing has an option to buy Investors Insurance
Corporation within the next five years. Sales on behalf of Investors Insurance
Corporation began in June 2002.
In November 2002, we announced a strategic plan to consolidate the life
and annuity product portfolio marketing business of Legacy Marketing. The
product consolidation will allow Legacy Marketing to focus its resources more
efficiently.
Legacy Marketing discontinued marketing life insurance products issued
by American National effective during the first quarter of 2003. These products
accounted for a nominal amount of revenue during each of the years ending
December 31, 2002, 2001, and 2000. Legacy Marketing will continue to administer
American National life insurance products, including acceptance of renewal
premium. Certain Legacy Marketing employees who were supporting the life
insurance product operations were either terminated or reassigned to other
positions in Legacy Marketing.
In addition, during the first quarter of 2003, Legacy Marketing
discontinued the marketing of several annuity products issued by Transamerica.
Legacy Marketing will continue to administer these annuity products and to
accept additional premium payments, subject to applicable additional deposit
rules for these products. The discontinued products accounted for approximately
31%, 59%, and 45% of our total consolidated revenue for the years ended December
31, 2002, 2001, and 2000. However, our sales of recently introduced Transamerica
products have been strong. Furthermore, sales on behalf of our other carriers
have increased during the two months ended February 28, 2003, and total sales of
annuity products have increased by 26% during this period compared to the same
period in 2002. Legacy Marketing is also developing new products that we expect
will result in increased sales in 2003.
5
Through our wholly-owned broker-dealer subsidiary, Legacy Financial, we
sell variable annuity and life insurance products, mutual funds, and debt and
equity securities. Legacy Financial has entered into sales agreements with
investment companies that give it the non-exclusive right to sell investment
products on behalf of those companies. Sales of investment products are
conducted through Legacy Financial's network of independent registered
representatives (who we refer to as "Representatives"). Under the sales
agreements, we are compensated based upon predetermined percentages of the sales
generated by the Representatives. The agreements may be terminated by either
party upon thirty days prior written notice. During 2002, Legacy Financial
accounted for approximately 5% of our consolidated revenues.
Legacy Financial is registered as a broker-dealer with, and is subject
to regulation by, the SEC, NASD, and Municipal Securities Rulemaking Board. As a
result of federal and state broker-dealer registration and self-regulatory
organization memberships, Legacy Financial is subject to regulation that covers
many aspects of its securities business. This regulation covers matters such as
capital requirements, recordkeeping and reporting requirements, and
employee-related matters, including qualification and licensing of supervisory
and sales personnel. Also, these regulations include supervisory and
organizational procedures intended to ensure compliance with securities laws and
prevent improper trading on material nonpublic information. Rules of the
self-regulatory organizations are designed to promote high standards of
commercial honor and just and equitable principles of trade. A particular focus
of the applicable regulations concerns the relationship between broker-dealers
and their customers. As a result, many aspects of the broker-dealer customer
relationship are subject to regulation, including "suitability" determinations
as to customer transactions, limitations in the amounts that may be charged to
customers, and correspondence with customers.
During 2000, we invested in prospectdigital, LLC, which is developing
an Internet-based customer relationship management product. In January 2002, we
purchased all of the remaining outstanding equity interests in prospectdigital.
Prospectdigital has generated nominal revenues to date.
In December 2000, we acquired the assets and name of Values Financial
Network, Inc. Values Financial Network is engaged in the business of
values-based investment screening, and has generated nominal revenues to date.
Competitive Business Conditions
The annuity business is rapidly evolving and intensely competitive.
Legacy Marketing's primary market is fixed annuities sold through independent
producers. In addition, Legacy Marketing administers the products sold by
Producers on behalf of the issuing insurance carriers. Fixed annuity sales in
the United States were approximately $94 billion in 2002. Some of Legacy
Marketing's top competitors selling fixed annuities through independent sales
channels are Allianz Life of North America, Midland National Life Insurance
Company, American Equity Investment Life, the North American Company for Life
and Health Insurance, the AmerUs Group, and Jackson National Life Insurance
Company. These competitors may have greater financial resources than we do.
However, our business model allows us greater flexibility, as we can adjust the
mix of business sold if one, or more, of our carriers were to experience capital
constraints or other events that effect their business models. They may respond
more quickly than us to new or emerging products and changes in customer
requirements. We are not aware of any significant new means of competition,
products or services that our competitors provide or will soon provide. However,
in the highly competitive fixed annuity marketplace, new distribution models,
product innovations and technological advances may occur at any time and could
present us with competitive challenges. There can be no assurance that we will
be able to compete successfully. In addition, our business model relies on
Producers to effectively market our products competitively. Maintaining
relationships with these Producers requires introducing new products to the
market in an efficient and timely manner, offering competitive commission
schedules, and providing superior marketing, training, and support. In the
recent past, we have been reasonably successful in attracting and retaining
Producers. We are not aware of any top Producers who may discontinue marketing
our products. Due to competition among insurance companies and insurance
marketing organizations for successful producers, there can be no assurance that
we will be able to retain some or all of our top Producers.
Regulatory Environment
State insurance regulations and the National Association of Insurance
Commissioners continually reexamine existing laws and regulations, and may
impose changes in the future that materially adversely affect our business,
results of operations and financial condition. In particular, rate rollback
legislation and legislation to control premiums, policy terminations and other
policy terms may affect the marketability of policies or the amount of premiums
that can be charged for such policies, and thus the commissions we can earn.
Also, recently a committee of Congress has been considering the advisability of
enacting federal statutes providing for the regulation of insurance. Although
there is not yet a specific proposal, additional regulation at the federal level
could also affect
6
our business, results of operations and financial condition. The President of
the United States is currently advocating the establishment of tax-deferred
savings plans which would offer taxpayers the ability to contribute amounts
substantially greater than IRA plans allow. If these plans are enacted, or if
the tax code is revised to reduce the tax-deferred status of annuity products or
to increase the tax-deferred status of competing products, our business could be
adversely impacted because our competitive advantage could be weakened.
Legacy Financial is registered as a broker-dealer with, and is subject
to regulation by, the SEC, NASD, and Municipal Securities Rulemaking Board. This
regulation covers matters such as capital requirements, recordkeeping and
reporting requirements, and employee-related matters, including qualification
and licensing of supervisory and sales personnel. Any proceeding alleging
violation of, or noncompliance with, laws and regulations applicable to us or
our subsidiaries could harm our business, financial condition, results of
operations, and business prospects. In addition, changes in federal legislation,
state legislation, court decisions and administrative policies could
significantly and adversely affect the insurance industry generally and our
business in particular.
Employees
As of February 28, 2003, we employed 502 employees. None of our
employees is represented by a collective bargaining agreement. We consider our
relations with our employees to be good, and we will continue to strive to
provide a positive work environment for our employees.
Financial Information about Segments
The financial information about segments required by Item 101(b) of
Regulation S-K is contained in our financial statements and supplementary data,
Part II, Item 8 of this Form 10-K.
Financial Information about Geographic Areas
During the last three fiscal years, we have not depended on revenue
from sources outside the United States. Also during that time, all long-lived
assets have been located in the United States.
Item 2. Properties
In June 2001, we purchased the building that houses our headquarters
and most of Legacy Marketing's operations in Petaluma, California.
Item 3. Legal Proceedings
We are 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 cases, we believe that the ultimate disposition of these claims
will not have a material adverse effect on our financial condition, cash flows
or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of security holders during the fourth
quarter of 2002.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
As of March 15, 2003, Regan Holding Corp.'s Series A Common Stock was
held by approximately 1,000 shareholders of record and our Series B Common Stock
was held by approximately 10,000 shareholders of record. There is no established
public trading market for our stock.
Our Board of Directors may, at its sole discretion, declare and pay
dividends on common stock, subject to capital and solvency restrictions under
California law. To date, we have not paid any dividends on our common stock. Our
ability to pay dividends is dependent on the ability of our wholly-owned
subsidiaries to pay dividends or make other distributions to us. As of December
31, 2002, we do not anticipate paying dividends on any of our outstanding common
stock in the foreseeable future.
Item 6. Selected Consolidated Financial Data
Year Ended December 31,
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ --------------- --------------- --------------- --------------
Selected Income Statement Data:
Total revenue $ 50,049,000 $ 55,209,000 $ 42,432,000 $50,938,000 $ 46,575,000
Net income (loss) $ (60,000) $ (348,000) $ (3,564,000) $ 3,635,000 $ 9,770,000
Earnings (loss) per share - basic:
Before cumulative effect of accounting
change $ -- $ (0.03) $ (0.15) $ 0.11 $ 0.37
Cumulative effect of accounting change -- -- (0.01) -- --
------------- ------------ ------------ ----------- -----------
$ -- $ (0.03) $ (0.16) $ 0.11 $ 0.37
Earnings (loss) per share - diluted:
Before cumulative effect of accounting
change $ -- $ (0.03) $ (0.15) $ 0.10 $ 0.36
Cumulative effect of accounting change -- -- (0.01) -- --
------------- ------------ ------------ ----------- -----------
$ -- $ (0.03) $ (0.16) $ 0.10 $ 0.36
Selected Balance Sheet Data:
Total assets $ 49,953,000 $ 46,260,000 $ 43,114,000 $47,158,000 $ 31,286,000
Total non current liabilities $ 11,630,000 $ 4,578,000 $ 3,578,000 $ 4,258,000 $ 663,000
Redeemable common stock $ 10,115,000 $ 11,124,000 $ 11,237,000 $11,563,000 $ 11,225,000
Cash dividends declared -- -- -- -- --
Selected Operating Data:
Total fixed premium placed inforce(1) $1.3 billion $1.6 billion $1.1 billion $ 1.6 billion $1.7 billion
Total fixed policies placed inforce(1) 24,000 30,000 20,000 28,000 32,000
Policies maintained at year end 107,000 101,000 89,000 85,000 64,000
(1) When a policyholder remits a premium payment with an accurate and completed
application for an insurance policy, the policy is considered inforce.
Inforce premium and policies are statistics of our carriers but are factors
that directly affect our revenue.
Item 7. 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.
8
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.
General Overview of Our Business
Regan Holding Corp. is a holding company, whose primary operating
subsidiaries are Legacy Marketing and Legacy Financial.
Legacy Marketing designs, markets and administers fixed annuity
products on behalf of certain unaffiliated insurance carriers in each of the
United States, except Alabama and New York, and the District of Columbia. Legacy
Marketing has marketing agreements with Transamerica, American National, John
Hancock, and Investors Insurance Corporation. The marketing agreements grant
Legacy Marketing the exclusive right to market certain fixed annuity products
issued by these insurance carriers. Legacy Marketing is responsible for
appointing independent insurance producers who have contracted with Legacy
Marketing to sell these products. For these services, the insurance carriers pay
Legacy Marketing commissions and marketing allowances.
Legacy Marketing also has administrative agreements with each of the
insurance carriers listed above, and with IL Annuity, whose marketing agreement
with us was terminated effective during the first quarter of 2002. Under the
terms of the administrative agreements, Legacy Marketing provides clerical,
administrative and accounting services with respect to the insurance policies.
For providing these services, the insurance carriers pay Legacy Marketing
administrative fees.
Through our wholly-owned broker-dealer subsidiary, Legacy Financial, we
sell variable annuity and life insurance products, mutual funds, and debt and
equity securities. Sales of investment products are conducted through Legacy
Financial's network of independent registered representatives.
The results of our operations are generally affected by the conditions
that affect other companies that market annuity and life insurance products, and
third-party administrators of those products. These conditions are increased
competition, changes in the regulatory and legislative environments, and changes
in general economic and investment conditions.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results
of Operations is based in large part on the consolidated financial statements of
Regan Holding Corp., which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements. Actual results could differ from those estimates.
Legacy Marketing has marketing and administrative agreements with
certain insurance carriers, listed above. Under the terms of the marketing
agreements, Legacy Marketing is responsible for appointing producers who have
contracted with Legacy Marketing to sell fixed annuity products to the general
public.
Under the terms of the administrative agreements, Legacy Marketing
provides clerical, administrative and accounting services with respect to the
insurance policies. For providing these services, the insurance carriers pay
Legacy Marketing issuing, maintenance, and termination fees on a per transaction
basis, with the amount of the fee depending on the type of policy and type of
service.
There are no significant management judgements associated with
reporting these revenues. When a policyholder remits a premium payment with an
accurate and completed application for an insurance policy, the policy is
considered inforce and Legacy Marketing recognizes marketing allowances and
commission income. Legacy Marketing's carriers grant policyholders a contractual
right to terminate the insurance contract ten to thirty days after a policy is
placed inforce. This return period varies depending on the carrier, the type of
policy and the jurisdiction in which the policy is sold. Legacy Marketing
gathers historical product return data that does not vary significantly from
quarter to quarter, and has historically been predictive of future events.
Returns are estimated using this data and have been reflected in the
Consolidated Financial Statements. Legacy Marketing recognizes administrative
fees on a per transaction basis as services are performed, with the amount of
the fee depending on the type of policy and type of service.
We capitalize external consulting fees, and salaries and benefits for
employees who are directly associated with the development of software for
internal use when both of the following occur:
9
o The preliminary project stage is completed and therefore the
project is in the application development stage; and
o Management authorizes and commits to funding a software project
and it is probable that the project will be completed and the
software will be used to perform the function desired.
Modifications or enhancements made to an existing software product that
result in additional functionality are also capitalized. When the new software
is placed in production, we begin amortizing the asset over its estimated useful
life. Training and maintenance costs are accounted for as expenses as they
occur. We periodically review capitalized internal use software to determine if
the carrying value is fairly stated. If our review determines that future cash
flows related to the software are insufficient, or if new technology indicates
that the value of replacement software is less than our carrying value, we
record an impairment loss.
