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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 September 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
____________
Commission File Number: 0-19704
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|
As of November 5, 2004, there were 23,034,000 shares of Common
Stock-Series A outstanding and 553,000 shares of Common Stock-Series B
outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, December 31,
2004 2003
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents $ 3,309,000 $ 9,908,000
Trading investments 6,978,000 6,308,000
Available-for-sale investments 2,504,000 5,939,000
Accounts receivable, net of allowance of $617,000 and $866,000
at September 30, 2004 and December 31, 2003 2,291,000 4,225,000
Prepaid expenses and deposits 818,000 803,000
Deferred taxes 707,000 1,356,000
----------- -----------
Total current assets 16,607,000 28,539,000
----------- -----------
Net fixed assets 27,644,000 24,278,000
Deferred taxes 1,746,000 1,170,000
Goodwill -- 679,000
Intangible assets, net 140,000 196,000
Option to purchase Investors Insurance Company 2,975,000 1,200,000
Other assets 939,000 1,053,000
----------- -----------
Total non current assets 33,444,000 28,576,000
----------- -----------
Total assets $50,051,000 $57,115,000
=========== ===========
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 5,658,000 $10,790,000
Income taxes payable 3,000 1,990,000
Current portion of notes payable 195,000 307,000
----------- -----------
Total current liabilities 5,856,000 13,087,000
----------- -----------
Deferred compensation payable 6,895,000 6,257,000
Other liabilities 1,060,000 196,000
Notes payable, less current portion 9,759,000 7,083,000
----------- -----------
Total non current liabilities 17,714,000 13,536,000
----------- -----------
Total liabilities 23,570,000 26,623,000
----------- -----------
Redeemable common stock, Series A and B 8,084,000 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 September 30, 2004
and December 31, 2003 3,068,000 3,158,000
Common stock committed 25,000 25,000
Paid-in capital 6,523,000 6,510,000
Retained earnings 8,781,000 11,779,000
Accumulated other comprehensive income, net -- 56,000
----------- -----------
Total shareholders' equity 18,397,000 21,528,000
----------- -----------
Total liabilities, redeemable common stock, and shareholders' equity $50,051,000 $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 Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue
Marketing allowances and commission overrides $ 3,838,000 $ 10,984,000 $ 16,788,000 $ 37,419,000
Trailing commissions 1,165,000 1,755,000 3,655,000 5,169,000
Administrative fees 2,460,000 3,542,000 7,999,000 10,678,000
Other revenue 418,000 512,000 1,510,000 3,052,000
------------ ------------ ------------ ------------
Total revenue 7,881,000 16,793,000 29,952,000 56,318,000
------------ ------------ ------------ ------------
Expenses
Selling, general and administrative 8,637,000 13,676,000 29,475,000 41,550,000
Depreciation and amortization 1,050,000 1,009,000 3,255,000 3,129,000
Goodwill impairment losses -- 491,000 679,000 491,000
Other 603,000 1,134,000 1,775,000 2,819,000
------------ ------------ ------------ ------------
Total expenses 10,290,000 16,310,000 35,184,000 47,989,000
------------ ------------ ------------ ------------
Operating income (loss) (2,409,000) 483,000 (5,232,000) 8,329,000
------------ ------------ ------------ ------------
Other income
Investment income, net 158,000 102,000 411,000 257,000
Interest expense (2,000) (6,000) (7,000) (26,000)
------------ ------------ ------------ ------------
Total other income, net 156,000 96,000 404,000 231,000
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,253,000) 579,000 (4,828,000) 8,560,000
Provision for (benefit from) income taxes (850,000) 213,000 (1,856,000) 3,431,000
------------ ------------ ------------ ------------
Net income (loss) before accretion of redeemable
common stock (1,403,000) 366,000 (2,972,000) 5,129,000
Accretion of redeemable common stock -- -- 29,000 (70,000)
------------ ------------ ------------ ------------
Net income (loss) available for common shareholders $ (1,403,000) $ 366,000 $ (2,943,000) $ 5,059,000
============ ============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.06) $ 0.02 $ (0.12) $ 0.21
Weighted average shares outstanding 23,672,000 24,292,000 23,865,000 24,519,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.06) $ 0.01 $ (0.12) $ 0.18
Weighted average shares outstanding 23,672,000 27,185,000 23,865,000 27,348,000
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 (2,972,000) (2,972,000)
Net unrealized losses
on investments (56,000) (56,000)
------------
Total comprehensive loss (3,028,000)
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 13,000 13,000
----------- ----------- ----------- ----------- ------------ ------------- ------------
Balance September 30, 2004
(unaudited) 20,167,000 $ 3,068,000 $ 25,000 $ 6,523,000 $ 8,781,000 $ -- $ 18,397,000
=========== =========== =========== =========== ============ ============= ============
See notes to financial statements.
