UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2002
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
____________.
Commission file number 0-4366
Regan Holding Corp.
-------------------
(Exact name of registrant as specified in its charter)
California 68-0211359
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2090 Marina Avenue, Petaluma, California 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 [ ]
Applicable Only To Corporate Issuers:
Indicate the number of shares outstanding of the registrant's common
stock, as of May 13, 2002:
Common Stock-Series A 24,645,000
Common Stock-Series B 569,000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, December 31,
2002 2001
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents $ 2,529,000 $ 1,376,000
Trading investments 4,633,000 --
Available-for-sale investments 5,561,000 12,571,000
Accounts receivable 1,309,000 1,948,000
Prepaid expenses and deposits 1,980,000 1,057,000
Income taxes receivable 71,000 76,000
----------- -----------
Total current assets 16,083,000 17,028,000
----------- -----------
Net fixed assets 25,469,000 24,047,000
Deferred tax assets 2,001,000 1,529,000
Intangible assets 1,358,000 1,370,000
Other assets 1,592,000 2,053,000
----------- -----------
Total non current assets 30,420,000 28,999,000
----------- -----------
Total assets $46,503,000 $46,027,000
=========== ===========
Liabilities, redeemable common stock,
and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 8,313,000 $ 8,069,000
Loans payable 6,088,000 4,750,000
----------- -----------
Total current liabilities 14,401,000 12,819,000
----------- -----------
Deferred compensation payable 4,633,000 4,356,000
Other liabilities 258,000 222,000
----------- -----------
Total non current liabilities 4,891,000 4,578,000
----------- -----------
Total liabilities 19,292,000 17,397,000
----------- -----------
Redeemable common stock, Series A and B 10,507,000 11,124,000
----------- -----------
Shareholders' equity
Preferred stock, no par value: Authorized: 100,000,000 shares
No shares issued or outstanding -- --
Series A common stock, no par value:
Authorized: 45,000,000 shares, issued and outstanding:
20,703,000 and 20,769,000 at March 31, 2002 and
December 31, 2001 3,531,000 3,596,000
Common stock committed 25,000 25,000
Paid-in capital 6,491,000 6,424,000
Retained earnings 6,564,000 7,405,000
Accumulated other comprehensive income 93,000 56,000
----------- -----------
Total shareholders' equity 16,704,000 17,506,000
----------- -----------
Total liabilities, redeemable common stock and shareholders' equity $46,503,000 $46,027,000
=========== ===========
See notes to financial statements.
2
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended
March 31,
-----------------------------
2002 2001
------------ ------------
Revenue
Marketing allowances $ 5,028,000 $ 5,273,000
Commissions 4,023,000 3,891,000
Administrative fees 2,626,000 2,514,000
Other income 77,000 79,000
------------ ------------
Total revenue 11,754,000 11,757,000
------------ ------------
Expenses
Selling, general and administrative 11,109,000 11,939,000
Depreciation and amortization 1,049,000 961,000
Other 817,000 967,000
------------ ------------
Total expenses 12,975,000 13,867,000
------------ ------------
Operating loss (1,221,000) (2,110,000)
Other income (loss)
Investment income, net 47,000 123,000
Interest expense (109,000) (21,000)
------------ ------------
Total other income (loss), net (62,000) 102,000
------------ ------------
Loss before income taxes (1,283,000) (2,008,000)
Benefit from income taxes 485,000 751,000
------------ ------------
Net loss $ (798,000) $ (1,257,000)
============ ============
Basic and diluted loss per share:
Net loss available to common shareholders $ (0.03) $ (0.05)
Weighted average shares outstanding:
Basic and diluted 25,341,000 25,963,000
See notes to financial statements.
3
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Series A
Common Stock Common Accumulated Other
-------------------------- Stock Paid-in Retained Comprehensive
Shares Amount Committed Capital Earnings Income Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance January 1, 2002 20,769,000 $ 3,596,000 $ 25,000 $ 6,424,000 $ 7,405,000 $ 56,000 $17,506,000
Comprehensive loss,
net of tax:
Net loss (798,000) (798,000)
Net unrealized
gains on investments 66,000 66,000
Less: reclassification
adjustment for losses
included in net loss (29,000) (29,000)
-----------
Total comprehensive loss (761,000)
Retirement upon voluntary
repurchases of common stock (66,000) (65,000) (43,000) (108,000)
Retirement upon mandatory
redemption 67,000 67,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance March 31, 2002 20,703,000 $ 3,531,000 $ 25,000 $ 6,491,000 $ 6,564,000 $ 93,000 $16,704,000
=========== =========== =========== =========== =========== =========== ===========
See notes to financial statements.
