Table of Contents
UNITED STATES
FORM 10-Q/A
[X]
For the Quarterly Period Ended March 31, 2000
OR
[ ]
For the Transition Period from to
Commission File No. 0-4366
REGAN HOLDING CORP.
California (State or Other Jurisdiction of Incorporation or Organization) | 68-0211359 (I.R.S. Employer Identification Number) |
2090 Marina Avenue,
(707) 778-8638
Proceedings During The Preceding Five Years:
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 [ ]
Applicable Only To Corporate Issuers:
Indicate the number of shares outstanding of the registrant’s common stock, as of April 30, 2000:
Common Stock-Series A 25,684,156
Common Stock-Series B 589,734
Restatement of Financial Results
In connection with a review of Regan Holding Corp.’s (the “Company’s”) stock option program, the Company re-evaluated its accounting for stock options granted to independent insurance producers. As a result, the Company has restated its 1999 and 2000 results (see Note 2 to the Condensed Consolidated Financial Statements).
Financial statement information and related disclosures included in this amended filing reflect, where appropriate, changes as a result of the restatements.
Except for the restatement of the financial results described above and the impact of the Company adopting SEC Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements, no other significant modifications have been made to this amended filing, nor has other information presented in this document been updated since the original filing.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
March 31, | December 31, | |||||||||
2000 | 1999 | |||||||||
(Unaudited and Restated) | ||||||||||
Assets | ||||||||||
Cash and cash equivalents | $ | 5,779,373 | $ | 1,094,759 | ||||||
Investments | 12,128,696 | 20,861,973 | ||||||||
Accounts receivable | 1,994,216 | 2,625,867 | ||||||||
Prepaid expenses | 977,824 | 516,759 | ||||||||
Income taxes receivable | 2,309,462 | 2,893,701 | ||||||||
Deferred income taxes-current | 710,261 | 895,841 | ||||||||
Marketing supplies inventory | 795,359 | 706,418 | ||||||||
Total current assets | 24,695,191 | 29,595,318 | ||||||||
Net fixed assets | 13,105,734 | 12,168,135 | ||||||||
Deferred income taxes-non current | 2,949,607 | 2,582,301 | ||||||||
Prepaid software licensing fees | 897,416 | 779,375 | ||||||||
Other assets | 1,493,582 | 2,018,575 | ||||||||
Total non-current assets | 18,446,339 | 17,548,386 | ||||||||
Total Assets | $ | 43,141,530 | $ | 47,143,704 | ||||||
Liabilities, Redeemable Common Stock, and Shareholders’ Equity | ||||||||||
Liabilities | ||||||||||
Accounts payable | $ | 475,113 | $ | 435,999 | ||||||
Accrued sales convention costs | 1,783,035 | 2,248,913 | ||||||||
Accrued liabilities | 4,843,665 | 4,764,637 | ||||||||
Margin loan payable | — | 3,088,918 | ||||||||
Other current liabilities | 159,999 | 107,384 | ||||||||
Total current liabilities | 7,261,812 | 10,645,851 | ||||||||
Loans payable | 2,251,911 | 2,256,418 | ||||||||
Incentive compensation payable | 126,785 | 469,720 | ||||||||
Deferred compensation payable | 1,924,376 | 1,364,713 | ||||||||
Other liabilities | 204,105 | 167,641 | ||||||||
Total non-current liabilities | 4,507,177 | 4,258,492 | ||||||||
Total Liabilities | 11,768,989 | 14,904,343 | ||||||||
Commitments and Contingencies | — | |||||||||
Redeemable Common Stock, Series A and B | 11,459,884 | 11,563,285 | ||||||||
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: 20,872,292 and 20,863,520 shares at March 31, 2000 and December 31, 1999, respectively | 3,669,651 | 3,659,367 | ||||||||
Paid-in capital from retirement of common stock | 936,104 | 927,640 | ||||||||
Paid-in capital from producer stock options | 4,526,000 | 4,276,000 | ||||||||
Retained earnings | 11,333,409 | 12,385,173 | ||||||||
Accumulated other comprehensive loss-net | (552,507 | ) | (572,104 | ) | ||||||
Total Shareholders’ Equity | 19,912,657 | 20,676,076 | ||||||||
Total Liabilities, Redeemable Common Stock and Shareholders’ Equity | $ | 43,141,530 | $ | 47,143,704 | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
Table of Contents
REGAN HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended | ||||||||||
March 31, | ||||||||||
2000 | 1999 | |||||||||
(Restated) | ||||||||||
Revenue | ||||||||||
Marketing allowances | $ | 4,173,759 | $ | 7,876,090 | ||||||
Commission income | 3,603,751 | 4,040,988 | ||||||||