During 2002, we began an evaluation of an internal use software project
that we initially licensed in 1998. We began this project intending to replace
our administration system after the vendor required us to migrate from the
existing system to an alternative platform. In late 2002, we learned from our
vendor that we might be able to retain our existing system. A financial analysis
completed in February 2003 indicated that staying on the existing system may
provide greater benefit than converting to a new system even after considering
the investment to date. Our evaluation of the new software project, while still
ongoing, is nearing conclusion. Our final decision is dependent upon successful
conclusion of negotiations with our software vendor, allowing us to continue to
use our existing system for an extended period. If we are successful in
favorably concluding our negotiations, we will probably abandon most of the work
associated with the replacement system. To date, we have $4.4 million
capitalized relating to this software. We estimate that approximately $1.2
million of this asset has continuing value and can be used to upgrade our
existing system. If our final decision is to abandon the new software, we expect
to write-off the remaining $3.2 million in the period we make our decision.
We have issued Series A and Series B redeemable common stock to certain
shareholders. We are obligated to repurchase the redeemable common stock at the
current fair market value. Because there is no active trading market for our
stock that would establish market value, our Board of Directors approved a
redemption value of $2.20 per share and $1.82 per share for Series A and Series
B redeemable common stock as of December 31, 2002. This valuation by management
was derived from an independent appraisal of our stock value based on financial
information provided by us.
When we purchased Values Financial Network, Inc. in 2000, part of the
purchase price was for goodwill. Before January 1, 2002, we amortized the
goodwill on a straight-line basis over 10 years, which was its estimated useful
life. Pursuant to Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," we ceased amortizing goodwill on
January 1, 2002 (see Footnote 4 to the financial statements). As required by
SFAS 142, we performed a transitional and annual goodwill impairment test during
2002. The impairment test required by the provisions of SFAS 142 required us to
forecast the discounted value of future cash flows expected to be derived from
Values Financial Network, Inc. During 2002, we revised the business model for
Values Financial Network Inc. to focus on corporate and individual producer
sales. Current projections support the balance of goodwill. When we perform our
2003 annual goodwill impairment analysis, we may conclude that some amount of
goodwill impairment has occurred if revenues do not occur as planned.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
deferred tax assets will, or will not, be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences become deductible. Management
believes it is more likely than not that the deferred tax assets will be
realized.
Investments classified as available-for-sale are periodically reviewed
to determine if declines in fair value below cost are other-than-temporary.
Significant and sustained decreases in quoted market prices, a series of
historical and projected operating losses by the investee or other factors are
considered as part of the review. If the decline in fair value has been
determined to be other-than-temporary, an impairment loss is recorded in
investment income and the individual security is written down to a new cost
basis. During 2001, we determined that certain investment securities had
other-than-temporary declines in fair value below cost. As a result, in 2001 we
recorded impairment losses of $642,000, and the individual securities were
written down to a new cost basis.
10
Regan Holding Corp. Consolidated
Year ended December 31, 2002 compared with year ended December 31, 2001
We had consolidated net losses of $60,000 in 2002, compared to
consolidated net losses of $348,000 in 2001. The improved results are primarily
due to reduced losses at Values Financial Network, Inc. and Legacy Financial,
and the recognition of net income at our Other segments in 2002 compared to net
losses in 2001, partially offset by lower net income at Legacy Marketing.
Year ended December 31, 2001 compared with year ended December 31, 2000
We experienced consolidated net losses of $348,000 in 2001, compared to
consolidated net losses of $3.6 million in 2000. The reduced losses are
attributable to net income at Legacy Marketing during 2001 compared to net
losses during 2000, and reduced net losses at our Other segments, partially
offset by increased losses by Values Financial Network, Inc., Legacy Financial,
and Imagent Online, LLC.
Legacy Marketing
Year ended December 31, 2002 compared with year ended December 31, 2001
During 2002, Legacy Marketing's net income totaled $1.6 million,
compared to net income of $2.8 million during 2001. This decrease of $1.2
million is primarily due to decreased revenues, partially offset by decreased
expenses and the recognition of investment income in 2002 compared to investment
losses in 2001.
Legacy Marketing's revenue decreased $5.6 million (10%) primarily due
to decreased marketing allowances and commission income. Marketing allowances
and commission revenue, combined, decreased $5.9 million (14%) due to a decrease
in sales of fixed annuity and life policies. The sales decrease is primarily due
to a shift in the marketplace toward more traditional fixed income-based
annuities. Administrative fees increased $307,000 (3%) primarily due to an
increase in the number of policies administered year over year, partially offset
by a lower number of policies issued in 2002.
In November 2002, we announced a strategic plan to consolidate the life
and annuity product portfolio marketing business of Legacy Marketing. We believe
this product consolidation will allow Legacy Marketing to focus its resources
more efficiently.
Legacy Marketing discontinued marketing life insurance products issued
by American National effective during the first quarter of 2003. These products
accounted for a nominal amount of revenue during each of the years ending
December 31, 2002, 2001, and 2000. Legacy Marketing will continue to administer
American National life insurance products, including acceptance of renewal
premium. Certain Legacy Marketing employees who were supporting the life
insurance product operations were either terminated or reassigned to other
positions in Legacy Marketing.
In addition, during the first quarter of 2003, Legacy Marketing
discontinued the marketing of several annuity products issued by Transamerica.
Legacy Marketing will continue to administer these annuity products and to
accept additional premium payments, subject to applicable additional deposit
rules for these products. The discontinued products accounted for approximately
31%, 59%, and 45% of our total consolidated revenue for the years ended December
31, 2002, 2001, and 2000. However, our sales of recently introduced Transamerica
products have been strong. Furthermore, sales on behalf of our other carriers
have increased during the two months ended February 28, 2003, and total sales of
annuity products have increased by 26% during this period compared to the same
period in 2002. Legacy Marketing is also developing new products that we expect
to result in increased sales in 2003.
As of December 31, 2002, Legacy Marketing sold products on behalf of
four unaffiliated insurance carriers: Transamerica, American National, John
Hancock and Investors Insurance Corporation. During the first quarter of 2002,
Legacy Marketing ceased selling products on behalf of IL Annuity, as both
parties mutually agreed to terminate their marketing agreement. Legacy Marketing
currently intends to continue to administer IL Annuity products. The agreements
with the following carriers generated a significant portion of the Company's
total consolidated revenue (sales on behalf of Investors Insurance Corporation
began in the second quarter of 2002):
2002 2001
---- ----
Transamerica 52% 68%
American National 17% 5%
IL Annuity 12% 20%
John Hancock 8% -
11
Although Legacy Marketing sells and administers several products on
behalf of the insurance carriers, our consolidated revenues are derived
primarily from sales and administration of the following annuity product series:
2002 2001
---- ----
SelectMark(SM) series (sold on behalf of Transamerica) 51% 67%
BenchMark(SM) series (sold on behalf of American
National) 16% 4%
VisionMark(SM) series (sold on behalf of IL Annuity) 11% 19%
AssureMark(SM) series (sold on behalf of John Hancock) 8% -
We expect that sales of the SelectMark (SM) series sold on behalf of
Transamerica will decrease during 2003, as a result of the product consolidation
discussed above.
Legacy Marketing's expenses decreased $2.9 million (6%) primarily
attributable to decreases in selling, general and administrative expenses.
Selling, general and administrative expenses decreased $2.9 million (7%)
primarily due to decreases in professional fees, commissions, compensation, and
occupancy expenses. Professional fees decreased primarily due to lower
consulting fees related to internal use software maintenance, and reduced legal
expenses. The decrease in commissions was primarily related to lower sales.
Compensation decreased primarily due to the effect of attrition, as Legacy
Marketing's headcount decreased 4% in 2002. The decreased occupancy expense was
primarily a result of our purchasing the building that houses our headquarters,
which resulted in no rent expense after June 2001, partially offset by increased
interest expense from financing the building purchase.
Legacy Marketing recognized investment income of $638,000 in 2002
compared to investment losses of $239,000 in 2001. This shift was primarily
because 2001 included impairment losses of $642,000 related to
other-than-temporary declines in the value of certain investment securities.
Year ended December 31, 2001 compared with year ended December 31, 2000
During 2001, Legacy Marketing's net income totaled $2.8 million,
compared to losses of $1.6 million during 2000, primarily due to increased
revenues partially offset by increased expenses and the recognition of
non-operating losses in 2001 compared to non-operating income in 2000.
Legacy Marketing's revenue increased $14 million (36%) primarily due to
increased marketing allowances, commission income, and administrative fees.
Marketing allowances and commission revenue, combined, increased $12.3 million
(43%) due to an increase in sales of fixed annuity and life policies. The sales
increase was primarily due to: i) favorable market conditions for fixed return
investment products, ii) the implementation of marketing programs designed to
strengthen relationships with existing producers and attract new producers, and,
iii) the introduction of new products and enhancements of existing products.
Administrative fees increased $2.2 million (23%) primarily due to increases in
the number of policies issued and administered.
Legacy Marketing's expenses increased $2.8 million (6%) primarily
attributable to increases in selling, general and administrative expenses,
depreciation and amortization. The increase in selling, general and
administrative expenses of $1.6 million (4%) is primarily due to increases in
compensation, partially offset by decreases in professional fees, sales
promotion and support expenses, and occupancy expenses. Compensation increased
primarily due to the effect of salary increases effective December 2000, and the
addition of employees at higher salary levels. Professional fees decreased
primarily due to lower consulting fees related to internal use software
maintenance. Sales promotion and support expenses decreased primarily due to our
discontinuing a broad-based stock option sales related program in 2001. The
decreased occupancy expense was primarily a result of our purchasing the
building that houses our headquarters, which resulted in no rent expense after
June 2001. Depreciation and amortization expense increased $670,000 (20%)
primarily related to a higher internal use software balance. During 2001, Legacy
Marketing determined that certain investment securities had other-than-temporary
declines in fair value below cost. As a result, Legacy Marketing recorded
impairment losses of $642,000, and the individual securities were written down
to a new cost basis.
12
Legacy Financial
Year ended December 31, 2002 compared with year ended December 31, 2001
Legacy Financial incurred net losses of $595,000 during 2002, compared
to net losses of $837,000 during 2001. The improved results are primarily due to
increased revenues.
Legacy Financial's major source of revenue is commission income, which
is generated through sales of variable life and annuity products, mutual funds,
and debt and equity securities. Levels of commission income are directly related
to the volume of sales of such products. Legacy Financial revenue increased
$387,000 (18%) primarily due to increases in the volume of sales resulting from
a more attractive product mix for Legacy Financial's distribution network of
registered representatives.
Legacy Financial's total expenses were unchanged during 2002 compared
to 2001.
Legacy Financial has incurred cumulative losses since its inception in
1995. We have committed to make sufficient contributions to support Legacy
Financial's operations through February 2004.
Year ended December 31, 2001 compared with year ended December 31, 2000
Legacy Financial incurred net losses of $837,000 during 2001, compared
to net losses of $143,000 during 2000, primarily due to decreased revenues and
increased expenses.
Legacy Financial revenue decreased $829,000 (28%) primarily due to
decreases in the volume of sales resulting from adverse market conditions for
variable investment products.
Legacy Financial's expenses increased $266,000 (8%) primarily due to
increases in selling, general and administrative expenses. Selling, general and
administrative expenses increased $316,000 (11%) primarily attributable to
compensation due to a higher number of employees, and increases in rent and
legal fees, partially offset by decreased sales promotion and support expenses.
Increased rent expense resulted from our sale in December 2000 of the building
that houses Legacy Financial's operations and the subsequent office lease
payments made by Legacy Financial to the new building owner. Legal fees
increased primarily due to higher legal fees associated with litigation in the
normal course of business. Sales promotion and support expenses decreased
primarily due to costs incurred in 2000 to purchase sales leads and the
discontinuance of a broad-based stock option sales incentive program in 2001.
Values Financial Network, Inc.
Year ended December 31, 2002 compared with year ended December 31, 2001
Values Financial Network, Inc. incurred net losses of $520,000 during
2002, compared to net losses of $1.2 million during 2001, primarily due to
reduced expenses partially offset by lower revenues. Total revenues decreased
$38,000 (84%) primarily due to decreased sales leads revenue. Total expenses
decreased $1.2 million (58%) in 2002 primarily resulting from the termination of
employees and decreased IT consulting fees.
Year ended December 31, 2001 compared with year ended December 31, 2000
We purchased Values Financial Network, Inc. in December 2000. During
2001, Values Financial Network incurred net losses of $1.2 million, compared to
net losses of $86,000 during 2000, primarily due to expenses incurred during the
entity's start-up phase.
Imagent Online
In 2000, we purchased, through Imagent Online, a 33.3% ownership
interest in a development stage company named prospectdigital, LLC
("prospectdigital") for $403,000.
In January 2002, we purchased all of the remaining outstanding stock of
prospectdigital for $225,000 in cash, a non-recourse note payable in the amount
of $75,000 and payable out of the future profits of prospectdigital, and
$100,000 of contingent consideration based on future income. Under the terms of
the purchase agreement, prospectdigital remained liable for payment of the $1.5
million indebtedness, plus accrued interest, due to us. Prospectdigital is now a
wholly owned subsidiary, and the results of prospectdigital's operations have
been included in the Consolidated Financial Statements since the date of
acquisition.
13
Year ended December 31, 2002 compared with year ended December 31, 2001
Imagent Online had net losses of $648,000 during 2002, compared to net
losses of $660,000 during 2001. This favorable change of $12,000 is primarily
due to increased revenues at prospectdigital in 2002. As discussed above,
prospectdigital's results of operations are included in the Consolidated
Financial Statements since our acquisition of it in January 2002. Prior to the
acquisition, we accounted for our investment in prospectdigital under the equity
method of accounting. Accordingly, our share of prospectdigital's losses during
2001 and 2000 were included in other expenses. Imagent Online had no revenue in
2001 and 2000, and its expenses primarily consisted of its share of
prospectdigital's losses.
Year ended December 31, 2001 compared with year ended December 31, 2000
Imagent Online recorded net losses of $660,000 during 2001, compared to
net losses of $581,000 during 2000, primarily due to increased equity investment
losses from its investment in prospectdigital.