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
----------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (2,972,000) $ 5,129,000
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 3,255,000 3,129,000
Write-off of fixed assets 64,000 648,000
Impairment of goodwill and intangible assets 679,000 538,000
Unrealized gains on trading securities, net (181,000) (986,000)
Other (102,000) 336,000
Changes in operating assets and liabilities:
Purchases of trading securities, net (485,000) (108,000)
Accounts receivable 1,952,000 (1,269,000)
Prepaid expenses and deposits (15,000) 1,414,000
Income taxes receivable and payable (1,987,000) (1,182,000)
Deferred tax assets 110,000 (317,000)
Accounts payable and accrued liabilities (5,132,000) 2,734,000
Deferred compensation payable 638,000 1,113,000
Other operating assets and liabilities (797,000) (487,000)
------------ ------------
Net cash provided by (used in) operating activities (4,973,000) 10,692,000
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (2,101,000) (5,876,000)
Proceeds from sales and maturities of available-for-sale securities 5,536,000 3,931,000
Purchases of fixed assets (6,629,000) (2,699,000)
------------ ------------
Net cash used in investing activities (3,194,000) (4,644,000)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable 5,025,000 --
Payments toward note payable (2,461,000) (82,000)
Repurchases of redeemable common stock (851,000) (1,033,000)
Voluntary repurchases of common stock (145,000) (396,000)
------------ ------------
Net cash provided by (used in) financing activities: 1,568,000 (1,511,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents (6,599,000) 4,537,000
Cash and cash equivalents, beginning of period 9,908,000 4,793,000
------------ ------------
Cash and cash equivalents, end of period $ 3,309,000 $ 9,330,000
============ ============
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 Consolidated Financial Statements are unaudited but reflect all
adjustments, consisting only of normal recurring adjustments, which are,
in the opinion of management, necessary for a fair statement of the
Company's consolidated financial position and results of operations. The
results for the three months and nine months ended September 30, 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, which was 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 Nine Months Ended
September 30, September 30,
---------------- ----------- ------------------------------
2004 2003 2004 2003
------------- ----------- ------------- -------------
Net income (loss) available for common
shareholders, as reported $ (1,403,000) $ 366,000 $ (2,943,000) $ 5,059,000
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related tax effects (75,000) (115,000) (212,000) (312,000)
------------- ----------- ------------- -------------
Pro forma net income (loss) available for common
shareholders $ (1,478,000) $ 251,000 $ (3,155,000) $ 4,747,000
============= =========== ============= =============
Earnings (loss) per share:
Basic - as reported $ (0.06) $ 0.02 $ (0.12) $ 0.21
Basic - pro forma $ (0.06) $ 0.01 $ (0.13) $ 0.19
Diluted - as reported $ (0.06) $ 0.01 $ (0.12) $ 0.18
Diluted - pro forma $ (0.06) $ 0.01 $ (0.13) $ 0.17
6
3. Earnings (Loss) per Share
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
----------- ---------- ----------- -----------
Net income (loss) available for common
shareholders, as reported $(1,403,000) $ 366,000 $(2,943,000) $ 5,059,000
=========== ========== =========== ===========
Reconciliation of shares used in basic and diluted
earnings per share calculations:
Basic:
Weighted average common shares outstanding 23,672,000 24,292,000 23,865,000 24,519,000
=========== ========== =========== ===========
Basic net income (loss) per share $ (0.06) $ 0.02 $ (0.12) $ 0.21
=========== ========== =========== ===========
Diluted:
Weighted average common shares outstanding 23,672,000 24,292,000 23,865,000 24,519,000
Dilutive effect of stock options -- 2,893,000 -- 2,829,000
----------- ---------- ----------- -----------
Shares used in diluted net income (loss) per share
calculation 23,672,000 27,185,000 23,865,000 27,348,000
=========== ========== =========== ===========
Diluted net income (loss) per share $ (0.06) $ 0.01 $ (0.12) $ 0.18
=========== ========== =========== ===========
As the Company incurred net losses in the three and nine months ended
September 30, 2004, options to purchase 15.5 million shares of the
Company's common stock were excluded from the computation of diluted net
loss per share for those periods, as the effect would have been
antidilutive. Options to purchase 15,000 shares and 639,000 shares of the
Company's common stock were excluded from the computation of diluted net
income per share for the three and nine months ended September 30, 2003,
as the options' exercise price was greater than the average market price
of the common stock and, therefore, the effect would have been
antidilutive.
