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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 March 31, 2005
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 May 5, 2005, there were 23,784,000 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
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents $ 1,021,000 $ 4,348,000
Trading investments 6,842,000 7,900,000
Option to purchase Investors Insurance Corporation 2,975,000 2,975,000
Accounts receivable, net of allowance of $422,000 and $569,000
at March 31, 2005 and December 31, 2004 1,995,000 1,496,000
Income taxes receivable 758,000 755,000
Prepaid expenses and deposits 724,000 705,000
Deferred tax assets -- 772,000
----------- -----------
Total current assets 14,315,000 18,951,000
----------- -----------
Net fixed assets 27,646,000 27,675,000
Intangible assets, net 104,000 122,000
Notes receivable 932,000 672,000
Other assets 253,000 198,000
----------- -----------
Total non current assets 28,935,000 28,667,000
----------- -----------
Total assets $43,250,000 $47,618,000
=========== ===========
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 6,504,000 $ 5,243,000
Current portion of notes payable 202,000 199,000
----------- -----------
Total current liabilities 6,706,000 5,442,000
----------- -----------
Deferred compensation payable 7,411,000 7,748,000
Deferred tax liabilities -- 1,242,000
Other liabilities 164,000 854,000
Notes payable, less current portion 9,665,000 9,708,000
----------- -----------
Total non current liabilities 17,240,000 19,552,000
----------- -----------
Total liabilities 23,946,000 24,994,000
----------- -----------
Redeemable common stock, Series A and B 7,432,000 7,486,000
----------- -----------
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:
20,956,000 shares and 20,912,000 shares at
March 31, 2005 and December 31, 2004 3,915,000 3,847,000
Paid-in capital 6,522,000 6,522,000
Retained earnings 1,435,000 4,769,000
----------- -----------
Total shareholders' equity 11,872,000 15,138,000
----------- -----------
Total liabilities, redeemable common stock, and shareholders' equity $43,250,000 $47,618,000
=========== ===========
See notes to financial statements.
2
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended
March 31,
----------------------------
2005 2004
------------ ------------
Revenue
Marketing allowances and commission overrides $ 3,687,000 $ 7,439,000
Trailing commissions 1,091,000 1,278,000
Administrative fees 2,284,000 2,866,000
Other revenue 274,000 378,000
------------ ------------
Total revenue 7,336,000 11,961,000
------------ ------------
Expenses
Selling, general and administrative 9,613,000 11,265,000
Depreciation and amortization 986,000 1,055,000
Other 564,000 636,000
------------ ------------
Total expenses 11,163,000 12,956,000
------------ ------------
Operating loss (3,827,000) (995,000)
------------ ------------
Other income
Investment income, net 30,000 117,000
Interest expense (3,000) (3,000)
------------ ------------
Total other income, net 27,000 114,000
------------ ------------
Loss before income taxes (3,800,000) (881,000)
Benefit from income taxes 466,000 361,000
------------ ------------
Net loss $ (3,334,000) $ (520,000)
============ ============
Basic and diluted net loss per share $ (0.14) $ (0.02)
Weighted average shares used to compute basic
and diluted net loss per share 24,318,000 24,034,000
See notes to financial statements.
3
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Series A Common Stock
---------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
---------- ----------- ----------- ----------- -----------
Balance December 31, 2004 20,912,000 $ 3,847,000 $ 6,522,000 $ 4,769,000 $15,138,000
Net loss (3,334,000) (3,334,000)
Exercise of stock options 44,000 68,000 -- 68,000
---------- ----------- ----------- ----------- -----------
Balance March 31, 2005 (unaudited) 20,956,000 $ 3,915,000 $ 6,522,000 $ 1,435,000 $11,872,000
========== =========== =========== =========== ===========
See notes to financial statements.
