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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2004
or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
____________
REGAN HOLDING CORP.
(Exact name of registrant as specified in its charter)
California 68-0211359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2090 Marina Avenue Petaluma, CA 94954
(Address of principal executive offices) (Zip Code)
707-778-8638
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Applicable Only To Corporate Issuers:
Indicate the number of shares outstanding of the registrant's common
stock, as of August 6, 2004:
Common Stock-Series A 23,111,000
Common Stock-Series B 553,000
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents $ 7,514,000 $ 9,908,000
Trading investments 7,102,000 6,308,000
Available-for-sale investments 2,668,000 5,939,000
Accounts receivable, net of allowance of $623,000 and $866,000
at June 30, 2004 and December 31, 2003 1,736,000 4,225,000
Prepaid expenses and deposits 962,000 803,000
Deferred taxes 881,000 1,356,000
----------- -----------
Total current assets 20,863,000 28,539,000
----------- -----------
Net fixed assets 27,774,000 24,278,000
Deferred taxes 1,812,000 1,170,000
Goodwill -- 679,000
Intangible assets, net 159,000 196,000
Other assets 2,425,000 2,253,000
----------- -----------
Total non current assets 32,170,000 28,576,000
----------- -----------
Total assets $53,033,000 $57,115,000
=========== ===========
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 5,690,000 $10,790,000
Income taxes payable 1,119,000 1,990,000
Current portion of notes payable 192,000 307,000
----------- -----------
Total current liabilities 7,001,000 13,087,000
----------- -----------
Deferred compensation payable 7,006,000 6,257,000
Other liabilities 979,000 196,000
Notes payable, less current portion 9,807,000 7,083,000
----------- -----------
Total non current liabilities 17,792,000 13,536,000
----------- -----------
Total liabilities 24,793,000 26,623,000
----------- -----------
Redeemable common stock, Series A and B 8,412,000 8,964,000
----------- -----------
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:
20,167,000 shares and 20,252,000 shares at June 30, 2004
and December 31, 2003 3,068,000 3,158,000
Common stock committed 25,000 25,000
Paid-in capital 6,520,000 6,510,000
Retained earnings 10,184,000 11,779,000
Accumulated other comprehensive income, net 31,000 56,000
----------- -----------
Total shareholders' equity 19,828,000 21,528,000
----------- -----------
Total liabilities, redeemable common stock, and
shareholders' equity $53,033,000 $57,115,000
=========== ===========
See notes to financial statements
2
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue
Marketing allowances and commission overrides $ 5,511,000 $ 15,629,000 $ 12,950,000 $ 27,295,000
Trailing commissions 1,212,000 1,297,000 2,490,000 2,553,000
Administrative fees 2,673,000 3,552,000 5,539,000 7,136,000
Other revenue 714,000 1,713,000 1,092,000 2,540,000
------------ ------------ ------------ ------------
Total revenue 10,110,000 22,191,000 22,071,000 39,524,000
------------ ------------ ------------ ------------
Expenses
Selling, general and administrative 9,570,000 15,586,000 20,835,000 27,873,000
Depreciation and amortization 1,151,000 1,040,000 2,206,000 2,120,000
Goodwill impairment losses 679,000 -- 679,000 --
Other 536,000 785,000 1,172,000 1,685,000
------------ ------------ ------------ ------------
Total expenses 11,936,000 17,411,000 24,892,000 31,678,000
------------ ------------ ------------ ------------
Operating income (loss) (1,826,000) 4,780,000 (2,821,000) 7,846,000
------------ ------------ ------------ ------------
Other income
Investment income, net 135,000 65,000 252,000 155,000
Interest expense (2,000) (14,000) (5,000) (20,000)
------------ ------------ ------------ ------------
Total other income, net 133,000 51,000 247,000 135,000
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,693,000) 4,831,000 (2,574,000) 7,981,000
Provision for (benefit from) income taxes (644,000) 1,943,000 (1,005,000) 3,218,000
------------ ------------ ------------ ------------
Net income (loss) before accretion of redeemable
common stock (1,049,000) 2,888,000) (1,569,000) 4,763,000
Accretion of redeemable common stock 29,000 (70,000) 29,000 (70,000)