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
------------------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $ (798,000) $(1,257,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,049,000 961,000
Losses on write-off of fixed assets 159,000 --
Losses on equity investee -- 401,000
Common stock awarded to producers -- 50,000
Amortization/accretion of investments 20,000 --
Realized losses on sales of investments, net 49,000 107,000
Changes in operating assets and liabilities
Accounts receivable 639,000 (95,000)
Prepaid expenses and deposits (923,000) (143,000)
Income taxes receivable and payable 5,000 (567,000)
Deferred tax assets (497,000) (184,000)
Accounts payable and accrued liabilities 244,000 (361,000)
Deferred compensation payable 277,000 51,000
Other operating assets and liabilities 5,000 183,000
----------- -----------
Net cash provided by (used in) operating activities 229,000 (854,000)
----------- -----------
Cash flows from investing activities:
Purchases of investments (5,592,000) (469,000)
Proceeds from sales and maturities of investments 7,962,000 4,898,000
Purchases of fixed assets (1,901,000) (1,341,000)
Acquisition of prospectdigital assets (225,000) --
Equity in and advances to investee -- (30,000)
----------- -----------
Net cash provided by investing activities 244,000 3,058,000
----------- -----------
Cash flows from financing activities:
Proceeds from loans payable 1,338,000 500,000
Payments toward loans payable -- (2,765,000)
Repurchases of redeemable common stock (550,000) (6,000)
Voluntary repurchases of common stock (108,000) --
----------- -----------
Net cash provided by (used in) financing activities 680,000 (2,271,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,153,000 (67,000)
Cash and cash equivalents, beginning of period 1,376,000 1,882,000
----------- -----------
Cash and cash equivalents, end of period $ 2,529,000 $ 1,815,000
=========== ===========
See notes to financial statements.
5
REGAN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in
conformity with accounting principles generally accepted in the United
States of America and include the accounts of Regan Holding Corp. (the
"Company") and its wholly-owned subsidiaries. All intercompany
transactions have been eliminated.
The statements are unaudited but reflect all adjustments consisting
only of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the Company's
consolidated financial position and results of operations. The results
for the three months ended March 31, 2002 are not necessarily
indicative of the results to be expected for the entire year. Users of
these Consolidated Financial Statements are encouraged to refer to the
Annual Report on Form 10-K for the year ended December 31, 2001 for
additional disclosure.
2. Investments
The Company's investments are classified as either available-for-sale
or trading securities, and are carried at fair value. For
available-for-sale securities, net unrealized gains and losses are
reported as a separate component of shareholders' equity. For trading
securities, net unrealized gains and losses are reported as investment
income or loss.
3. Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted Financial Accounting Standards
No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142
eliminates the requirement to amortize goodwill and indefinite-lived
intangible assets, addresses the amortization of intangible assets with
a defined life and addresses the impairment testing and recognition for
goodwill and intangible assets. As of March 31, 2002, the balance of
intangible assets included $1.2 million of goodwill that was being
amortized over ten years prior to January 1, 2002. As required by SFAS
142, the Company is no longer amortizing goodwill and is required to
perform an initial evaluation to determine if any impairment of
goodwill exists. The Company expects to complete its initial evaluation
of goodwill during the second quarter of 2002 but does not anticipate
that the evaluation will result in a material change to its
consolidated results of operations or financial position.
4. Acquisition of prospectdigital, LLC
In January 2002, the Company acquired the remaining 67% of the
outstanding stock of prospectdigital, LLC for $225,000 in cash. The
Company is accounting for this transaction as a purchase of assets.
Prospectdigital is now a wholly-owned subsidiary. The results of
prospectdigital's operations have been included in the Consolidated
Financial Statements since the date of acquisition. Prospectdigital
provides an on-line marketing service to insurance agents and
registered representatives selling annuities and life insurance. To
date prospectdigital has had nominal revenue and used its capital to
develop software to support its business and incur operating expenses.
Prior to the acquisition, the Company owned 33% of prospectdigital and
its investment was accounted for under the equity method. The Company
recorded 98.8% of the losses of prospectdigital to reflect a
hypothetical liquidation at book value at each balance sheet date.