4. Comprehensive Income (Loss)
Total comprehensive loss for the three and nine months ended September 30,
2004 was $1,434,000 and $3,028,000. For the three and nine months ended
September 30, 2003, total comprehensive income was $350,000 and
$5,159,000.
5. Option to Purchase Investors Insurance Corporation
On July 1, 2002, the Company entered into a Purchase Option Agreement with
SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the
outstanding capital stock of Investors Insurance Corporation ("IIC").
Pursuant to the terms of the agreement, SCOR has granted the Company the
right to purchase the outstanding capital stock of IIC in exchange for
annual option fees. The Company has paid annual option fees totaling
approximately $3.0 million as of September 30, 2004. The Company has the
right to exercise the option at any time prior to the expiration date on
June 30, 2005. If the Company elects to exercise the option, it must
complete the purchase transaction within two years of exercising the
option. Upon completion of a purchase transaction, the option fees will be
included in the purchase price. If the option expires unused, the fees
paid will be expensed.
6. Notes Payable
The Company has a mortgage of $7.1 million on the office building which
houses its headquarters. Payment in full of this note is due on August 1,
2012. 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. Prior to August
1, 2006 the interest rate on the note is 6.95%. Thereafter, the interest
rate will be 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 September 30, 2004, the balance due
on the note 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 balance due under this loan facility 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, amortized on the basis of a 20-year
term, and interest. 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
7
note as of September 30, 2004 was $2.8 million. To manage interest
expense, the Company entered into an interest rate swap agreement with a
notional amount equal to the principal balance of the note which modifies
its interest expense 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%.
7. 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 an interest rate swap agreement
with a current notional amount of $2.8 million to hedge the interest
expense associated with its LIBOR-based borrowings. The Company designates
the interest rate swap as a qualifying cash flow hedge under SFAS 133.
8. 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 establishes 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. The VFN projections of future
cash flows supported the balance of goodwill at that time. 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 at that time.
