UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 2003
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 (I.R.S. Employer
incorporation or organization) Identification No.)
2090 MARINA AVENUE, PETALUMA, CALIFORNIA 94954
(Address of principal executive offices and Zip Code)
(707) 778-8638
(Registrant's telephone number, including area code)
Securities registered under
Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the common equity was sold, or the average bid and asked prices
of such common equity, as of the last business day of the registrants most
recently completed second fiscal quarter.
$22,404,000
There is currently no trading market for the registrant's stock. Accordingly,
the foregoing aggregate market value is based upon the price at which the
registrant has repurchased its stock most recently prior to the last business
day of the registrant's most recently completed second fiscal quarter.
As of March 15, 2004, the number of shares outstanding of the registrant's
Series A Common Stock was 23,374,000 and the number of shares outstanding of the
registrant's Series B Common Stock was 553,000. The registrant has no other
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for Regan Holding Corp.'s Annual
Meeting of Stockholders to be held on June 10th, 2004 are incorporated by
reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS
Page
----
Item 1. Description Of Business...........................................................................4
Item 2. Properties........................................................................................7
Item 3. Legal Proceedings.................................................................................7
Item 4. Submission Of Matters To A Vote Of Security Holders...............................................7
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters.............................8
Item 6. Selected Consolidated Financial Data..............................................................8
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations.............8
Item 7a. Quantitative And Qualitative Disclosure About Market Risk........................................20
Item 8. Financial Statements And Supplementary Data......................................................21
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.............44
Item 9a. Controls And Procedures..........................................................................44
Item 10. Directors And Executive Officers Of The Company..................................................44
Item 11. Executive Compensation...........................................................................45
Item 12. Security Ownership Of Certain Beneficial Owners And Management...................................45
Item 13. Certain Relationships And Related Transactions...................................................45
Item 14. Principal Accountant Fees and Services...........................................................45
Item 15. Exhibits, Financial Statement Schedules, And Reports On Form 8-K.................................45
3
PART I
Item 1. Description of Business
Except for historical information contained herein, the matters
discussed in this report contain forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties that could cause actual results to differ materially.
General Development of Business
Regan Holding Corp. is a holding company, incorporated in the State of
California, whose primary operating subsidiaries are Legacy Marketing Group
("Legacy Marketing") and Legacy Financial Services, Inc. ("Legacy Financial").
During 2003, Legacy Marketing generated approximately 96% of our consolidated
revenues. Legacy Marketing designs, markets and administers fixed annuity
products on behalf of certain unaffiliated insurance carriers in each of the
United States, except Alabama and New York.
Legacy Marketing has marketing agreements with Transamerica Life
Insurance and Annuity Company ("Transamerica"), American National Insurance
Company ("American National"), John Hancock Variable Life Insurance Company
("John Hancock"), and Investors Insurance Corporation. The marketing agreements
grant us the exclusive right to market certain proprietary fixed annuity
products issued by these insurance carriers. Fixed annuity products are
insurance products that are sold to purchasers in the form of insurance
policies. Under the terms of these agreements, we are responsible for appointing
independent insurance producers (who we refer to as "Producers") who have
contracted with us to sell fixed annuity products. For these services, the
insurance carriers pay us marketing allowances and commissions based on the
premium volume of insurance policies placed inforce. We are responsible for
paying sales commissions to the Producers.
Legacy Marketing sells fixed annuity products through a network of
approximately 27,000 Producers, of whom approximately 7,000 generated business
for us during 2003. Each Producer has entered into a non-exclusive agreement
with Legacy Marketing Group which defines the parties' business relationship.
Such agreements typically may be terminated with up to ninety days prior written
notice by either the Producer or Legacy Marketing, with or without cause.
Our sales network is built on a multi-level structure in which
Producers may recruit other Producers. Recruited Producers are referred to as
"downline" Producers within the original Producer's network. Recruited Producers
may also recruit other Producers, creating a hierarchy under the original
Producer. The standard Producer contract contains a nine-level design in which a
Producer may advance from one level to the next based on sales commission
amounts and the size of the Producer's downline network. As a Producer advances
to higher levels within the system, he receives higher commissions on sales made
through his downline network. This creates a financial incentive for Producers
to build a hierarchy of downline Producers, which contributes to their financial
growth and to the growth of Legacy Marketing. If a Producer leaves the network,
his downline Producers can still receive sales commissions. Advancements to
higher levels can occur as often as every three months. Producers at the highest
levels are called "Wholesalers." We had approximately 500 Wholesalers who
generated business for Legacy Marketing during 2003.
We provide tools and services that assist Wholesalers with recruiting,
training and support responsibilities associated with the Producers in their
hierarchy. In addition, we assist Producers with programs designed to increase
their sales and better serve their clients. Recruiting and training programs
include visual presentations, product videos and seminars, advertising material
guidelines and sales flip charts. We also produce product information, sales
brochures, pre-approved advertisements and recruiting material.
Legacy Marketing works closely with the insurance carriers in product
design and development. Our marketing and actuarial departments work with the
insurance carriers to design proprietary fixed annuity products to be marketed
by Legacy Marketing. All of these products include guarantees for the benefit of
policyholders and are guaranteed by the issuing insurance carriers. These
guarantees generally include:
o a contractually guaranteed minimum interest rate,
o a contractually guaranteed maximum administrative fee, and
o the ability to allocate among various Cash Value Strategies(TM).
4
In addition to the marketing agreements, Legacy Marketing has
administrative agreements with each of the four insurance carriers listed above
and with IL Annuity and Insurance Company ("IL Annuity"), whose marketing
agreement with us terminated effective during the first quarter of 2002. Under
the terms of the administrative agreements, we provide clerical, administrative
and accounting services with respect to the insurance policies. These services
include billing, collecting and remitting premium for the policies. For
providing these services, the insurance carriers pay us a fee per transaction,
with the amount of the fee depending on the type of policy and type of service.
Administrative services with respect to the insurance policies are performed at
our headquarters in Petaluma, California and at our facilities in Rome, Georgia.
Neither the marketing agreements nor the administrative agreements
prevent us from entering into similar arrangements with other insurance
carriers. However, the marketing agreements with Transamerica and John Hancock,
in general, prevent us from marketing products with other carriers which are
defined as unique and proprietary under the terms of our marketing agreements
with Transamerica and John Hancock.
The marketing agreement with American National expires on November 15,
2007, and the administrative agreement with American National expires on
February 15, 2008. Both agreements may be renewed by mutual agreement for
successive one-year terms. The agreements may be terminated by either party upon
twelve months prior written notice without cause, and may be terminated by
either party immediately for cause. The marketing and administrative agreements
with Transamerica and John Hancock do not have fixed terms but may be terminated
by either party upon twelve months prior written notice without cause, and may
be terminated by either party immediately for cause.
Legacy Marketing discontinued marketing life insurance products issued
by American National effective during the first quarter of 2003. These products
accounted for a nominal amount of revenue during each of the years ending
December 31, 2003, 2002, and 2001. Legacy Marketing will continue to administer
American National life insurance products, including acceptance of renewal
premium. Certain Legacy Marketing employees who were supporting the life
insurance product operations were either terminated or reassigned to other
positions in Legacy Marketing.
