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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2003
or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
____________
REGAN HOLDING CORP.
(Exact name of registrant as specified in its charter)
California 68-0211359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2090 Marina Avenue, Petaluma, CA 94954
(Address of principal executive offices) (Zip Code)
707-778-8638
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Applicable Only To Corporate Issuers:
Indicate the number of shares outstanding of the registrant's common
stock, as of November 7, 2003:
Common Stock-Series A 23,547,000
Common Stock-Series B 560,000
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Explanatory Note
This Quarterly Report on Form 10-Q/A amends the Registrant's Form 10-Q for the
quarter ended September 30, 2003. This Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 2003 is being filed to restate the Registrant's
financial results. In connection with a review of the Registrant's contracts,
the Registrant determined that it should have recorded additional revenue during
the three and nine month periods ended September 30, 2003 that it earned as
marketing allowances and commission overrides for sales of fixed annuity
products under the terms of one if its insurance carrier partner contracts. As a
result, the Registrant has revised its Consolidated Financial Statements for the
three and nine months ended September 30, 2003 for this additional revenue and
for related bonus expense accruals. (See Note 2 to the Consolidated Financial
Statements for additional information concerning the revisions.)
Except for disclosures affected by the revisions to the Registrant's
Consolidated Financial Statements, all other information is presented as of the
original filing date and has not been updated in this amended filing.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited and Restated)
Assets
Cash and cash equivalents $ 9,330,000 $ 4,793,000
Trading investments 5,355,000 4,261,000
Available-for-sale investments 6,806,000 4,890,000
Accounts receivable, net of allowance of $776,000 and $760,000
at September 30, 2003 and December 31, 2002 4,294,000 3,274,000
Prepaid expenses and deposits 708,000 2,122,000
----------- ------------
Total current assets 26,493,000 19,340,000
----------- ------------
Net fixed assets 24,834,000 25,841,000
Deferred tax assets 2,013,000 1,715,000
Goodwill 679,000 1,170,000
Intangible assets, net 214,000 332,000
Other assets 2,132,000 1,649,000
----------- ------------
Total non current assets 29,872,000 30,707,000
----------- ------------
Total assets $56,365,000 $ 50,047,000
=========== ============
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $11,640,000 $ 8,906,000
Income taxes payable 1,145,000 2,327,000
Current portion of note payable 114,000 109,000
----------- ------------
Total current liabilities 12,899,000 11,342,000
----------- ------------
Deferred compensation payable 5,354,000 4,241,000
Other liabilities 186,000 190,000
Note payable, less current portion 7,112,000 7,199,000
----------- ------------
Total non current liabilities 12,652,000 11,630,000
----------- ------------
Total liabilities 25,551,000 22,972,000
----------- ------------
Redeemable common stock, Series A and B 9,152,000 10,115,000
----------- ------------
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:
20,263,000 shares and 20,495,000 shares at September 30, 2003
and December 31, 2002 3,083,000 3,324,000
Common stock committed 25,000 25,000
Paid-in capital 6,508,000 6,499,000
Retained earnings 12,039,000 7,135,000
Accumulated other comprehensive income (loss), net 7,000 (23,000)
----------- ------------
Total shareholders' equity 21,662,000 16,960,000
----------- ------------
Total liabilities, redeemable common stock, and
shareholders' equity $56,365,000 $ 50,047,000
=========== ============
3
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Restated) (Restated)
Revenue
Marketing allowances and commission overrides $ 10,984,000 $ 6,829,000 $ 37,419,000 $ 21,826,000
Trailing commissions 1,755,000 1,672,000 5,169,000 5,011,000
Administrative fees 3,542,000 2,904,000 10,678,000 8,691,000
Other income 512,000 187,000 3,052,000 573,000
------------ ------------ ------------ ------------
Total revenue 16,793,000 11,592,000 56,318,000 36,101,000
------------ ------------ ------------ ------------
Expenses
Selling, general and administrative 13,676,000 10,555,000 41,550,000 33,025,000
Depreciation and amortization 1,009,000 1,129,000 3,129,000 3,218,000
Goodwill impairment losses 491,000 -- 491,000 --
Other 1,134,000 602,000 2,819,000 2,169,000
------------ ------------ ------------ ------------
Total expenses 16,310,000 12,286,000 47,989,000 38,412,000
------------ ------------ ------------ ------------
Operating income (loss) 483,000 (694,000) 8,329,000 (2,311,000)
------------ ------------ ------------ ------------
Other income
Investment income, net 102,000 93,000 257,000 490,000
Interest expense (6,000) (26,000) (26,000) (62,000)