During 2000, the Company loaned $1.1 million to prospectdigital. The
loan bears interest equal to the Prime Rate. In 2001, the Company
extended a $400,000 line of credit to prospectdigital. The line of
credit bears interest at 8.0%. As of the acquisition date,
prospectdigital had drawn $358,000 from the line of credit. Under the
terms of the purchase agreement, prospectdigital remains liable for
payment of $1.5 million of indebtedness, plus accrued interest, to the
Company. The Company is required to pay up to $475,000 in future
profits to the former co-owners, after prospectdigital has earned in
excess of $1.5 million, plus accrued interest on its indebtedness. As
of March 31, 2002, the Company had not finalized the allocation of the
purchase price to the acquired assets and liabilities. The preliminary
estimate of the fair value of non-cash assets acquired and liabilities
assumed was $729,000 and $504,000.
5. Loans Payable
6
During 2001, the Company purchased the office building which houses its
headquarters for $10.6 million. In conjunction with the acquisition,
the Company entered into a loan agreement for approximately $4.8
million. The property collateralizes the loan, which bears interest at
a rate equal to LIBOR plus 3.50%, adjusted monthly. Interest on the
loan is due and payable monthly. The unpaid principal balance is due
and payable on June 19, 2002.
From time to time, to better manage cash flows, the Company borrows on
its margin account rather than sell securities that are maturing in the
short term. During the first quarter of 2002, the Company obtained
loans totaling $1.3 million. The loans bear interest at 1/2% above the
Call Rate, as published in The Wall Street Journal, and are
collateralized by the Company's investment portfolio.
6. Commitments and Contingencies
The Company is involved in various claims and legal proceedings arising
in the ordinary course of business. Although it is difficult to predict
the ultimate outcome of these claims, management believes, based on
discussions with legal counsel, that the ultimate disposition of these
claims will not have a material adverse effect on our financial
condition, cash flows or results of operations.
7. Loss Per Share
Per-share
Loss Shares Amount
----------- ----------- --------
For the three months ended March 31, 2002
Basic and diluted loss available to
common shareholders $ (798,000) 25,341,000 $ (0.03)
=========== =========== ========
For the three months ended March 31, 2001
Basic and diluted loss available to
common shareholders $(1,257,000) 25,963,000 $ (0.05)
=========== =========== ========
The diluted loss per share calculation for the three months ended March
31, 2002 and 2001 excludes antidilutive stock options of 4.1 million
and 5.0 million.
8. Segment Information
Total Revenue Net Income (Loss)
--------------------------------- ---------------------------------
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Legacy Marketing Group $ 11,347,000 $ 11,373,000 $ (286,000) $ (167,000)
Legacy Financial Services, Inc. 456,000 435,000 (223,000) (178,000)
Imagent Online, LLC 20,000 -- (170,000) (242,000)
Values Financial Network, Inc. 2,000 4,000 (133,000) (420,000)
Other 33,000 40,000 14,000 (250,000)
Intercompany Eliminations (104,000) (95,000) -- --
------------ ------------ ------------ ------------
Total $ 11,754,000 $ 11,757,000 $ (798,000) $ (1,257,000)
============ ============ ============ ============
The Legacy Marketing Group business segment includes the results of
selling and administering fixed annuity and life insurance products and
general corporate expenses not allocated to the Company's other
segments. Previously, general corporate expenses were reported as a
separate business segment. The segment disclosure for the first quarter
of 2001 has been restated to reflect the change in the composition of
reportable segments.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Regan Holding Corp. Consolidated
We experienced consolidated net losses of $798,000 during the first
quarter of 2002, compared to consolidated net losses of $1.3 million during the
first quarter of 2001. The reduced net losses are primarily due to lower
start-up costs at Values Financial Network, Inc. and Imagent Online, LLC, and
recognition of income in our Other Segments in the first quarter of 2002
compared to losses during the first quarter of 2001, partially offset by
increased losses at Legacy Marketing Group and Legacy Financial Services, Inc.
7
Legacy Marketing Group
During the first quarter of 2002, Legacy Marketing Group ("Legacy
Marketing") experienced net losses of $286,000, compared to net losses of
$167,000 during the same period in 2001. Minor decreases in revenues and
expenses were offset by recognition of non-operating losses during the first
quarter of 2002 compared to non-operating income during the first quarter of
2001.