------------ ------------ ------------ ------------
Net income (loss) available for common shareholders $ (1,020,000) $ 2,818,000 $ (1,540,000) $ 4,693,000
============ ============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.04) $ 0.11 $ (0.06) $ 0.19
Weighted average shares outstanding 23,892,000 24,530,000 23,963,000 24,636,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.04) $ 0.10 $ (0.06) $ 0.17
Weighted average shares outstanding 23,892,000 27,344,000 23,963,000 27,477,000
See notes to financial statements
3
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Accumulated
Series A Common Stock Common Other
-------------------------- Stock Paid-in Retained Comprehensive
Shares Amount Committed Capital Earnings Income Total
----------- ----------- ---------- ----------- ----------- ---------- -----------
Balance December 31, 2003 20,252,000 $ 3,158,000 $ 25,000 $ 6,510,000 $11,779,000 $ 56,000 $21,528,000
Comprehensive loss,
net of tax:
Net loss (1,569,000) (1,569,000)
Net unrealized losses
on investments (25,000) (25,000)
-----------
Total comprehensive loss (1,594,000)
Retirement of common stock upon
voluntary repurchases (85,000) (90,000) (55,000) (145,000)
Accretion to redemption value
of redeemable common stock 29,000 29,000
Producer stock option expense 10,000 10,000
----------- ----------- ---------- ----------- ----------- ---------- -----------
Balance June 30, 2004 (unaudited) 20,167,000 $ 3,068,000 $ 25,000 $ 6,520,000 $10,184,000 $ 31,000 $19,828,000
=========== =========== ========== =========== =========== ========== ===========
See notes to financial statements
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
---------------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,569,000) $ 4,763,000
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 2,206,000 2,120,000
Impairment of goodwill 679,000 --
Unrealized gains on trading securities, net (360,000) (614,000)
Other 44,000 180,000
Changes in operating assets and liabilities:
Purchases of trading securities, net (431,000) (573,000)
Accounts receivable 2,501,000 (1,695,000)
Prepaid expenses and deposits (159,000) 1,363,000
Income taxes receivable and payable (871,000) 1,520,000
Deferred tax assets (150,000) (55,000)
Accounts payable and accrued liabilities (5,100,000) 1,133,000
Deferred compensation payable 749,000 1,167,000
Other operating assets and liabilities 611,000 143,000
----------- -----------
Net cash provided by (used in) operating activities (1,850,000) 9,452,000
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (78,000) (5,868,000)
Proceeds from sales and maturities of available-for-sale securities 3,320,000 3,931,000
Purchases of fixed assets (5,727,000) (1,428,000)
----------- -----------
Net cash used in investing activities (2,485,000) (3,365,000)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable 5,025,000 --
Payments toward note payable (2,416,000) (56,000)
Repurchases of redeemable common stock (523,000) (550,000)
Voluntary repurchases of common stock (145,000) (292,000)
----------- -----------
Net cash provided by (used in) financing activities 1,941,000 (898,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,394,000) 5,189,000
Cash and cash equivalents, beginning of period 9,908,000 4,793,000
----------- -----------
Cash and cash equivalents, end of period $ 7,514,000 $ 9,982,000
=========== ===========
See notes to financial statements
5
REGAN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in
conformity with accounting principles generally accepted in the United
States of America and include the accounts of Regan Holding Corp. (the
"Company") and its wholly owned subsidiaries. All intercompany
transactions have been eliminated.
The statements are unaudited but reflect all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the Company's consolidated financial
position and results of operations. The results for the three months and
six months ended June 30, 2004 are not necessarily indicative of the
results to be expected for the entire year. These unaudited Consolidated
Financial Statements should be read in conjunction with the audited
Consolidated Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003 filed by the Company
with the Securities and Exchange Commission on March 30, 2004.