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 flows 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
9. Segment Information
Total Revenue Net Income (Loss)
------------------------------------------------------ --------------------------------------------------
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
-------------------------- -------------------------- ------------------------ ------------------------
2004 2003 2004 2003 2004 2003 2004 2003
------------ ------------ ------------ ------------ ----------- ----------- ----------- -----------
Legacy Marketing
Group $ 7,116,000 $ 15,983,000 $ 27,523,000 $ 54,378,000 $(1,162,000) $ 1,255,000 $(1,747,000) $ 7,027,000
Legacy Financial
Services, Inc. 725,000 821,000 2,313,000 2,057,000 (114,000) (118,000) (320,000) (605,000)
Imagent Online, LLC 83,000 98,000 217,000 186,000 (77,000) (137,000) (353,000) (437,000)
Values Financial
Network, Inc. 10,000 9,000 30,000 20,000 (79,000) (656,000) (677,000) (941,000)
Other 111,000 37,000 338,000 149,000 29,000 22,000 125,000 85,000
Intercompany
Eliminations (164,000) (155,000) (469,000) (472,000) -- -- -- --
------------ ------------ ------------ ------------ ----------- ----------- ----------- -----------
Total $ 7,881,000 $ 16,793,000 $ 29,952,000 $ 56,318,000 $(1,403,000) $ 366,000 $(2,972,000) $ 5,129,000
============ ============ ============ ============ =========== =========== =========== ===========
Total Assets
----------------------------
September 30, December 31,
2004 2003
------------ ------------
Legacy Marketing Group $ 47,747,000 $ 54,698,000
Legacy Financial Services, Inc. 1,344,000 2,034,000
Imagent Online, LLC 493,000 622,000
Values Financial Network, Inc. 1,407,000 2,019,000
Other 593,000 403,000
Intercompany Eliminations (1,533,000) (2,661,000)
------------ ------------
Total $ 50,051,000 $ 57,115,000
============ ============
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Certain statements contained in this document, including Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of Regan Holding
Corp. and its businesses to be materially different from that expressed or
implied by such forward-looking statements. These risks, uncertainties and
factors include, among other things, the following: general economic and
business conditions; political and social conditions; government regulations,
especially regulations affecting the insurance industry; regulatory initiatives
and compliance with governmental regulations; the effects upon insurance markets
and upon insurance industry business practices and relationships due to
investigations and regulatory activities by the California Attorney General's
Office, the New York Attorney General's Office, the California Department of
Insurance, and other authorities concerning, among other things, insurance
broker practices, contingent commission arrangements and bid solicitation
activities; 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.
Recent Industry Developments
On October 29, 2004, the California Attorney General's Office announced
the launch of a formal investigation into possible anti-trust violations and
fraud by insurance companies and brokers, including bid rigging and other
anti-competitive conduct in the insurance industry. Other state authorities have
announced similar investigations. In addition, California Insurance Commissioner
John Garamendi has released for public review a proposed new set of regulations
addressing broker conduct. As currently drafted, the proposed regulations would,
among other things, impose penalties on brokers who fail to disclose all
material facts surrounding their receipt or potential receipt of income from a
third party flowing from a transaction on behalf of a client.
Also, the National Association of Insurance Commissioners ("NAIC")
recently announced that it has formed the NAIC Executive Task Force on Broker
Activities to gather facts and coordinate activities to address alleged criminal
misconduct and violations of existing insurance laws involving insurance
companies and insurance brokers. The Task Force is comprised of 13 member
states, including California, and will pursue a three-pronged action plan
designed to coordinate multi-state interest and inquiries, leverage state
expertise and resources, engage consumers and develop a model act for brokers'
disclosure of compensation.
The Company's core business consists of selling fixed annuity products, on
behalf of insurance carriers, through a network of approximately 27,000
independent insurance brokers that the Company refers to as "Producers." If the
proposed California regulations were to be adopted in their current form, or
similar regulations were to be adopted in other jurisdictions, the Producers
would have to disclose to potential purchasers of fixed annuity products,
compensation they may receive from the Company or the insurance carriers, as a
result of such sales. The Company is unable to predict whether these proposed
regulations will become law or the final form in which the proposed regulations
will be enacted and whether other new initiatives may affect the Company's
business and the demand for the fixed annuity products that the Company markets.
It is possible, however, that enactment of the proposed California regulations,
or similar regulations in other jurisdictions, or the consequences of the
announced investigations or other similar investigations, could have a material
adverse effect on the insurance industry in general or on the Company's
financial condition and results of operations.