Other Segments
Year ended December 31, 2002 compared with year ended December 31, 2001
During 2002, combined net income from other entities was $61,000,
compared to combined net losses of $371,000 in 2001. This favorable change of
$432,000 is primarily due to closing the operations of our LifeSurance
Corporation subsidiary in late 2001.
Year ended December 31, 2001 compared with year ended December 31, 2000
During 2001, combined net losses from other entities were $371,000,
compared to combined net losses of $1.1 million in 2000. The reduced net losses
are primarily due to the dissolution of our subsidiary LifeSurance Corporation,
resulting from a plan announced during the first quarter of 2001. All employees
were either terminated or transferred to Legacy Marketing. LifeSurance
Corporation was dissolved in December 2001.
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 provided by operating activities, which includes a series of
transactions where we purchased investment securities, was $410,000 for the year
ended December 31, 2002. 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 improved operating results.
Net cash provided by investing activities was $1.9 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.
Net cash provided by financing activities was $1.1 million. This was
primarily due to net proceeds from loans, partially offset by repurchases of our
common stock. 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 are obligated to
repurchase certain shares of our common stock. At December 31, 2002 and December
31, 2001, the total redemption value of all redeemable common stock outstanding
was $10.1 million and $11.1 million. Cash paid to repurchase some of these
shares totaled $964,000 during 2002, and $500,000 during 2001. As the value of
our common stock rises, our monetary obligation with respect to the redeemable
common stock also increases.
14
We lease office and warehouse premises and certain office equipment
under non-cancelable operating leases. As of December 31, 2002, our total
contractual cash obligations, including the building financing discussed above,
were as follows:
Payments Due by Period
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Contractual
Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Long-Term Debt $7,308,000 $ 109,000 $ 241,000 $279,000 $6,679,000
Operating Leases 2,531,000 1,047,000 1,286,000 198,000 --
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Total Contractual
Cash Obligations $9,839,000 $1,156,000 $1,527,000 $477,000 $6,679,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
In 1998, we entered into an agreement with Lynda L. Regan, Chief
Executive Officer and Chairman of the Board of Directors. Under the terms of
this agreement, in the event of the death of Ms. Regan, we are obligated to
repurchase from Ms. Regan's estate all of the shares of our common stock that
were owned by Ms. Regan at the time of her death or that were transferred by her
to one or more trusts prior to her death. The purchase price to be paid by us
shall be equal to 125% of the fair market value of the shares. The purchase
price was equal to $28 million at December 31, 2002. We have purchased two life
insurance policies with a combined face amount of $29 million for the purpose of
funding this obligation in the event of Ms. Regan's death.
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.
We generated $410,000 and $10.9 million of cash flow from operations in
2002 and 2001. However, if requests to repurchase redeemable common stock
increase significantly, a cash shortfall could ultimately occur. Management
believes 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 were to occur, management
believes that adequate financing could be obtained to meet our cash flow needs.
There can be no assurances that such financing would be available on favorable
terms.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition
for Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002. Our
management anticipates that the implementation of SFAS 146 will not have a
material effect on our consolidated results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others". This interpretation requires
the initial recognition and initial measurement, on a prospective basis only, to
guarantees issued or modified after December 31, 2002. The Company anticipates
that the implementation of this interpretation will not have a material effect
on its 2003 consolidated results of operations or financial position.
RISK FACTORS
RISKS RELATED TO OUR COMPANY
We have experienced losses in recent years and if losses continue, our
business could suffer.
We had a $60,000 net loss for the year ended December 31, 2002, and net
losses of $348,000 and $3.6 million for the years ended December 31, 2001 and
2000. We intend to continue to invest in marketing, operations, technology, and
product development. As a result, we will need to generate increases in revenue
and reduce our operating costs to achieve profitability. If we fail to improve
our operating results, our financial condition and prospects could be weakened.
15
We depend on a limited number of sources for our products, and any
interruption, deterioration, or termination of the relationship with any of our
insurance carriers could be disruptive to our business and harm our results of
operations and financial condition.
Legacy Marketing has marketing agreements with Transamerica Life
Insurance and Annuity Company, American National Insurance Company, John Hancock
Variable Life Insurance Company, and Investors Insurance Corporation. Legacy
Marketing has also entered into administrative agreements with each of the four
insurance carriers, and IL Annuity and Insurance Company, whose marketing
agreement terminated during the first quarter of 2002. During 2002, 52%, 17%,
12%, and 8% of our total consolidated revenue resulted from agreements with
Transamerica, American National, IL Annuity, and John Hancock.
In December 2001, Legacy Marketing and IL Annuity agreed that the IL
Annuity product mix being marketed by Legacy Marketing did not provide a
sufficient rate of return to IL Annuity. Accordingly, Legacy Marketing began
phasing out the marketing of IL Annuity products. The phase-out was completed
during the first quarter of 2002. A number of policyholders continue to hold IL
Annuity products, however, which require certain administrative services. Legacy
Marketing continues to administer IL Annuity products under the terms of an
administrative services agreement with IL Annuity and intends to continue doing
so for the foreseeable future.
In June 2002, Legacy Marketing entered into marketing and
administrative services agreements with Investors Insurance Corporation, an
unaffiliated insurance carrier. Under these agreements, Legacy Marketing will
sell and administer annuity products on behalf of Investors Insurance
Corporation. Legacy Marketing has an option to buy Investors Insurance
Corporation within the next five years. Sales on behalf of Investors Insurance
Corporation began in June 2002.
In November 2002, we announced a strategic plan to consolidate the life
and annuity product portfolio marketing business of Legacy Marketing. We believe
this product consolidation will allow Legacy Marketing to focus its resources
more efficiently.
Legacy Marketing discontinued marketing life insurance products issued
by American National effective during the first quarter of 2003. These products
accounted for a nominal amount of revenue during each of the years ending
December 31, 2002, 2001, and 2000. Legacy Marketing will continue to administer
American National life insurance products, including acceptance of renewal
premium. Certain Legacy Marketing employees who were supporting the life
insurance product operations were either terminated or reassigned to other
positions in Legacy Marketing.
In addition, Legacy Marketing discontinued the marketing of several
annuity products issued by Transamerica during the first quarter of 2003. Legacy
Marketing will continue to administer these annuity products and to accept
additional premium payments, subject to applicable additional deposit rules for
these products. The discontinued products accounted for approximately 31%, 59%,
and 45% of our total consolidated revenue for the years ended December 31, 2002,
2001, and 2000.
The marketing agreement with American National expires November 15,
2007, and the administrative agreement with American National expires on
February 15, 2008. Both agreements may be renewed by mutual agreement for
successive one-year terms. The agreements may be terminated by either party upon
twelve months prior written notice without cause, and may be terminated by
either party immediately for cause. The marketing and administrative agreements
with Transamerica and John Hancock do not have fixed terms but may be terminated
by either party upon twelve months prior written notice without cause, and may
be terminated by either party immediately for cause.
Any interruption, deterioration, or termination of the relationship
with any of our insurance carriers could be disruptive to our business and harm
our results of operations and financial condition.
If we fail to attract and retain key personnel, our business, operating
results, and financial condition could be diminished.
Our success depends largely on the skills, experience and performance
of certain key members of our management. In the recent past, we have been
successful at attracting and retaining key personnel. We have no agreements with
these individuals requiring them to maintain their employment with us. If we
lose one or more of these key employees, particularly Lynda L. Regan, Chairman
of the Board and Chief Executive Officer, or
16
R. Preston Pitts, President, Chief Operating Officer and Secretary, our
business, operating results, and financial condition could be diminished because
we rely on their contacts, insurance carrier and Producer relationships, and
strategic direction to drive our revenues. However, we are not aware of any key
personnel who are planning to retire or leave our company in the near future.
Although we maintain and are the beneficiary of key person life insurance
policies on the lives of Lynda L. Regan and R. Preston Pitts, we do not believe
the proceeds would be adequate to compensate us for their loss.
Our success also depends on our continued ability to attract, retain,
and motivate highly skilled employees. In the recent past, we have been
successful attracting and retaining highly skilled personnel. Competition for
employees in our industry is intense, particularly for personnel with training
and experience. We may be unable to retain our highly skilled employees or to
attract, assimilate, or retain other highly qualified employees in the future.
Our performance will depend on the continued growth of Legacy
Marketing. If Legacy Marketing fails to grow, our financial performance could
suffer.
Our growth is, and for the foreseeable future will continue to be,
dependent on Legacy Marketing's ability to design, market and administer fixed
annuity products. The ability of Legacy Marketing to successfully perform these
services could be affected by many factors, including:
o The ability of Legacy Marketing to recruit, train, and motivate
Producers.
o The degree of market acceptance of the products marketed on behalf of
our insurance carriers.
o The relationship between Legacy Marketing and our insurance carriers.
o The failure of Legacy Marketing to comply with federal, state and
other regulatory requirements applicable to the sale or administration
of insurance products.
o Competition from other financial services companies in the sale and
administration of insurance products.
A large percentage of our revenue is derived from sales of fixed
annuities. The historical crediting rates of fixed annuities are directly
affected by financial market conditions. Changes in market conditions can affect
demand for these annuities. Our future success depends on our ability to
introduce and market new products and services that are financially attractive
and address our customers' changing demands. We may experience difficulties that
delay or prevent the successful design, development, introduction, marketing, or
administration of our products and services. These delays may cause customers to
forego purchases of our products and services and instead purchase those of our
competitors. The failure to be successful in our sales efforts could
significantly decrease our revenue and operating results, resulting in weakened
financial condition and prospects.
We may be unable to effectively fund our working capital requirements,
which could harm our operating results and earnings.
If our cash inflows and existing cash and investments become
insufficient to support future operating requirements or the redemption of our
common stock, we will need to obtain additional funding either by incurring
additional debt or issuing equity to investors in either the public or private
capital markets. Our cash flows are primarily dependent upon the commissions we
receive based on the premium generated from the sale of annuity products that we
sell. The market for these products is extremely competitive. New products are
constantly being developed to replace existing products in the marketplace. If
we are unable to keep pace with the development of such new products, our cash
inflows could decrease. Due to this changing environment in which we operate, we
are unable to predict whether our cash inflows will be sufficient to support
future operating requirements. Our failure to obtain additional funding when
needed could delay new product introduction or business expansion opportunities
which could cause a decrease in our operating results and financial condition.
We are unaware of any material limitations on our ability to obtain additional
funding. If additional funds are raised through the issuance of equity
securities, the ownership percentage of our then-current shareholders would be
reduced. Furthermore, any equity securities issued in the future may have
rights, preferences, or privileges senior to that of our existing common stock.
Significant repurchases of our common stock could materially decrease
our cash position.
17
As of December 31, 2002, we are obligated to redeem 3,822,000 shares of
Series A Common Stock at the option of the holders of these shares. Of the
560,000 shares of Series B Common Stock outstanding, we are obligated to redeem
up to 10% of these shares at the option of the holders of these shares, limited
to a specified twenty-day period each year. The price per share is based on the
estimated fair market value of the stock on the redemption date. The redemption
of all eligible shares during 2003 would require $8.5 million, which would
materially decrease our cash position.
RISKS RELATED TO OUR INDUSTRY
We may not be able to compete successfully with competitors that may
have greater resources than we do.
The annuity business is rapidly evolving and intensely competitive.
Legacy Marketing's primary market is fixed annuities sold through independent
producers. In addition, Legacy Marketing administers the products sold by
Producers on behalf of the issuing insurance carriers. Fixed annuity sales in
the United States were approximately $94 billion in 2002. Some of Legacy
Marketing's top competitors selling fixed annuities through independent sales
channels are Allianz Life of North America, Midland National Life Insurance
Company, American Equity Investment Life, the North American Company for Life
and Health Insurance, the AmerUs Group, and Jackson National Life Insurance
Company. These competitors may have greater financial resources than we do.
However, our business model allows us greater flexibility, as we can adjust the
mix of business sold if one or more of our carriers were to experience capital
constraints or other events that affect their business models. Our competitors
may respond more quickly than us to new or emerging products and changes in
customer requirements. We are not aware of any significant new means of
competition, products or services that our competitors provide or will soon
provide. However, in the highly competitive fixed annuity marketplace, new
distribution models, product innovations and technological advances may occur at
any time and could present us with competitive challenges. There can be no
assurance that we will be able to compete successfully. In addition, our
business model relies on Producers to effectively market our products
competitively. Maintaining relationships with these Producers requires
introducing new products to the market in an efficient and timely manner,
offering competitive commission schedules, and providing superior marketing,
training, and support. In the recent past, we have been reasonably successful in
attracting and retaining Producers. We are not aware of any top Producers who
are planning to discontinue marketing our products. Due to competition among
insurance companies and insurance marketing organizations for successful
producers, there can be no assurance that we will be able to retain some or all
of our top Producers.
We may face increased governmental regulation and legal uncertainties,
which could result in diminished financial performance.
State insurance regulators and the National Association of Insurance
Commissioners continually reexamine existing laws and regulations, and may
impose changes in the future that materially adversely affect our business,
results of operations and financial condition. In particular, rate rollback
legislation and legislation to control premiums, policy terminations and other
policy terms may affect the marketability of policies or the amount of premiums
that can be charged for such policies, and thus the commissions we can earn.
Also, recently a committee of Congress has been considering, in general, the
advisability of enacting federal statutes providing for the regulation of
insurance. Although there is not yet a specific proposal, additional regulation
at the federal level could affect our business, results of operations and
financial condition.
Legacy Financial is registered as a broker-dealer with, and is subject
to regulation by, the SEC, NASD, and Municipal Securities Rulemaking Board. This
regulation covers matters such as capital requirements, recordkeeping and
reporting requirements, and employee-related matters, including qualification
and licensing of supervisory and sales personnel. Any proceeding alleging
violation of, or noncompliance with, laws and regulations applicable to us or
our subsidiaries could harm our business, financial condition, results of
operations, and business prospects. In addition, changes in federal legislation,
state legislation, court decisions and administrative policies could
significantly and adversely affect the insurance industry generally and our
business in particular.