2. Stock Options
The Company has a stock-based employee compensation plan 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 income (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 income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income (loss) available for common
shareholders, as reported: $ (1,020,000) $ 2,818,000 $ (1,540,000) $ 4,693,000
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related
tax effects (68,000) (105,000) (137,000) (207,000)
------------- ------------- ------------- -------------
Pro forma net income (loss) available for
common shareholders $ (1,088,000) $ 2,713,000 $ (1,677,000) $ 4,486,000
============= ============= ============= =============
Earnings (loss) per share:
Basic - as reported $ (0.04) $ 0.11 $ (0.06) $ 0.19
Basic - pro forma $ (0.05) $ 0.11 $ (0.07) $ 0.18
Diluted - as reported $ (0.04) $ 0.10 $ (0.06) $ 0.17
Diluted - pro forma $ (0.05) $ 0.10 $ (0.07) $ 0.16
6
3. Earnings (Loss) per Share
Income/(Loss) Shares Amount
----------- ----------- --------
For the three months ended June 30, 2004
Net loss $(1,049,000)
Accretion of redeemable common stock 29,000
-----------
Basic and diluted loss available to common
shareholders $(1,020,000) 23,892,000 $ (0.04)
=========== =========== ========
For the three months ended June 30, 2003
Net income $ 2,888,000
Accretion of redeemable common stock (70,000)
-----------
Income available to common shareholders 2,818,000 24,530,000 $ 0.11
========
Effect of dilutive securities--employee and
producer stock options -- 2,814,000
----------- -----------
Diluted earnings per share $ 2,818,000 27,344,000 $ 0.10
=========== =========== ========
For the six months ended June 30, 2004
Net loss $(1,569,000)
Accretion of redeemable common stock 29,000
-----------
Basic and diluted loss available to common
shareholders $(1,540,000) 23,963,000 $ (0.06)
=========== =========== ========
For the six months ended June 30, 2003
Net income $ 4,763,000
Accretion of redeemable common stock (70,000)
-----------
Income available to common shareholders 4,693,000 24,636,000 $ 0.19
========
Effect of dilutive securities--employee and
producer stock options -- 2,841,000
----------- -----------
Diluted earnings per share $ 4,693,000 27,477,000 $ 0.17
=========== =========== ========
The diluted loss per share calculations for the three months and six
months ended June 30, 2004 exclude antidilutive stock options of 3.4
million and 3.3 million.
4. Comprehensive Income (Loss)
Total comprehensive loss for the three and six months ended June 30, 2004
was $1,118,000 and $1,594,000. For the three and six months ended June 30,
2003, total comprehensive income was $2,934,000 and $4,809,000.
5. Notes Payable
The Company has a mortgage of $7.1 million on the office building which
houses its headquarters. This note is due on August 1, 2012. Principal
payments are due on the note based on a 25-year amortization schedule. On
August 1, 2012, the Company must pay the remaining principal due on the
note which will be approximately $5.9 million. Before August 1, 2006 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%. As of June 30, 2004, the note balance was $7.1 million.
During 2003, the Company began construction of a new building in Rome,
Georgia and established a $2.7 million loan facility to finance
construction costs. The loan balance on December 31, 2003 was $191,000.
During April 2004 the Company refinanced its construction loan replacing
it with a $2.9 million variable interest rate note indexed to LIBOR plus
1.9%. The note is payable over ten years in monthly installments of
principal and interest based on a 20-year term. At the end of the ten
years, the Company must pay the balance of the principal due on the note.
The outstanding balance of the note as of June 30, 2004 was $2.9 million.
To manage interest expense, the Company entered into an interest rate swap
agreement for the notional amount of the note, to modify its interest
expense from a variable rate to a fixed rate. The April 2004 swap
7
agreement involves the exchange of interest obligations from April 2004
through April 2014 whereby the Company pays a fixed rate of 6.8% in
exchange for LIBOR plus 1.9%. As of June 30, 2004, the note balance was
$2.9 million.
6. Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance
with the provisions of Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires the Company to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability.
For derivatives designated as cash flow hedges, changes in fair value of
the derivative are reported as other comprehensive income and are
subsequently reclassified into earnings when the hedged transaction
affects earnings. Changes in fair value of derivative instruments not
considered hedging instruments and ineffective portions of hedges are
recognized in earnings in the current period.