During the second quarter of 2003, American National reduced the
crediting rates of several annuity products marketed by Legacy Marketing. In
addition, American National lowered the commission rates that they pay to Legacy
Marketing for sales of these products. As a result, sales of annuity products on
behalf of American National decreased during the second half of 2003 and overall
Legacy Marketing revenues also declined due to this event. Legacy Marketing has
developed new annuity products with American National that may result in
increased sales for Legacy Marketing in the long term.
The marketing and administrative agreements with John Hancock were
entered into in January 2001, and we began marketing and administering products
during the fourth quarter of 2001.
During the third quarter of 2003, Legacy Marketing began discontinuing
the marketing of the AssureMark (SM) fixed annuity product issued by John
Hancock. As a result, sales of annuity products on behalf of John Hancock
decreased during the second half of 2003 and will continue to decrease during
2004. Legacy Marketing plans to develop new annuity products with John Hancock
that may result in increased sales in the long term.
In June 2002, Legacy Marketing entered into marketing and
administrative services agreements with Investors Insurance Corporation, an
unaffiliated insurance carrier. Under these agreements, Legacy Marketing will
sell and administer annuity products on behalf of Investors Insurance
Corporation. Legacy Marketing has an option to buy Investors Insurance
Corporation. The option expires on June 30, 2005. If Legacy Marketing exercises
the option, it must complete the purchase transaction within two years of
exercising the option. Sales on behalf of Investors Insurance Corporation began
in June 2002.
During the first quarter of 2003, Legacy Marketing discontinued the
marketing of several annuity products issued by 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 discontinued products accounted for approximately 3%, 31%, and 59%
of our total consolidated revenue for the years ended December 31, 2003, 2002,
and 2001. Sales of recently introduced Transamerica products have partially
offset the effect of the discontinued Transamerica products. However, effective
in May 2004 Legacy Marketing will discontinue marketing Transamerica products.
We intend to continue providing administrative services.
5
Through our wholly-owned broker-dealer subsidiary, Legacy Financial, we
sell variable annuity and life insurance products, mutual funds, and debt and
equity securities. Legacy Financial has entered into sales agreements with
investment companies that give it the non-exclusive right to sell investment
products on behalf of those companies. Sales of investment products are
conducted through Legacy Financial's network of independent registered
representatives (who we refer to as "Representatives"). Under the sales
agreements, we are compensated based upon predetermined percentages of the sales
generated by the Representatives. The agreements may be terminated by either
party upon thirty days prior written notice. During 2003, Legacy Financial
accounted for approximately 4% of our consolidated revenues.
Legacy Financial is registered as a broker-dealer with, and is subject
to regulation by, the U.S. Securities and Exchange Commission, National
Association of Securities Dealers, Municipal Securities Rulemaking Board, and
various state agencies. As a result of federal and state broker-dealer
registration and self-regulatory organization memberships, Legacy Financial is
subject to regulation that covers many aspects of its securities business. This
regulation covers matters such as capital requirements, recordkeeping and
reporting requirements, and employee-related matters, including qualification
and licensing of supervisory and sales personnel. Also, these regulations
include supervisory and organizational procedures intended to ensure compliance
with securities laws and prevent improper trading on material nonpublic
information. Rules of the self-regulatory organizations are designed to promote
high standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship between
broker-dealers and their customers. As a result, many aspects of the
broker-dealer customer relationship are subject to regulation, including
"suitability" determinations as to customer transactions, limitations in the
amounts that may be charged to customers, and correspondence with customers.
During 2000, through our wholly owned subsidiary Imagent Online, we
invested in prospectdigital, LLC, which was developing an Internet-based
customer relationship management product. In January 2002, we purchased all of
the remaining outstanding equity interests in prospectdigital. Prospectdigital
has generated nominal revenues to date.
In December 2000, we acquired the assets and name of Values Financial
Network, Inc. Values Financial Network is engaged in the business of
values-based investment screening, and has generated minimal revenues to date.
Competitive Business Conditions
The fixed annuity business is rapidly evolving and intensely
competitive. Legacy Marketing's primary market is fixed annuities sold through
independent producers. In addition, Legacy Marketing administers the products
sold by Producers on behalf of the issuing insurance carriers. Fixed annuity
sales in the United States were approximately $88 billion in 2003. Some of
Legacy Marketing's top competitors selling fixed annuities through independent
sales channels are Allianz Life of North America, American Equity Investment
Life, Jefferson Pilot Financial Insurance Company, and AmerUs Group. These
competitors may have greater financial resources than we do. However, our
business model allows us greater flexibility, as we can adjust the mix of
business sold if one, or more, of our carriers were to experience capital
constraints or other events that effect their business models. Our competitors
may respond more quickly than us to new or emerging products and changes in
customer requirements. We are not aware of any significant new means of
competition, products or services that our competitors provide or will soon
provide. However, in the highly competitive fixed annuity marketplace, new
distribution models, product innovations and technological advances may occur at
any time and could present us with competitive challenges. There can be no
assurance that we will be able to compete successfully. In addition, our
business model relies on our Wholesaler distribution network to effectively
market our products competitively. Maintaining relationships with these
Wholesaler distribution networks requires introducing new products and services
to the market in an efficient and timely manner, offering competitive commission
schedules, and providing superior marketing, training, and support. In the
recent past, we have been reasonably successful in expanding and maintaining our
current distribution network. We are not aware of any Wholesaler who may
discontinue marketing our products. Due to competition among insurance companies
and insurance marketing organizations for successful Wholesalers, there can be
no assurance that we will be able to retain some or all of our Wholesaler
distribution networks.
Regulatory Environment
State legislators, state insurance regulators and the National
Association of Insurance Commissioners continually reexamine existing laws and
regulations, and may impose changes in the future that materially adversely
affect our business, results of operations and financial condition. In
particular, rate rollback legislation and legislation to
6
control premiums, policy terminations and other policy terms may affect the
marketability of policies or the amount of premiums that can be charged for such
policies, and thus the commissions we can earn. Recently a committee of the U.S.
House of Representatives has been considering the advisability of enacting
federal statutes that would impose certain national uniform insurance regulatory
standards to be applied by state insurance regulators. No such legislation has
yet been introduced. A bill entitled "The Federal Insurance Consumer Protection
Act of 2003" (S. 1373), has been introduced in the U.S. Senate which, if
enacted, would establish comprehensive and exclusive federal regulation over all
"interstate insurers," including all property and casualty insurers selling in
more than one state, with no option for such insurers to remain regulated by the
states. This legislation would repeal the McCarran-Ferguson antitrust exemption
for the business of insurance. It would also establish a Federal Insurance
Regulatory Commission within the Department of Commerce that would have
exclusive regulatory jurisdiction over property and casualty and life insurers
that do business in more than one U.S. jurisdiction. The legislation would
establish comprehensive federal regulatory oversight over such insurers,
including licensing, solvency supervision, accounting and auditing practices,
form and rate approval, and market conduct examination. The legislation also
would establish a National Insurance Guaranty Fund, which may be empowered to
collect pre-funded assessments that are different from, and potentially greater
than, current state guaranty fund assessment levels. We cannot predict whether
these or other proposals will be adopted, or what impact, if any, such proposals
may have on our business, financial condition or results of operation.
Legacy Financial is registered as a broker-dealer with, and is subject
to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and
various state agencies. This regulation covers matters such as capital
requirements, recordkeeping and reporting requirements, and employee-related
matters, including qualification and licensing of supervisory and sales
personnel. Any proceeding alleging violation of, or noncompliance with, laws and
regulations applicable to us or our subsidiaries could harm our business,
financial condition, results of operations, and business prospects. In addition,
changes in federal legislation, state legislation, court decisions and
administrative policies could significantly and adversely affect the securities
industry generally and our business in particular.