Administrative fees | 2,222,885 | 2,288,243 | ||||||||
Seminar income | 62,131 | 130,789 | ||||||||
Other income | 141,124 | 53,313 | ||||||||
Total revenue | 10,203,650 | 14,389,423 | ||||||||
Expenses | ||||||||||
Salaries and related benefits | 6,251,009 | 5,557,313 | ||||||||
Sales promotion and support | 1,364,727 | 2,097,833 | ||||||||
Producer stock options | 250,000 | — | ||||||||
Professional fees | 1,046,770 | 385,973 | ||||||||
Occupancy | 758,648 | 381,958 | ||||||||
Depreciation and amortization | 597,683 | 562,268 | ||||||||
Stationery and supplies | 209,335 | 178,021 | ||||||||
Courier and postage | 207,291 | 244,828 | ||||||||
Travel and entertainment | 150,022 | 93,448 | ||||||||
Equipment | 362,442 | 179,034 | ||||||||
Insurance | 148,294 | 88,117 | ||||||||
Other | 206,255 | 53,014 | ||||||||
Total expenses | 11,552,476 | 9,821,807 | ||||||||
Operating Income (Loss) | (1,348,826 | ) | 4,567,616 | |||||||
Other Income (Loss) | ||||||||||
Investment income—net | 253,300 | 198,658 | ||||||||
Loss on disposals of fixed assets | (186,898 | ) | — | |||||||
Total other income (loss) | 66,402 | 198,658 | ||||||||
Income (Loss) Before Income Taxes, and Before Cumulative Effect of Accounting Change | (1,282,424 | ) | 4,766,274 | |||||||
Provision for (Benefit From) Income Taxes | (461,432 | ) | 1,972,526 | |||||||
Net Income (Loss) Before Cumulative Effect of Accounting Change | (820,992 | ) | 2,793,748 | |||||||
Cumulative Effect of Accounting Change, Net of Tax | (226,000 | ) | — | |||||||
Net Income (Loss) | $ | (1,046,992 | ) | $ | 2,793,748 | |||||
Earnings (Loss) Per Share: | ||||||||||
Weighted average shares outstanding-basic | 26,345,353 | 26,395,692 | ||||||||
Basic earnings (loss) per share Before Cumulative Effect of Accounting Change | $ | (0.03 | ) | $ | 0.11 | |||||
Cumulative Effect of Accounting Change | (0.01 | ) | — | |||||||
Basic earnings (loss) per share | $ | (0.04 | ) | $ | 0.11 | |||||
Weighted average shares outstanding-diluted | 26,345,353 | 27,413,090 | ||||||||
Diluted earnings (loss) per share Before Cumulative Effect of Accounting Change | $ | (0.03 | ) | $ | 0.10 | |||||
Cumulative Effect of Accounting Change | (0.01 | ) | — | |||||||
Diluted earnings (loss) per share | $ | (0.04 | ) | $ | 0.10 | |||||
See accompanying notes to Condensed Consolidated Financial Statements.
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REGAN HOLDING CORP. AND SUBSIDIARIES
Paid-in Capital | |||||||||||||||||||||||||||||||||
from | Paid-in Capital | ||||||||||||||||||||||||||||||||
Series A Common Stock | Retirement of | from | |||||||||||||||||||||||||||||||
Common | Producer | ||||||||||||||||||||||||||||||||
Shares | Amount | Stock | Options | ||||||||||||||||||||||||||||||
(Restated) | |||||||||||||||||||||||||||||||||
Balance December 31, 1999 | 20,863,520 | $ | 3,659,367 | $ | 927,640 | $ | 4,276,000 | ||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2000 | |||||||||||||||||||||||||||||||||
Net unrealized gains on investments | |||||||||||||||||||||||||||||||||
Less: Gains included in net loss | |||||||||||||||||||||||||||||||||
Deferred tax on net unrealized gains | |||||||||||||||||||||||||||||||||
Total comprehensive losses | |||||||||||||||||||||||||||||||||
Redemption and retirement of common stock | (7,028 | ) | (7,028 | ) | 8,464 | ||||||||||||||||||||||||||||
Exercise of stock options | 15,800 | 17,312 | |||||||||||||||||||||||||||||||
Producer stock option expense | 250,000 | ||||||||||||||||||||||||||||||||
Balance March 31, 2000 (Unaudited) | 20,872,292 | $ | 3,669,651 | $ | 936,104 | $ | 4,526,000 | ||||||||||||||||||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
Accumulated | ||||||||||||||
Other | ||||||||||||||
Retained | Comprehensive | |||||||||||||
Earnings | Loss | Total | ||||||||||||
(Restated) | (Restated) | |||||||||||||
Balance December 31, 1999 | $ | 12,385,173 | $ | (572,104 | ) | $ | 20,676,076 | |||||||
Comprehensive loss: | ||||||||||||||
Net loss for the three months ended March 31, 2000 | (1,046,992 | ) | (1,046,992 | ) | ||||||||||
Net unrealized gains on investments | 41,319 | 41,319 | ||||||||||||
Less: Gains included in net loss | (8,746 | ) | (8,746 | ) | ||||||||||
Deferred tax on net unrealized gains | (12,976 | ) | (12,976 | ) | ||||||||||
Total comprehensive losses | (1,027,395 | ) | ||||||||||||