In April 2004 the Company entered into a interest rate swap agreement with
a notional amount of $2.9 million to hedge the interest expense associated
with its LIBOR-based borrowings. The Company designates the interest rate
swap as qualifying cash flow hedge under SFAS 133. No change in fair value
was noted at June 30, 2004.
7. Values Financial Network, Inc.
When the Company purchased Values Financial Network, Inc. ("VFN") in 2000,
part of the purchase price was for goodwill. Before January 1, 2002, the
Company 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," the Company ceased amortizing goodwill on January 1, 2002. As
required by SFAS 142, the Company performs an annual goodwill impairment
test. The impairment test of SFAS 142 requires the Company to measure fair
value of the reporting unit. The Company established fair value by
preparing a forecast of the discounted value of future cash flows expected
to be derived from VFN.
During 2002, the Company revised the business model for VFN to focus on
corporate and individual producer sales and its projections of future cash
flows supported the balance of goodwill. In early 2003 the Company further
refined its business model for VFN, including identifying a new market and
committing additional resources to develop the business. During 2003, due
to the failure of VFN to produce revenues as projected, the Company
updated its annual measurement of fair value of VFN. The fair value
measurement based on a revised cash flow forecast was predicated on VFN
realizing a lower level of sales. This forecast of cash flows did not
support the balance of goodwill, and the Company recorded a goodwill
impairment loss of $491,000 during 2003. Projections of future cash flows
supported the remaining balance of goodwill.
During the second quarter of 2004, due to the failure of VFN to produce
revenues as projected, particularly in the corporate arena, management
decided to cease actively marketing to the corporate market. As a result,
management lowered its expectations for future sales. This event met the
criteria of a "triggering event" for testing the recoverability of
long-lived assets as required by Statement of Financial Accounting
Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal
of Long-Lived Assets". Accordingly, the Company compared the carrying
amount of VFN's long-lived assets to the projected sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the
asset group. Based on the fact that the sum of the undiscounted cash flows
exceeded VFN's assets, the Company concluded no impairment had occurred to
the long-lived assets.
As a result of performing the impairment tests required under SFAS 144,
the Company was then required under the provisions of SFAS 142 to perform
a goodwill impairment test using the revised cash flow forecast discounted
at an appropriate cost of capital. The results of this test indicated that
the Company's goodwill was not recoverable. Accordingly, the Company
recorded a goodwill impairment loss of $679,000 during the second quarter
of 2004.
8
8. Segment Information
Total Revenue Net Income (Loss)
-------------------------------------------------------- ------------------------------------------------------
Three Months Three Months Six Months Six Months Three Months Three Months Six Months Six Months
Ended Ended Ended Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30,
2004 2003 2004 2003 2004 2003 2004 2003
------------ ------------- ------------ ------------ -------------- ------------ -------------- ------------
Legacy Marketing
Group $ 9,317,000 $21,573,000 $ 20,408,000 $ 38,394,000 $ (397,000) $3,358,000 $ (584,000) $5,772,000
Legacy Financial
Services, Inc. 770,000 654,000 1,588,000 1,236,000 (45,000) (219,000) (204,000) (487,000)
Imagent Online, LLC 74,000 48,000 133,000 88,000 (137,000) (146,000) (278,000) (300,000)
Values Financial
Network, Inc. 10,000 9,000 20,000 11,000 (503,000) (144,000) (599,000) (285,000)
Other 91,000 64,000 227,000 112,000 33,000 39,000 96,000 63,000
Intercompany
Eliminations (152,000) (157,000) (305,000) (317,000) -- -- -- --
----------- ----------- ------------ ------------ ---------- ---------- ---------- ----------
Total $10,110,000 $22,191,000 $ 22,071,000 $ 39,524,000 $(1,049,000) $2,888,000 $(1,569,000) $4,763,000
=========== =========== ============ ============ =========== ========== =========== ==========
9
Total Assets
---------------------------
June 30, December 31,
2004 2003
------------ ------------
Legacy Marketing $ 52,013,000 $ 54,698,000
Group
Legacy Financial 1,563,000 2,034,000
Services, Inc.