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
-------------------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $(3,334,000) $ (520,000)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 986,000 1,055,000
Losses on write-off of fixed assets 25,000 --
Reduction of allowance for doubtful accounts (147,000) (16,000)
Unrealized (gains) losses on trading securities, net 155,000 (258,000)
Amortization of premium on investments -- 22,000
Changes in operating assets and liabilities:
Sale (purchases) of trading securities, net 903,000 (280,000)
Accounts receivable (352,000) 1,343,000
Prepaid expenses and deposits (19,000) 114,000
Income taxes receivable and payable (3,000) (386,000)
Deferred taxes (470,000) 9,000
Accounts payable and accrued liabilities 1,261,000 (3,274,000)
Deferred compensation payable (337,000) 632,000
Other operating assets and liabilities (745,000) 496,000
----------- -----------
Net cash used in operating activities (2,077,000) (1,063,000)
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (48,000)
Issuance of notes receivable, net (260,000) (8,000)
Purchases of fixed assets (964,000) (4,157,000)
----------- -----------
Net cash used in investing activities (1,224,000) (4,213,000)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable -- 2,150,000
Payments of notes payable (40,000) (29,000)
Repurchases of redeemable common stock (54,000) (250,000)
Proceeds from exercise of commmon stock options 68,000 --
----------- -----------
Net cash (used in) provided by financing activities: (26,000) 1,871,000
----------- -----------
Net decrease in cash and cash equivalents (3,327,000) (3,405,000)
Cash and cash equivalents, beginning of period 4,348,000 9,908,000
----------- -----------
Cash and cash equivalents, end of period $ 1,021,000 $ 6,503,000
=========== ===========
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 ended March 31, 2005 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, 2004,
which was filed by the Company with the Securities and Exchange Commission
on March 31, 2005.
2. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment",
which establishes standards for transactions in which an entity exchanges
its equity instruments for goods or services. This standard requires a
public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of
the award. This eliminates the exception to account for such awards using
the intrinsic method previously allowable under APB Opinion No. 25. In
April 2005, the Securities and Exchange Commission adopted a rule that
delayed the compliance dates for adoption of SFAS 123R, which the Company
had previously been required to adopt no later than July 1, 2005. The SEC's
rule allows companies to implement SFAS 123R at the beginning of their next
fiscal year. As a result, the Company intends to adopt SFAS 123R effective
January 1, 2006. The Company continues to assess the potential impact that
the adoption of SFAS No. 123R could have on its financial position, results
of operations or statement of cash flows.
3. 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 the net loss, as all options granted
under the plan had an exercise price equal to the fair market value of the
underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation:
6
For the Three Months Ended
March 31,
--------------------------
2005 2004
----------- -----------
Net loss, as reported $(3,334,000) $ (520,000)
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related tax effects (17,000) (69,000)
----------- -----------
Pro forma net loss $(3,351,000) $ (589,000)
=========== ===========
Loss per share:
Basic and diluted - as reported $ (0.14) $ (0.02)
Basic and diluted - pro forma $ (0.14) $ (0.02)
4. Net Loss per Share
For the Three Months Ended
March 31,
----------------------------
2005 2004
----------- ------------
Net loss $(3,334,000) $ (520,000)
=========== ============
Weighted average shares used to compute basic and
diluted net loss per share 24,318,000 24,034,000
=========== ============
Basic and diluted net loss per share $ (0.14) $ (0.02)
=========== ============
As the Company incurred net losses in the three months ended March 31,
2005 and 2004, options to purchase 8.2 million and 14.3 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.
5. Comprehensive Loss
Total comprehensive loss for the three months ended March 31, 2005 and
2004 was $3,334,000 and $476,000.
6. 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 ("Investors
Insurance"). Pursuant to the terms of the agreement, SCOR has granted the
Company the right to purchase the outstanding capital stock of Investors
Insurance in exchange for annual option fees. The Company has paid option
fees totaling approximately $3.0 million through March 31, 2005. The
Company has the right to exercise the option at any time prior to its
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 paid will be included in the purchase price. If the option
expires unused, the fees paid will be expensed. Before expiration, the
Company can request a refund of fees paid in the event that the financial
rating of Investors Insurance declines as defined in the agreement. As of
March 31, 2005, the Investors Insurance rating had declined to a level
where the Company believes it can request such a refund. The Company is
exploring various methods to finance the acquisition of Investors
Insurance, including the issuance of debt or equity securities by the
Company or one of its subsidiaries. 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.