------------ ------------ ------------ ------------
Total other income, net 96,000 67,000 231,000 428,000
------------ ------------ ------------ ------------
Income (loss) before income taxes 579,000 (627,000) 8,560,000 (1,883,000)
Provision for (benefit from) income taxes 213,000 (232,000) 3,431,000 (688,000)
------------ ------------ ------------ ------------
Net income (loss) before accretion of redeemable
common stock 366,000 (395,000) 5,129,000 (1,195,000)
Accretion of redeemable common stock -- -- (70,000) --
------------ ------------ ------------ ------------
Net income (loss) available for common shareholders $ 366,000 $ (395,000) $ 5,059,000 $ (1,195,000)
============ ============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ 0.02 $ (0.02) $ 0.21 $ (0.05)
Weighted average shares outstanding 24,292,000 24,991,000 24,519,000 25,154,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ 0.01 $ (0.02) $ 0.18 $ (0.05)
Weighted average shares outstanding 27,185,000 24,991,000 27,348,000 25,154,000
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Accumulated
Series A Common Stock Common Other
--------------------- Stock Paid-in Retained Comprehensive
Shares Amount Committed Capital Earnings Income (Loss) Total
------ ------ --------- ------- -------- ------------- -----
(Restated) (Restated)
Balance December 31, 2002 20,495,000 $3,324,000 $25,000 $6,499,000 $ 7,135,000 $(23,000) $16,960,000
Comprehensive income, net of tax:
Net income 5,129,000 5,129,000
Net unrealized gains on investments 40,000 40,000
Less: reclassification adjustment for
losses included in net income (10,000) (10,000)
-----------
Total comprehensive income 5,159,000
Retirement upon voluntary repurchases
of common stock (232,000) (241,000) (155,000) (396,000)
Accretion to redemption value (70,000) (70,000)
Producer stock option expense 9,000 9,000
---------- ----------- ------- ---------- ----------- ------- -----------
Balance September 30, 2003 (unaudited) 20,263,000 $ 3,083,000 $25,000 $6,508,000 $12,039,000 $ 7,000 $21,662,000
========== =========== ======= ========== =========== ======= ===========
5
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
-------------
2003 2002
------------ -----------
(Restated)
Cash flows from operating activities:
Net income (loss) $ 5,129,000 $(1,195,000)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 3,129,000 3,218,000
Write-off of fixed assets 648,000 243,000
Impairment of goodwill and intangible assets 538,000 --
Provision for bad debts 249,000 238,000
Producer stock option expense 9,000 4,000
Amortization premium or discount on investments 61,000 57,000
Realized (gains) losses on sales of investments, net 17,000 (219,000)
Unrealized (gains) losses on trading securities, net (986,000) 1,226,000
Changes in operating assets and liabilities:
Purchases of trading securities, net (108,000) (5,063,000)
Accounts receivable (1,269,000) (64,000)
Prepaid expenses and deposits 1,414,000 (906,000)
Income taxes receivable and payable (1,182,000) (592,000)
Deferred tax assets (317,000) (111,000)
Accounts payable and accrued liabilities 2,734,000 291,000
Deferred compensation payable 1,113,000 (494,000)
Other operating assets and liabilities (487,000) (817,000)
------------ -----------
Net cash provided by (used in) operating activities 10,692,000 (4,184,000)
------------ -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (5,876,000) (959,000)
Proceeds from sales and maturities of available-for-sale securities 3,931,000 8,107,000
Purchases of fixed assets (2,699,000) (4,580,000)
Acquisition of prospectdigital assets -- (225,000)
------------ -----------
Net cash provided by (used in) investing activities (4,644,000) 2,343,000
------------ -----------
Cash flows from financing activities:
Proceeds from loan payable -- 4,831,000
Payments of loan payable -- (8,541,000)
Proceeds from note payable -- 7,350,000
Payments toward note payable (82,000) (17,000)
Repurchases of redeemable common stock (1,033,000) (832,000)
Voluntary repurchases of common stock (396,000) (456,000)
------------ -----------
Net cash provided by (used in) financing activities (1,511,000) 2,335,000
------------ -----------
Net increase in cash and cash equivalents 4,537,000 494,000
Cash and cash equivalents, beginning of period 4,793,000 1,376,000
------------ -----------
Cash and cash equivalents, end of period $ 9,330,000 $ 1,870,000
============ ===========
6
REGAN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in
conformity with accounting principles generally accepted in the United
States of America and include the accounts of Regan Holding Corp. (the
"Company") and its wholly owned subsidiaries. All intercompany
transactions have been eliminated.
The statements are unaudited but reflect all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of the Company's consolidated financial
position and results of operations. The results for the three months and
nine months ended September 30, 2003 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, 2002 filed by the Company
with the Securities and Exchange Commission on March 31, 2003.