Imagent Online, LLC 556,000 622,000
Values Financial 1,497,000 2,019,000
Network, Inc.
Other 555,000 403,000
Intercompany Eliminations (3,151,000) (2,661,000)
------------ ------------
Total $ 53,033,000 $ 57,115,000
============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain statements contained in this document, including Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of Regan Holding
Corp. and its businesses to be materially different from that expressed or
implied by such forward-looking statements. These risks, uncertainties and
factors include, among other things, the following: general economic and
business conditions; political and social conditions; government regulations,
especially regulations affecting the insurance industry; demographic changes;
the ability to adapt to changes resulting from acquisitions or new ventures; and
various other factors referred to in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Regan Holding Corp. assumes no obligation to update forward-looking
statements to reflect actual results or changes in or additions to the factors
affecting such forward-looking statements.
Regan Holding Corp. Consolidated
We had consolidated net losses of $1.0 million during the three months
ended June 30, 2004 compared to consolidated net income of $2.9 million during
the same period in 2003. For the six months ended June 30, 2004, we had
consolidated net losses of $1.6 million compared to consolidated net income of
$4.8 million during the six months ended June 30, 2003. These unfavorable
changes of $3.9 million and $6.4 million are primarily due to net losses at
Legacy Marketing Group ("Legacy Marketing"), partially offset by decreased
losses by Legacy Financial Services, Inc. ("Legacy Financial").
Legacy Marketing
During the second quarter of 2004, Legacy Marketing had a net loss of
$397,000, compared to net income of $3.4 million during the second quarter of
2003. For the six months ended June 30, 2004, Legacy Marketing had a net loss of
$584,000, compared to net income of $5.8 million during the same period in 2003.
The decline in results was primarily due to decreased revenue, partially offset
by decreased expenses.
During the three months and six months ended June 30, 2004, Legacy
Marketing commissions and marketing allowances decreased $9.0 million (65%) and
$14.7 million (56%) compared to the same periods of 2003. The decrease in Legacy
Marketing's sales was due to decreased sales of declared rate annuities
partially offset by increased sales of equity index annuities issued by
Investors Insurance Corporation. This shift in product mix was primarily due to
the continuing low interest rate environment during the six months ended June
30, 2004. The continued low interest rate environment caused many carriers that
issue declared rate annuities, such as American National Life Insurance Company
("American National"), to reduce the crediting rates and compensation paid on
some of their products. The decrease in crediting rates on these declared rate
annuity products helped divert sales to equity index annuities. The affected
products accounted for approximately 41% and 39% of our total consolidated
revenue for the three and six months ended June 30, 2003 and declined to 10% and
10
11% of our total consolidated revenue for the three and six months ended June
30, 2004. Revenue from sales of American National products decreased $7.7
million and $12.0 million during the three and six months ended June 30, 2004
compared to the corresponding periods in 2003.
Legacy Marketing's annuity sales were also negatively affected by
Transamerica Life Insurance Company ("Transamerica") lowering the commission
rates of several annuity products marketed by Legacy Marketing during 2003 and
the Company discontinuing marketing Transamerica products effective May 3, 2004.
The affected products accounted for approximately 26% and 19% of our total
consolidated revenue for the three months ended June 30, 2004 and 2003. For the
six months ended June 30, 2004 and 2003, the affected products accounted for
approximately 27% and 19% of our total consolidated revenue. Revenues from sales
of Transamerica products decreased $1.6 million and $2.6 million during the
three and six months ended June 30, 2004 compared to the same periods in 2003.
Revenue from sales of Transamerica products accounted for 28% of our total
consolidated revenue during the three and six months ended June 30, 2004.
Revenues from the sales of Transamerica products will continue to decrease
during the remainder of 2004. We intend to continue providing administrative
services in connection with Transamerica products.