Redemption and retirement of common stock | (4,772 | ) | (3,336 | ) | ||||||||||
Exercise of stock options | 17,312 | |||||||||||||
Producer stock option expense | 250,000 | |||||||||||||
Balance March 31, 2000 (Unaudited) | $ | 11,333,409 | $ | (552,507 | ) | $ | 19,912,657 | |||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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REGAN HOLDING CORP. AND SUBSIDIARIES
For the Three Months Ended | |||||||||||
March 31, | |||||||||||
2000 | 1999 | ||||||||||
(Restated) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (1,046,992 | ) | $ | 2,793,748 | ||||||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | |||||||||||
Depreciation and amortization of fixed assets | 583,199 | 544,512 | |||||||||
Loss on disposal of fixed assets | (186,898 | ) | — | ||||||||
Amortization of intangible assets | 14,484 | 17,757 | |||||||||
Common stock awarded to producers | — | 369,905 | |||||||||
Producer stock option expenses | 250,000 | 81,000 | |||||||||
Amortization/accretion of investments | (625 | ) | (21,576 | ) | |||||||
Realized gains on sales of investments | 8,746 | 87,652 | |||||||||
Changes in assets and liabilities | |||||||||||
Net change in accounts receivable | 631,651 | (391,949 | ) | ||||||||
Net change in prepaid expenses | (461,065 | ) | (477,264 | ) | |||||||
Net change in income taxes receivable | 584,239 | 2,045,239 | |||||||||
Net change in deferred income taxes | (194,700 | ) | (72,714 | ) | |||||||
Net change in marketing supplies inventory | (88,941 | ) | (142,304 | ) | |||||||
Net change in software licensing fees | (118,041 | ) | — | ||||||||
Net change in accounts payable | 39,114 | (54,577 | ) | ||||||||
Net change in accrued sales convention costs | (465,878 | ) | 154,261 | ||||||||
Net change in accrued liabilities | 79,028 | (964,605 | ) | ||||||||
Net change in other assets and liabilities | 473,196 | (103,866 | ) | ||||||||
Net cash provided by operating activities | 100,517 | 3,865,219 | |||||||||
Cash flows from investing activities: | |||||||||||
Purchases of investments | (5,730,021 | ) | (12,032,709 | ) | |||||||
Proceeds from sales of investments | 14,487,749 | 8,588,066 | |||||||||
Purchases of fixed assets | (1,333,901 | ) | (450,626 | ) | |||||||
Net cash provided by (used in) in investing activities | 7,423,827 | (3,895,269 | ) | ||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from margin loan | 1,000,000 | — | |||||||||
Payments toward margin loan | (4,124,515 | ) | — | ||||||||
Payments toward loan payable | (4,507 | ) | — | ||||||||
Return of building loan reserve | 378,717 | — | |||||||||
Payments for redemption and retirement of common stock | (106,737 | ) | (3,703 | ) | |||||||
Proceeds from stock option exercises | 17,312 | — | |||||||||
Net cash used in financing activities | (2,839,730 | ) | (3,703 | ) | |||||||
Increase (decrease) in cash and cash equivalents | 4,684,614 | (33,753 | ) | ||||||||
Cash and cash equivalents, beginning of period | 1,094,759 | 5,916,731 | |||||||||
Cash and cash equivalents, end of period | $ | 5,779,373 | $ | 5,882,978 | |||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Table of Contents
REGAN HOLDING CORP. AND SUBSIDIARIES
1. Financial Information
The accompanying Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States and include the accounts of Regan Holding Corp. (the “Company”) and its wholly-owned subsidiaries, Legacy Marketing Group (“LMG”), Legacy Financial Services, Inc., Legacy Advisory Services, Inc., Legacy Reinsurance Company, and LifeSurance Corporation. All intercompany transactions have been eliminated.
The statements are unaudited but reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and results of operations. The Condensed Consolidated Balance Sheet data at December 31, 1999, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year. Users of these Condensed Consolidated Financial Statements are encouraged to refer to the Annual Report on Form 10-K/A (Amendment No. 2) for the year ended December 31, 1999 for additional disclosure.
Effective January 1, 2000, the Company changed, from five years to three years, the estimated useful life over which certain computer hardware is being depreciated. Had this change in estimate not occurred, the Company would have recorded $443,307 in depreciation expense during the three months ended March 31, 2000.