2. Restatement of Financial Results
In connection with a review of the Company's contracts, the Company
determined that it should have recorded additional revenue during the third
quarter of 2003 that it earned as marketing allowances and commission
overrides for sales of fixed annuity and life products under the terms of
one of its insurance carrier partner contracts. Accordingly, the Company
has recorded additional revenue of $772,000, additional expense of $51,000
associated with bonus accruals during the third quarter of 2003 and an
additional tax provision of $297,000 resulting in an increase to net income
of $424,000. The Company has restated its results for the three and nine
months ended September 30, 2003.
The effects of the restatement on the Company's Consolidated Financial
Statements are as follows:
Statement of Operations Data:
For the Three Months Ended For the Nine Months Ended
September 30, 2003 September 30, 2003
------------------------------ ----------------------------
As originally As originally
reported As restated reported As restated
------------ ----------- ----------- -----------
Total Revenue $ 16,021,000 $16,793,000 $55,545,000 $56,318,000
Total Expenses 16,259,000 16,310,000 47,937,000 47,989,000
------------ ----------- ----------- -----------
Operating income (loss) (238,000) 483,000 7,608,000 8,329,000
Other income 96,000 96,000 231,000 231,000
------------ ----------- ----------- -----------
Income (loss) before income taxes (142,000) 579,000 7,839,000 8,560,000
Provision for (benefit from) income taxes (84,000) 213,000 3,134,000 3,431,000
------------ ----------- ----------- -----------
Net income (loss) $ (58,000) $ 366,000 $ 4,705,000 $ 5,129,000
============ =========== =========== ===========
Earnings (loss) per share - basic $ 0.00 $ 0.02 $ 0.19 $ 0.21
============ =========== =========== ===========
Earnings (loss) per share - diluted $ 0.00 $ 0.01 $ 0.17 $ 0.18
============ =========== =========== ===========
Balance Sheet Data
September 30, 2003
------------------------------
As originally
reported As restated
-------- -----------
Total Assets $55,593,000 $56,365,000
Total Liabilities $25,203,000 $25,551,000
Redeemable common stock $ 9,152,000 $ 9,152,000
Shareholders Equity $21,238,000 $21,662,000
7
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 net income (loss), as all options
granted under the plan had an exercise price equal to the fair market
value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------- -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
(Restated) (Restated)
Net income (loss) available for common
shareholders, as reported: $ 366,000 $ (395,000) $ 5,059,000 $ (1,195,000)
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related
tax effects (115,000) (125,000) (312,000) (354,000)
----------- ----------- ------------- -------------
Pro forma net income (loss) available for
common shareholders $ 251,000 $ (520,000) $ 4,747,000 $ (1,549,000)
=========== =========== ============= =============
Earnings (loss) per share:
Basic - as reported $ 0.02 $ (0.02) $ 0.21 $ (0.05)
Basic - pro forma $ 0.01 $ (0.02) $ 0.19 $ (0.06)
Diluted - as reported $ 0.01 $ (0.02) $ 0.18 $ (0.05)
Diluted - pro forma $ 0.01 $ (0.02) $ 0.17 $ (0.06)
4. Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes
standards for classifying and measuring certain financial instruments with
characteristics of both liabilities and equity. Many of these instruments
were previously classified as equity. The provisions of SFAS 150 will
require that some of these instruments now be classified as liabilities.
SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for existing financial
instruments beginning on July 1, 2003. The implementation of SFAS 150 had
no material effect on the Company's consolidated results of operations or
financial position.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements with
Multiple Deliverables". EITF 00-21 provides guidance on when and how to
account for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. The Company
adopted EITF 00-21 on July 1, 2003. The adoption of EITF 00-21 did not
have a material effect on the Company's consolidated financial position
and results of operations.
5. Performance Bonus
During the first six months of 2003, Legacy Marketing Group earned a
performance bonus from sales of fixed annuity and life products under the
terms of one of its insurance carrier partner contracts. Amounts were
earned when fixed and determinable and all revenue recognition criteria
had been met. The Company recorded revenue of $2 million for the six
months ended June 30, 2003. These amounts are included in Other income.
During the third quarter of 2003, the carrier paid Legacy Marketing Group
in full and both parties agreed to terminate the bonus program effective
July 1, 2003.
8
6. Sales Incentive Program
During 2003, Legacy Marketing Group initiated a sales incentive program
for its top independent insurance producers ("Wholesalers"). This program
offers bonuses to Wholesalers based primarily on their achievement of
predetermined annual sales targets. Bonuses will be paid to qualifying
Wholesalers during the first quarter of 2004. The Company recorded
expenses of $696,000 and $2.7 million for the three months and nine months
ended September 30, 2003 related to the sales incentive program. These
amounts are included in Selling, general and administrative expenses.