Administrative fees decreased $880,000 (25%) and $1.6 million (22%) during
the three months and six months ended June 30, 2004 compared to the same periods
in 2003 primarily due to decreased issuing fees resulting from decreased annuity
sales. Other income decreased $1.1 million (67%) and $1.6 million (71%) during
the three months and six months ended June 30, 2004 compared to the same periods
in 2003. This decrease was primarily due to the termination of a performance
bonus earned on sales of fixed annuity and life products under the terms of one
of the Company's insurance carrier partner contracts during the first six months
of 2003. The contract was amended to terminate the bonus program effective July
1, 2003.
During the six months ended June 30, 2004, Legacy Marketing sold and
administered products on behalf of three unaffiliated insurance carriers:
American National, Transamerica and Investors Insurance Corporation. As
indicated below, the agreements with these carriers generated a significant
portion of our total consolidated revenue:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ----------- -----------
American National 25% 46% 24% 44%
Transamerica 28% 20% 28% 22%
Investors Insurance
Corporation 23% 19% 27% 18%
Legacy Marketing also performs administrative services for products issued
by John Hancock Variable Life Insurance Company and IL Annuity and Insurance
Company.
Our consolidated revenues are derived primarily from sales and
administration of the following annuity products:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
------------- ------------- ------------ ------------
BenchMark(SM) series (sold on behalf of American National) 24% 46% 23% 43%
SelectMark(R) series (sold on behalf of Transamerica) 28% 20% 28% 22%
MarkOne(SM) series (sold on behalf of Investors Insurance
Corporation) 20% 19% 26% 18%
As mentioned above, sales of the SelectMark(R) series sold on behalf of
Transamerica will effectively cease.
Legacy Marketing expenses decreased $6.0 million (37%) and $7.3 million
(25%) during the three months and six months ended June 30, 2004 compared to the
same periods in 2003 primarily due to decreases in selling, general and
administrative expenses. Selling, general and administrative expenses decreased
$5.9 million (41%) and $6.9 million (27%) primarily due to decreases in sales
promotion and support expenses, compensation, and stationary and supplies. Sales
promotion and support expenses decreased primarily due to decreased insurance
producer related incentive trip expense and decreased sales support expenses due
to decreased sales. Compensation decreased primarily due to decreased headcount,
reduced use of temporary help, reduced overtime costs and decreased incentive
based compensation based on our consolidated year-to-date results. Decreased
stationary and supplies were primarily due to reduced sales. Other expenses
11
decreased $201,000 (31%) and $524,000 (37%) during the three and six months
ended June 30, 2004 compared to the same periods in 2003 primarily due to
decreased leased equipment costs and license fees.
Legacy Financial
During the second quarter of 2004, Legacy Financial's net loss of $45,000
compared to net losses of $219,000 during the same period of 2003. For the six
months ended June 30, 2004, Legacy Financial had net losses of $204,000 compared
to net losses of $487,000 during the same period in 2003, due to increased
revenues and decreased expenses.
Legacy Financial revenue increased $116,000 (18%) and $352,000 (28%)
during the three months and six months ended June 30, 2004 compared to the same
periods in 2003, primarily due to increased commissions resulting from improved
equity market conditions in 2004 and increased reimbursable insurance premiums.
Legacy Financial expenses decreased $163,000 (16%) and $109,000 (5%)
during the three months and six months ended June 30, 2004 compared to the same
periods in 2003. The decrease in the 2004 expenses is primarily due to a
decrease in selling, general and administrative expenses. Selling, general and
administrative expenses decreased $137,000 (15%) and $141,000 (8%) for the three
and six month periods ending June 30, 2004 compared to the corresponding 2003
periods primarily due to decreased compensation expense.
Imagent Online, LLC
Imagent Online, LLC ("Imagent") had net losses of $137,000 during the
second quarter of 2004 compared to net losses of $146,000 during the second
quarter of 2003. During the six months ended June 30, 2004, Imagent had net
losses of $278,000 compared to net losses of $300,000 during the same period in
2003. The reduced losses are primarily due to increased revenues. Revenues
increased $26,000 (54%) and $45,000 (51%) during the three months and six months
ended June 30, 2004 compared to the comparable prior year periods primarily due
to increased subscription, fulfillment and licensing revenues.