Employees
As of February 29, 2004, we employed 482 employees. None of our
employees is represented by a collective bargaining agreement. We consider our
relations with our employees to be good, and we will continue to strive to
provide a positive work environment for our employees.
Financial Information about Segments
The financial information about segments required by Item 101(b) of
Regulation S-K is contained in our financial statements and supplementary data,
Part II, Item 8 of this Form 10-K.
Financial Information about Geographic Areas
During the last three fiscal years, we have not depended on revenue
from sources outside the United States. Also during that time, all long-lived
assets have been located in the United States.
Item 2. Properties
In June 2001, we purchased the building that houses our headquarters
and most of Legacy Marketing's operations in Petaluma, California. During 2003
we began construction of a building in Rome, Georgia. Upon completion, our
employees located in Rome will move to the new building.
Item 3. Legal Proceedings
We are 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, we believe that the ultimate disposition of these claims
will not have a material adverse effect on our financial condition, cash flows
or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of security holders during the fourth
quarter of 2003.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
As of March 15, 2004, Regan Holding Corp.'s Series A Common Stock was
held by approximately 1,000 shareholders of record and our Series B Common Stock
was held by approximately 10,000 shareholders of record. There is no established
public trading market for our stock.
Our Board of Directors may, at its sole discretion, declare and pay
dividends on common stock, subject to capital and solvency restrictions under
California law. To date, we have not paid any dividends on our common stock. Our
ability to pay dividends is dependent on the ability of our wholly-owned
subsidiaries to pay dividends or make other distributions to us. As of December
31, 2003, we do not anticipate paying dividends on any of our outstanding common
stock in the foreseeable future.
Item 6. Selected Consolidated Financial Data
Year Ended December 31,
-------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ -------------- ------------
Selected Income Statement Data:
Total revenue $ 70,917,000 $ 50,049,000 $ 55,209,000 $ 42,432,000 $ 50,938,000
Net income (loss) $ 5,029,000 $ (60,000) $ (348,000) $ (3,564,000) $ 3,635,000
Earnings (loss) per share - basic:
Before cumulative effect of accounting
change $ 0.20 $ -- $ (0.03) $ (0.15) $ 0.11
Cumulative effect of accounting change -- -- -- (0.01) --
------------ ------------ ------------ -------------- ------------
$ 0.20 $ -- $ (0.03) $ (0.16) $ 0.11
Earnings (loss) per share - diluted:
Before cumulative effect of accounting
change $ 0.18 $ -- $ (0.03) $ (0.15) $ 0.10
Cumulative effect of accounting change -- -- -- (0.01) --
------------ ------------ ------------ -------------- ------------
$ 0.18 $ -- $ (0.03) $ (0.16) $ 0.10
Selected Balance Sheet Data:
Total assets $ 57,115,000 $ 50,047,000 $ 46,260,000 $ 43,114,000 $ 47,158,000
Total non current liabilities $ 13,536,000 $ 11,630,000 $ 4,578,000 $ 3,578,000 $ 4,258,000
Redeemable common stock $ 8,964,000 $ 10,115,000 $ 11,124,000 $ 11,237,000 $ 11,563,000
Cash dividends declared -- -- -- -- --
Selected Operating Data:
Total fixed premium placed inforce(1) $ 2.15 billion $ 1.3 billion $ 1.6 billion $ 1.1 billion $ 1.6 billion
Total fixed policies placed inforce(1) 36,000 24,000 30,000 20,000 28,000
Policies maintained at year end 127,000 107,000 101,000 89,000 85,000
(1) When a policyholder remits a premium payment with an accurate and
completed application for an insurance policy, the policy is placed
inforce. Inforce premium and policies are statistics of our carriers
but are factors that directly affect our revenue.
Item 7. 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.
8
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.
General Overview of Our Business
Regan Holding Corp. is a holding company, whose primary operating
subsidiaries are Legacy Marketing and Legacy Financial.
Legacy Marketing designs, markets and administers fixed annuity
products on behalf of certain unaffiliated insurance carriers in each of the
United States, except Alabama and New York. As of December 31, 2003, Legacy
Marketing had marketing agreements with Transamerica, American National, John
Hancock, and Investors Insurance Corporation. The marketing agreements grant
Legacy Marketing the exclusive right to market certain fixed annuity products
issued by these insurance carriers. Legacy Marketing is responsible for
appointing independent insurance producers who have contracted with Legacy
Marketing to sell these products. For these services, the insurance carriers pay
Legacy Marketing commissions and marketing allowances.
Legacy Marketing also has administrative agreements with each of the
insurance carriers listed above, and with IL Annuity, whose marketing agreement
with us was terminated effective during the first quarter of 2002. Under the
terms of the administrative agreements, Legacy Marketing provides clerical,
administrative and accounting services with respect to the insurance policies.
For providing these services, the insurance carriers pay Legacy Marketing
administrative fees.
Through our wholly-owned broker-dealer subsidiary, Legacy Financial, we
sell variable annuity and life insurance products, mutual funds, and debt and
equity securities. Sales of investment products are conducted through Legacy
Financial's network of independent registered representatives.
The results of our operations are generally affected by the conditions
that affect other companies that market annuity and life insurance products, and
third-party administrators of those products. These conditions are increased
competition, changes in the regulatory and legislative environments, and changes
in general economic and investment conditions.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results
of Operations is based in large part on the consolidated financial statements of
Regan Holding Corp., which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements. Actual results could differ from those estimates.
Legacy Marketing has marketing and administrative agreements with
certain insurance carriers, listed above. Under the terms of the marketing
agreements, Legacy Marketing is responsible for appointing producers with
various states' departments of insurance, who have contracted with Legacy
Marketing to sell fixed annuity products to the general public.
Under the terms of the administrative agreements, Legacy Marketing
provides clerical, administrative and accounting services with respect to the
insurance policies. For providing these services, the insurance carriers pay
Legacy Marketing issuing, maintenance, and termination fees on a per transaction
basis, with the amount of the fee depending on the type of policy and type of
service.
There are no significant management judgements associated with
reporting these revenues. When a policyholder remits a premium payment with an
accurate and completed application for an insurance policy, the policy is
considered inforce and Legacy Marketing recognizes marketing allowances and
commission income. Legacy Marketing's carriers grant policyholders a contractual
right to terminate the insurance contract ten to thirty days after a policy is
placed inforce. This return period varies depending on the carrier, the type of
policy and the jurisdiction in which the policy is sold. Legacy Marketing
gathers historical product return data that does not vary significantly from
quarter to quarter, and has historically been predictive of future events.
Returns are estimated using this data and have been reflected in the
Consolidated Financial Statements. Legacy Marketing recognizes administrative
fees on a per transaction basis as services are performed, with the amount of
the fee depending on the type of policy and type of service.
9
We capitalize external consulting fees, and salaries and benefits for
employees who are directly associated with the development of software for
internal use when both of the following occur:
o The preliminary project stage is completed and therefore the
project is in the application development stage; and
o Management authorizes and commits to funding a software
project and it is probable that the project will be completed
and the software will be used to perform the function desired.