7. 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
7
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 March 31, 2005, the balance due on
the note was $7.1 million.
The Company also has a mortgage on its building in Rome, Georgia. The note
has a variable interest rate indexed to the 30-day LIBOR plus 1.9% and 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 March 31, 2005 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 a variable rate indexed to the 30-day
LIBOR plus 1.9%.
8. Income Taxes
The rate of benefit for income taxes for the quarter ended March 31, 2005
differs from the federal and state statutory rate due to the establishment
of a valuation allowance against existing deferred tax assets in the
amount of $812,000.
9. 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 designated
the interest rate swap as a qualifying cash flow hedge under SFAS 133.
10. Segment Information
Total Revenue Net Loss
------------------------------- --------------------------------
Three Months Ended March 31,
----------------------------------------------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Legacy Marketing Group $ 6,595,000 $ 11,089,000 $ (2,971,000) $ (189,000)
Legacy Financial Services, Inc. 823,000 954,000 (54,000) (96,000)
Imagent Online, LLC 52,000 59,000 (246,000) (141,000)
Values Financial Network, Inc. 3,000 11,000 (63,000) (94,000)
Intercompany Eliminations (137,000) (152,000) -- --
------------ ------------ ------------ ------------
Total $ 7,336,000 $ 11,961,000 $ (3,334,000) $ (520,000)
============ ============ ============ ============
Total Assets
------------------------------
March 31, December 31,
2005 2004
------------ ------------
Legacy Marketing Group $ 46,143,000 $ 50,487,000
Legacy Financial Services, Inc. 1,478,000 1,512,000
Imagent Online, LLC 2,773,000 2,514,000
Values Financial Network, Inc. 2,105,000 2,069,000
Other 63,000 63,000
Intercompany Eliminations (9,312,000) (9,027,000)
------------ ------------
Total $ 43,250,000 $ 47,618,000
============ ============
8
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 those expressed or
implied by such forward-looking statements. These risks, uncertainties and
factors include, among other things, the following: general market conditions
and the changing interest rate environment; population growth rates and
demographic patterns; the interruption, deterioration, or termination of our
relationships with the insurance carriers who provide our products or the agents
who market and sell them; the ability to develop and market new products to keep
up with the evolving industry in which we operate; increased governmental
regulation, especially regulations affecting insurance, reinsurance, and holding
companies; the ability to attract and retain talented and productive personnel;
the ability to effectively fund our working capital requirements; the risk of
substantial litigation or insurance claims; and other factors referred to in
Management's Discussion and Analysis of Financial Condition and Results of
Operations located in our Annual Report on Form 10-K for the year ended December
31, 2004.
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
In December 2004, the National Association of Insurance Commissioners (the
"NAIC") approved amendments to the NAIC's model Producer Licensing Act. Under
the model Act, producers, like Legacy Marketing's Producers, who have been
appointed by an insurer as its agent and do not receive compensation from a
customer, are not required to disclose the amount of compensation received from
the insurer. However, under the model Act, producers are required to disclose to
the customer, prior to selling insurance to that customer, that the producer
will be receiving compensation from the insurer, or that the producer represents
the insurer and may provide services to the customer for the insurer. One state
has adopted a regulation based on the model Act and others are considering
similar regulation or legislation. In addition, the NAIC has held a hearing to
consider, and may in the future propose, additional measures affecting
producers.
On April 13, 2005, California Insurance Commissioner John Garamendi
released for public review a revised set of proposed regulations addressing
broker conduct. As currently drafted, the proposed regulations would, among
other things, require brokers to disclose whether they are acting on behalf of
the insurer or the customer, prohibit brokers who are acting on behalf of
customers from accepting compensation from third parties without the prior
consent of the customer, and require brokers to disclose whether they will seek
quotes from one or more than one insurer. If the broker seeks quotes from more
than one insurer, the proposed regulations would also require the broker to
disclose the number of quotes obtained, the names of the insurers that provide
the quotes, and the compensation the broker could receive from each insurer if
that insurer's bid were accepted by the customer.