Values Financial Network, Inc.
Values Financial Network, Inc. ("VFN") had net losses of $503,000 during
the second quarter of 2004 compared to net losses of $144,000 during the second
quarter of 2003. During the six months ended June 30, 2004, VFN had net losses
of $599,000 compared to net losses of $285,000 during the same period in 2003.
The increased losses are due to goodwill impairment losses during the second
quarter of 2004. Expenses decreased $80,000 (32%) and $149,000 (31%) during the
three and six months ended June 30, 2004 compared to the same periods in 2003
primarily due to decreased depreciation expense resulting from a write-down in
the value of long-term assets in the third quarter of 2003.
When the Company purchased VFN in 2000, part of the purchase price was for
goodwill. Before January 1, 2002, the Company 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," the Company ceased amortizing goodwill on January
1, 2002. As required by SFAS 142, the Company performs an annual goodwill
impairment test. The impairment test of SFAS 142 requires the Company to measure
fair value of the reporting unit. The Company established fair value by
preparing a forecast of the discounted value of future cash flows expected to be
derived from VFN.
During 2002, the Company revised the business model for VFN to focus on
corporate and individual producer sales and its projections of future cash flows
supported the balance of goodwill. In early 2003 the Company further refined its
business model for VFN, including identifying a new market and committing
additional resources to develop the business. During 2003, due to the failure of
VFN to produce revenues as projected, the Company updated its annual measurement
of fair value of VFN. The fair value measurement based on a revised cash flow
forecast was predicated on VFN realizing a lower level of sales. This forecast
of cash flows did not support the balance of goodwill, and the Company recorded
a goodwill impairment loss of $491,000 during 2003. Projections of future cash
flows supported the remaining balance of goodwill.
During the second quarter of 2004, due to the failure of VFN to produce
revenues as projected, particularly in the corporate arena, management decided
to cease actively marketing to the corporate market. As a result, management
lowered its expectations for future sales. This event met the criteria of a
"triggering event" for testing the recoverability of long-lived assets as
required by Statement of Financial Accounting Standards No. 144 ("SFAS 144")
12
"Accounting for the Impairment or Disposal of Long-Lived Assets". Accordingly,
the Company compared the carrying amount of VFN's long-lived assets to the
projected sum of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset group. Based on the fact that the sum of the
undiscounted cash flows exceeded VFN's assets, the Company concluded no
impairment had occurred to the long-lived assets.
As a result of performing the impairment tests required under SFAS 144,
the Company was then required under the provisions of SFAS 142 to perform a
goodwill impairment test using the revised cash flow forecast discounted at an
appropriate cost of capital. The results of this test indicated that the
Company's goodwill was not recoverable. Accordingly, the Company recorded a
goodwill impairment loss of $679,000 during the second quarter of 2004.
Other Segment
During the second quarter of 2004, net income from Legacy Advisory
Services was $33,000, compared to net income of $39,000 during the second
quarter of 2003. For the six months ended June 30, 2004, net income from Legacy
Advisory Services was $96,000, compared to net income of $63,000 during the same
period in 2003. These favorable changes were primarily due to increased advisory
fee revenues.
Liquidity and Capital Resources
Net cash used by operating activities was $1.9 million for the six months
ended June 30, 2004 compared to net cash provided by operating activities of
$9.5 million for the same period in 2003. The change was primarily due to
decreased operating results, decreased income taxes payable due to a pre-tax
loss in the first six months of 2004, decreased accounts payable and accrued
liabilities primarily due to the payment of bonuses to wholesalers based on
their achievement of predetermined 2003 sales targets, payments of employee
incentive bonuses and costs associated with a Producer incentive trip, and an
increase in prepaid expenses and deposits compared to a decrease in 2003, offset
in part by decreased accounts receivable primarily due to increased payments
from our carriers during the first six months of 2004, compared to the same
period in 2003 and an impairment of goodwill in 2004.
Net cash used in investing activities was $2.5 million for the six months
ended June 30, 2004 compared to net cash used by investing activities of $3.4
million for the six months ended June 30, 2003. The decrease was due to reduced
purchases of available-for-sale investments partially offset by construction
costs related to our new servicing facility building in Rome, Georgia and
computer software costs.