10
Overview
On July 1, 2002, the Company entered into a Purchase Option Agreement with
SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the outstanding
capital stock of Investors Insurance Corporation ("IIC"). Pursuant to the terms
of the agreement, SCOR has granted the Company the right to purchase the
outstanding capital stock of IIC in exchange for annual option fees. The Company
has paid annual option fees totaling approximately $3.0 million as of September
30, 2004. The Company has the right to exercise the option at any time prior to
the expiration date on June 30, 2005. If the Company elects to exercise the
option, it must complete the purchase transaction within two years of exercising
the option. The Company is exploring various methods to finance the acquisition
of IIC, including the issuance of debt or equity securities by the Company or a
subsidiary of the Company. As a result, it is possible that the Company will
issue a significant amount of debt or equity securities to one or more new
investors. Any such issuance of equity securities would likely reduce the
percentage ownership of the Company held by current shareholders.
Regan Holding Corp. Consolidated
We had a consolidated net loss of $1.4 million during the three months
ended September 30, 2004, compared to consolidated net income of $366,000 during
the same period in 2003. For the nine months ended September 30, 2004, we had a
consolidated net loss of $3.0 million, compared to consolidated net income of
$5.1 million during the nine months ended September 30, 2003. These unfavorable
changes of $1.8 million and $8.1 million were primarily due to a net loss
incurred by Legacy Marketing Group ("Legacy Marketing") in each period presented
in 2004, compared to net income in each period presented in 2003, which was
partially offset by decreased net losses from Values Financial Network in both
periods and lower losses from Legacy Financial Services ("Legacy Financial") for
the nine month period.
Legacy Marketing
During the three months ended September 30, 2004, Legacy Marketing had a
net loss of $1.2 million, compared to net income of $1.3 million during the same
period in 2003. For the nine months ended September 30, 2004, Legacy Marketing
had a net loss of $1.7 million, compared to net income of $7.0 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 nine months ended September 30, 2004, Legacy
Marketing commissions and marketing allowances decreased $7.8 million (64%) and
$22.6 million (55%), compared to the same periods in 2003. The decrease in each
period was primarily due to decreased sales of fixed annuities issued by Legacy
Marketing's carriers. The low interest rate environment continues to cause many
carriers that issue declared rate annuities, such as American National Life
Insurance Company ("American National"), to reduce the crediting rates and
compensation paid to us and our network of Producers on certain products. As a
result, sales of the affected products in the first nine months and third
quarter of 2004 were lower than in the comparable periods of 2003. The affected
products accounted for approximately 29% and 36% of our total consolidated
revenue for the three and nine months ended September 30, 2003, and only 3% and
9% of our total consolidated revenue for the three and nine months ended
September 30, 2004. Revenues from sales of American National products decreased
$3.0 million and $15.0 million during the three and nine months ended September
30, 2004, compared to the corresponding periods in 2003.
Legacy Marketing's annuity sales were also negatively affected by
Transamerica Life Insurance Company ("Transamerica") and Legacy Marketing
deciding to discontinue the marketing of Transamerica products that were
marketed exclusively by Legacy Marketing, effective May 3, 2004. Legacy
Marketing continues to offer other Transamerica products and is currently
working with Transamerica to develop new products that Legacy Marketing will
market exclusively. Legacy Marketing expects to begin marketing these
Transamerica products in the near future. The discontinued products accounted
for approximately 17% and 29% of our total consolidated revenue for the three
months ended September 30, 2004 and 2003. For the nine months ended September
30, 2004 and 2003, the affected products accounted for approximately 25% and 22%
of our total consolidated revenue. Revenues from sales of Transamerica products
decreased $3.5 million and $6.1 million during the three and nine months ended
September 30, 2004, compared to the same periods in 2003. Revenue from sales of
Transamerica products accounted for 20% and 26% of our total consolidated
revenue during the three and nine months ended September 30, 2004. We expect
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.
We also experienced a decrease in sales of fixed annuities issued by IIC
during 2004. We believe the decrease was primarily attributable to a downgrade
in the A.M. Best credit rating of IIC from an A- rating to a B++ rating in
September 2003. Revenues from the sales of IIC products decreased $1.8 million
and $2.9 million during the three and nine months ended September 30, 2004,
compared to the same periods in 2003. Revenue from sales of IIC products
accounted for 28% of our total consolidated revenue during the three and nine
months ended September 30, 2004.