Adverse changes in tax laws could diminish the marketability of most of
our products, resulting in decreased revenue.
Under the Internal Revenue Code of 1986, as amended, income tax payable
by policyholders on investment earnings is deferred during the accumulation
period of most of the annuity products that we market. This favorable income tax
treatment results in our policyholders paying no income tax on their earnings in
the annuity products until they take a cash distribution. We believe that the
tax deferral features contained within the annuity products that we market give
our products a competitive advantage over other non-insurance investment
products where income taxes may be due on current earnings. The President of the
United States is currently advocating the
18
establishment of tax-deferred savings plans which would offer taxpayers the
ability to contribute amounts substantially greater than IRA plans allow. If
these plans are enacted, or if the tax code is revised to reduce the
tax-deferred status of annuity products or to increase the tax-deferred status
of competing products, our business could be adversely impacted because our
competitive advantage could be weakened. In addition, some products that we sell
receive favorable estate tax treatment under the tax code. If the tax code is
revised to change existing estate tax laws, our business could be adversely
affected. We cannot predict other future tax initiatives that the President or
Congress may propose that may affect us.
We operate in an industry in which there is significant risk of
litigation. Substantial claims against us could diminish our financial condition
or results of operations.
As a professional services firm primarily engaged in marketing and
administration of annuity products, we encounter litigation in the normal course
of business. Although it is difficult to predict the ultimate outcome of these
cases, management believes, based on discussions with legal counsel, that the
ultimate disposition of these claims will not have a material adverse effect on
our financial condition, cash flows or results of operations. In addition,
companies in the life insurance industry have been subject to substantial claims
involving sales practices, agent misconduct, failure to properly supervise
agents, and other matters in connection with sales of life insurance, annuities,
and other investment products. Increasingly, these lawsuits have resulted in the
award of substantial judgments, including material amounts of punitive damages
that are disproportionate to the actual damages. In some states juries have
substantial discretion in awarding punitive damages that creates the potential
for material adverse judgments in litigation. If any similar lawsuit or other
litigation is brought against us, such proceedings may materially harm our
business, financial condition, or results of operations.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
Our investments are categorized as trading or available-for-sale
securities.
Investments in fixed income instruments carry a degree of market risk.
Market risk represents the potential for losses due to adverse changes in the
fair market value of financial investments. The market risks faced by us relate
primarily to our investment portfolio, which exposes us to risks related to
interest rates, credit quality and equity prices.
Interest rate risk is the price sensitivity of a fixed income security
to changes in interest rates. The following table provides information about our
fixed income investments, which are sensitive to changes in interest rates.
Listed below are cash flows from principal amounts and related weighted average
interest rates by expected maturity dates for fixed income investments held at
December 31, 2002 and 2001. Actual cash flows could differ from expected
amounts.
Amortized Estimated
December 31, 2002 2003 2004 2005 2006 2007 Thereafter Cost Fair Value
----------------- ---- ---- ---- ---- ---- ---------- ---- ----------
Fixed maturities $4,588,000 $-- $-- $-- $-- $340,000 $4,928,000 $4,890,000
Average interest
rate 4.58% -- -- -- -- 7.03%
Amortized Estimated
December 31, 2001 2002 2003 2004 2005 2006 Thereafter Cost Fair Value
----------------- ---- ---- ---- ---- ---- ---------- ---- ----------
Fixed maturities $515,000 $6,407,000 $417,000 $-- $-- $1,025,000 $8,364,000 $8,243,000
Average interest
rate 4.00% 4.53% 5.10% -- -- 7.03%
We invest in marketable securities which are predominately investment
grade. As a result, we believe we have minimal exposure to credit risk.
Equity price risk is the potential loss arising from changes in the
value of equity securities. In general, equity securities have more year-to-year
price variability than intermediate term high-grade bonds. However, returns over
longer time frames have been consistently higher. Our equity securities consist
primarily of investments in mutual funds. As a result of unfavorable market
conditions related to our mutual fund investments, the fair value of
19
our equity securities is below original cost at December 31, 2002 and 2001. The
original cost and fair values of our marketable equity securities are shown
below:
Original Cost Fair Value
------------- ----------
December 31, 2002 $ 5,295,000 $ 4,261,000
December 31, 2001 $ 5,018,000 $ 4,328,000
All of the above risks are monitored on an ongoing basis. A combination
of in-house review and consultation with our investment broker is used to
analyze individual securities, as well as the entire portfolio.
20
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Regan Holding Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, 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, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. 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 of America, 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 our opinion.
As discussed in Note 1, the Company changed its method of recognizing revenue
for contracts with sales obligation provisions in accordance with Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements, during the
year ended December 31, 2000, and changed its method of accounting for goodwill
and other intangible assets in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, during the year ended
December 31, 2002.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 27, 2003
21
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
2002 2001
------------- ------------
Assets
Cash and cash equivalents $ 4,793,000 $ 1,376,000
Trading investments 4,261,000 -
Available-for-sale investments 4,890,000 12,571,000
Accounts receivable, net of allowance of $702,000 and $348,000 at
December 31, 2002 and 2001 3,180,000 2,733,000
Prepaid expenses and deposits 2,122,000 1,057,000
Income taxes receivable - 76,000
------------- ------------
Total current assets 19,246,000 17,813,000
------------- ------------
Net fixed assets 25,841,000 24,047,000
Deferred tax assets 1,715,000 1,529,000
Goodwill, net 1,170,000 1,170,000
Intangible assets, net 332,000 200,000
Other assets 1,649,000 1,501,000
------------- ------------
Total non current assets 30,707,000 28,447,000
------------ ------------
Total assets $ 49,953,000 $ 46,260,000
============= ============
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 8,812,000 $ 8,302,000
Income taxes payable 2,327,000 --
Loan payable -- 4,750,000
Current portion of note payable 109,000 --
------------- ------------
Total current liabilities 11,248,000 13,052,000
------------- ------------
Deferred compensation payable 4,241,000 4,356,000
Other liabilities 190,000 222,000
Note payable, less current portion 7,199,000 --
------------- ------------
Total non current liabilities 11,630,000 4,578,000
------------- ------------
Total liabilities 22,878,000 17,630,000
------------- ------------
Redeemable common stock, Series A and B 10,115,000 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 and
20,769,000 at December 31, 2002 and 2001 3,324,000 3,596,000
Common stock committed 25,000 25,000
Paid-in capital 6,499,000 6,424,000
Retained earnings 7,135,000 7,405,000
Accumulated other comprehensive income (loss) (23,000) 56,000
------------- ------------
Total shareholders' equity 16,960,000 17,506,000
------------- ------------
Total liabilities, redeemable common stock and shareholders' equity $ 49,953,000 $ 46,260,000
============= ============
See notes to financial statements.
22
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Year Ended December 31,
2002 2001 2000
----------- ----------- -----------
Revenue
Marketing allowances $21,178,000 $25,527,000 $17,525,000
Commissions 16,044,000 17,304,000 13,841,000
Administrative fees 12,007,000 11,700,000 9,550,000
Other income 820,000 678,000 1,516,000
----------- ----------- -----------
Total revenue 50,049,000 55,209,000 42,432,000
----------- ----------- -----------
Expenses
Selling, general and administrative 43,521,000 47,575,000 45,590,000
Depreciation and amortization 4,339,000 4,578,000 3,518,000
Other 2,859,000 3,459,000 2,730,000
----------- ----------- -----------
Total expenses 50,719,000 55,612,000 51,838,000
----------- ----------- -----------
Operating loss (670,000) (403,000) (9,406,000)
Other income (loss)
Investment income (loss), net 652,000 (125,000) 999,000
Interest expense (76,000) (40,000) (260,000)
Gain on sale of building -- -- 3,574,000
----------- ----------- -----------
Total other income (loss) 576,000 (165,000) 4,313,000
Loss before income taxes and cumulative
effect of accounting change (94,000) (568,000) (5,093,000)
Income tax benefit (34,000) (220,000) (1,755,000)
----------- ----------- -----------
Net loss before cumulative effect of accounting
Change (60,000) (348,000) (3,338,000)
Cumulative effect of accounting change, net of tax -- -- (226,000)
----------- ----------- -----------
Net loss $ (60,000) $ (348,000) $(3,564,000)
============ =========== ===========
Basic and diluted loss per share:
Loss before cumulative effect of accounting change $ -- $ (0.01) $ (0.13)
Accretion of redeemable common stock -- (0.02) (0.02)
----------- ----------- -----------
Loss available to common shareholders before
cumulative effect of accounting change -- (0.03) (0.15)
Cumulative effect of accounting change -- -- (0.01)
----------- ----------- -----------
Basic and diluted loss available to common shareholders $ -- $ (0.03) $ (0.16)
=========== =========== ===========
Weighted average shares outstanding 25,093,000 25,861,000 26,238,000
See notes to financial statements.
23
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Series A Common Stock Accumulated
--------------------------------------- Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Committed Capital Earnings Income (Loss) Total
------ ------ ------------ ------- -------- ------------- -----
Balance December 31,
1999 20,863,000 $3,659,000 $ -- $5,204,000 $12,385,000 $ (572,000) $20,676,000
Comprehensive
Loss, net of tax:
Net loss (3,564,000) (3,564,000)
Net unrealized gains
on investments 72,000 72,000
Less:
Reclassification
adjustment for losses
included in net
loss (11,000) (11,000)
-----------
Total comprehensive
loss (3,503,000)
Accretion to
redemption value (495,000) (495,000)
Retirement upon
voluntary
repurchases of
common stock (86,000) (89,000) (82,000) (171,000)
Issuance of common
stock 27,000 26,000 26,000
Common stock committed 66,000 100,000 100,000
Producer stock option
expense 1,114,000 1,114,000
---------- ---------- --------- ----------- ----------- ----------- -----------
Balance December 31,
2000 20,870,000 3,596,000 100,000 6,318,000 8,244,000 (511,000) 17,747,000
Comprehensive income,
net of tax:
Net loss (348,000) (348,000)
Net unrealized gains
on investments 1,036,000 1,036,000
Less:
Reclassification
adjustment for
losses included in
net loss (469,000) (469,000)
-----------
Total comprehensive
income 219,000
Retirement upon
voluntary
repurchases of
common stock (149,000) (150,000) (94,000) (244,000)
Retirement upon
mandatory redemption 10,000 10,000
Accretion to
redemption value (397,000) (397,000)
Issuance of common
Stock committed 33,000 150,000 (150,000) -
Common stock
committed 15,000 75,000 75,000
Producer stock option
expense 96,000 96,000
---------- ---------- --------- ----------- ----------- ----------- -----------
Balance December 31,
2001 20,769,000 3,596,000 25,000 6,424,000 7,405,000 56,000 17,506,000
24
Comprehensive
loss, net of tax:
Net loss (60,000) (60,000)
Net unrealized losses
on investments (211,000) (211,000)
Less:
Reclassification
adjustment for
gains included in
net loss 132,000 132,000
-----------
Total
comprehensive loss (139,000)
Retirement upon
voluntary
repurchases of
common stock (274,000) (272,000) (184,000) (456,000)
Retirement upon
mandatory redemption 71,000 71,000
Accretion to
redemption value (26,000) (26,000)
Producer stock option
expense 4,000 4,000
---------- ---------- --------- ----------- ----------- ----------- -----------
Balance December 31, 2002 20,495,000 $3,324,000 $ 25,000 $ 6,499,000 $7,135,000 $ (23,000) $16,960,000
========== ========== ========= =========== =========== =========== ===========
See notes to financial statements.
25
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Year Ended December 31,
2002 2001 2000
------------- ------------- -----------
Cash flows from operating activities:
Net loss $ (60,000) $ (348,000) $ (3,564,000)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 4,339,000 4,578,000 3,518,000
Loss (gain), on sale or disposal of fixed assets 255,000 381,000 (3,850,000)
Provision for bad debts 393,000 342,000 369,000
Losses on equity investee -- 896,000 721,000
Common stock awarded to non-employees -- 75,000 100,000
Producer stock option expense 4,000 96,000 1,114,000
Investment impairment loss -- 642,000 --
Amortization (accretion) of investments 76,000 47,000 (138,000)
Realized (gains) losses on sales of investments, net (219,000) 138,000 18,000
Unrealized losses on trading securities, net 1,034,000 -- --
Changes in operating assets and liabilities:
Purchases of trading securities, net (5,276,000) -- --
Accounts receivable (840,000) (1,003,000) 200,000
Prepaid expenses and deposits (1,065,000) 236,000 (201,000)
Income taxes receivable and payable 2,403,000 3,585,000 (767,000)
Deferred tax assets (134,000) (133,000) 1,666,000
Accounts payable and accrued liabilities 510,000 15,000 (251,000)
Deferred compensation payable (115,000) 1,359,000 1,632,000
Other operating assets and liabilities (895,000) 14,000 (319,000)
------------- ------------- -----------
Net cash provided by operating activities 410,000 10,920,000 248,000
------------- ------------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (959,000) (10,150,000) (7,687,000)
Proceeds from sales and maturities of available-for-sale
securities 8,633,000 8,049,000 18,415,000
Proceeds from building sale -- -- 8,400,000
Proceeds from (issuance of) note receivable -- 5,750,000 (5,750,000)
Purchases of fixed assets (5,580,000) (16,458,000) (5,635,000)
Acquisition of Values Financial Network assets -- (2,350,000)
Acquisition of prospectdigital assets (225,000) -- --
Equity in and advances to investee -- (358,000) (1,503,000)
------------- ------------- -----------
Net cash provided by (used in) investing activities 1,869,000 (13,167,000) 3,890,000
------------- ------------- -----------
Cash flows from financing activities:
Proceeds from loans payable 5,321,000 5,250,000 4,600,000
Payments toward loans payable (10,071,000) (2,765,000) (6,985,000)
Proceeds from note payable 7,350,000 -- --
Payments toward note payable (42,000) -- --
Repurchases of redeemable common stock (964,000) (500,000) (821,000)
Voluntary repurchases of common stock (456,000) (244,000) (171,000)
Proceeds from stock option exercises -- -- 26,000
------------- ------------- -----------
Net cash provided by (used in) in financing activities 1,138,000 1,741,000 (3,351,000)
------------- ------------- -----------
Net increase (decrease) in cash and cash equivalents 3,417,000 (506,000) 787,000
Cash and cash equivalents, beginning of period 1,376,000 1,882,000 1,095,000
------------- ------------- -----------
Cash and cash equivalents, end of period $ 4,793,000 $ 1,376,000 $ 1,882,000
============= ============= ===========
Supplemental cash flow information:
Taxes Paid $ 7,000 $ 14,000 $ --
Interest Paid $ 411,000 $ 180,000 $ 224,000
See notes to financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGAN HOLDING CORP. AND SUBSIDIARIES
1. Organization and Summary of Significant Accounting Policies
a. Organization
Regan Holding Corp. (the "Company") is a holding company, incorporated
in California in 1990, whose primary operating subsidiaries are Legacy Marketing
Group ("Legacy Marketing") and Legacy Financial Services, Inc. ("Legacy
Financial").