These regulations were proposed by Commissioner Garamendi as a result of a
renewed regulatory focus on the insurance industry, which in California was
marked by the October 2004 announcement by the California Attorney General's
Office of a formal investigation into possible anti-trust violations and fraud
by insurance companies and brokers, including bid rigging and other
anti-competitive conduct. Authorities in other states announced similar
investigations in the fourth quarter of 2004.
Our core business consists of selling fixed annuity products on behalf of
insurance carriers through a network of approximately 24,000 Producers. If the
amendments to the model Act, the regulations proposed by the California
Insurance Commissioner, or similar or additional regulations were adopted by
states in which we conduct business, the Producers would have to disclose to
potential purchasers of fixed annuity products any compensation the Producers
may receive from Legacy Marketing or the insurance carriers. Producers may also
have to disclose that they represent the insurance carriers and may provide
services to the customer on behalf of those carriers. We are unable to predict
whether or which states will adopt the amendments to the model Act, whether
California will adopt the proposed regulations, and whether other new
initiatives may affect our business and the demand for fixed annuity products
marketed by Legacy Marketing. It is possible, however, that enactment of the
9
amendments to the model Act, the regulations proposed by the California
Insurance Commissioner, or similar or additional regulations, could have a
material adverse effect on the insurance industry in general or on our financial
condition and results of operations.
Overview
On July 1, 2002, we 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 ("Investors Insurance"). Pursuant to
the terms of the agreement, SCOR has granted us the right to purchase the
outstanding capital stock of Investors Insurance in exchange for annual option
fees. We have paid option fees totaling approximately $3.0 million through March
31, 2005. We have the right to exercise the option at any time prior to its
expiration date on June 30, 2005. If we elect to exercise the option, we 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. Before expiration, we can request a refund of fees paid in the event
that the financial rating of Investors Insurance declines as defined in the
agreement. As of March 31, 2005, the Investors Insurance rating had declined to
a level where we believe we can request such a refund. We are exploring various
methods to finance the acquisition of Investors Insurance, including the
issuance of debt or equity securities by us or one of our subsidiaries. As a
result, it is possible that we 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 $3.3 million during the three months
ended March 31, 2005, compared to a consolidated net loss of $520,000 during the
same period in 2004. The increased losses of $2.8 million were primarily due to
higher net losses incurred by Legacy Marketing Group ("Legacy Marketing") and
Imagent Online, LLC ("Imagent") during the first quarter of 2005 compared to the
first quarter of 2004, which was partially offset by decreased net losses from
Values Financial Network, Inc. ("VFN") and Legacy Financial Services, Inc.
("Legacy Financial").
Legacy Marketing
During the three months ended March 31, 2005, Legacy Marketing had a net
loss of $3.0 million, compared to a net loss of $189,000 during the same period
in 2004. The decline in results was primarily due to decreased revenue and the
establishing of a valuation allowance against the Company's deferred tax assets,
partially offset by decreased expenses.
During the three months ended March 31, 2005, Legacy Marketing commissions
and marketing allowances decreased $3.9 million (48%) compared to the same
period in 2004. The decrease was primarily due to decreased sales of fixed
annuities issued by Legacy Marketing's carriers.
Legacy Marketing experienced a decrease in sales of fixed annuities issued
by Investors Insurance during the three months ended March 31, 2005 and 2004. We
believe the decrease was primarily attributable to a downgrade in the A.M. Best
credit rating of Investors Insurance from an A- rating to a B++ rating in
September 2003. As a result, sales of fixed annuities issued by Investors
Insurance began to decline significantly in the second quarter of 2004 and
continued to decline through the end of 2004. Revenues from the sales and
administration of Investors Insurance products decreased $2.0 million during the
three months ended March 31, 2005, compared to the same period in 2004. Revenue
from sales and administration of Investors Insurance products accounted for 24%
of our total consolidated revenue during the three months ended March 31, 2005.
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. The
discontinued products accounted for approximately 19% and 27% of our total
consolidated revenue for the three months ended March 31, 2005 and 2004.
Revenues derived from sales and administration of Transamerica products
decreased $1.8 million during the three months ended March 31, 2005, compared to
the same period in 2004. Legacy Marketing continues to administer the
discontinued products and to accept additional premium payments, subject to
applicable additional deposit rules for these products.