Administrative fees decreased $1.1 million (31%) and $2.7 million (25%)
during the three months and nine months ended September 30, 2004, compared to
the same periods in 2003, primarily due to decreased issuing fees resulting from
decreased fixed annuity sales. Other income increased $29,000 (16%) and
decreased $1.6 million (64%) during the three months and nine months ended
September 30, 2004, compared to the same periods in 2003. This decrease in the
nine months ended September 30, 2004 was primarily due to a performance bonus
earned during the first half of 2003 on sales of fixed annuity and life products
11
under the terms of one of the Company's insurance carrier partner contracts. The
contract was amended to terminate the bonus program effective July 1, 2003.
During the nine months ended September 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 Nine Months Ended
September 30, September 30,
--------------------------- ------------------------
2004 2003 2004 2003
------------- ------------ ----------- -----------
American National 26% 30% 24% 40%
Transamerica 20% 30% 26% 24%
Investors Insurance
Corporation 28% 24% 28% 20%
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 were derived primarily from sales and
administration of the following annuity products:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ------------ ------------ -----------
BenchMark(SM) series (sold on behalf of American National) 24% 30% 23% 39%
SelectMark(R) series (sold on behalf of Transamerica) 20% 30% 26% 24%
MarkOne(SM) series (sold on behalf of Investors Insurance
Corporation) 19% 24% 24% 20%
As mentioned above, sales of the SelectMark(R) series sold on behalf of
Transamerica will continue to decrease during the remainder of 2004.
Legacy Marketing expenses decreased $4.9 million (35%) and $12.2 million
(28%) during the three months and nine months ended September 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
$4.8 million (38%) and $11.7 million (31%) primarily due to decreases in sales
promotion and support expenses, employee compensation, and stationery and
supplies. Sales promotion and support expenses decreased primarily due to
decreased insurance Producer-related bonuses and incentive trip expense, and
decreased sales support expenses resulting from decreased sales. Employee
compensation decreased primarily due to decreased headcount, reduction in
temporary help, reduced employee overtime and decreased incentive-based
compensation based upon our consolidated year to date operating results.
Decreased stationery and supplies were primarily due to reduced sales. Other
expenses decreased $160,000 (25%) and $684,000 (33%) during the three and nine
months ended September 30, 2004, compared to the same periods in 2003. The
decrease was primarily due to decreased leased equipment costs and a decrease in
losses on disposal of fixed assets.
Legacy Financial
During the third quarter of 2004, Legacy Financial had a net loss of
$114,000, compared to a net loss of $118,000 during the same period in 2003. For
the nine months ended September 30, 2004, Legacy Financial had a net loss of
$320,000, compared to a net loss of $605,000 during the same period in 2003, due
to increased revenues and decreased expenses.
Legacy Financial revenue decreased $96,000 (12%) and increased $256,000
(12%) during the three months and nine months ended September 30, 2004, compared
to the same periods in 2003. The decrease in the three months ended September
30, 2004, was primarily due to decreased reimbursable insurance premiums and
sponsorship revenues, partially offset by an increase in commissions resulting
from improved equity market conditions in 2004. There was also an increase in
12
commissions in the nine months ended September 30, 2004, compared to the same
period in 2003, which was partially offset by a decrease in reimbursable
insurance premiums and sponsorship revenues.
Legacy Financial's expenses decreased $119,000 (12%) and $224,000 (7%)
during the three months and nine months ended September 30, 2004, compared to
the same periods in 2003. The decrease in the 2004 expenses was primarily due to
a decrease in selling, general and administrative expenses. Selling, general and
administrative expenses decreased $128,000 (14%) and $266,000 (10%) for the
three and nine months ended September 30, 2004, compared to the corresponding
2003 periods. The decrease was primarily due to decreased employee compensation
expense resulting from a reduced headcount.
Imagent Online, LLC
Imagent Online, LLC ("Imagent") had a net loss of $77,000 during the three
months ended September 30, 2004, compared to a net loss of $137,000 during the
same period in 2003. During the nine months ended September 30, 2004, Imagent
had a net loss of $353,000, compared to a net loss of $437,000 during the same
period in 2003. The reduced losses are primarily due to a reduction in expenses.