Legacy Marketing has marketing agreements with Transamerica Life
Insurance and Annuity Company ("Transamerica"), American National Insurance
Company ("American National"), John Hancock Variable Life Insurance Company
("John Hancock"), and Investors Insurance Corporation (the "carriers"). During
2002, Legacy Marketing terminated its marketing agreement with IL Annuity and
Insurance Company ("IL Annuity"). The marketing agreements grant Legacy
Marketing the exclusive right to market certain fixed annuity products issued by
the carriers (the "policies"). In addition, Legacy Marketing is responsible for
appointing independent insurance producers who contract with Legacy Marketing to
sell policies. The highest producers are referred to as wholesalers. For
providing these services, the carriers pay Legacy Marketing commissions and
marketing allowances.
Legacy Marketing also has administrative agreements with the carriers
(including IL Annuity) pursuant to which Legacy Marketing provides clerical,
administrative, and accounting services with respect to the policies. These
services include billing, collecting and remitting premium for the policies. For
providing these services, the carriers pay Legacy Marketing administrative fees.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial,
the Company sells variable annuity and life insurance products, mutual funds and
debt and equity securities. Legacy Financial has entered into sales agreements
with investment companies that give it the non-exclusive right to sell
investment products on behalf of those companies. Sales of investment products
are conducted through Legacy Financial's network of independent registered
representatives.
b. Basis of Presentation
The 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. and its subsidiaries after
elimination of intercompany accounts and transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
c. Revenue Recognition
When a policyholder remits a premium payment with an accurate and
completed application for an insurance policy, the policy is considered inforce
and Legacy Marketing recognizes marketing allowances and commission income.
Legacy Marketing's carriers grant policyholders a contractual right to terminate
the insurance contract ten to thirty days after a policy is placed inforce. This
return period varies depending on the carrier, the type of policy and the
jurisdiction in which the policy is sold. Legacy Marketing gathers historical
product return data that does not vary significantly from quarter to quarter,
and has historically been predictive of future events. Returns are estimated
using this data and have been reflected in the Consolidated Financial
Statements. Legacy Marketing recognizes administrative fees on a per transaction
basis as services are performed, with the amount of the fee depending on the
type of policy and type of service.
27
Legacy Financial recognizes commission revenue when clients remit
payment with a signed and completed variable annuity or investment contract.
Under the terms of the sales agreements between Legacy Financial and various
investment companies, Legacy Financial is compensated based upon predetermined
percentages of actual sales levels.
Effective January 1, 2000, the Company changed its revenue recognition
policy in order to comply with SEC Staff Accounting Bulletin No. 101 with
respect to a production premium deficiency requirement under one of its
marketing agreements. This change is reflected in the statement of operations as
a cumulative effect of accounting change of $226,000, net of taxes of $149,000,
during the year ended December 31, 2000.
d. Cash and Cash Equivalents
Cash and cash equivalents include marketable securities with an
original maturity of ninety days or less.
e. Investments
The Company's investments are classified as available-for-sale or
trading securities and are carried at fair value. For available-for-sale
securities, unrealized gains and losses, net of the related tax effect, are
reported as a separate component of shareholders' equity. For trading
securities, unrealized gains and losses are reported in Selling, general and
administrative expenses.
Premiums and discounts are amortized or accreted over the life of the
related investment as an adjustment to yield using the effective interest
method. Interest income is recognized when earned. Realized gains and losses on
sales of investments are recognized in the period sold using the specific
identification method for determining cost.
Investments classified as available-for-sale are periodically reviewed
to determine if declines in fair value below cost are other-than-temporary.
Significant and sustained decreases in quoted market prices, a series of
historical and projected operating losses by the investee or other factors are
considered as part of the review. If the decline in fair value has been
determined to be other-than-temporary, an impairment loss is recorded in
Investment income and the individual security is written down to a new cost
basis.
f. Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation and
amortization. The Company capitalizes consulting fees, and salaries and benefits
for employees who are directly associated with the development of software for
internal use when both of the following occur:
o The preliminary project stage is completed and therefore the
project is in the application development stage; and
o Management authorizes and commits to funding a software
project and it is probable that the project will be completed
and the software will be used to perform the function desired.
Modifications or enhancements made to an existing software product that
result in additional functionality are also capitalized. When the new software
is placed in production, we begin amortizing the asset over its estimated useful
life. Training and maintenance costs are accounted for as expenses as they
occur.
Depreciation is computed using the straight-line method over the
estimated useful life of each type of asset, as follows:
Computer hardware and purchased software 3-5 years
Internal use software development costs 3-5 years
Leasehold improvements 2-10 years
Furniture and equipment 5 years
Building 40 years
28
g. Goodwill and Other Intangible Assets
Goodwill and Other Intangible assets were acquired in the Company's
purchase of Values Financial Network, Inc. in 2000 and prospectdigital, LLC in
2002. Prior to January 1, 2002, goodwill was amortized on a straight-line basis
over 10 years, which is its estimated useful life. Pursuant to Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," the Company ceased amortizing goodwill beginning January 1,
2002 (see Note 4). As required by SFAS 142, the Company performed a transitional
and annual goodwill impairment test during 2002, and determined that goodwill
was not impaired. Intangible assets are amortized on a straight-line basis over
their estimated useful lives of 5 years.
h. Impairment of Long-Lived Assets
In accordance with Statement of Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
reviews long-lived assets and intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable. Measurement of the impairment of long-lived assets is based upon
management's estimate of undiscounted future cash flows. We periodically review
capitalized internal use software to determine if the carrying value is fairly
stated. If our review determines that future cash flows directly related to the
software or the business unit of which it is a part, as applicable, are
insufficient, or if new technology indicates that the value of replacement
software is less than our carrying value, we record an impairment loss. If
software in development is abandoned, the Company takes a charge to write off
the capitalized amount in the period the decision is made to abandon it.
i. Redeemable Common Stock
Redeemable common stock is carried at the greater of the issuance value
or the redemption value. Periodic adjustments to reflect increases or decreases
in redemption value are recorded as accretion, with an offsetting adjustment to
retained earnings.
j. Income Taxes
The Company provides deferred taxes based on the enacted tax rates in
effect on the dates temporary differences between the book and the tax bases of
assets and liabilities reverse.
k. Stock Options
At December 31, 2002, the Company has a stock-based employee
compensation plan (see Note 12) and accounts for this plan under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in net loss, as all options
granted under the plan had an exercise price equal to the fair market value of
the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:
2002 2001 2000
---- ---- ----
Net loss, as reported: $ (60,000) $(348,000) $(3,564,000)
Deduct: Total stock-based employee
compensation expense
determined under fair value method for all
awards, net of related tax effects (478,000) (411,000) (414,000)
--------- --------- -----------
Pro forma net loss $(538,000) $(759,000) $(3,978,000)
Basic and diluted loss per share:
As reported $ - $ (0.03) $ (0.16)
Pro forma $ (0.02) $ (0.04) $ (0.17)
29
The fair value of the employee option grants for pro forma disclosure purposes
was estimated using the minimum value method, with the following assumptions:
2002 2001 2000
------------ ------------ --------
Risk-free interest rates 4.08%-4.52% 4.50%-4.88% 5.92%-6.67%
Expected life 4 years 3-5 years 3-5 years
Dividend yield None None None
l. Accounting Pronouncement to be Adopted Subsequent to December 31, 2002
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies
Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition
for Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002. The
Company's management anticipates that the implementation of SFAS 146 will not
have a material effect on its consolidated results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others". This interpretation requires
the initial recognition and initial measurement, on a prospective basis only, to
guarantees issued or modified after December 31, 2002. The Company anticipates
that the implementation of this interpretation will not have a material effect
on its 2003 consolidated results of operations or financial position.
2. Investments
Maturity in years:
-------------------------------------------------------------------------
1 to 5 5 to 10 Longer Than
Years Years 10 Years Other Total
---------- ----------- ---------- ---------- -----------
December 31, 2002
Corporate bonds $4,588,000 $ -- $ 340,000 $ -- $ 4,928,000
Mutual funds -- -- -- 5,295,000 5,295,000
---------- ----------- ---------- ---------- -----------
Amortized cost 4,588,000 -- 340,000 5,295,000 10,223,000
Gross unrealized gains 4,000 -- -- -- 4,000
Gross unrealized losses -- -- (42,000) (1,034,000) (1,076,000)
---------- ----------- ---------- ---------- -----------
Fair value $4,592,000 $ -- $ 298,000 $4,261,000 $ 9,151,000
========== =========== ========== ========== ===========
December 31, 2001
Corporate bonds $7,339,000 $ -- $1,025,000 $ -- $ 8,364,000
Mutual funds -- -- -- 4,376,000 4,376,000
---------- ----------- ---------- ---------- -----------
Amortized cost 7,339,000 -- 1,025,000 4,376,000 12,740,000
Gross unrealized gains 8,000 -- -- -- 8,000
Gross unrealized losses -- -- (129,000) (48,000) (177,000)
---------- ----------- ---------- ---------- -----------
Fair value $7,347,000 $ -- $ 896,000 $4,328,000 $12,571,000
========== =========== ========== ========== ===========
2002 2001 2000
----------- ---------- ----------
Gross realized gains $ 281,000 $ 92,000 $ 144,000
Gross realized losses $ (62,000) $ (230,000) $ (162,000)
During 2001, the Company determined that certain investment securities
had other-than-temporary declines in fair value below cost. As a result, the
Company recorded impairment losses of $642,000, and the individual securities
were written down to a new cost basis.
30
3. Fixed Assets
December 31,
-------------------------
2002 2001
------------ -----------
Computer hardware and purchased
software $ 7,796,000 $ 7,340,000
Internal use software development costs 16,345,000 10,996,000
Leasehold improvements 1,324,000 1,260,000
Furniture and equipment 3,169,000 3,174,000
Building 7,798,000 7,780,000
Land 2,703,000 2,689,000
------------ -----------
39,135,000 33,239,000
Accumulated depreciation and amortization (13,294,000) (9,192,000)
------------ -----------
Total $ 25,841,000 $24,047,000
============ ===========
4. Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted SFAS 142, which 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 December 31, 2002, the balance of intangible assets included $1.2
million of goodwill related to the Company's purchase of Values Financial
Network, Inc. in December 2000 that was being amortized over ten years prior to
January 1, 2002. As required by SFAS 142, the Company is no longer amortizing
goodwill. The Company completed a transitional and annual goodwill impairment
test during the six months ended June 30, 2002 and year ended December 31, 2002
and determined that goodwill was not impaired.
The following table provides comparative net loss and loss per share
had the non-amortization provision of SFAS 142 been adopted for all periods
presented:
For the Year Ended December 31,
-------------------------------
2002 2001
---- ----
Net loss $(60,000) $(348,000)
Adjustments:
Goodwill amortization, net of tax benefit
of $- and $52,000 for years
ended December 31, 2002 and 2001 - 78,000
-------------------------------
Adjusted net loss $(60,000) $(270,000)
===============================
Reported basic and diluted loss per share $ - $ (0.03)
Adjusted basic and diluted loss per share $ - $ (0.03)
There was no amortization of goodwill for the year ended December 31,
2000, and the carrying amount of goodwill of $1.2 million did not change from
December 31, 2001 to December 31, 2002.
Acquired intangible assets, all subject to amortization:
December 31,
------------
2002 2001
--------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------------------------------------------------------
Copyrights $250,000 $(100,000) $250,000 $(50,000)
Software license 223,000 (41,000) - -
--------------------------------------------------------------
Total $473,000 $(141,000) $250,000 $(50,000)
==============================================================
The aggregate amortization expense for the year ended December 31, 2002
was $91,000. The estimated amortization expense for each of the next three years
ended December 31, 2005 is $95,000, and the estimated amortization expense for
the years ended December 31, 2006 and 2007 are $45,000 and $2,000.
31
5. Acquisition of prospectdigital, LLC
In 2000, the Company purchased a 33.3% ownership interest in a
development stage company named prospectdigital, LLC ("prospectdigital") for
$403,000. Prospectdigital provides an on-line marketing service to brokers
selling annuities and life insurance. To date, prospectdigital has had nominal
revenue and has used its capital to develop software to support its business. In
addition, the Company loaned $1.1 million to prospectdigital in 2000. The loan
bears interest equal to the Prime Rate. In 2001, the Company extended a $400,000
line of credit to prospectdigital, which bears interest at 8.0%. As of December
31, 2001, prospectdigital had drawn $358,000 from the line of credit.