2. Restatement of Financial Results and Cumulative Effect of Accounting Change
Stock Option Expense- During the quarter ended March 31, 2000, the Company originally recorded stock option expense of $1,384,000 related to 2,132,507 stock options granted to independent insurance producers ("Producers") in January 2000 pursuant to Regan Holding Corp.’s Producer Stock Option and Award plan. The number of options granted was based on the Producers' sales performance during 1999. In addition, the Company granted 1,515,924 options to Producers in January 2001, which were based on their performance during 2000. In connection with a review of the Company’s stock option program, the Company determined that the expense related to the options granted in 2001 should have been recorded during the year ended December 31, 2000, based on the Producers performance and the current fair value of options earned at each interim reporting date. As a result, the Condensed Consolidated Statement of Operations for quarter ended March 31, 2000 has been restated to reflect Producer stock option expense of $250,000 related to the stock options granted in January 2001 which were earned by Producers during the first quarter of 2000 and to reflect a $1,384,000 decrease in Producer stock option expense to reverse stock option expense related to options granted in January 2000 which were earned by Producers in 1999. There was no comparable effect for the quarter ended March 31, 1999.
Revenue Recognition- Effective January 1, 2000, the Company adopted SEC Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements(“SAB 101”). Under the Marketing Agreement with American National Insurance Company (“American National”), the Company is obligated to repay to American National an annual amount equal to 0.1% of specified premium levels to the extent that such premiums are below the minimum production requirement of $500 million during each twelve month period ended September 30th (the “Premium Deficiency”). As a result, the Company changed its revenue recognition policy to recognize commission revenue net of 0.1% of the Premium Deficiency, assuming no additional premiums will be sold under the American National Marketing Agreement. Prior to December 31, 1999, the Company recorded revenue throughout the twelve month period net of 0.1% of the projected annual Premium Deficiency. The cumulative effect of this change in accounting principle resulted in an increase in the net loss of $226,000, net of a tax benefit of $149,000, in the quarter ended March 31, 2000. In addition, commission revenue increased by $52,888 during the three months ended March 31, 2000. The Form 10-Q for the three months ended March 31, 2000 as originally filed did not include the effect of adopting SAB 101. Accordingly, the impact of adoption has been included in the first quarter 2000 results in the accompanying Condensed Consolidated Statement of Operations.
The effects of the restatement of the stock option expense and the adoption of SAB 101 on the Company’s Condensed Consolidated Financial Statements for the period ending March 31, 2000 are as follows:
Statement of Operations Data:
For the Three Months Ended | ||||||||
March 31, 2000 | ||||||||
As originally | ||||||||
reported | As restated | |||||||
Total revenue | $ | 10,150,762 | $ | 10,203,650 | ||||
Total expenses | 12,686,476 | 11,552,476 | ||||||
Operating loss | (2,535,714 | ) | (1,348,826 | ) | ||||
Other income | 66,402 | 66,402 | ||||||
Loss before income taxes and cumulative effect of accounting change | (2,469,312 | ) | (1,282,424 | ) | ||||
Benefit from income taxes | (943,241 | ) | (461,432 | ) | ||||
Net loss before cumulative effect of accounting change | (1,526,071 | ) | (820,992 | ) | ||||
Cumulative effect of accounting change, net of tax | — | (226,000 | ) | |||||
Net loss | $ | (1,526,071 | ) | $ | (1,046,992 | ) | ||
Net loss per share – basic and diluted | $ | .06 | $ | .04 | ||||
Balance Sheet Data:
March 31, 2000 | ||||||||
As originally | ||||||||
reported | As restated | |||||||
Total assets | $ | 42,923,031 | $ | 43,141,530 | ||||
Total liabilities | $ | 11,446,877 | $ | 11,768,989 | ||||
Redeemable common stock | $ | 11,459,884 | $ | 11,459,884 | ||||
Shareholders’ equity | $ | 20,016,270 | $ | 19,912,657 |
3. Margin Loan Payable
During the first quarter of 2000, the Company borrowed an additional $1,000,000 under a margin loan agreement with the Company’s investment broker. As of March 31, 2000 the margin loan was paid in full.
4. Loan Payable
In 1999, the Company entered into a loan payable for the purchase of a building. The loan agreement contains certain covenants with which the Company must comply, including restrictions on repurchasing non-redeemable common stock. The lender has waived this covenant through June 30, 2000, provided that such voluntary repurchases do not exceed $125,000 per quarter. Pursuant to the loan agreement, the Company was also required to place approximately $560,000 in reserve to cover loan payments in the event of default and to provide for certain repair costs. During the first quarter of 2000, the lender released $378,717 of such reserves for general use by the Company.