10
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 quarter of 2005 were lower than in the same
period of 2004. The affected products accounted for approximately 13% of our
total consolidated revenue for the three months ended March 31, 2004, and only
3% of our total consolidated revenue for the three months ended March 31, 2005.
Revenue derived from sales and administration of American National products
decreased $786,000 during the three months ended March 31, 2005, compared to the
same period in 2004. Legacy Marketing has developed new products with American
National that may result in increased sales for Legacy Marketing in the long
term.
Administrative fees decreased $647,000 (23%) during the three months ended
March 31, 2005, compared to the same period in 2004, primarily due to decreased
issuing and maintenance fees resulting from decreased fixed annuity sales.
During the three months ended March 31, 2005, Legacy Marketing sold and
administered products primarily on behalf of three unaffiliated insurance
carriers: American National, Transamerica and Investors Insurance. As indicated
below, the agreements with these carriers generated a significant portion of our
total consolidated revenue:
Three Months Ended
March 31,
---------------------------
2005 2004
------------- ------------
American National 26% 22%
Investors Insurance 24% 31%
Transamerica 19% 27%
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
March 31,
------------------
2005 2004
---- ----
BenchMark(SM) series (sold on behalf of American National) 24% 21%
SelectMark(R) series (sold on behalf of Transamerica) 19% 27%
MarkOne(SM) series (sold on behalf of Investors Insurance) 18% 31%
Legacy Marketing expenses decreased $1.7 million (15%) during the three
months ended March 31, 2005, compared to the same period in 2004, primarily due
to decreases in selling, general and administrative expenses. Selling, general
and administrative expenses decreased $1.6 million (16%) primarily due to a
decrease in employee compensation. Employee compensation decreased primarily due
to decreased headcount and a reduction in temporary help.
Legacy Marketing established a valuation allowance of $812,000 as of March
31, 2005 related primarily to its federal deferred tax assets.
Legacy Financial
During the first quarter of 2005, Legacy Financial had a net loss of
$54,000, compared to a net loss of $96,000 during the same period in 2004,
primarily due to decreased expenses, partially offset by decreased revenue.
Legacy Financial revenue decreased $131,000 (14%) during the three months
ended March 31, 2005, compared to the same period in 2004. The decrease was
primarily due to decreased commission income and advisory fees. Commission
income decreased as a result of decreased sales volume, and advisory fees
decreased primarily due to a decrease in assets under management during the
three months ended March 31, 2005, compared to the same period in 2004.
11
Legacy Financial's expenses decreased $202,000 (18%) during the three
months ended March 31, 2005, compared to the same period in 2004. The decrease
in the 2005 expenses was primarily due to a decrease in selling, general and
administrative expenses. Selling, general and administrative expenses decreased
$130,000 (14%) for the three months ended March 31, 2005, compared to the
corresponding 2004 period. The decrease was primarily due to decreased employee
compensation expense. Employee compensation decreased primarily due to decreased
headcount and a reduction in temporary help. Other expenses decreased $72,000
(36%) during the three months ended March 31, 2005, compared to the same period
in 2004, primarily due to a decrease in miscellaneous expenses.
Imagent
Imagent had a net loss of $246,000 during the three months ended March 31,
2005, compared to a net loss of $141,000 during the same period in 2004. The
increased losses were primarily due to an increase in selling, general and
administrative expenses. Selling, general and administrative expenses increased
$133,000 (58%) during the three months ended March 31, 2005, compared to the
same 2004 period, primarily due to increased employee compensation and
professional fees. Employee compensation increased primarily due to increased
headcount and professional fees increased primarily due to increased consulting
fees.
Values Financial Network, Inc.
VFN had a net loss of $63,000 during the three months ended March 31,
2005, compared to a net loss of $94,000 during the same period in 2004,
primarily due to decreased expenses. VFN expenses decreased $53,000 (32%) during
the three months ended March 31, 2005, compared to the same period in 2004
primarily due to a decrease in selling, general and administrative expenses.