Modifications or enhancements made to an existing software product that
result in additional functionality are also capitalized. When the new software
is placed in production, we begin amortizing the asset over its estimated useful
life. Training and maintenance costs are accounted for as expenses as they
occur. We periodically review capitalized internal use software to determine if
the carrying value is fully recoverable. If there are future cash flows directly
related to the software we record an impairment loss when the present value of
the future cash flows is less than the carrying value. If software, or
components of software, in development are abandoned, the Company takes a charge
to write off the capitalized amount in the period the decision is made to
abandon it.
During 2003, we completed our 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. 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 have completed a rigorous evaluation of our
Company-wide technological needs, which included an assessment of the viability
of the existing system. As a result of this assessment we concluded that we
would use both systems and in the fourth quarter of 2003 we recorded a write-off
of $1.1 million associated with abandoned components of the software cost.
Our assessment supports the remaining $3.3 million balance.
When the Company purchased Values Financial Network, Inc. ("VFN") in
2000, part of the purchase price was for goodwill. Before January 1, 2002, the
Company amortized the goodwill on a straight-line basis over 10 years, which was
its estimated useful life. Pursuant to Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the
Company ceased amortizing goodwill on January 1, 2002. As required by SFAS 142,
the Company performs an annual goodwill impairment test. The impairment test of
SFAS 142 requires the Company to measure fair value of the reporting unit. The
Company 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. In early 2003 the Company further refined its business
model for VFN, including identifying a new market and committing additional
resources to develop the business. During 2003, due to the failure of VFN to
produce revenues as projected, the Company updated its annual measurement of
fair value of VFN. The fair value measurement based on a revised cash flow
forecast was predicated on VFN realizing a lower level of sales. This forecast
of cash flows did not support the balance of goodwill, and the Company recorded
a goodwill impairment loss of $491,000 during 2003. Current projections support
the remaining balance of goodwill.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
deferred tax assets will, or will not, be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences become deductible. Management
believes it is more likely than not that the deferred tax assets will be
realized.
Investments classified as available-for-sale are periodically reviewed
to determine if declines in fair value below cost are other-than-temporary.
Significant and sustained decreases in quoted market prices, a series of
historical and projected operating losses by the investee or other factors are
considered as part of the review. If the decline in fair value has been
determined to be other-than-temporary, an impairment loss is recorded in
investment income and the individual security is written down to a new cost
basis. During 2001, we determined that certain
10
investment securities had other-than-temporary declines in fair value below
cost. As a result, in 2001 we recorded impairment losses of $642,000, and the
individual securities were written down to a new cost basis.
Regan Holding Corp. Consolidated
Year ended December 31, 2003 compared with year ended December 31, 2002
We had consolidated net income of $5.0 million in 2003, compared to
consolidated net losses of $60,000 in 2002. The improved results are primarily
due to increased net income at Legacy Marketing, partially offset by increased
losses at Values Financial Network, Inc. primarily due to asset impairment
losses.
Year ended December 31, 2002 compared with year ended December 31, 2001
We had consolidated net losses of $60,000 in 2002, compared to
consolidated net losses of $348,000 in 2001. The improved results are primarily
due to reduced losses at Values Financial Network, Inc. and Legacy Financial,
and the recognition of net income at our Other segments in 2002 compared to net
losses in 2001, partially offset by lower net income at Legacy Marketing.
Legacy Marketing
Year ended December 31, 2003 compared with year ended December 31, 2002
During 2003, Legacy Marketing's net income totaled $7.2 million,
compared to net income of $1.6 million during 2002. This increase of $5.6
million is primarily due to increased revenues, partially offset by increased
expenses and decreased investment income in 2003 compared to 2002.
During 2003, Legacy Marketing's revenue increased $20.2 million (42%)
primarily due to increased commissions and marketing allowances. Marketing
allowances and commissions increased $16.3 million (46%). 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. Legacy Marketing will continue to administer these
annuity products and to accept additional premium payments, subject to
applicable additional deposit limitations for these products. The discontinued
products accounted for approximately 3% and 31% of our total consolidated
revenue during 2003 and 2002. Sales of recently introduced Transamerica products
have partially offset the effect of the discontinued Transamerica products.
However, effective in May 2004 Legacy Marketing will discontinue marketing
Transamerica products. We intend to continue providing administrative services.
In addition, during the second quarter of 2003, American National reduced the
crediting rates of several annuity products marketed by Legacy Marketing and
lowered the commission rates that they pay to Legacy Marketing for sales of
these products. As a result, sales of annuity products on behalf of American
National began to decrease during the second quarter of 2003. This trend
continued throughout the remainder of 2003. It is possible that overall
consolidated revenues may also decline due to this event. Legacy Marketing has
developed new annuity products with American National that may result in
increased sales for Legacy Marketing in the long term. Furthermore, during the
third quarter of 2003, Legacy Marketing began discontinuing the marketing of the
AssureMark (SM) fixed annuity product issued by John Hancock. As a result, sales
of annuity products on behalf of John Hancock decreased during 2003. Legacy
Marketing plans to develop new annuity products with John Hancock that may
result in increased sales in the long term.
Administrative fees increased $1.9 million (16%) during 2003 compared
to 2002 primarily due to increased issuing and maintenance fees. Other income
increased $2.0 million during 2003 compared to 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. The
Company and the insurance carrier agreed to terminate the bonus program
effective July 1, 2003.
As of December 31, 2003, Legacy Marketing sold products on behalf of
four unaffiliated insurance carriers: Transamerica, American National, John
Hancock and Investors Insurance Corporation. Legacy Marketing also performs
administrative services for products of IL Annuity. The agreements with the
following carriers generated a significant portion of the Company's total
consolidated revenue (sales on behalf of Investors Insurance Corporation began
in the second quarter of 2002):
11
2003 2002
---- ----
American National 37% 17%
Transamerica 25% 52%
Investors Insurance Corporation 23% 6%
IL Annuity 6% 12%
John Hancock 3% 8%
Although Legacy Marketing sells and administers several products on
behalf of the insurance carriers, our consolidated revenues are derived
primarily from sales and administration of the following annuity product series:
2003 2002
---- ----
BenchMark(SM) series (sold on behalf of
American National) 37% 16%
SelectMark(SM) series (sold on behalf of
Transamerica) 25% 51%
MarkOne(SM) series (sold on behalf of
Investors Insurance Corporation) 23% 6%
VisionMark(SM) series (sold on behalf
of IL Annuity) 4% 11%
AssureMark(SM) series (sold on behalf of
John Hancock) 3% 8%
As indicated above, American National reduced the crediting rates on
several annuity products and we will cease marketing Transamerica products
effective in May 2004. As a result of these events our sales of Transamerica and
American National products will likely decrease.
Legacy Marketing's expenses increased $10.6 million (23%) primarily due
to increased selling, general and administrative expenses and other. The
increase in selling, general and administrative expenses of $9.7 million (24%)
was 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 were
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. Other
expenses increased $1.2 million (47%) primarily due to the $1.1 million
write-off of internal use software.
Legacy Marketing recognized investment income of $409,000 in 2003
compared to $638,000 in 2002. This decrease was primarily due to lower realized
gains on sales of investment securities during 2003.
Year ended December 31, 2002 compared with year ended December 31, 2001
During 2002, Legacy Marketing's net income totaled $1.6 million,
compared to net income of $2.8 million during 2001. This decrease of $1.2
million was primarily due to decreased revenues, partially offset by decreased
expenses and the recognition of investment income in 2002 compared to investment
losses in 2001.