5. Deferred Compensation Payable
During the first quarter of 2000, $421,984 in commissions were deferred by producers under the Regan Holding Corp. Producer Commission Deferral Plan and $32,468 in compensation was deferred by key employees under the Regan Holding Corp. Key Employee Deferred Compensation Plan. Such amounts have been recorded as a liability in the accompanying Condensed Consolidated Financial Statements, plus Company matching contributions of $27,579 and first quarter gains of $77,632.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Redeemable Common Stock
The Company is obligated to repurchase certain of its shares of common stock pursuant to various agreements under which the common stock was issued. During the three months ended March 31, 2000, redeemable common stock was redeemed and retired as follows:
Series B | ||||||||||||||||||||||||
Series A Redeemable | Redeemable | Total Redeemable | ||||||||||||||||||||||
Common Stock | Common Stock | Common Stock | ||||||||||||||||||||||
Carrying | Carrying | Carrying | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Balance December 31, 1999 | 4,921,615 | $ | 9,794,014 | 589,757 | $ | 1,769,271 | 5,511,372 | $ | 11,563,285 | |||||||||||||||
Redemption and retirement of common stock | (51,925 | ) | (103,332 | ) | (23 | ) | (69 | ) | (51,948 | ) | (103,401 | ) | ||||||||||||
Balance March 31, 2000 | 4,869,690 | $ | 9,690,682 | 589,734 | $ | 1,769,202 | 5,459,424 | $ | 11,459,884 | |||||||||||||||
7. Stock Option Expense (Restated)
In January 2001, the Company granted 1,515,924 stock options to Producers based on their sales performance during 2000. Accordingly, during the quarter ended March 31, 2000, the Company recorded Producer stock option expense of $250,000 related to the January 2001 grants which were earned by Producers during the first quarter of 2000. The fair value of the options was estimated using the Black-Scholes option-pricing model with the following assumptions: risk free interest rates ranging from 5.0% to 6.5%, expected volatility of 28.3%, and expected lives of 6 years. A dividend yield assumption was not applicable, as the Company’s stock is not publicly traded nor does the Company pay dividends.
8. Loss on Disposals of Fixed Assets
The Company recorded pre-tax non-operating losses of $186,898 during the first quarter of 2000 related to idle assets and other equipment replaced as a result of capital improvements.
9. Amendments to Marketing and Insurance Processing Agreements
In April 2000, LMG and American National Insurance Company ("American National") amended the terms of the Marketing Agreement and the Insurance Processing Agreement, pursuant to which LMG markets and administers fixed annuity and life insurance products, to extend the terms to July 31, 2000. LMG and American National are in the process of negotiating a five year extension for both agreements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Segment Information (Restated)
The table below presents information about the Company’s operating segments:
Legacy | Legacy | |||||||||||||||||
Marketing | Financial | |||||||||||||||||
Group | Services, Inc. | Other | Total | |||||||||||||||
(Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||
Three months ended March 31, 2000: | ||||||||||||||||||
Total revenue | $ | 9,321,921 | $ | 709,404 | $ | 172,325 | $ | 10,203,650 | ||||||||||
Total expenses | 9,719,257 | 430,544 | 1,402,675 | 11,552,476 | ||||||||||||||
Operating income (loss) | (397,336 | ) | 278,860 | (1,230,350 | ) | (1,348,826 | ) | |||||||||||
Other income (loss) | 244,509 | 3,695 | (181,802 | ) | 66,402 | |||||||||||||
Income (loss) before tax | (152,827 | ) | 282,555 | (1,412,152 | ) | (1,282,424 | ) | |||||||||||
Tax provision (benefit) | (189,488 | ) | 62,535 | (334,479 | ) | (461,432 | ) | |||||||||||
Net income (loss) before cumulative effect of accounting change | 36,661 | 220,020 | (1,077,673 | ) | (820,992 | ) | ||||||||||||
Cumulative effect of accounting change | (226,000 | ) | — | — | (226,000 | ) | ||||||||||||
Net income (loss) | $ | (189,339 | ) | $ | 220,020 | $ | (1,077,673 | ) | $ | (1,046,992 | ) | |||||||
Three months ended March 31, 1999: | ||||||||||||||||||
Total revenue | $ | 14,067,996 | $ | 242,219 | $ | 79,208 | $ | 14,389,423 | ||||||||||
Total expenses | 7,940,659 | 308,855 | 1,572,293 | 9,821,807 | ||||||||||||||
Operating income (loss) | 6,127,337 | (66,636 | ) | (1,493,085 | ) | 4,567,616 | ||||||||||||
Other income | 198,359 | 299 | — | 198,658 | ||||||||||||||
Income (loss) before tax | 6,325,696 | (66,337 | ) | (1,493,085 | ) | 4,766,274 | ||||||||||||
Tax provision (benefit) | 2,459,949 | (57,539 | ) | (429,884 | ) | 1,972,526 | ||||||||||||
Net income (loss) | $ | 3,865,747 | $ | (8,798 | ) | $ | (1,063,201 | ) | $ | 2,793,748 | ||||||||
Total assets: | ||||||||||||||||||
March 31, 2000 | $ | 23,792,559 | $ | 1,524,880 | $ | 17,824,091 | $ | 43,141,530 | ||||||||||
December 31, 1999 | $ | 27,527,585 | $ | 1,327,639 | $ | 18,288,480 | $ | 47,143,704 | ||||||||||
“Other” segments above include Regan Holding Corp. (stand-alone) and its remaining subsidiaries, Legacy Advisory Services, Inc., Legacy Reinsurance Company, and LifeSurance Corporation. Such entities’ operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.