7. Impairment of Goodwill, Intangible Assets, and Fixed Assets
When the Company purchased Values Financial Network, Inc. ("VFN") in 2000,
part of the purchase price was for goodwill. Before January 1, 2002, the
Company amortized the goodwill on a straight-line basis over 10 years,
which was its estimated useful life. Pursuant to Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets," the Company ceased amortizing goodwill on January 1, 2002. As
required by SFAS 142, the Company performed a transitional and annual
goodwill impairment test during 2002. The impairment test of SFAS 142
required the Company to measure fair value of the reporting unit. The
Company established fair value by preparing a forecast of the discounted
value of future cash flows expected to be derived from VFN.
During 2002, the Company revised the business model for VFN to focus on
corporate and individual producer sales and its projections supported the
balance of goodwill. During 2003 the Company further refined its business
model for VFN, including identifying a new market and committing
additional resources to develop the business. During the third quarter of
2003 the Company updated its annual measurement of fair value of VFN due
to the failure of VFN to produce revenues as projected. The fair value
measurement based on a revised cash flow forecast was predicated on VFN
realizing a lower level of sales. This forecast of cash flows did not
support the balance of goodwill, and the Company recorded a preliminary
goodwill impairment loss of $491,000 during the third quarter of 2003.
Additionally, when the Company purchased VFN in 2000, among the assets
acquired were long-lived assets comprised of a website, which incorporates
sales lead management, investment screening and asset allocation
functionalities, and copyrights related to two books. These assets were
recorded at fair value, as determined by an independent appraisal. In
connection with the updated measurement of the fair value of the VFN asset
group as discussed above, the Company recorded a long-lived asset
impairment loss of $394,000 during the third quarter of 2003, included in
Other expenses.
8. Commitments and Contingencies
During the second quarter of 2003, the Company amended its Shareholder
Agreement with Lynda L. Regan, Chief Executive Officer of the Company and
Chairman of the Company's Board of Directors. Under the terms of the
amended agreement, upon the death of Ms. Regan, the Company would have the
option (but not the obligation) to purchase from Ms. Regan's estate all
shares of common stock that were owned by Ms. Regan at the time of her
death, or were transferred by her to one or more trusts prior to her
death. In addition, upon the death of Ms. Regan, her heirs would have the
option (but not the obligation) to sell their inherited shares to the
Company. The purchase price to be paid by the Company shall be equal to
125% of the fair market value of the shares. As of September 30, 2003, the
Company believes that 125% of the fair market value of the shares owned by
Ms. Regan was equal to $28.2 million. The Company has purchased two life
insurance policies with a combined face amount of $29 million for the
purpose of funding this potential obligation upon Ms. Regan's death.
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 cases, management believes, based on discussions
with legal counsel, that the ultimate disposition of these claims will not
have a material adverse effect on its financial condition, cash flows or
results of operations.
9
9. Earnings (Loss) per Share
Income/(Loss) Shares Amount
------------- ------ ------
For the three months ended September 30, 2003 (Restated)
Income available to common shareholders $ 366,000 24,292,000 $ 0.02
Effect of dilutive securities--employee and
producer stock options -- 2,893,000
----------- ----------
Diluted earnings per share $ 366,000 27,185,000 $ 0.01
=========== ========== ========
For the three months ended September 30, 2002
Basic and diluted loss available to
common shareholders $ (395,000) 24,991,000 $ (0.02)
=========== ========== ========
For the nine months ended September 30, 2003 (Restated)
Net income $ 5,129,000
Accretion of redeemable common stock (70,000)
-----------
Income available to common shareholders 5,059,000 24,519,000 $ 0.21
Effect of dilutive securities--employee and
producer stock options -- 2,829,000
----------- ----------
Diluted earnings per share $ 5,059,000 27,348,000 $ 0.18
=========== ========== ========
For the nine months ended September 30, 2002
Basic and diluted loss available to
common shareholders $(1,195,000) 25,154,000 $ (0.05)
=========== ========== ========
The diluted loss per share calculations for both the three months and nine
months ended September 30, 2002 exclude antidilutive stock options of 4.1
million.
10. Comprehensive Income (loss)
Total comprehensive income (loss) for the three months ended September 30,
2003 and 2002 was $350,000 and $(447,000). For the nine months ended
September 30, 2003 and 2002, total comprehensive income (loss) was
$5,159,000 and $(1,321,000).