During the first quarter of 2002, Legacy Marketing commissions and
marketing allowances decreased $141,000 (2%) from the first quarter of 2001, due
to a decrease in sales of fixed annuity and life insurance policies.
Administrative fees increased $112,000 (4%) primarily due to increases in the
number of policies administered.
During the first quarter of 2002, Legacy Marketing sold its products on
behalf of four unaffiliated insurance carriers: American National Insurance
Company, IL Annuity and Insurance Company, Transamerica Life Insurance and
Annuity Company, and John Hancock Variable Life Insurance Company. As indicated
below, the agreements with three of these carriers generated a significant
portion of our total consolidated revenue (sales on behalf of John Hancock began
in the fourth quarter of 2001):
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Transamerica 64% 69%
IL Annuity 16% 19%
American National 11% 8%
Although Legacy Marketing markets and administers several products on
behalf of the four insurance carriers, our consolidated revenues are derived
primarily from sales and administration of two particular annuity product
series, as indicated below:
Three Months Ended
March 31,
------------------------
2002 2001
---- ----
SelectMark(R) series (sold on behalf of Transamerica) 64% 68%
VisionMark(R) series (sold on behalf of IL Annuity) 16% 17%
In December 2001, Legacy Marketing began phasing out the marketing of
IL Annuity products. The phaseout was completed prior to March 31, 2002. Legacy
Marketing continues to administer IL Annuity products.
The minor decrease in Legacy Marketing expenses in the first quarter of
2002 compared to the first quarter of 2001 was primarily due to decreases in
selling, general and administrative expenses, partially offset by increases in
other expenses and depreciation and amortization. The decrease in selling,
general and administrative expenses of $308,000 (3%) is primarily attributable
to decreases in professional fees and occupancy expenses, partially offset by an
increase in salaries and related benefits primarily attributable to decreased
capitalized wages related to internal use software projects. Other expenses
increased $239,000 (46%) primarily due to a write-off of internal use software
that was developed to facilitate marketing certain IL Annuity products.
Depreciation and amortization expense increased $61,000 (7%) primarily related
to higher fixed asset balances.
Legacy Marketing had non-operating losses of $65,000 during the first
quarter of 2002 compared to non-operating income of $71,000 during the first
quarter of 2001. This shift was primarily due to increased interest expense
resulting from a loan for the Company's purchase of the building that houses its
headquarters in June 2001, and lower investment income.
Legacy Financial Services, Inc.
Legacy Financial Services, Inc. ("Legacy Financial") incurred net
losses of $223,000 during the first quarter of 2002 compared to net losses of
$178,000 during the first quarter of 2001, primarily due to increased expenses
partially offset by increased revenues.
Legacy Financial revenue increased $21,000 (5%) primarily due to
increases in the volume of sales by Legacy
8
Financial's distribution network of registered representatives.
Legacy Financial's expenses increased $113,000 (16%), primarily due to
increases in selling, general and administrative expenses. Selling, general and
administrative expenses increased $104,000 (15%) primarily due to increases in
compensation due to a higher number of employees, professional fees, and sales
promotion and support.
Imagent Online, LLC
In January 2002, Imagent Online, LLC, our wholly-owned subsidiary,
acquired the remaining 67% of the outstanding stock in prospectdigital, LLC for
$225,000 in cash. We are accounting for this transaction as a purchase of
assets. Prospectdigital is now a wholly-owned subsidiary. The results of
prospectdigital's operations have been consolidated in Imagent's financial
statements since that date. Prospectdigital provides an on-line marketing
service to insurance agents and registered representatives selling annuities and
life insurance. To date prospectdigital has had nominal revenue and used its
capital to develop software to support its business and incur operating
expenses. Prior to the acquisition, Imagent owned 33% of prospectdigital and its
investment was accounted for under the equity method. Imagent recorded 98.8% of
the losses of prospectdigital to reflect a hypothetical liquidation at book
value at each balance sheet date. During 2000, Imagent loaned $1.1 million to
prospectdigital. The loan bears interest equal to the Prime Rate. In 2001,
Imagent extended a $400,000 line of credit to prospectdigital. The line of
credit bears interest at 8.0%. As of the acquisition date, prospectdigital had
drawn $358,000 from the line of credit. Under the terms of the purchase
agreement, prospectdigital remains liable for payment of $1.5 million of
indebtedness, plus accrued interest, to Imagent. Imagent is required to pay up
to $475,000 in future profits to the former co-owners, after prospectdigital has
earned in excess of $1.5 million, plus accrued interest on its indebtedness. As
of March 31, 2002, we had not finalized the allocation of the purchase price to
the acquired assets and liabilities. The preliminary estimate of the fair value
of non-cash assets acquired and liabilities assumed was $729,000 and $504,000.