11. Subsequent Events
During May 2000, the Company entered into an agreement to fund a financial services Internet start-up company. Pursuant to this agreement, the Company purchased an equity investment in the Internet company for $500,000 during May 2000 and is obligated to provide additional funding of up to $1 million during 2000, depending on the Internet company's achievement of agreed-upon development objectives.
12. Reclassifications
Certain amounts in the 1999 consolidated financial statements have been reclassified to conform with 2000 classifications. Such reclassifications had no impact on net income (loss) or shareholders’ equity.
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
Except for historical information contained herein, certain of the matters discussed in this Form 10-Q/A are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” involve certain risks and uncertainties. All forecasts and projections in this report are “forward-looking statements” and are based on management’s current expectations of the Company’s near term results, based on current information available. Actual results could differ materially.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below presents information about the Company’s operating segments:
Legacy | Legacy | |||||||||||||||||
Marketing | Financial | |||||||||||||||||
Group | Services, Inc. | Other | Total | |||||||||||||||
(Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||
Three months ended March 31, 2000: | ||||||||||||||||||
Total revenue | $ | 9,321,921 | $ | 709,404 | $ | 172,325 | $ | 10,203,650 | ||||||||||
Total expenses | 9,719,257 | 430,544 | 1,402,675 | 11,552,476 | ||||||||||||||
Operating income (loss) | (397,336 | ) | 278,860 | (1,230,350 | ) | (1,348,826 | ) | |||||||||||
Other income (loss) | 244,509 | 3,695 | (181,802 | ) | 66,402 | |||||||||||||
Income (loss) before tax | (152,827 | ) | 282,555 | (1,412,152 | ) | (1,282,424 | ) | |||||||||||
Tax provision (benefit) | (189,488 | ) | 62,535 | (334,479 | ) | (461,432 | ) | |||||||||||
Net income (loss) before cumulative effect of accounting change | 36,661 | 220,020 | (1,077,673 | ) | (820,992 | ) | ||||||||||||
Cumulative effect of accounting change | (226,000 | ) | — | — | (226,000 | ) | ||||||||||||
Net income (loss) | $ | (189,339 | ) | $ | 220,020 | $ | (1,077,673 | ) | $ | (1,046,992 | ) | |||||||
Three months ended March 31, 1999: | ||||||||||||||||||
Total revenue | $ | 14,067,996 | $ | 242,219 | $ | 79,208 | $ | 14,389,423 | ||||||||||
Total expenses | 7,940,659 | 308,855 | 1,572,293 | 9,821,807 | ||||||||||||||
Operating income (loss) | 6,127,337 | (66,636 | ) | (1,493,085 | ) | 4,567,616 | ||||||||||||
Other income | 198,359 | 299 | — | 198,658 | ||||||||||||||
Income (loss) before tax | 6,325,696 | (66,337 | ) | (1,493,085 | ) | 4,766,274 | ||||||||||||
Tax provision (benefit) | 2,459,949 | (57,539 | ) | (429,884 | ) | 1,972,526 | ||||||||||||
Net income (loss) | $ | 3,865,747 | $ | (8,798 | ) | $ | (1,063,201 | ) | $ | 2,793,748 | ||||||||
Total assets: | ||||||||||||||||||
March 31, 2000 | $ | 23,792,559 | $ | 1,524,880 | $ | 17,824,091 | $ | 43,141,530 | ||||||||||
December 31, 1999 | $ | 27,527,585 | $ | 1,327,639 | $ | 18,288,480 | $ | 47,143,704 | ||||||||||
“Other” segments above include Regan Holding Corp. (stand-alone) and its remaining subsidiaries, Legacy Advisory Services, Inc., Legacy Reinsurance Company, and LifeSurance Corporation.
Analysis of Regan Holding Corp. Consolidated
Results of Operations—The Company experienced a consolidated net loss of approximately $1.1 million in the first quarter of 2000, compared to consolidated net income of approximately $2.8 million during the first quarter of 1999, due primarily to a decrease in LMG revenue which is discussed below.
Liquidity and Capital Resources—The Company’s ability to mobilize its assets remained strong at March 31, 2000, with cash and short-term investment grade securities representing 41.5% of the Company’s total consolidated assets.
The Company’s principal needs for cash are: (i) funding operating expenses; (ii) purchases of computer hardware and software, leasehold improvements, and acquisitions of furniture and fixtures to accommodate new employees and support growth in operations; (iii) funding continued product development and potential strategic acquisitions; and (iv) as a reserve to cover possible redemptions of certain of the Company’s common stock, which is redeemable at the option of certain shareholders under various agreements with the Company. In the first quarter of 2000, redemption requests received by the Company were not material in amount, neither individually nor in the aggregate, and the Company believes that its liquid assets are sufficient to meet anticipated requests for redemption. At March 31, 2000 and December 31, 1999, the total redemption value of all redeemable common stock outstanding was approximately $11.5 million.