Legacy Marketing's revenue decreased $5.6 million (10%) primarily due
to decreased marketing allowances and commission income. Marketing allowances
and commission revenue, combined, decreased $5.9 million (14%) due to a decrease
in sales of fixed annuity and life policies. The sales decrease was primarily
due to a shift in the marketplace toward more traditional fixed income-based
annuities. Administrative fees increased $307,000 (3%) primarily due to an
increase in the number of policies administered year over year, partially offset
by a lower number of policies issued in 2002.
Legacy Marketing's expenses decreased $2.9 million (6%) primarily
attributable to decreases in selling, general and administrative expenses. The
decrease in selling, general and administrative expenses of $2.9 million (7%)
was primarily due to decreases in professional fees, commissions, compensation,
and occupancy expenses. Professional fees decreased primarily due to lower
consulting fees related to internal use software maintenance, and reduced legal
expenses. The decrease in commissions was primarily related to lower sales.
Compensation decreased primarily due to the effect of attrition, as Legacy
Marketing's headcount decreased 4% in 2002. The decreased occupancy expense was
primarily a result of our purchasing the building that houses our headquarters,
which resulted in no rent expense after June 2001, partially offset by increased
interest expense from financing the building purchase.
Legacy Marketing recognized investment income of $638,000 in 2002
compared to investment losses of $239,000 in 2001. This shift was primarily
because 2001 included impairment losses of $642,000 related to
other-than-temporary declines in the value of certain investment securities.
12
Legacy Financial
Year ended December 31, 2003 compared with year ended December 31, 2002
Legacy Financial incurred net losses of $683,000 during 2003, compared
to net losses of $595,000 during 2002. Results declined primarily due to
increased expenses partially offset by increased revenues.
Legacy Financial revenue increased $460,000 (18%) during 2003 compared
to 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 $582,000 (17%) in 2003 compared to
2002. The increase was primarily due to an increase in selling, general and
administrative expenses and other expenses. Selling, general and administrative
expenses increased $359,000 (11%) primarily attributable to increased sales
promotion expenses, increased errors and omissions insurance premiums, and
increased incentive compensation. Other expenses increased $223,000 (71%)
primarily due to increased equipment maintenance expenses and increased
insurance costs.
Legacy Financial has incurred cumulative losses since its inception in
1995. We have committed to make sufficient contributions to support Legacy
Financial's operations through February 2005.
Year ended December 31, 2002 compared with year ended December 31, 2001
Legacy Financial incurred net losses of $595,000 during 2002, compared
to net losses of $837,000 during 2001. The improved results were primarily due
to increased revenues.
Legacy Financial revenue increased $387,000 (18%) primarily due to
increases in the volume of sales resulting from a more attractive product mix
for Legacy Financial's distribution network of registered representatives.
Legacy Financial's total expenses were unchanged during 2002 compared
to 2001.
Values Financial Network, Inc.
Year ended December 31, 2003 compared with year ended December 31, 2002
Values Financial Network, Inc. incurred net losses of $1.0 million
during 2003, compared to net losses of $520,000 during 2002. The increased
losses were due to goodwill, intangibles, and long-lived asset impairment losses
during 2003. Revenues increased $23,000 (329%) during 2003 compared to 2002
primarily due to rental income from a tenant who began subleasing office space
from VFN in the second quarter of 2003. Expenses excluding the impairment losses
were relatively unchanged during 2003 compared to 2002.
When the Company purchased the assets of 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 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 goodwill impairment
loss of $491,000 during 2003.
Additionally, when the Company purchased VFN in 2000, among the assets
acquired were long lived assets comprising 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
13
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 2003, included in Other
expenses.
Year ended December 31, 2002 compared with year ended December 31, 2001
Values Financial Network, Inc. incurred net losses of $520,000 during
2002, compared to net losses of $1.2 million during 2001, primarily due to
reduced expenses partially offset by lower revenues. Total revenues decreased
$38,000 (84%) primarily due to decreased sales leads revenue. Total expenses
decreased $1.2 million (58%) in 2002 primarily resulting from the termination of
employees and decreased IT consulting fees.
Imagent Online
In 2000, we purchased, through Imagent Online, a 33.3% ownership
interest in a development stage company named prospectdigital, LLC
("prospectdigital") for $403,000.
In January 2002, we purchased all of the remaining outstanding stock of
prospectdigital for $225,000 in cash, a non-recourse note payable in the amount
of $75,000 and payable out of the future profits of prospectdigital, and
$100,000 of contingent consideration based on future income. Under the terms of
the purchase agreement, prospectdigital remained liable for payment of the $1.5
million indebtedness, plus accrued interest, due to us. Prospectdigital is now a
wholly owned subsidiary, and the results of prospectdigital's operations have
been included in the Consolidated Financial Statements since the date of
acquisition.
Year ended December 31, 2003 compared with year ended December 31, 2002
Imagent Online had net losses of $606,000 during 2003, compared to net
losses of $648,000 during 2002. This favorable change of $39,000 was primarily
due to increased revenues at prospectdigital in 2003.
Year ended December 31, 2002 compared with year ended December 31, 2001
Imagent Online had net losses of $648,000 during 2002, compared to net
losses of $660,000 during 2001. This favorable change of $12,000 was primarily
due to increased revenues at prospectdigital in 2002. As discussed above,
prospectdigital's results of operations are included in the Consolidated
Financial Statements since our acquisition of it in January 2002. Prior to the
acquisition, we accounted for our investment in prospectdigital under the equity
method of accounting. Accordingly, our share of prospectdigital's losses during
2001 were included in other expenses. Imagent Online had no revenue in 2001, and
its expenses primarily consisted of its share of prospectdigital's losses.
Other Segments
Year ended December 31, 2003 compared with year ended December 31, 2002
During 2003, combined net income from Legacy Advisory Services and
Legacy Re, which is inactive, was $122,000, compared to combined net income of
$61,000 in 2002. This favorable change of $61,000 is primarily due to increased
advisory fee revenues.
Year ended December 31, 2002 compared with year ended December 31, 2001
During 2002, combined net income from Legacy Advisory Services, Legacy
Re and Concept Strategies, Inc. was $61,000, compared to combined net losses of
$371,000 in 2001. This favorable change of $432,000 is primarily due to closing
the operations of our LifeSurance Corporation subsidiary in late 2001.
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 and develop fixed assets, primarily internal use
software and computer hardware, in order to increase operational efficiency;
(iii) to fund continued product development; 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 from operating
activities.
14
Net cash provided by operating activities was $12.0 million for 2003
compared to $410,000 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 unrealized gains on
trading securites in 2003 compared to unrealized losses in 2002.
Net cash used in investing activities was $5.2 million compared to net
cash provided by investing activities of $1.9 million for 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 $1.6 million for 2003
compared to net cash provided by financing activities of $1.1 million for 2002,
primarily due to lower net proceeds from loans and higher repurchases of our
common stock during 2003. During 2001, we purchased the office building which
houses our headquarters for $10.6 million. In conjunction with the acquisition,
we entered into a bridge loan agreement for $4.8 million. In July 2002, we
replaced the bridge loan with permanent financing in the amount of $7.4 million.
The note is payable over ten years in monthly installments of principal and
interest based on a 25-year term. At the end of ten years, we must pay the
balance of principal due on the note. For the first five years, the interest
rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%,
adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease
in the interest rate. The maximum interest rate is 10.50%.