11. Segment Information
Total Revenue
---------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------ --------------
(Restated) (Restated)
Legacy Marketing
Group $15,983,000 $11,033,000 $ 54,378,000 $ 34,446,000
Legacy Financial
Services, Inc. 821,000 651,000 2,057,000 1,877,000
Imagent Online, LLC 98,000 20,000 186,000 61,000
Values Financial
Network, Inc. 9,000 2,000 20,000 5,000
Other 37,000 37,000 149,000 100,000
Intercompany
Eliminations (155,000) (151,000) (472,000) (388,000)
----------- ----------- ------------ ------------
Total $16,793,000 $11,592,000 $ 56,318,000 $ 36,101,000
=========== =========== ============ ============
Net Income (Loss)
------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(Restated) (Restated)
Legacy Marketing
Group $ 1,255,000 $ (2,000) $7,027,000 $ 157,000
Legacy Financial
Services, Inc. (118,000) (119,000) (605,000) (485,000)
Imagent Online, LLC (137,000) (160,000) (437,000) (491,000)
Values Financial
Network, Inc. (656,000) (133,000) (941,000) (421,000)
Other 22,000 19,000 85,000 45,000
Intercompany
Eliminations -- -- -- --
---------- ---------- ---------- ----------
Total $ 366,000 $ (395,000) $5,129,000 $(1,195,000)
========== ========== ========== ===========
10
Total Assets
-----------------------------
September 30, December 31,
2003 2002
---- ----
(Restated)
Legacy Marketing $ 54,497,000 $51,294,000
Group
Legacy Financial 1,265,000 1,188,000
Services, Inc.
Imagent Online, LLC 706,000 852,000
Values Financial 2,040,000 2,969,000
Network, Inc.
Other 406,000 194,000
Intercompany (2,549,000) (6,450,000)
Eliminations ------------- -----------
Total $ 56,365,000 $50,047,000
============= ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain statements contained in this document, including Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of Regan Holding
Corp. and its businesses to be materially different from that expressed or
implied by such forward-looking statements. These risks, uncertainties and
factors include, among other things, the following: general economic and
business conditions; political and social conditions; government regulations,
especially regulations affecting the insurance industry; demographic changes;
the ability to adapt to changes resulting from acquisitions or new ventures; and
various other factors referred to in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Regan Holding Corp. assumes no obligation to update forward-looking
statements to reflect actual results or changes in or additions to the factors
affecting such forward-looking statements.
Regan Holding Corp. Consolidated
We had consolidated net income of $366,000 during the three months ended
September 30, 2003 compared to consolidated net losses of $395,000 during the
same period in 2002. For the nine months ended September 30, 2003, we had
consolidated net income of $5.1 million compared to consolidated net losses of
$1.2 million during the nine months ended September 30, 2002. These favorable
changes of $761,000 and $6.3 million are primarily due to increased net income
at Legacy Marketing Group ("Legacy Marketing"), partially offset by increased
losses by Values Financial Network, Inc. ("VFN") primarily due to asset
impairment losses.
Legacy Marketing
During the third quarter of 2003, Legacy Marketing earned net income of
$1.3 million compared to net losses of $2,000 during the third quarter of 2002.
For the nine months ended September 30, 2003, Legacy Marketing had net income of
$7.0 million, compared to net income of $157,000 during the same period in 2002.
These improved results are primarily due to increased revenue, partially offset
by increased expenses.
During the three months and nine months ended September 30, 2003, Legacy
Marketing commissions and marketing allowances increased $4.3 million (54%) and
$15.9 million (63%) compared to the same periods of 2002. Legacy Marketing's
sales increase was driven by sales of declared rate and equity index annuities,
reflecting a shift in the marketplace toward more traditional fixed income-based
annuities. The overall increase in commissions and marketing allowances during
2003 was offset in part by the effect of discontinuing several annuity products
issued by Transamerica Life Insurance and Annuity Company ("Transamerica").
Legacy Marketing will continue to administer these annuity products and to
accept additional premium payments, subject to applicable additional deposit
rules for these products. The
11
discontinued products accounted for a nominal amount of our total consolidated
revenue for the quarter ended September 30, 2003 and approximately 33% of our
total consolidated revenue for the quarter ended September 30, 2002. For the
nine months ended September 30, 2003 and 2002, the discontinued products
accounted for approximately 4% and 35% of our total consolidated revenue. Sales
of recently introduced Transamerica products have partially offset the effect of
the discontinued Transamerica products.
During the second quarter of 2003, American National Life Insurance
Company ("American National") reduced the crediting rates of several annuity
products marketed by Legacy Marketing. As a result, sales of annuity products on
behalf of American National began to decrease during the second quarter of 2003
and throughout the third quarter of 2003. We believe this trend may continue for
the remainder of 2003. It is possible that overall consolidated revenues may
also decline due to this event. Legacy Marketing is developing new annuity
products with American National that may result in increased sales for Legacy
Marketing in the long term.
During the third quarter of 2003, Legacy Marketing began discontinuing the
marketing of the AssureMark (SM) fixed annuity product issued by John Hancock
Variable Life Insurance Company ("John Hancock"). As a result, sales of annuity
products on behalf of John Hancock decreased during the third quarter and will
continue to decrease for the remainder of 2003. Legacy Marketing is developing
new annuity products with John Hancock that may result in increased sales in the
long term.