The Company did not have control over prospectdigital, therefore, the
investment in prospectdigital was accounted for under the equity method. In
applying the equity method, the Company recorded its proportionate share of the
operations (losses) of prospectdigital using a hypothetical liquidation at book
value at each balance sheet date, net of the Company's estimate of any
other-than-temporary impairment. The Company's recorded loss on its investment,
loans payable and advances to prospectdigital was $896,000 and $721,000 during
2001 and 2000, and is included in other expenses. The amounts invested and
advanced, net of the Company's share of cumulative losses, have been included in
other assets at December 31, 2001.
In January 2002, the Company purchased all of the remaining outstanding
stock of prospectdigital for $225,000 in cash, a non-recourse note payable in
the amount of $75,000 and payable out of the future profits of prospectdigital,
and $100,000 of contingent consideration based on future income. Under the terms
of the purchase agreement, prospectdigital remained liable for payment of the
$1.5 million indebtedness, plus accrued interest, due to the Company.
6. Purchase of Values Financial Network, Inc.
In 2000, the Company paid $3.7 million for the purchase of Values
Financial Network assets. Among the assets acquired were a website, which
incorporates sales lead management, investment screening and asset allocation
functionalities, and copyrights related to two books. These assets were recorded
at fair value, as determined by an independent appraisal. Payments in excess of
the identifiable assets were recorded as goodwill. Results of Values Financial
Network's operations have been included in the Consolidated Financial Statements
since the date of acquisition.
7. Accounts Payable and Accrued Liabilities
December 31,
-----------------------------
2002 2001
------------ -----------
Accrued compensation $ 2,346,000 $ 2,871,000
Accrued sales convention costs 1,664,000 1,039,000
Commissions payable 1,110,000 1,366,000
Payable to insurance carrier 1,097,000 581,000
Accounts payable 728,000 845,000
Accrued production premium deficiency 637,000 485,000
Miscellaneous accrued expenses 1,230,000 1,115,000
------------ -----------
Total $ 8,812,000 $ 8,302,000
============ ===========
8. Loan Payable and Note Payable
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
32
semi-annual 1.00% increase/decrease in the interest rate. The maximum interest
rate is 10.50%. As of December 31, 2002, the Company made payments of $42,000
toward the principal balance of the note. The required principal payments over
the next five years are as follows: $109,000, $116,000, $125,000, $135,000, and
$144,000.
9. Deferred Compensation Payable
The Company sponsors a qualified defined contribution 401(k) plan,
which is available to all employees. The 401(k) plan allows employees to defer,
on a pre-tax basis, up to 15% of their annual compensation as contributions to
the 401(k) plan, subject to a maximum of $11,000. The Company matches 50% of
each employee's contributions, up to 6% of their annual compensation, subject to
a maximum of $5,500. The Company's matching contributions were $434,000,
$439,000, and $409,000 for the years ended December 31, 2002, 2001, and 2000.
The Company also sponsors a non-qualified tax deferred compensation
plan, which is available to certain employees who, because of Internal Revenue
Code limitations, are prohibited from contributing the maximum percentage of
salary to the 401(k) Plan. Under this deferred compensation plan, certain
employees may defer, on a pre-tax basis, a percentage of annual compensation,
including bonuses. The Company matches 50% of each employee's contributions, up
to a maximum of 6% of annual compensation, less amounts already matched under
the 401(k) plan. The Company made matching contributions of $59,000, $55,000,
and $48,000 during the years ended December 31, 2002, 2001, and 2000. As of
December 31, 2002 and 2001, employee contributions and Company matching
contributions, net of accumulated investment losses, totaled $650,000 and
$575,000.
The Company also sponsors a non-qualified tax deferred compensation
plan under which producers who earn a minimum of $100,000 may defer, on a
pre-tax basis, up to 50% of annual commissions. In addition, the Company will
match producer contributions for those producers who earn over $250,000 in
annual commissions at rates ranging from 1% to 5% of amounts deferred, depending
on the level of annual commissions earned. During the years ended December 31,
2002, 2001, and 2000, matching contributions related to the producer commission
deferral plan were $19,000, $36,000, and $32,000. As of December 31, 2002 and
2001, producer contributions and Company matching contributions, net of
accumulated investment losses, totaled $3.6 million and $3.8 million.
10. Commitments and Contingencies
The Company leases office and warehouse premises and certain office
equipment under non-cancelable operating leases. Related rent expense of
$585,000, $1.6 million, and $1.5 million is included in occupancy costs for the
years ended December 31, 2002, 2001, and 2000. Total rentals for leases of
equipment included in equipment expense were $1.1 million, $922,000, and
$802,000 for the years ended December 31, 2002, 2001, and 2000.
The Company's future minimum annual lease commitments under all
operating leases as of December 31, 2002 are as follows:
Year Ended December 31,
2003 $1,047,000
2004 505,000
2005 474,000
2006 307,000
2007 198,000
----------
Total minimum lease payments $2,531,000
==========
In 1998, the Company entered into a Shareholder's Agreement with Lynda
L. Regan, Chief Executive Officer of the Company and Chairman of the Company's
Board of Directors. Under the terms of this agreement, in the event of the death
of Ms. Regan, the Company shall repurchase from Ms. Regan's estate all shares of
common stock that were owned by Ms. Regan at the time of her death, or were
transferred by her to one or more trusts prior to her death. The purchase price
to be paid by the Company shall be equal to 125% of the fair market value of the
shares. The purchase price was equal to $28 million at December 31, 2002. The
Company has purchased two life insurance policies with a combined face amount of
$29 million for the purpose of funding this obligation in the event of Ms.
Regan's death.
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 cases, management believes, based on
33
discussions with legal counsel, that the ultimate disposition of these claims
will not have a material adverse effect on our financial condition, cash flows
or results of operations.
As part of the Company's agreements with certain of its insurance
producers, the Company may, under certain circumstances, be obligated to offer
to purchase the business of the producers. At December 31, 2002, there were no
outstanding commitments by the Company relating to such obligations.
11. Redeemable Common Stock
Between 1990 and 1992, the Company issued Series A and Series B
redeemable common stock to certain shareholders. The Company is obligated to
repurchase the redeemable common stock at the current fair market value. Because
there is no active trading market for the Company's stock that would establish
market value, the Company's Board of Directors approved a redemption value for
Series A redeemable common stock of $2.20 per share and $2.19 per share, and a
redemption value for Series B redeemable common stock of $1.82 and $2.19 per
share, as of December 31, 2002 and 2001, based on an independent appraisal of
the stock value obtained by management.
Series A Series B Total
Redeemable Common Redeemable Common Redeemable Common
Stock Stock Stock
------------------------ ---------------------- ------------------------
Carrying Carrying Carrying
Shares Amount Shares Amount Shares Amount
---------- ----------- -------- ----------- ---------- -----------
Balance January 1, 2000 4,921,000 $ 9,794,000 590,000 $ 1,769,000 5,511,000 $11,563,000
Redemptions and retirement of common
stock (410,000) (810,000) (6,000) (11,000) (416,000) (821,000)
Accretion to redemption value -- 495,000 -- -- -- 495,000
---------- ----------- -------- ----------- ---------- -----------
Balance December 31, 2000 4,511,000 9,479,000 584,000 1,758,000 5,095,000 11,237,000
Redemptions and retirement of common
stock (232,000) (500,000) (3,000) (10,000) (235,000) (510,000)
Accretion to redemption value -- 397,000 -- -- -- 397,000
---------- ----------- -------- ----------- ---------- -----------
Balance December 31, 2001 4,279,000 9,376,000 581,000 1,748,000 4,860,000 11,124,000
Redemptions and retirement of common
stock (457,000) (996,000) (21,000) (39,000) (478,000) (1,035,000)
Accretion to redemption value -- 26,000 -- -- -- 26,000
---------- ----------- -------- ----------- ---------- -----------
Balance December 31, 2002 3,822,000 $ 8,406,000 560,000 $ 1,709,000 4,382,000 $10,115,000
========== =========== ======== =========== ========== ===========
The Company recorded redeemable common stock accretion of $26,000 and
$397,000 and related to Series A redeemable common stock for the years ended
December 31, 2002 and 2001. The carrying value of Series B redeemable common
stock is greater than the redemption value, and has not been accreted.
Holders of Series A redeemable common stock may redeem their holdings
without limitation. Holders of Series B redeemable common stock may only redeem
up to 10% of their holdings once per year, limited to a specified twenty-day
period during November.
12. Stock Options and Stock Awards
The Company currently sponsors two stock-based compensation plans.
Under both plans, the exercise price of each option equals the estimated fair
value of the underlying common stock on the date of grant, as estimated by
management, except for incentive stock options granted to shareholders who own
10% or more of the Company's outstanding stock, where the exercise price equals
110% of the estimated fair value. Both plans are administered by committees,
which are appointed by the Company's Board of Directors.
Producer Option Plan -- Under the Regan Holding Corp. Producer Stock
Option and Award plan (the "Producer Option Plan"), the Company may grant to
Legacy Marketing producers and Legacy Financial registered representatives
shares of the Company's common stock and non-qualified stock options (the
"Producer Options") to purchase the Company's common stock. A total of 12.5
million shares have been reserved for grant under the Producer Option Plan.
Total stock options granted to Producers for 2002, 2001, and 2000 were 10,000,
265,000, and 1.7 million. Total expenses recorded for Producer stock option
grants were $4,000, $96,000, and $1.1 million
34
during 2002, 2001 and 2000. The Producer stock options granted for each of the
three years ended December 31, 2002 vested immediately upon the grant date. The
fair value of the Producer options were estimated using the Black-Scholes
option-pricing model with the following assumptions:
2002 2001 2000
--------- ----------- -----------
Risk-free interest rates 4.78% 5.13%-6.80% 5.04%-6.52%
Volatility 27% 27%-31% 28%-34%
Dividend yield None None None
Expected life 6 years 6-10 years 6-10 years
The following table summarizes information with respect to shares of
Series A common stock awarded to non-employees:
2001 2000
----------- --------
Share grants 48,000 66,000
Fair value per share $1.53-$1.65 $ 1.53
Expense recorded $ 75,000 $100,000
There were no shares of Series A common stock awarded to non-employees
during 2002. The share grant for 2001 listed above includes 15,000 shares of
Series A common stock that the Company was obligated to award to a service
provider, but had not been issued as of December 31, 2002.
Employee Option Plan -- Under the Regan Holding Corp. 1998 Stock Option
Plan (the "Employee Option Plan"), the Company may grant to employees and
directors incentive stock options and non-qualified options to purchase the
Company's common stock (collectively referred to herein as "Employee Options").
A total of 8.5 million shares have been reserved for grant under the Employee
Option Plan. The Employee Options generally vest over four or five years and
expire in ten years, except for incentive stock options granted to shareholders
who own 10% or more of the outstanding shares of the Company's stock, which
expire in five years. The Company uses the intrinsic value method of accounting
for stock-based awards granted to employees and, accordingly, does not recognize
compensation expense for its stock-based awards to employees.
Stock option activity under both plans was as follows:
Total
Weighted average
Shares Exercise Price
------ --------------
Outstanding at December 31, 1999 8,810,000 $1.13
Granted 5,118,000 $1.52
Exercised (27,000) $0.95
Forfeited (525,000) $1.08
Outstanding at December 31, 2000 13,376,000 $1.28
Granted 2,976,000 $1.62
Exercised -- $ --
Forfeited (788,000) $1.25
Outstanding at December 31, 2001 15,564,000 $1.35
Granted 1,153,000 $1.68
Exercised -- $ --
Forfeited (768,000) $1.22
Outstanding at December 31, 2002 15,949,000 $1.38
Exercisable at December 31, 2000 8,984,000 $1.25
Exercisable at December 31, 2001 11,512,000 $1.31
Exercisable at December 31, 2002 12,407,000 $1.32
35
The following table summarizes information about stock options
outstanding at December 31, 2002 under both plans:
Options Outstanding Options Exercisable
------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of exercise prices Shares Contractual Life Price Shares Price
- ------------------------ ------ ---------------- ----- ------ -----
$ 0.73-$0.84 1,654,000 2.6 $ 0.73 1,614,000 $ 0.73
$ 1.03 120,000 1.3 $ 1.03 120,000 $ 1.03
$ 1.27-$1.40 5,832,000 2.5 $ 1.27 5,568,000 $ 1.27
$ 1.53 4,317,000 4.9 $ 1.53 3,132,000 $ 1.53
$ 1.61 2,081,000 4.8 $ 1.61 1,718,000 $ 1.61
$ 1.65 737,000 8.4 $ 1.65 203,000 $ 1.65
$ 1.68 1,208,000 8.5 $ 1.68 52,000 $ 1.68
13. Income Taxes
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.
The benefit from federal and state income taxes consists of amounts
currently (receivable) payable and amounts deferred which, for the periods
indicated, are shown below:
For the Year Ended December 31,
------------------------------------------------
2002 2001 2000
--------- ---------- ------------
Current income taxes:
Federal $ 76,000 $ (92,000) $(3,418,000)
State 24,000 5,000 (3,000)
--------- --------- -----------
Total current 100,000 (87,000) (3,421,000)
--------- --------- -----------
Deferred income taxes:
Federal (170,000) (117,000) 1,712,000
State 36,000 (16,000) (46,000)
--------- --------- -----------
Total deferred (134,000) (133,000) 1,666,000
--------- --------- -----------
Benefit from income taxes $ (34,000) $(220,000) $(1,755,000)
========= ========= ===========
The Company's deferred tax assets (liabilities) consist of the
following:
December 31,
------------------------
2002 2001
----------- -----------
Producer stock option and stock awards $ 2,182,000 $ 2,180,000
Producer deferred compensation 1,696,000 1,735,000
Accrued sales convention costs 663,000 414,000
State net operating loss carryforward, less valuation
allowance of $362,000 and $264,000, net of federal
taxes 248,000 321,000
Alternative minimum tax credit carryforward 304,000 304,000
Investment impairment charge -- 256,000
Capital loss 353,000 70,000
Unrealized losses 427,000 --
Other 817,000 335,000
----------- -----------
Subtotal deferred tax assets 6,690,000 5,615,000
36
Fixed asset depreciation (3,611,000) (2,658,000)
Deferred gain on building sale (1,364,000) (1,364,000)
Unrealized gains -- (37,000)
Other -- (27,000)
----------- -----------
Subtotal deferred tax liabilities (4,975,000) (4,086,000)
----------- -----------
Deferred tax assets, net $ 1,715,000 $ 1,529,000
=========== ===========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
deferred tax assets will, or will not, be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences become deductible. Management
believes it is more likely than not that the deferred tax assets will be
realized.