Net cash provided by financing activities was $1.9 million for the six
months ended June 30, 2004 compared to net cash used by financing activities of
$898,000 for the six months ended June 30, 2003. The change was primarily due to
net proceeds from our construction loan to finance the new building in Rome,
Georgia.
During 2003, the Company began construction of a new building in Rome,
Georgia and established a $2.7 million loan facility to finance construction
costs. During April 2004 the Company refinanced its construction loan replacing
it with a $2.9 million variable interest rate note indexed to LIBOR plus 1.9%.
The note is payable over ten years in monthly installments of principal and
interest based on a 20-year term. At the end of the ten years, the Company must
pay the balance of the principal due on the note. The outstanding balance of the
note as of June 30, 2004 was $2.9 million. To manage interest expense, the
Company entered into an interest rate swap agreement for the notional amount of
the note, to modify its interest characteristics from a variable rate to a fixed
rate. The April 2004 swap agreement involves the exchange of interest
obligations from April 2004 through April 2014 whereby the Company pays a fixed
rate of 6.8% in exchange for LIBOR plus 1.9%.
We used $1.9 million of cash in our operations during the six months ended
June 30, 2004 and incurred consolidated net losses of $1.6 million. If our
consolidated net losses continue, or if requests to repurchase redeemable common
stock increase significantly, a cash shortfall could ultimately occur. We
believe that existing cash and investment balances, together with anticipated
cash flow from operations, will provide sufficient funding for the foreseeable
future. However, in the event that a cash shortfall occurred, we believe that
adequate financing could be obtained to meet our cash flow needs. There can be
no assurances that such financing would be available on favorable terms.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk, interest
rate risk, credit risk, or equity price risk since December 31, 2003, except as
follows.
To manage interest expense, the Company entered into a hedging transaction
whereby it purchased an interest rate swap with the same notional amount as the
mortgage note on its new Rome, Georgia service facility. This swap changes the
interest characteristics of the note from a variable rate to a fixed rate. The
April 2004 swap agreement involves the exchange of interest obligations from
April 2004 through April 2014 whereby the Company pays a fixed rate of 6.8% in
exchange for LIBOR plus 1.9%.
Please see the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 for more information concerning Quantitative and Qualitative
Disclosures About Market Risk.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) 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. As of June 30,
2004, the Company's Chief Executive Officer and Chief Financial Officer
evaluated, with the participation of the Company's management, the effectiveness
of the Company's disclosure controls and procedures. Based on that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures were effective as of the
end of the period covered by this report. The Company's management, including
the Chief Executive Officer and the Chief Financial Officer, also evaluated the
Company's internal control over financial reporting to determine whether any
changes occurred during the quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. Based on that evaluation, there have been no
such changes during the period covered by this report.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of our shareholders at the
Annual Meeting of Shareholders held on June 10, 2004:
For Against Abstain/Withheld
--- ------- ----------------
1. Election of five (5) Directors to hold office until the Annual
Meeting of Shareholders in 2005 and until their successors are duly
elected. The nominees are listed as follows:
a. Lynda L. Regan 12,683,958 -- 77
b. R. Preston Pitts 12,683,994 -- 41
c. Ute Scott-Smith 12,683,958 -- 77
d. J. Daniel Speight, Jr. 12,684,010 -- 25
e. Dr. Donald Ratajczak 12,684,001 -- 34
2. Ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the year ended
December 31, 2004. 12,682,554 1,387 94
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Commercial Note between SunTrust Bank and the Company executed
April 23, 2004.
Exhibit 31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2004.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAN HOLDING CORP.
Date: August 12, 2004 Signature: /s/ R. Preston Pitts
----------------------------------
R. Preston Pitts
President, Chief Operating Officer
and Chief Financial Officer
16
INDEX TO EXHIBITS
Number Description
- ------ -----------
Exhibit 10.1 Commercial Note between SunTrust Bank and the Company executed
April 23, 2004.
Exhibit 31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
17