Administrative fees increased $638,000 (22%) and $2 million (23%) during
the three months and nine months ended September 30, 2003 compared to the same
periods in 2002 primarily due to increased issuing and maintenance fees. Other
income increased $25,000 (16%) and $2.1 million (472%) during the three months
and nine months ended September 30, 2003 compared to the three months and nine
months ended September 30, 2002. This increase was primarily due to a
performance bonus earned on sales of fixed annuity and life products under the
terms of one of the Company's insurance carrier partner contracts. During the
third quarter of 2003, the Company and the insurance carrier agreed to terminate
the bonus program effective July 1, 2003.
As of September 30, 2003, Legacy Marketing sold and administered products
on behalf of four unaffiliated insurance carriers: American National,
Transamerica, Investors Insurance Corporation, and John Hancock. Legacy
Marketing also performs administrative services for products of IL Annuity and
Insurance Company ("IL Annuity"). As indicated below, the agreements with these
carriers generated a significant portion of our total consolidated revenue
(sales on behalf of Investors Insurance Corporation began in the second quarter
of 2002):
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(Restated) (Restated)
American National 30% 20% 40% 15%
Transamerica 30% 47% 24% 57%
Investors Insurance
Corporation 24% 4% 20% 1%
IL Annuity 6% 13% 6% 13%
John Hancock 2% 12% 3% 8%
Our consolidated revenues are derived primarily from sales and
administration of the following annuity products:
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Restated) (Restated)
BenchMark(SM) series (sold on behalf of American National) 30% 19% 39% 14%
SelectMark(R) series (sold on behalf of Transamerica) 30% 43% 24% 55%
MarkOne(SM) series (sold on behalf of Investors Insurance
Corporation) 24% 4% 20% 1%
VisionMark(R) series (sold on behalf of IL Annuity) 3% 12% 4% 12%
AssureMark(SM) series (sold on behalf of John Hancock) 2% 12% 3% 8%
12
As mentioned above, we believe that sales of the BenchMark(SM) series sold
on behalf of American National and sales of the AssureMark(SM) series sold on
behalf of John Hancock may decrease during the remainder of 2003.
Legacy Marketing expenses increased $2.9 million (26%) and $8.3 million
(24%) during the three months and nine months ended September 30, 2003 compared
to the same periods in 2002 primarily due to increases in selling, general and
administrative expenses. Selling, general and administrative expenses increased
$2.9 million (30%) and $8.3 million (28%) primarily due to increases in
compensation, sales promotion and support expenses, insurance, occupancy, and
courier expenses. Compensation increased primarily due to salary increases,
incentive based compensation based on our consolidated year-to-date results,
temporary help due to increased business volume, and benefits. Sales promotion
and support expenses increased primarily due to bonuses for our top independent
insurance producers based on their achievement, for the year 2003, of
predetermined annual sales targets which will be paid in the first quarter of
2004. Increased insurance expenses reflected rising prices for errors and
omissions and workers' compensation insurance coverage. The increase in courier
expenses was related to increased business volume.
During 2002, we began an evaluation of an internal use software project
that we initially licensed in 1998 with the intent to modify and customize the
licensed software prior to deployment. We began this project intending to
replace our administration system after the vendor of our existing
administration system required us to migrate from the existing system to an
alternative platform. In late 2002, we learned from our vendor that we might be
able to retain our existing system. Modification and customization of the
licensed software was suspended in December of 2002. To date, we have $4.4
million capitalized relating to this licensed software. A financial analysis
completed in the first quarter of 2003 indicated that remaining on the existing
system may provide greater benefit than converting to a new system. In the third
quarter of 2003, our vendor concluded that we could continue to use our existing
system for an extended period. We are currently performing a rigorous evaluation
of our Company-wide technological needs, which includes an assessment of the
viability of the existing system. One possibility under consideration is to use
our existing administrative system for some products and to use the new system
for other products. We expect to complete this assessment before year-end.
We previously estimated that if our final decision was to fully abandon
the software project, approximately $1.2 million of this software would have
continuing value and be used to upgrade our existing system and the remaining
$3.2 million would be written off. As we proceed with our assessment, we expect
to further refine these estimates. In the event we decide to use both systems, a
smaller write off or no write off may occur.
Legacy Financial
During the third quarter of 2003, Legacy Financial's net loss of $118,000
was relatively unchanged compared to the third quarter of 2002. For the nine
months ended September 30, 2003, Legacy Financial had net losses of $605,000
compared to net losses of $485,000 during the same period in 2002, primarily due
to increased expenses partially offset by increased revenue.