The benefit from income taxes differs from the benefit computed by
applying the statutory federal income tax rate (34%) to income before taxes, as
follows:
For the Year Ended December 31,
--------------------------------------------------
2002 2001 2000
-------- --------- -----------
Federal income taxes benefit earned at
statutory rate (34%) $(32,000) $(193,000) $(1,710,000)
Increases (reductions) in income taxes resulting
from:
State franchise taxes, net of federal income
tax benefit 40,000 (7,000) (27,000)
Other (42,000) (20,000) (18,000)
-------- --------- -----------
Benefit from income taxes $(34,000) $(220,000) $(1,755,000)
======== ========= ===========
As of December 31, 2002, the Company has state net operating loss
carryforwards of $8.6 million that are expected to be utilized in the future.
$4.9 million of these state net operating losses begin to expire on December 31,
2012. The Company also has, for state income tax purposes, $304,000 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.
14. Loss per Share
The basic and diluted loss per share calculations are based on the
weighted average number of common shares outstanding including shares of
redeemable common stock.
Loss Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
For the year ended December 31, 2002
Basic loss per share
Loss $ (60,000)
Accretion of redeemable common stock (26,000)
-----------
Basic and diluted loss available to
common shareholders $ (86,000) 25,093,000 $ --
=========== ============= ======
For the year ended December 31, 2001
Basic loss per share
Loss $ (348,000)
Accretion of redeemable common stock (397,000)
Basic and diluted loss available to
common shareholders $ (745,000) 25,861,000 $(0.03)
=========== ============= ======
For the year ended December 31, 2000
Basic loss per share
Loss before cumulative effect of accounting change $(3,338,000)
Accretion of redeemable common stock (495,000)
------------
37
Loss available to common shareholders before
Cumulative effect of accounting change (3,833,000) 26,238,000 $(0.15)
Cumulative effect of accounting change (226,000) -- 0.01)
----------- ------------- ------
Basic and diluted loss available to
common shareholders $(4,059,000) 26,238,000 $(0.16)
=========== ============= ======
The diluted loss per share calculation for the years ended December 31,
2002, 2001 and 2000 excludes antidilutive stock options of 4.1 million, 3.3
million and 6.8 million.
15. Segment Information
The Company has identified its reportable segments based on its method
of internal reporting and segregates its business into six primary reportable
segments: Legacy Marketing, Legacy Financial, Imagent Online, Values Financial
Network, and Other. Intersegment transactions are generally accounted for at
amounts comparable to transactions with unaffiliated customers, and are
eliminated in consolidation. The Legacy Marketing business segment includes the
results of selling and administering fixed annuity 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 disclosures for the years ended December 31, 2001 and 2000 have been
restated to reflect the change in the composition of reportable segments.
Values
Legacy Legacy Imagent Financial
Marketing Financial Online Network
------------ ----------- ----------- -----------
Year Ended December 31, 2002
Total revenue $ 47,859,000 $ 2,519,000 $ 86,000 $ 7,000
Total expenses 45,786,000 3,475,000 1,141,000 841,000
------------ ----------- ----------- -----------
Operating income (loss) 2,073,000 (956,000) (1,055,000) (834,000)
Other income (loss) 571,000 7,000 (2,000) --
------------ ----------- ----------- -----------
Income (loss) before tax 2,644,000 (949,000) (1,057,000) (834,000)
Tax provision (benefit) 1,002,000 (354,000) (409,000) (314,000)
------------ ----------- ----------- -----------
Net income (loss) $ 1,642,000 $ (595,000) $ (648,000) $ (520,000)
============ =========== =========== ===========
Year Ended December 31, 2001
Total revenue $ 53,446,000 $ 2,132,000 $ -- $ 45,000
Total expenses 48,615,000 3,475,000 1,142,000 2,004,000
------------ ----------- ----------- -----------
Operating income (loss) 4,831,000 (1,343,000) (1,142,000) (1,959,000)
Other income (loss) (273,000) 14,000 92,000 2,000
------------ ----------- ----------- -----------
Income (loss) before tax 4,558,000 (1,329,000) (1,050,000) (1,957,000)
Tax provision (benefit) 1,807,000 (492,000) (390,000) (726,000)
------------ ----------- ----------- -----------
Net income (loss) $ 2,751,000 $ (837,000) $ (660,000) $(1,231,000)
============ =========== =========== ===========
Year Ended December 31, 2000
Total revenue $ 39,423,000 $ 2,961,000 $ 4,000 $ --
Total expenses 45,832,000 3,209,000 970,000 136,000
------------ ----------- ----------- -----------
Operating loss (6,409,000) (248,000) (966,000) (136,000)
Other income (loss) 4,235,000 27,000 42,000 --
------------ ----------- ----------- -----------
Loss before tax (2,174,000) (221,000) (924,000) (136,000)
Tax benefit (766,000) (78,000) (343,000) (50,000)
------------ ----------- ----------- -----------
Net loss before cumulative
effect of accounting change (1,408,000) (143,000) (581,000) (86,000)
Cumulative effect of accounting
change (226,000) -- -- --
------------ ----------- ----------- -----------
Net loss $ (1,634,000) $ (143,000) $ (581,000) $ (86,000)
============ =========== =========== ===========
38
Total assets
December 31, 2002 $ 65,952,000 $ 1,188,000 $ 852,000 $ 2,969,000
============ =========== =========== ===========
December 31, 2001 $ 61,564,000 $ 1,631,000 $ 1,114,000 $ 4,012,000
============ =========== =========== ===========
Intercompany
Other Subtotal Eliminations Total
----------- ------------ ------------ ------------
Year Ended December 31, 2002
Total revenue $ 134,000 $ 50,605,000 $ (556,000) $ 50,049,000
Total expenses 32,000 51,275,000 (556,000) 50,719,000
----------- ------------ ------------ ------------
Operating income (loss) 102,000 (670,000) -- (670,000)
Other income (loss) -- 576,000 -- 576,000
----------- ------------ ------------ ------------
Income (loss) before tax 102,000 (94,000) -- (94,000)
Tax provision (benefit) 41,000 (34,000) -- (34,000)
----------- ------------ ------------ ------------
Net income (loss) $ 61,000 $ (60,000) $ -- $ (60,000)
=========== ============ ============ ============
Year Ended December 31, 2001
Total revenue $ 120,000 $ 55,743,000 $ (534,000) $ 55,209,000
Total expenses 910,000 56,146,000 (534,000) 55,612,000
----------- ------------ ------------ ------------
Operating income (loss) (790,000) (403,000) -- (403,000)
Other income (loss) -- (165,000) -- (165,000)
----------- ------------ ------------ ------------
Income (loss) before tax (790,000) (568,000) -- (568,000)
Tax provision (benefit) (419,000) (220,000) -- (220,000)
----------- ------------ ------------ ------------
Net income (loss) $ (371,000) $ (348,000) $ -- $ (348,000)
=========== ============ ============ ============
Year Ended December 31, 2000
Total revenue $ 535,000 $ 42,923,000 $ (491,000) $ 42,432,000
Total expenses 2,182,000 52,329,000 (491,000) 51,838,000
----------- ------------ ------------ ------------
Operating loss (1,647,000) (9,406,000) -- (9,406,000)
Other income (loss) 9,000 4,313,000 -- 4,313,000
----------- ------------ ------------ ------------
Loss before tax (1,638,000) (5,093,000) -- (5,093,000)
Tax benefit (518,000) (1,755,000) -- (1,755,000)
----------- ------------ ------------ ------------
Net loss before cumulative
effect of accounting change (1,120,000) (3,338,000) -- (3,338,000)
Cumulative effect of accounting
Change -- (226,000) -- (226,000)
----------- ------------ ------------ ------------
Net loss $(1,120,000) $ (3,564,000) $ -- $ (3,564,000)
=========== ============ ============ ============
Total assets
December 31, 2002 $ 194,000 $ 71,155,000 $(21,202,000) $ 49,953,000
=========== ============ ============ ============
December 31, 2001 $ 244,000 $ 68,565,000 $(22,305,000) $ 46,260,000
=========== ============ ============ ============
16. Concentration of Risk
As of December 31, 2002, Legacy Marketing sold its products on behalf
of four unaffiliated insurance carriers: American National, Transamerica, John
Hancock and Investors Insurance Corporation. Effective during the first quarter
of 2002, Legacy Marketing and IL Annuity terminated their marketing agreement.
The agreements with the following carriers generated a significant portion of
the Company's total consolidated revenue (sales on behalf of Investors Insurance
Corporation began in the second quarter of 2002):
2002 2001 2000
---- ---- ----
Transamerica 52% 68% 50%
American National 17% 5% 10%
IL Annuity 12% 20% 29%
John Hancock 8% - -
39
Although Legacy Marketing sells and administers several annuity and
life insurance products on behalf of the insurance carriers, its revenues are
derived primarily from sales and administration of certain annuity product
series:
2002 2001 2000
---- ---- ----
SelectMark(SM) series (sold on behalf of Transamerica) 51% 67% 49%
BenchMark(SM) series (sold on behalf of American National) 16% 4% 6%
VisionMark(SM) series (sold on behalf of IL Annuity) 11% 19% 28%
AssureMark(SM) series (sold on behalf of John Hancock) 8% - -
During the first quarter of 2003, Legacy Marketing discontinued
marketing life insurance products issued by American National. Certain Legacy
Marketing employees who were supporting the life insurance product operations
were either terminated or reassigned to other positions in Legacy Marketing. In
addition, Legacy Marketing discontinued marketing certain fixed annuity products
issued by Transamerica.
40
Supplementary Data
Quarterly Financial Information (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- --------------------- ------------ ------------ ------------ ------------ ------------
2002
Total revenue $ 11,754,000 $ 12,576,000 $ 11,505,000 $ 14,214,000 $ 50,049,000
Operating income
(loss) $ (1,221,000) $ (205,000) $ (694,000) $ 1,450,000 $ (670,000)
Net income (loss) $ (798,000) $ (2,000) $ (395,000) $ 1,135,000 $ (60,000)
Basic earnings
(loss) per share:
Earnings (loss)
available to common
shareholders $ (0.03) $ -- $ (0.02) $ 0.05 $ --
Diluted earnings
(loss) per share:
Earnings (loss)
available to common
shareholders $ (0.03) $ -- $ (0.02) $ 0.04 $ --
2001
Total revenue $ 11,757,000 $ 15,068,000 $ 15,108,000 $ 13,276,000 $ 55,209,000
Operating income
(loss) $ (2,110,000) $ 1,023,000 $ 1,537,000 $ (853,000) $ (403,000)
Net income (loss) $ (1,257,000) $ 744,000 $ 979,000 $ (814,000) $ (348,000)
Basic earnings
(loss) per share:
Earnings (loss)
available to common
shareholders $ (0.05) $ 0.02 $ 0.04 $ (0.04) $ (0.03)
Diluted earnings
(loss) per share:
Earnings (loss)
available to common
shareholders $ (0.05) $ 0.02 $ 0.03 $ (0.04) $ (0.03)
41
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of Regan Holding Corp.
Our audits of the consolidated financial statements referred to in our report
dated March 27, 2003 also included an audit of the financial statement schedules
listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 27, 2003
42
Schedule II - Valuation and Qualifying Accounts
Additions
Balance at Charged to Balance at
beginning costs and end of
of period expenses Deductions period
--------- --------- ---------- ------
2002
Allowance for uncollectible accounts $ 348,000 $ 393,000 $ (39,000) $ 702,000
State net operating loss carryforward valuation allowance $ 264,000 $ 98,000 $ -- $ 362,000
2001
Allowance for uncollectible accounts $ 94,000 $ 342,000 $ (88,000) $ 348,000
State net operating loss carryforward valuation allowance $ -- $ 264,000 $ -- $ 264,000
2000
Allowance for uncollectible accounts $ 30,000 $ 369,000 $(305,000) $ 94,000
State net operating loss carryforward valuation allowance $ -- $ -- $ -- $ --
43
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Company
Information required by Item 10 is contained in the Company's
Definitive Proxy Statement in the section titled "Election of Directors." Such
information is incorporated herein by reference.
Item 11. Executive Compensation
Information required by Item 11 is contained in the Company's
Definitive Proxy Statement in the section titled "Election of Directors." Such
information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Certain information required by Item 12 is contained in the Company's
Definitive Proxy Statement in the section titled "Election of Directors." Such
information is incorporated herein by reference.
Securities Authorized For Issuance Under Equity Compensation Plans
(a) (b) (c)
- --------------------------- ------------------------- ---------------------- -----------------------------------------
Number of shares remaining available
Number of shares to be Weighted-average for future issuance under equity
issued upon exercise of exercise price of compensation plans (excluding
Plan category outstanding options outstanding options securities reflected in column (a))
- --------------------------- ------------------------- ---------------------- -----------------------------------------
Equity compensation plans
approved by stockholders
(1) 15,949,000 $1.38 5,051,000
- --------------------------- ------------------------- ---------------------- -----------------------------------------
(1) Includes the Regan Holding Corp. Producer Stock Option and Award Plan and
the Regan Holding Corp. 1998 Stock Option Plan
Regan Holding Corp. stockholders have approved all equity compensation plans.
Item 13. Certain Relationships and Related Transactions
Information required by Item 13 is contained in the Company's
Definitive Proxy Statement in the section titled "Election of Directors." Such
information is incorporated herein by reference.