Generally, the Company’s cash needs are met through cash provided from operating activities, which totaled approximately $101,000 during the quarter ended March 31, 2000, compared to approximately $3.9 million during the quarter ended March 31, 1999.
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At December 31, 1999, the Company's investment portfolio included a $12 million equity investment in Indianapolis Life Group of Companies (the "Indianapolis Group"), an affiliate of an insurance carrier with which LMG contracts. In the first quarter of 2000, the Indianapolis Group repurchased the equity securities from the Company for approximately $12.5 million, pursuant to the terms of the investment agreement under which the securities were purchased.
During the latter two quarters of 1999 and the first quarter of 2000, the Company obtained approximately $4.1 million in margin loan advances from its investment broker. The margin loan was repaid in full during the first quarter of 2000, using proceeds from the repurchase of the Indianapolis Group equity securities, as discussed above.
During May 2000, the Company entered into an agreement to fund a financial services internet start-up company. Pursuant to this agreement, the Company purchased an equity investment in the internet company for $500,000 during May 2000 and is obligated to provide additional funding of up to $1 million during 2000, depending on the internet company's achievement of agreed-upon development objectives.
In May 1998, the Company entered into a Shareholder’s Agreement with Lynda Regan, Chief Executive Officer of the Company and Chairman of the Company’s Board of Directors, and certain other individuals. Under the terms of this agreement, in the event of the death of Ms. Regan, the Company shall repurchase from Ms. Regan’s estate all of the shares of the Company’s common stock that were owned by Ms. Regan at the time of her death or that were transferred by her to one or more trusts prior to her death. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares. The Company has purchased a life insurance policy with a face amount of $14.0 million for the purpose of funding this obligation in the event of Ms. Regan’s death. Any excess of the obligation over the insurance proceeds are expected to be funded with cash and investments and, if necessary, through external financing.
Management intends to continue to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. As a result, management anticipates that cash and investments will continue to represent a high percentage of total assets. Management believes that existing cash and investment balances, together with cash flows from operations, will provide sufficient funding for the foreseeable future. However, in the event that a shortfall was to occur, management believes that adequate financing could be obtained to meet the Company’s cash flow needs.
Analysis of Legacy Marketing Group
Results of Operations—During the first quarter of 2000, LMG’s net loss totaled approximately $189,000 compared to net income of approximately $3.9 million in the first quarter of 1999. This shift is due primarily to decreases in income and to increases in expenses, as discussed below.
Income—LMG’s major sources of income are marketing allowances, commission income and administrative fees from sales and administration of fixed annuity and life insurance products on behalf of the insurance carriers with which the Company contracts (the “Carriers”). Levels of marketing allowances and commission income are directly related to the sales volume of such products. Administrative fees are a function not only of product sales, but also of administration of policies inforce and producer appointments. Total LMG income decreased approximately $4.8 million, or 33.7%, in the first quarter of 2000 compared to the first quarter of 1999. The decreases are attributable primarily to decreases in premium placed inforce for the Carriers, as discussed below.
LMG marketing allowances and commission income, combined, decreased approximately $4.6 million, or 39.4%, due to a decrease in fixed annuity premium placed inforce of approximately $236.7 million, or 47.7%, during the first quarter of 2000 compared to the first quarter of 1999. This decrease is attributable primarily to current market conditions which have resulted in the poor performance of bond investments underlying the annuities’ crediting rates and to lower than anticipated market acceptance of the VisionMark II™annuity, which was introduced in 1999 to replace the original version of the VisionMark™. The decrease in premium placed inforce was partially offset by a shift to fixed life insurance products which yield higher commissions.
Currently, the Company markets and administers fixed annuity and life insurance products on behalf of three Carriers. During the three months ended March 31, 2000, 13.4%, 36.8%, and 40.6% of the Company’s total consolidated income resulted from LMG agreements with American National, IL Annuity and Insurance Company ("IL Annuity"), and Transamerica Life Insurance and Annuity Company ("Transamerica") respectively, compared to 8.9%, 80.4%, and 6.4% during the same period in 1999.
Although the Company markets and administers several fixed annuity and life insurance products on behalf of the Carriers, LMG’s income is derived primarily from sales and administration of two fixed annuity products. During the first quarters of 2000 and 1999, 18.1% and 63.0% of the Company’s total income resulted
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These shifts from sales of IL Annuity products to sales of Transamerica products are attributable primarily to market acceptance of the SelectMark™ product and are expected to continue for the foreseeable future.
The Company is currently implementing several intiatives to increase LMG income, including negotiations with insurance carriers to provide marketing and administrative services, similar to those performed for the Carriers. In addition, LMG is expected to release several new products during 2000, which are expected to diversify LMG's product portfolio, enhance market share, and increase income. Several marketing programs are also planned for 2000, which are designed to strengthen relationships with existing producers and to attract new producers. However, there can be no assurances that such events would occur or, were they to occur, would result in increases in LMG income.