Legacy Financial revenue increased $170,000 (26%) and $180,000 (10%)
during the three months and nine months ended September 30, 2003 compared to the
same periods in 2002, primarily due to increased reimburseable insurance
premiums and increased sponsorship revenues, partially offset by decreased
marketing allowances and commissions related to lower overall sales volume and
changes in product mix.
Legacy Financial expenses increased $176,000 (21%) and $394,000 (15%)
during the three months and nine months ended September 30, 2003 compared to the
same periods in 2002. The increase in the second quarter of 2003 expenses is
primarily due to an increase in selling, general and administrative expenses and
other expenses. Selling, general and administrative expenses increased $128,000
(16%) primarily attributable to increased sales promotion expenses, increased
errors and omissions insurance premiums, and increased incentive compensation.
Other expenses increased $48,000 (77%) primarily due to increased equipment
maintenance expenses and increased insurance costs.
On a year-to-date basis, selling, general and administrative expenses
increased $259,000 (11%) primarily due to increased errors and omissions
insurance premiums, increased incentive compensation, and increased sales
promotion expenses, partially offset by lower occupancy costs resulting from
Legacy Financial's move to the Company's headquarters during 2002. Other
expenses increased $135,000 (59%) primarily due to increased equipment
maintenance expenses and increased insurance costs.
13
Imagent Online, LLC
Imagent Online, LLC ("Imagent") had net losses of $137,000 during the
third quarter of 2003 compared to net losses of $160,000 during the third
quarter of 2002. During the nine months ended September 30, 2003, Imagent had
net losses of $437,000 compared to net losses of $491,000 during the same period
in 2002. The reduced losses are primarily due to increased revenues partially
offset by increased expenses. Revenues increased $78,000 (390%) and $125,000
(205%) during the three months and nine months ended September 30, 2003 compared
to the comparable prior year periods primarily due to increased subscription and
licensing revenues. Expenses increased $45,000 (16%) and $60,000 (7%) during the
third quarter and year-to-date periods primarily due to increased salaries and
benefits associated with increased headcount, partially offset by decreased
postage expenses related to direct marketing campaigns.
Values Financial Network, Inc.
Values Financial Network, Inc. ("VFN") had net losses of $656,000 during
the third quarter of 2003 compared to net losses of $133,000 during the third
quarter of 2002. During the nine months ended September 30, 2003, VFN had net
losses of $941,000 compared to net losses of $421,000 during the same period in
2002. The increased losses are due to goodwill, intangibles, and long-lived
asset impairment losses during the third quarter of 2003. Revenues increased
$7,000 (350%) and $15,000 (300%) during the quarterly and year-to-date periods
primarily due to rental income from a tenant who began subleasing office space
from VFN in the second quarter of 2003. Expenses were relatively unchanged
during the quarterly and year-to-date periods.
When the Company purchased Values Financial Network, Inc. ("VFN") in 2000,
part of the purchase price was for goodwill. Before January 1, 2002, the Company
amortized the goodwill on a straight-line basis over 10 years, which was its
estimated useful life. Pursuant to Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased
amortizing goodwill on January 1, 2002. As required by SFAS 142, the Company
performed a transitional and annual goodwill impairment test during 2002. The
impairment test of SFAS 142 required the Company to measure fair value of the
reporting unit. The Company established fair value by preparing a forecast of
the discounted value of future cash flows expected to be derived from VFN.
During 2002, the Company revised the business model for VFN to focus on
corporate and individual producer sales and its projections supported the
balance of goodwill. During 2003 the Company further refined its business model
for VFN, including identifying a new market and committing additional resources
to develop the business. During the third quarter of 2003 the Company updated
its annual measurement of fair value of VFN due to the failure of VFN to produce
revenues as projected. The fair value measurement based on a revised cash flow
forecast was predicated on VFN realizing a lower level of sales. This forecast
of cash flows did not support the balance of goodwill, and the Company recorded
a preliminary goodwill impairment loss of $491,000 during the third quarter of
2003.
Additionally, when the Company purchased VFN in 2000, among the assets
acquired were long-lived assets comprised of a website, which incorporates sales
lead management, investment screening and asset allocation functionalities, and
copyrights related to two books. These assets were recorded at fair value, as
determined by an independent appraisal. In connection with the updated
measurement of the fair value of the VFN asset group as discussed above, the
Company recorded a long-lived asset impairment loss of $394,000 during the third
quarter of 2003, included in Other expenses.
Other Segment
During the third quarter of 2003, combined net income from our Other
segment of $22,000 was relatively unchanged compared to the third quarter of
2002. For the nine months ended September 30, 2003, combined net income from our
Other segment was $85,000, compared to combined net income of $45,000 during the
same period in 2002. This favorable change is primarily due to increased
advisory fee revenues.