Item 14. Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and executed, can provide only
reasonable assurance of achieving the desired control objectives. Within the 90
days prior to the date of this report, the Company's Chief Executive Officer and
Chief Financial Officer evaluated, with the participation of Company's
management, the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, which disclosed no significant
deficiencies or material weakness, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the evaluation.
44
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Exhibits and Financial Statement Schedules:
1. The following financial statements are included in Item 8:
(i) Independent Accountants Report.
(ii) Consolidated Balance Sheet as of December 31, 2002 and
2001.
(iii) Consolidated Statement of Operations for the years ended
December 31, 2002, 2001, and 2000.
(iv) Consolidated Statement of Shareholders' Equity for the
years ended December 31, 2002, 2001, and 2000.
(v) Consolidated Statement of Cash Flows for the years ended
December 31, 2002, 2001, and 2000.
(vi) Notes to Consolidated Financial Statements.
2. (i) Quarterly Financial Information.
(ii) Schedule II - Valuation and Qualifying Accounts.
3. See(c) below.
(b) Regan Holding Corp. filed a Form 8-K, dated November 26, 2002,
announcing a strategic plan to consolidate the life insurance
and annuity product portfolio marketing business of Legacy
Marketing Group.
(c) Exhibit Index:
3(a) Restated Articles of Incorporation. (1)
3(b)(2) Amended and Restated Bylaws of the Company. (5)
4(a) Shareholders' Agreement, dated as of May 29, 1998, by and among the
Company, Lynda Regan, Alysia Anne Regan, Melissa Louise Regan and
RAM Investments.(6)
10(a) Administrative Services Agreement effective January 1, 1991, as
amended, between Allianz Life Insurance Company of North America and
the Company.(2)
10(b)(1) Marketing Agreement effective June 1, 1993, as amended, between
American National Insurance Company and the Company.(2)
10(b)(2) Amendment Three to Marketing Agreement with American National
Insurance Company.(3) 10(b)(3) Amendment Four to Marketing Agreement
with American National Insurance Company.(3) 10(b)(4) Amendment Five
to Marketing Agreement with American National Insurance Company.(4)
- ----------------------
(1) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1994.
(2) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 1996.
45
(3) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and six months ended June 30, 1998.
(4) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1998.
(5) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 2000.
(6) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 1998.
46
10(b)(5) Amendment Six to Marketing Agreement with American National Insurance
Company (5)
10(b)(6) Amendment Seven to Marketing Agreement with American National Insurance
Company.(2)
10(b)(7) Amendment Eight to Marketing Agreement with American National Insurance
Company.(3)
10(b)(8) Amendment Nine to Marketing Agreement with American National Insurance
Company.(3)
10(b)(9) Amendment Ten to Marketing Agreement with American National Insurance
Company.(4)
10(b)(10) Amendment Eleven to Marketing Agreement with American National
Insurance Company.(9)
10(b)(11) Amendment Twelve to Marketing Agreement with American National
Insurance Company.(9)
10(b)(12) Amendment Thirteen to Marketing Agreement with American National
Insurance Company. (10)
10(b)(13) Amendment Fourteen to Marketing Agreement with American National
Insurance Company. (11)
10(b)(14) Amendment Sixteen to Marketing Agreement with American National
Insurance Company. (12)
10(b)(15) Amendment Seventeen to Marketing Agreement with American National
Insurance Company. (13)
10(b)(16) Amendment Eighteen to Marketing Agreement with American National
Insurance Company. (13)
10(b)(17) Amendment Nineteen to Marketing Agreement with American National
Insurance Company. (14)
10(b)(18) Amendment Twenty to Marketing Agreement with American National
Insurance Company. (15)
10(b)(19) Amendment Twenty One to Marketing Agreement with American National
Insurance Company. (16)
10(b)(20) Amendment Twenty Two to Marketing Agreement with American National
Insurance Company. (17)
10(b)(21) Amendment Twenty Three to Marketing Agreement with American National
Insurance Company. (17)
10(b)(22) Amendment Twenty Four to Marketing Agreement with American National
Insurance Company. (18)
10(b)(23) Amendment Twenty Five to Marketing Agreement with American National
Insurance Company. (19)
10(b)(24) Amendment Twenty Six to Marketing Agreement with American National
Insurance Company. (20)
10(b)(25) Amendment Twenty Seven to Marketing Agreement with American National
Insurance Company. (21)
10(b)(26) Marketing Agreement, effective November 15, 2002, between American
National Insurance Company and Legacy Marketing Group. (22)
10(c)(1) Insurance Processing Agreement, effective June 1, 1993, as amended,
between American National Insurance Company and Legacy Marketing
Group.(1)
10(c)(2) Amendment to Insurance Processing Agreement with American National
Insurance Company.(2)
10(c)(3) Amendment Two to Insurance Processing Agreement with American National
Insurance Company.(3)
10(c)(4) Amendment Three to Insurance Processing Agreement with American
National Insurance Company.(4)
10(c)(5) Amendment Four to Insurance Processing Agreement with American National
Insurance Company.(5)
10(c)(6) Amendment Five to Insurance Processing Agreement with American National
Insurance Company.(5)
10(c)(7) Amendment Six to Insurance Processing Agreement with American National
Insurance Company.(6)
10(c)(8) Amendment Seven to Insurance Processing Agreement with American
National Insurance Company.(7)
10(c)(9) Amendment Eight to Insurance Processing Agreement with American
National Insurance Company.(7)
10(c)(10) Amendment Nine to Insurance Processing Agreement with American
National Insurance Company.(8)
47
(1) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1994.
(2) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months ended March 31, 1998.
(3) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and six months ended June 30, 1998.
(4) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 1998.
(5) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1998.
(6) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months ended March 31, 1999.
(7) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and six months ended June 30, 1999.
(8) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 1999.
(9) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1999.
(10) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months ended March 31, 2000.
(11) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the three months and six months ended June 30, 2000.
(12) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 2000.
(13) Incorporated herein by reference to the Company's Form S-1/A Post
Effective Amendment No. 1, dated February 2, 2001.
(14) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 2000.
(15) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the three months ended March 31, 2001.
(16) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the six months ended June 30, 2001.
(17) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the nine months ended September 30, 2001.
(18) Incorporated herein by reference to the Company's Form S-2/A, Amendment
No. 2, dated February 11, 2002.
(19) Incorporated herein by reference
to the Company's annual report on Form 10-K for the year ended December
31, 2001.
(20) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the six months ended June 30, 2002.
(21) Incorporated herein by reference to the Company's amended annual report
on Form 10-K/A for the year ended December 31, 2001.
(22) Certain confidential commercial and financial information has been
omitted from the indicated exhibits, but filed under separate cover
with the U.S. Securities and Exchange Commission.
48
10(c)(11) Amendment Ten to Insurance Processing Agreement with American
National Insurance Company.(4)
10(c)(12) Amendment Eleven to Insurance Processing Agreement with American
National Insurance Company.(4)
10(c)(13) Amendment Twelve to Insurance Processing Agreement with American
National Insurance Company. (5)
10(c)(14) Amendment Thirteen to Insurance Processing Agreement with American
National Insurance Company. (6)
10(c)(15) Amendment Fifteen to Insurance Processing Agreement with American
National Insurance Company.(7)
10(c)(16) Amendment Sixteen to Insurance Processing Agreement with American
National Insurance Company. (9)
10(c)(17) Amendment Seventeen to Insurance Processing Agreement with American
National Insurance Company. (9)
10(c)(18) Amendment Eighteen to Insurance Processing Agreement with American
National Insurance Company. (10)
10(c)(19) Amendment Nineteen to Insurance Processing Agreement with American
National Insurance Company. (11)
10(c)(20) Amendment Twenty to Insurance Processing Agreement with American
National Insurance Company. (12)
10(c)(21) Amendment Twenty One to Insurance Processing Agreement with American
National Insurance Company.(14)
10(c)(22) Amendment Twenty Two to Insurance Processing Agreement with American
National Insurance Company.(14)
10(c)(23) Amendment Twenty Three to Insurance Processing Agreement with
American National Insurance Company. (15)
10(c)(24) Amendment Twenty Four to Insurance Processing Agreement with
American National Insurance Company. (16)
10(c)(25) Amendment Twenty Five to Insurance Processing Agreement with
American National Insurance Company. (17)
10(c)(26) Amendment Twenty Six to Insurance Processing Agreement with American
National Insurance Company. (18)
10(c)(27) Amendment Twenty Seven to Insurance Processing Agreement with
American National Insurance Company.
10(c)(28) Administrative Services Agreement, effective February 15, 2003,
between American National Insurance Company and Legacy Marketing
Group. (21)
10(d) Form of Producer Agreement.(1)
10(e) Settlement Agreement dated June 18, 1993, among the State of Georgia as
receiver for and on behalf of Old Colony Life Insurance Company, other
related parties and the Company.(1)
10(f) 401(K) Profit Sharing Plan & Trust dated July 1, 1994.(1)
10(g) Marketing Agreement effective January 1, 1996 between IL Annuity and
Insurance Company and Legacy Marketing Group.(2)
10(h) Insurance Processing Agreement effective January 1, 1996 between IL
Annuity and Insurance Company and Legacy Marketing Group.(2)
10(i) Marketing Agreement effective May 29, 1998 between Transamerica Life
Insurance and Annuity Company and Legacy Marketing Group.(3)
10(i)(1) Amendment Two to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(12)
10(i)(2) Amendment Three to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(14)
10(i)(3) Amendment Four to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(21)
10(j)(1) Administrative Services Agreement effective May 29, 1998 between
Transamerica Life Insurance and Annuity Company and Legacy Marketing
Group, as amended.(3)
49
10(j)(2) Amendment to the Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(4)
10(j)(3) Amendment Two to the Administrative Services Agreement with
Transamerica Life Insurance and Annuity Company.(4)
10(j)(4) Amendment Three to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company. (12)
10(j)(5) Amendment Four to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(14)
10(j)(6) Amendment Five to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(21)
10(k) Marketing Agreement effective January 18, 2001 between John Hancock
Life Insurance Company and Legacy Marketing Group.
10 (k)(1)Amendment to the Marketing Agreement with John Hancock Life
Insurance Company.
10(l) Administrative Services Agreement effective January 18, 2001 between
John Hancock Life Insurance Company and Legacy Marketing Group.
10(l)(1) Amendment to the Administrative Services Agreement with John Hancock
Life Insurance Company.
10(m) Agreement of Purchase and Sale, dated March 8, 2001, by and between
Regan Holding Corp. and G & W/Lakeville Corporate Center, LLC. (13)
10(n) Promissory Note by and between Regan Holding Corp. and Washington
Mutual Bank FA, dated July 10, 2002. (17)
10(o) Producer Stock Award and Stock Option Plan, as amended.(8)
10(o)(1) 1998 Stock Option Plan, as amended.(8)
13.1 Annual Report filed on Form 10-K for the ended December 31, 2002. (19)
24 Power of Attorney. (20)
99.1 Certification of Lynda L. Regan pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of G. Steven Taylor pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1994.
(2) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1995.
(3) Incorporated herein by reference to the Company's Form 8-K, dated June
1, 1998.
(4) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1999.
(5) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months ended March 31, 2000.
(6) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and six months ended June 30, 2000.
(7) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 2000.
(8) Incorporated herein by reference to the Company's Definitive Proxy
Statement dated July 31, 2001. (9) Incorporated herein by reference to
the Company's Form S-1/A Post Effective Amendment No. 1, dated
February 2, 2001.
(10) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 2000.
(11) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the three months ended March 31, 2001.
(12) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the six months ended June 30, 2001.
(13) Incorporated herein by reference to the Company's Form 8-K, dated June
21, 2001.
50
(14) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the nine months ended September 30, 2001.
(15) Incorporated herein by reference to the Company's Form S-2/A, Amendment
No. 2, dated February 11, 2002. (16) Incorporated herein by reference
to the Company's annual report on Form 10-K for the year ended December
31, 2001.
(17) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the six months ended June 30, 2002.
(18) Incorporated herein by reference to the Company's amended annual report
on Form 10-K/A for the year ended December 31, 2001.
(19) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 2002.
(20) Previously filed.
(21) Certain confidential commercial and financial information has been
omitted from the indicated exhibits, but filed under separate cover
with the U.S. Securities and Exchange Commission.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
By: /s/ Lynda L. Regan Date: March 31, 2003
- ----------------------
Lynda L. Regan
Chairman and Chief Executive Officer
By: /s/ G. Steven Taylor Date: March 31, 2003
- ------------------------
G. Steven Taylor
Principal Accounting and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Lynda L. Regan Date: March 31, 2003
- ----------------------
Lynda L. Regan
Chairman and Chief Executive Officer
By: /s/ R. Preston Pitts Date: March 31, 2003
- ------------------------
R. Preston Pitts
President and Chief Operating Officer
By: /s/ Donald Ratajczak Date: March 31, 2003
- ------------------------
Donald Ratajczak
Director
By: /s/ Ute Scott-Smith Date: March 31, 2003
- ------------------------
Ute Scott-Smith
Director
By: /s/ J. Daniel Speight, Jr. Date: March 31, 2003
- ------------------------------
J. Daniel Speight, Jr.
Director
52
CERTIFICATIONS
I, Lynda L. Regan, certify that:
1. I have reviewed this annual report on Form 10-K of Regan Holding Corp.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 date of this
annual report (the "Evaluation Date"); and
c. presented in this annual 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 officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
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 registrant's other certifying officer and I have indicated in this
annual report whether 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.
/s/ Lynda L. Regan
----------------------------------------------------------------------------
Lynda L. Regan
Chairman and Chief Executive Officer
Date: March 31, 2003
53
I, G. Steven Taylor, certify that:
1. I have reviewed this annual report on Form 10-K of Regan Holding Corp.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 date of this
annual report (the "Evaluation Date"); and
c. presented in this annual 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 officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
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 registrant's other certifying officer and I have indicated in this
annual report whether 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.
/s/ G. Steven Taylor
--------------------------------------------------------------------------
G. Steven Taylor
Chief Financial Officer
Date: March 31, 2003
54