During 2003, we began construction of a new building in Rome, Georgia and
established a $2.7 million loan facility to be drawn against to finance
construction costs. The interest rate is equal to LIBOR plus 2.10%. The interest
rate as of December 31, 2003 was 3.24%. The loan matures on October 27, 2004. As
of December 31, 2003, $2.5 million was available under the construction loan.
We are obligated to repurchase certain shares of our common stock. At
December 31, 2003 and December 31, 2002, the total redemption value of all
redeemable common stock outstanding was $9.0 million and $10.1 million. Cash
paid to repurchase some of these shares totaled $1.2 million during 2003, and
$964,000 during 2002. As the value of our common stock rises, our monetary
obligation with respect to the redeemable common stock also increases.
We lease office and warehouse premises and certain office equipment
under non-cancelable operating leases. As of December 31, 2003, our total
contractual cash obligations, including the building financing discussed above,
were as follows:
- --------------------- ------------------------------------------------------------------------------------------------
Payments Due by Period
- --------------------- ------------------------------------------------------------------------------------------------
Contractual
Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Debt $7,390,000 $307,000 $ 260,000 $ 298,000 $6,525,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Operating Leases 1,638,000 610,000 788,000 237,000 3,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Total Contractual
Cash Obligations $9,028,000 $917,000 $1,048,000 $ 535,000 $6,528,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
During 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 December 31, 2003, the Company
believes that 125% of the fair market value of the shares owned by Ms. Regan was
equal to $28.3 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.
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.
15
We generated $12.0 million and $410,000 of cash flow from operations in
2003 and 2002. However, if requests to repurchase redeemable common stock
increase significantly, a cash shortfall could ultimately occur. Management
believes that existing cash and investment balances, together with anticipated
cash flow from operations, will provide sufficient funding for the foreseeable
future. However, in the event that a cash shortfall were to occur, management
believes 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.
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 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.
RISK FACTORS
RISKS RELATED TO OUR COMPANY
We have experienced losses in recent years and if losses continue, our
business could suffer.
We had net losses of $60,000 and $348,000 for the years ended December
31, 2002 and 2001. We had net income of $5.0 million during 2003. We intend to
continue to invest in marketing, operations, technology, and product
development. We will need to generate adequate revenues and reduce our operating
costs to maintain profitability. If we fail to maintain profitability, our
financial condition and prospects could be weakened.
We depend on a limited number of sources for our products, and any
interruption, deterioration, or termination of the relationship with any of our
insurance carriers could be disruptive to our business and harm our results of
operations and financial condition.
Legacy Marketing has marketing agreements with Transamerica Life
Insurance and Annuity Company, American National Insurance Company, John Hancock
Variable Life Insurance Company, and Investors Insurance Corporation. Legacy
Marketing has also entered into administrative agreements with each of the four
insurance carriers, and IL Annuity and Insurance Company, whose marketing
agreement terminated during the first quarter of 2002. During 2003, 37%, 25%,
23%, 6%, and 3% of our total consolidated revenue resulted from agreements with
American National, Transamerica, Investors Insurance Corporation, IL Annuity,
and John Hancock.
Legacy Marketing discontinued the marketing of several annuity products
issued by Transamerica during the first quarter of 2003 primarily because those
products no longer met Transamerica's profitability targets. Legacy Marketing
will continue to administer these annuity products and to accept additional
premium payments, subject to applicable additional deposit limitations for these
products. The discontinued products accounted for approximately 3%, 31%, and 59%
of our total consolidated revenue for the years ended December 31, 2003, 2002,
and 2001. However, effective in May 2004 Legacy Marketing will discontinue
marketing Transamerica products, as a result our sales of Transamerica products
will likely decrease. We intend to continue providing administrative services.
In addition, Legacy Marketing discontinued marketing life insurance
products issued by American National effective during the first quarter of 2003.
These products accounted for a nominal amount of revenue during each of the
years ending December 31, 2003, 2002, and 2001. Legacy Marketing will continue
to administer American National life insurance products, including acceptance of
renewal premium. Two Legacy Marketing employees who were supporting the life
insurance product operations were terminated and nine were reassigned to other
positions in Legacy Marketing.
16
During the second quarter of 2003, American National reduced the
crediting rates of several annuity products marketed by Legacy Marketing. In
addition, American National lowered the commission rates that they pay to Legacy
Marketing for sales of these products. As a result, sales of annuity products on
behalf of American National began to decrease through the remainder of 2003. We
believe this trend may continue for 2004. 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. 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.
In June 2002, Legacy Marketing entered into marketing and
administrative services agreements with Investors Insurance Corporation, an
unaffiliated insurance carrier. Under these agreements, Legacy Marketing will
sell and administer annuity products on behalf of Investors Insurance
Corporation. Legacy Marketing has an option to buy Investors Insurance
Corporation. The option expires on June 30, 2005. If Legacy Marketing exercises
the option, it must complete the purchase transaction within two years of
exercising the option. Sales on behalf of Investors Insurance Corporation began
in June 2002.
The marketing agreement with American National expires on November 15,
2007, and the administrative agreement with American National expires on
February 15, 2008. Both agreements may be renewed by mutual agreement for
successive one-year terms. The agreements may be terminated by either party upon
twelve months prior written notice without cause, and may be terminated by
either party immediately for cause. The marketing and administrative agreements
with Transamerica and John Hancock do not have fixed terms but may be terminated
by either party upon twelve months prior written notice without cause, and may
be terminated by either party immediately for cause.
Any interruption, deterioration, or termination of the relationship
with any of our insurance carriers could be disruptive to our business and harm
our results of operations and financial condition.
If we fail to attract and retain key personnel, our business, operating
results, and financial condition could be diminished.
Our success depends largely on the skills, experience and performance
of certain key members of our management. In the recent past, we have been
successful at attracting and retaining key personnel. We have no agreements with
these individuals requiring them to maintain their employment with us. If we
lose one or more of these key employees, particularly Lynda L. Regan, Chairman
of the Board and Chief Executive Officer, or R. Preston Pitts, President and
Secretary, our business, operating results, and financial condition could be
diminished because we rely on their contacts, insurance carrier and Producer
relationships, and strategic direction to drive our revenues. However, we are
not aware of any key personnel who are planning to retire or leave our company
in the near future. Although we maintain and are the beneficiary of key person
life insurance policies on the lives of Lynda L. Regan and R. Preston Pitts, we
do not believe the proceeds would be adequate to compensate us for their loss.
Our success also depends on our continued ability to attract, retain,
and motivate highly skilled employees. In the recent past, we have been
successful attracting and retaining highly skilled personnel. Competition for
employees in our industry is intense, particularly for personnel with training
and experience. We may be unable to retain our highly skilled employees or to
attract, assimilate, or retain other highly qualified employees in the future.
Our performance will depend on the continued growth of Legacy
Marketing. If Legacy Marketing fails to grow, our financial performance could
suffer.
Our growth is, and for the foreseeable future will continue to be,
dependent on Legacy Marketing's ability to design, market and administer fixed
annuity products. The ability of Legacy Marketing to successfully perform these
services could be affected by many factors, including:
o The ability of Legacy Marketing to recruit, train, and motivate
Producers.
o The degree of market acceptance of the products marketed on behalf of
our insurance carriers.
o The relationship between Legacy Marketing and our insurance carriers.