14
Liquidity and Capital Resources
Net cash provided by operating activities was $10.7 million for the nine
months ended September 30, 2003 compared to net cash used in operating
activities of $4.2 million for the same period in 2002, primarily due to
increased operating results, lower net purchases of trading securities, and the
application of a prepaid deposit toward a producer incentive trip, offset in
part by payment for the annual option to purchase Investors Insurance
Corporation, included in Other assets.
Net cash used in investing activities was $4.6 million for the nine months
ended September 30, 2003 compared to net cash provided by investing activities
of $2.3 million for the nine months ended September 30, 2002, primarily due to
increased purchases and lower sales of available-for-sale securities, partially
offset by lower cash outlays for the development of internal use software.
Net cash used in financing activities was $1.5 million for the nine months
ended September 30, 2003 compared to net cash provided by financing activities
of $2.3 million for the nine months ended September 30, 2002, primarily due to
net proceeds from loans during the first nine months of 2002, and higher
repurchases of our common stock.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS 150 establishes standards for classifying
and measuring certain financial instruments with characteristics of both
liabilities and equity. Many of these instruments were previously classified as
equity. The provisions of SFAS 150 will require that some of these instruments
now be classified as liabilities. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective for existing financial instruments beginning on July 1, 2003. The
implementation of SFAS 150 had no material effect on the Company's consolidated
results of operations or financial position.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements with Multiple
Deliverables". EITF 00-21 provides guidance on when and how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The Company adopted EITF 00-21 on July 1,
2003. The adoption of EITF 00-21 did not have a material effect on the Company's
consolidated financial position and results of operations.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk, interest
rate risk, credit risk, or equity price risk since December 31, 2002. Please see
the Company's Annual Report on Form 10-K for the year ended December 31, 2002
for more information concerning Quantitative and Qualitative Disclosures About
Market Risk.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and executed, can provide only a
reasonable assurance of achieving the desired control objectives. The Company's
Chief Executive Officer and Chief Financial Officer evaluated, with the
participation of the Company's management, the effectiveness of the Company's
disclosure controls and procedures. Based on that evaluation, the Company
determined that it should have recorded additional revenue during the third
quarter of 2003 that it earned as marketing allowances and commission overrides
for sales of fixed annuity products under the terms of one if its insurance
carrier partner contracts. As a result, the Company is restating its
consolidated financial statements for the three months and nine months ended
September 30, 2003.
The Company, in consultation with its independent auditors,
PricewaterhouseCoopers LLP ("PWC"), has identified deficiencies in the Company's
internal control over financial reporting which resulted in two restatements of
its financial statements. One of these deficiencies resulted in the amendment of
the Company's Form 10-Q for the quarter ended March 31, 2003 in order to restate
the Company's consolidated financial statements. Another deficiency resulted in
the amendment of the Company's Form 10-Q for the period ended September 30, 2003
in order to restate the Company's consolidated financial statements. Members of
the Company's management and PWC have discussed these deficiencies with the
Audit Committee of the Company's Board of Directors. PWC has stated that these
deficiencies result in a "material weakness" under standards established by the
American Institute of Certified Public Accountants. The material weakness was
identified as a breakdown in communication between the financial and operational
management of the Company and a breakdown in the processes by which transactions
are reviewed.
To remedy this weakness, the Board of Directors of the Company approved
the formation of a disclosure committee (the "Disclosure Committee") and is
appointing executives of the Company to serve on the Disclosure Committee. The
Disclosure Committee will, among other things, meet quarterly as part of the
closing process and review each financial statement line item and footnote
disclosure to ensure the impacts of all business activity and transactions have
been appropriately accounted for and disclosed in the consolidated financial
statements of the Company. The Disclosure Committee will also review detailed
analytics of the Company's performance and assess the need for any additional
disclosures based on the relevant reporting period's activity. The Disclosure
Committee will begin reviewing the disclosures made by the Company in its
filings with the U.S. Securities and Exchange Commission starting with the
Company's Form 10-K for the year ended December 31, 2003.
Except as described above, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the date hereof. The Company's management,
including the Chief Executive Officer and the Chief Financial Officer, also
evaluated the Company's internal control over financial reporting to determine
whether any changes occurred during the quarter covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Based on that evaluation,
there have been no such changes during the period covered by this report, except
as described above.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 2003.
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: March 23, 2004 Signature: /s/ R. Preston Pitts
------------------------------------
R. Preston Pitts
President and Chief Operating Officer
Date: March 23, 2004 Signature: /s/ G. Steven Taylor
------------------------------------
G. Steven Taylor
Chief Financial Officer
17
INDEX TO EXHIBITS
Number Description
- ------ -----------
Exhibit 31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
18