Imagent had net losses of $170,000 during the first quarter of 2002
compared to net losses of $242,000 during the first quarter of 2001. The reduced
losses are primarily due to increased revenues and decreased start-up expenses
for prospectdigital. Minimal losses are expected in 2002 and we expect Imagent
to be profitable thereafter.
Values Financial Network, Inc.
During the first quarter of 2002, Values Financial Network, Inc.
incurred net losses of $133,000, compared to net losses of $420,000 during the
first quarter of 2001. The lower losses are primarily due to decreases in the
number of employees, sales promotion and support expenses, and professional
fees. Minimal losses are expected in 2002 and we expect Values Financial
Network, Inc. to be profitable thereafter.
Other Segments
During the first quarter of 2002, combined net income from our other
subsidiaries was $14,000, compared to combined net losses of $250,000 during the
first quarter of 2001. This favorable change of $264,000 is primarily due to
closing the operations our LifeSurance Corporation subsidiary.
Liquidity and Capital Resources
We require cash for the following purposes: (i) to fund operating
expenses, which consist primarily of selling, general and administrative
expenses; (ii) to purchase fixed assets, primarily internal use software and
computer hardware, in order to increase operational efficiency; (iii) to fund
continued product development and strategic acquisitions; and (iv) as a reserve
to cover possible redemptions of certain shares of our common stock, which are
redeemable at the option of the shareholders. Our primary source of cash is cash
flows from operating activities.
Net cash provided from operating activities was $229,000 for the first
quarter of 2002, primarily due to improved operating results.
Net cash provided by investing activities was $244,000, due to net
sales of short-term investment-grade securities partially offset by acquisitions
of fixed assets and our purchase of prospectdigital.
9
Net cash provided by financing activities was $680,000. This was
primarily due to proceeds from loans, partially offset by repurchases of our
common stock. From time to time, to better manage cash flows, we borrow on our
margin account rather than sell securities that are maturing in the short term.
During the first quarter of 2002, we obtained loans of $1.3 million. The loans
bear interest at 1/2% above the Call Rate, as published in The Wall Street
Journal, and are collateralized by our investment portfolio.
During 2001, we purchased the office building which houses our
headquarters for $10.6 million. In conjunction with the acquisition, we entered
into a loan agreement for approximately $4.8 million. The property
collateralizes the loan, which bears interest at a rate equal to LIBOR plus
3.50%, adjusted monthly. Interest on the loan is due and payable monthly. The
unpaid principal balance is due and payable on June 19, 2002. We are seeking to
obtain long-term financing to replace the current loan. However, there can be no
assurances that the refinancing will occur, or that the terms will be more
favorable than those currently existing.
We intend to continue to retain any earnings for use in our business
and do not anticipate paying any cash dividends in the foreseeable future.
We generated $229,000 of cash flow from operations during the first
quarter of 2002. However, we incurred consolidated net losses of $798,000. If
our consolidated net losses continue, or if requests to repurchase redeemable
common stock increase significantly, a cash shortfall could ultimately occur. We
believe that existing cash and investment balances, together with anticipated
cash flow from operations, will provide sufficient funding for the foreseeable
future. However, in the event that a cash shortfall were to 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.
Forward-Looking Statements
Certain statements contained in this document, including Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of Regan Holding
Corp. and its businesses to be materially different from that expressed or
implied by such forward-looking statements. These risks, uncertainties and
factors include, among other things, the following: general economic and
business conditions; political and social conditions; government regulations,
especially regulations affecting the insurance industry; demographic changes;
the ability to adapt to changes resulting from acquisitions or new ventures; and
various other factors referred to in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Regan Holding Corp. assumes no obligation to update forward-looking
statements to reflect actual results or changes in or additions to the factors
affecting such forward-looking statements.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
None.
(b) Reports on Form 8-K
None.
11
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 13, 2002 Signature: /s/ R. Preston Pitts
-----------------------------
R. Preston Pitts
President and Chief Operating Officer
Date: May 13, 2002 Signature: /s/ G. Steven Taylor
-----------------------------
G. Steven Taylor
Chief Financial Officer
12