Expenses—Total LMG expenses increased approximately $1.8 million, or 22.4%, during the three months ended March 31, 2000 compared to the three months ended March 31, 1999. This increase is due primarily to increases in compensation, occupancy, professional fees, and depreciation, as discussed below.
As a service organization, LMG's primary expenses are salaries and related employee benefits. These expenses increased approximately $465,000, or 8.8%, during the first quarter of 2000 compared to the first quarter of 1999. Such increases resulted primarily from regular annual wage increases and from increases in the average number of full-time equivalent employees. The increases in personnel during 1999 were largely attributable to preparation for, and accommodation of, increases in sales. However, the rate of increase in salaries expense is lower than the rates of increase in personnel due to the fact that newly added personnel were primarily at lower salary levels. During 2000, however, the Company plans to hire several LMG employees at higher salary levels, some of whom are expected to be elected as officers of LMG. Such increases in personnel are considered necessary in order to support anticipated increases in LMG income, as discussed above. Accordingly, salaries and benefits expense is expected to increase in future periods.
Occupancy expenses consist primarily of office building and equipment leasing costs. These expenses increased approximately $429,000, or 189.5%, in the first quarter of 2000 compared to the first quarter of 1999 due primarily to the leasing of new office space during the third quarter of 1999 and to overall increases in telephone, utilities, and other related expenses which correspond with increases in employment, as discussed above.
Professional fees increased approximately $632,000, or 234.3%, in the first quarter of 2000 compared to the three months ended March 31, 1999, due primarily to consulting fees related to various information systems projects.
Depreciation and amortization expense increased approximately $169,000, or 714.3%, in the first quarter of 2000 compared to the first quarter of 1999, due primarily to acquisitions of fixed assets, which were necessary to improve newly leased office space and to accommodate increases in employment, and to a change in the estimated useful lives over which certain computer hardware are being depreciated.
Analysis of Legacy Financial Services, Inc.
Results of Operations—During the first quarter of 2000, LFS had net income of approximately $220,000 compared to a net loss of approximately $9,000 during the first quarter of 1999. This shift is primarily due to increases in income, partially offset by increases in expenses, as discussed below.
Income—LFS’ major source of income is commission overrides, which are generated through sales of variable life insurance and annuity products, mutual funds, and certain equity securities. Levels of commission income are directly related to the volume of sales of such products. Total LFS revenue increased approximately $467,000, or 192.9%, in the three months ended March 31, 2000 compared to the corresponding period in 1999 due primarily to overall increases in sales volume. Also contributing to increases in commission income were shifts to sales by independent broker networks from which LFS receives higher net commissions.
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Expenses—Total LFS expenses increased approximately $122,000, or 39.4%, in the first quarter of 2000 compared to the first quarter of 1999 due primarily to increases in salaries and benefits. As a service organization, LFS operating expenses consist primarily of salaries and related employee benefits. These expenses increased approximately $131,000, or 64.2%, in the first quarter of 2000, from the corresponding quarter in 1999, due primarily to increases in the average number of employees, to the addition of personnel at higher pay levels, and to regular annual pay increases.
Analysis of Other Segments
Results of Operations—Other segments consist of Regan Holding Corp. (stand-alone), LifeSurance Corporation, Legacy Advisory Services, Inc. and Legacy Reinsurance Company. Combined net losses from these entities increased approximately $15,000, or 1.4%, in the first quarter of 2000 compared to the first quarter of 1999 primarily due to losses on disposals of fixed assets, partially offset by reduced operating expenses, as discussed below.
Regan Holding Corp. (stand-alone) recorded non-operating losses of approximately $187,000 during the first quarter of 2000 related to idle assets and other equipment replaced as a result of capital improvements. Also, Regan Holding Corp. (stand-alone) recorded $250,000 of Producer stock option expense related to stock options granted to producers as an incentive to stimulate sales. Offsetting this expense was a reversal of $1,384,000 in Producer stock option expense related to options granted in January 2000 but earned by producers in 1999.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) | Index to Exhibits | |||
Exhibit 10.1 | Amendment Thirteen to the Marketing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated April, 2000. * | |||
Exhibit 10.2 | Amendment Twelve to the Insurance Processing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated April 2000. * | |||
Exhibit 11.1 | Computation of Earnings (Loss) Per Share-Basic and Diluted (Restated) | |||
Exhibit 27 | Financial Data Schedule * | |||
(b) | Reports on Form 8-K | |||
No reports on Form 8-K were filed during the first quarter of 2000. |
* Filed with original filing on May 15, 2000.
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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: | September 20, 2001 | Signature: | /s/ R. PRESTON PITTS --------------------------------------------------- R. Preston Pitts, President & Chief Operating Officer |
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