Expenses decreased $113,000 (35%) and $110,000 (12%) during the three months and
nine months ended September 30, 2004, compared to the corresponding 2003
periods, primarily due to decreased employee compensation resulting from a
reduced headcount. In addition, there were decreases in professional fees and
equipment costs in each of the periods.
Values Financial Network, Inc.
Values Financial Network, Inc. ("VFN") had a net loss of $79,000 during
the three months ended September 30, 2004, compared to a net loss of $656,000
during the same period in 2003. During the nine months ended September 30, 2004,
VFN had a net loss of $677,000, compared to a net loss of $941,000 during the
same period in 2003. The decreased losses were primarily due to goodwill,
intangibles, and long-lived asset impairment losses recorded during the third
quarter of 2003, partially offset by goodwill impairment losses during the
second quarter of 2004. Other VFN operating expenses decreased $62,000 (29%) and
$213,000 (31%) during the three months and nine months ended September 30, 2004,
compared to the same periods in 2003, primarily due to decreased depreciation
expense resulting from the write-down in the value of long-term assets in the
third quarter of 2003 mentioned above.
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 establishes 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. The VFN projections of future cash
flows supported the balance of goodwill at that time. 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 at
that time.
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.
13
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 flows 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 three months ended September 30, 2004, net income from Legacy
Advisory Services was $29,000, compared to net income of $22,000 during the same
period in 2003. For the nine months ended September 30, 2004, net income from
Legacy Advisory Services was $125,000, compared to net income of $85,000 during
the same period in 2003. These favorable changes were primarily due to increased
advisory fee revenues, partially offset by increased professional fees.
Liquidity and Capital Resources
Net cash used by operating activities was $5.0 million for the nine months
ended September 30, 2004, compared to net cash provided by operating activities
of $10.7 million for the same period in 2003. The change was primarily due to
decreased operating results, 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 2003
incentive bonuses and payments associated with a Producer incentive trip, a
smaller decrease in prepaid expenses and deposits compared to 2003, decreased
income taxes payable due to a pre-tax loss in the first nine months of 2004 and
a decrease in the write-off of fixed assets. These amounts were partially offset
by decreased accounts receivable primarily due to decreased sales volume during
the first nine months of 2004, compared to the same period in 2003 and decreased
unrealized gains on trading securities.
Net cash used in investing activities was $3.2 million for the nine months
ended September 30, 2004, compared to $4.6 million for the nine months ended
September 30, 2003. The decrease was due to reduced purchases and increased
liquidation of available-for-sale investments to meet operating cash needs. The
decrease was partially offset by increased purchases of fixed assets primarily
due to construction costs related to the Company's new servicing facility
building in Rome, Georgia and computer software costs.
Net cash provided by financing activities was $1.6 million for the nine
months ended September 30, 2004, compared to net cash used by financing
activities of $1.5 million for the nine months ended September 30, 2003. The
change was primarily due to proceeds from the Company's construction loan and
mortgage loan for 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,
amortized on the basis of a 20-year term, and interest. 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 September 30, 2004 was $2.8 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 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%.
The Company used $5.0 million of cash in its operations and incurred
consolidated net losses of $3.0 during the nine months ended September 30, 2004.
If the Company's consolidated net losses continue, or if requests to repurchase
redeemable common stock increase significantly, a cash shortfall could
ultimately occur. The Company 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 occurred, the Company believes that adequate financing could be
obtained to meet its cash flow needs. There can be no assurances that such
financing would be available on favorable terms.
14
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
described below.
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 is intended
to have the effect of changing the interest rate 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
September 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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
On September 16, 2004, the Company filed a Form 8-K for the purpose of
filing a material contract.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAN HOLDING CORP.
Date: November 12, 2004 Signature: /s/ R. Preston Pitts
----------------------------------
R. Preston Pitts
President, Chief Operating Officer
and Chief Financial Officer
17
INDEX TO EXHIBITS
Number Description
- ------ -----------
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.
18