17
o The failure of Legacy Marketing to comply with federal, state and other
regulatory requirements applicable to the sale or administration of
insurance products.
o Competition from other financial services companies in the sale and
administration of insurance products.
A large percentage of our revenue is derived from sales of fixed
annuities. The historical crediting rates of fixed annuities are directly
affected by financial market conditions. Changes in market conditions can affect
demand for these annuities. Our future success depends on our ability to
introduce and market new products and services that are financially attractive
and address our customers' changing demands. We may experience difficulties that
delay or prevent the successful design, development, introduction, marketing, or
administration of our products and services. These delays may cause customers to
forego purchases of our products and services and instead purchase those of our
competitors. The failure to be successful in our sales efforts could
significantly decrease our revenue and operating results, resulting in weakened
financial condition and prospects.
We may be unable to effectively fund our working capital requirements,
which could have a material adverse effect on our operating results and
earnings.
If our cash inflows and existing cash and investments become
insufficient to support future operating requirements or the redemption of our
common stock, we will need to obtain additional funding either by incurring
additional debt or issuing equity to investors in either the public or private
capital markets. Our cash flows are primarily dependent upon the commissions we
receive based on the premium generated from the sale of annuity products that we
sell. The market for these products is extremely competitive. New products are
constantly being developed to replace existing products in the marketplace. If
we are unable to keep pace with the development of such new products, our cash
inflows could decrease. Due to this changing environment in which we operate, we
are unable to predict whether our cash inflows will be sufficient to support
future operating requirements. Our failure to obtain additional funding when
needed could delay new product introduction or business expansion opportunities
which could cause a decrease in our operating results and financial condition.
We are unaware of any material limitations on our ability to obtain additional
funding. If additional funds are raised through the issuance of equity
securities, the ownership percentage of our then-current shareholders would be
reduced. Furthermore, any equity securities issued in the future may have
rights, preferences, or privileges senior to that of our existing common stock.
Our cash positions at December 31, 2003 and December 31, 2002 were $9.9
million and $4.8 million.
Significant repurchases of our common stock could materially decrease
our cash position.
As of December 31, 2003, we are obligated to redeem 3,289,000 shares of
Series A Common Stock at the option of the holders of these shares. Of the
553,000 shares of Series B Common Stock outstanding, we are obligated to redeem
up to 10% of these shares at the option of the holders of these shares, limited
to a specified twenty-day period each year. The price per share is based on the
estimated fair market value of the stock on the redemption date. The redemption
of all eligible shares during 2004 would require $7.3 million, which would
materially decrease our cash position.
Pursuant to the terms of our Amended and Restated Shareholder's
Agreement with Lynda L. Regan, our Chief Executive Officer, upon the death of
Ms. Regan, the heirs of Ms. Regan will have the option (but not the obligation)
to sell to us all or a portion of the shares of the Company owned by Ms. Regan
at the time of her death and we will have the obligation to buy those shares.
The purchase price to be paid buy us, if any, shall be equal to 125% of the fair
market value of the shares. As of December 31, 2003, we believe 125% of the fair
market value of the shares owned by Ms. Regan was equal to $28.3 million. We
have purchased two life insurance policies with a combined face amount of $29
million for the purpose of funding this potential obligation. There can be no
assurances, however, that the proceeds from these insurance policies will be
available or sufficient to cover the purchase price of the shares owned by Ms.
Regan at the time of her death. If the proceeds from the insurance policies were
not available or sufficient to cover the purchase price of Ms. Regan's shares at
the time of her death, our operating results and financial condition could be
adversely affected.
RISKS RELATED TO OUR INDUSTRY
We may not be able to compete successfully with competitors that may
have greater resources than we do.
18
The fixed annuity business is rapidly evolving and intensely
competitive. Legacy Marketing's primary market is fixed annuities sold through
independent producers. In addition, Legacy Marketing administers the products
sold by Producers on behalf of the issuing insurance carriers. Fixed annuity
sales in the United States were approximately $88 billion in 2003. Some of
Legacy Marketing's top competitors selling fixed annuities through independent
sales channels are Allianz Life of North America, American Equity Investment
Life, Jefferson Pilot Financial Insurance Company, and AmerUs Group. These
competitors may have greater financial resources than we do. However, our
business model allows us greater flexibility, as we can adjust the mix of
business sold if one or more of our carriers were to experience capital
constraints or other events that affect their business models. Our competitors
may respond more quickly than us to new or emerging products and changes in
customer requirements. We are not aware of any significant new means of
competition, products or services that our competitors provide or will soon
provide. However, in the highly competitive fixed annuity marketplace, new
distribution models, product innovations and technological advances may occur at
any time and could present us with competitive challenges. There can be no
assurance that we will be able to compete successfully. In addition, our
business model relies on Wholesaler distribution networks to effectively market
our products competitively. Maintaining relationships with these Wholesaler
distribution networks requires introducing new products and services to the
market in an efficient and timely manner, offering competitive commission
schedules, and providing superior marketing, training, and support. In the
recent past, we have been reasonably successful in expanding and maintaining our
current Wholesaler distribution network. We are not aware of any Wholesaler who
may discontinue marketing our products. Due to competition among insurance
companies and insurance marketing organizations for successful Wholesalers,
there can be no assurance that we will be able to retain some or all of our
Wholesaler distribution networks.
We may face increased governmental regulation and legal uncertainties,
which could result in diminished financial performance.
State legislators, state insurance regulators and the National
Association of Insurance Commissioners continually reexamine existing laws and
regulations, and may impose changes in the future that materially adversely
affect our business, results of operations and financial condition. In
particular, rate rollback legislation and legislation to control premiums,
policy terminations and other policy terms may affect the marketability of
policies or the amount of premiums that can be charged for such policies, and
thus the commissions we can earn. Recently a committee of the U.S. House of
Representatives has been considering the advisability of enacting federal
statutes that would impose certain national uniform insurance regulatory
standards to be applied by state insurance regulators. No such legislation has
yet been introduced. A bill entitled "The Federal Insurance Consumer Protection
Act of 2003" (S. 1373), has been introduced in the U.S. Senate which, if
enacted, would establish comprehensive and exclusive federal regulation over all
"interstate insurers," including all property and casualty insurers selling in
more than one state, with no option for such insurers to remain regulated by the
states. This legislation would repeal the McCarran-Ferguson antitrust exemption
for the business of insurance. It would also establish a Federal Insurance
Regulatory Commission within the Department of Commerce that would have
exclusive regulatory jurisdiction over property and casualty and life insurers
that do business in more than one U.S. jurisdiction. The legislation would
establish comprehensive federal regulatory oversight over such insurers,
including licensing, solvency supervision, accounting and auditing practices,
form and rate approval, and market conduct examination. The legislation also
would establish a National Insurance Guaranty Fund, which may be empowered to
collect pre-funded assessments that are different from, and potentially greater
than, current state guaranty fund assessment levels. We cannot predict whether
these or other proposals will be adopted, or what impact, if any, such proposals
may have on our business, financial condition or results of operation.
Legacy Financial is registered as a broker-dealer with, and is subject
to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and
various state agencies. This regulation covers matters such as capital
requirements, recordkeeping and reporting requirements, and employee-related
matters, including qualification and licensing of supervisory and sales
personnel. Any proceeding alleging violation of, or noncompliance with, laws and
regulations applicable to us or our subsidiaries could harm our business,
financial condition, results of operations, and business prospects. In addition,
changes in federal legislation, state legislation, court decisions and
administrative policies could significantly and adversely affect the securities
industry generally and our business in particular.