Liquidity and Capital Resources
Net cash used in operating activities was $2.1 million for the three
months ended March 31, 2005, compared to net cash used in operating activities
of $1.1 million for the same period in 2004. The change was primarily due to
decreased operating results, increased accounts receivable, decreased deferred
tax liability, decreased deferred compensation payable and a decrease in other
operating liabilities. These amounts were partially offset by increased accounts
payable and accrued liabilities and proceeds from the sale of trading
securities.
Net cash used in investing activities was $1.2 million for the three
months ended March 31, 2005, compared to $4.2 million for the three months ended
March 31, 2004. The decrease was primarily due to reduced purchases of fixed
assets, which was mainly attributable to significant software purchases and
construction costs related to our servicing facility in Rome, Georgia during the
first quarter of 2004.
Net cash used in financing activities was $26,000 for the three months
ended March 31, 2005, compared to net cash provided by financing activities of
$1.9 million for the three months ended March 31, 2004. The change was primarily
due to proceeds from our construction loan related to the new building in Rome,
Georgia received in the first quarter of 2004.
During 2003, we began construction of a new building in Rome, Georgia and
established a $2.7 million loan facility to finance construction costs. During
April 2004, we refinanced our construction loan, replacing it with a $2.9
million variable interest rate note indexed to the 30-day 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, we
must pay the balance of the principal due on the note. The outstanding balance
of the note as of March 31, 2005 was $2.8 million. To manage interest expense,
we 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 we pay a fixed rate of 6.8% in exchange
for a variable rate indexed to the 30-day LIBOR plus 1.9%.
We used $2.1 million of cash in our operations and incurred consolidated
net losses of $3.3 million during the three months ended March 31, 2005. 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. Furthermore, we have lowered our cost structure by reducing our employee
headcount and eliminating consulting costs on several corporate initiatives.
However, in the event that a cash shortfall does occur, 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.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk, interest rate risk,
credit risk, or equity price risk since December 31, 2004. Please see our Annual
Report on Form 10-K for the year ended December 31, 2004 for more information
concerning Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
We maintain 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 March
31, 2005, our Chief Executive Officer and Chief Financial Officer evaluated,
with the participation of our management, the effectiveness of our disclosure
controls and procedures. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report.
Our management, including the Chief Executive Officer and the Chief Financial
Officer, also evaluated our 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,
our internal control over financial reporting. Based on that evaluation, there
have been no such changes during the period covered by this report.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any material pending legal proceedings.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer
Purchases of Equity Securities
As described in our Annual Report on Form 10-K for the year ended December 31,
2004, we are obligated to redeem certain shares of Series A Common Stock and
Series B Common Stock at the election of the holders of such shares upon the
receipt of such elections. During the first quarter of 2005, we purchased shares
as specified below. We have not publicly announced a plan or program to buy back
shares of our Common Stock and have no control over the amount or timing of
purchases we are required to make under the redemption provisions and subject to
applicable law. All purchases listed below were of redeemable Common Stock we
were obligated to purchase when holders of redeemable shares exercised their
right to put the shares to the Company in accordance with their terms.
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total Number (d) Maximum Number
of Shares (or Approximate Dollar
(a) Total Purchased as Part Value) of Shares that
Number of (b) Average of Publicly May yet be Purchased
Shares Price Paid Announced Plans under the Plans or
Period Purchased per Share or Programs (2) Programs (2)
- ------------------------ --------- --------- --------------- ------------
January 1, 2005
through
January 31, 2005 15,000(1) $ 2.20 N/A N/A
February 1, 2005
through
February 28, 2005 9,000(1) $ 2.20 N/A N/A
- ------------------------ --------- ------ ----------- ----------
Total 24,000 $ 2.20
1 Purchased in satisfaction of our obligation to redeem redeemable shares of
Common Stock.
2 Not applicable. We do not currently have in place any publicly announced
plans or programs to purchase our outstanding equity securities.
Item 6. 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.
14
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: May 16, 2005 Signature: /s/ R. Preston Pitts
----------------------------------
R. Preston Pitts
President, Chief Operating Officer
and Chief Financial Officer
15
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.
16