Adverse changes in tax laws could diminish the marketability of most of
our products, resulting in decreased revenue.
Under the Internal Revenue Code of 1986, as amended, income tax payable
by policyholders on investment earnings is deferred during the accumulation
period of most of the annuity products that we market. This favorable income tax
treatment results in our policyholders paying no income tax on their earnings in
the annuity products until they take a cash distribution. We believe that the
tax deferral features contained within the annuity products that we market give
our products a competitive advantage over other non-insurance investment
products where income taxes may be due on current earnings. If the tax code is
revised to reduce the tax-deferred status of annuity products or to increase the
tax-deferred status of competing products, our business could be adversely
impacted because our competitive advantage could be weakened. In addition, some
products that we sell receive favorable estate tax treatment under the tax code.
If the tax code is revised to change existing estate tax laws, our business
could be adversely affected. We cannot predict other future tax initiatives that
the federal government may propose that may affect us.
We operate in an industry in which there is significant risk of
litigation. Substantial claims against us could diminish our financial condition
or results of operation.
19
As a professional services firm primarily engaged in marketing and
administration of annuity products, we encounter litigation in the normal 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
our financial condition, cash flows or results of operations. In addition,
companies in the life insurance industry have been subject to substantial claims
involving sales practices, agent misconduct, failure to properly supervise
agents, and other matters in connection with sale of life insurance, annuities,
and other investment products. Increasingly, these lawsuits have resulted in the
award of substantial judgments, including material amounts of punitive damages
that are disproportionate to the actual damages. In some states juries have
substantial discretion in awarding punitive damages that creates the potential
for material adverse judgments in litigation. If any similar lawsuit or other
litigation is brought against us, such proceedings may materially harm our
business, financial condition, or results of operations.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
Our investments are categorized as trading or available-for-sale
securities.
Investments in fixed income instruments carry a degree of market risk.
Market risk represents the potential for losses due to adverse changes in the
fair market value of financial investments. The market risks faced by us relate
primarily to our investment portfolio, which exposes us to risks related to
interest rates, credit quality and equity prices.
Interest rate risk is the price sensitivity of a fixed income security
to changes in interest rates. The following table provides information about our
fixed income investments, which are sensitive to changes in interest rates.
Listed below are cash flows from principal amounts and related weighted average
interest rates by expected maturity dates for fixed income investments held at
December 31, 2003 and 2002. Actual cash flows could differ from expected
amounts.
Amortized Estimated
December 31, 2003 2004 2005 2006 2007 2008 Thereafter Cost Fair Value
- ----------------- ---- ---- ---- ---- ---- ---------- ---- ----------
Fixed maturities $ 515,000 $1,561,000 $1,736,000 $-- $-- $-- $3,812,000 $3,865,000
Average interest
Rate 2.94% 3.50% 5.20% -- -- --
Amortized Estimated
December 31, 2002 2004 2005 2006 2007 2008 Thereafter Cost Fair Value
- ----------------- ---- ---- ---- ---- ---- ---------- ---- ----------
Fixed maturities $4,588,000 $-- $-- $-- $-- $340,000 $4,928,000 $4,890,000
Average interest
Rate 4.58% -- -- -- -- 7.03%
During 2003 we invested in bond mutual funds which are sensitive to
interest rates. The original cost and fair value at December 31, 2003 were
$2,033,000 and $2,074,000.
We invest in marketable securities which are predominately investment
grade. As a result, we believe we have minimal exposure to credit risk.
Equity price risk is the potential loss arising from changes in the
value of equity securities. In general, equity securities have more year-to-year
price variability than intermediate term high-grade bonds. However, returns over
longer time frames have been consistently higher. Our equity securities consist
primarily of investments in broadly diversified mutual funds. As a result of
favorable market conditions related to our mutual fund investments, the fair
value of our equity securities is above original cost at December 31, 2003. The
original cost and fair values of our marketable equity securities are shown
below:
Original Cost Fair Value
------------- ----------
December 31, 2003 $5,633,000 $6,308,000
December 31, 2002 $5,295,000 $4,261,000
All of the above risks are monitored on an ongoing basis. A combination
of in-house review and consultation with our investment broker is used to
analyze individual securities, as well as the entire portfolio.
20
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Regan Holding Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Regan
Holding Corp. and its subsidiaries (the "Company") at December 31, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1, the Company changed its method of accounting for
goodwill and other intangible assets in accordance with Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangible Assets during the
year ended December 31, 2002.
PricewaterhouseCoopers LLP
San Francisco, California
March 30, 2004
21
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
-----------------------------
2003 2002
------------ ------------
Assets
Cash and cash equivalents $ 9,908,000 $ 4,793,000
Trading investments 6,308,000 4,261,000
Available-for-sale investments 5,939,000 4,890,000
Accounts receivable, net of allowance of $866,000 and $760,000 at
December 31, 2003 and 2002 4,225,000 3,274,000
Prepaid expenses and deposits 803,000 2,122,000
Deferred taxes 1,356,000 1,030,000
------------ ------------
Total current assets 28,539,000 20,370,000
------------ ------------
Net fixed assets 24,278,000 25,841,000
Deferred taxes 1,170,000 685,000
Goodwill 679,000 1,170,000
Intangible assets, net 196,000 332,000
Other assets 2,253,000 1,649,000
------------ ------------
Total non current assets 28,576,000 29,677,000
------------ ------------
Total assets $ 57,115,000 $ 50,047,000
============ ============
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 10,790,000 $ 8,906,000
Income taxes payable 1,990,000 2,327,000
Current portion of notes payable and other borrowings 307,000 109,000
------------ ------------
Total current liabilities 13,087,000 11,342,000
------------ ------------
Deferred compensation payable 6,257,000 4,241,000
Other liabilities 196,000 190,000
Note Payable, less current portion 7,083,000 7,199,000
------------ ------------
Total non current liabilities 13,536,000 11,630,000
------------ ------------
Total liabilities 26,623,000 22,972,000
------------ ------------
Redeemable common stock, Series A and B 8,964,000 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: 20,252,000 and
20,495,000 at December 31, 2003 and 2002 3,158,000 3,324,000
Common stock committed 25,000 25,000
Paid-in capital 6,510,000 6,499,000
Retained earnings 11,779,000 7,135,000
Accumulated other comprehensive income (loss) 56,000 (23,000)
------------ ------------
Total shareholders' equity 21,528,000 16,960,000
------------ ------------
Total liabilities, redeemable common stock and shareholders' equity $ 57,115,000 $ 50,047,000
============ ============
See notes to financial statements.
22
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Year Ended December 31,
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenue
Marketing allowances and commission overrides $ 48,396,000 $ 32,323,000 $ 38,123,000
Trailing commissions 5,130,000 4,899,000 4,708,000
Administrative fees 13,875,000 12,007,000 11,700,000
Other revenue 3,516,000 820,000 678,000
------------ ------------ ------------
Total revenue 70,917,000 50,049,000 55,209,000
------------ ------------ ------------
Expenses
Selling, general and administrative 53,583,000 43,521,000 47,575,000
Depreciation and amortization 4,077,000 4,339,000 4,578,000
Goodwill impairment losses 491,000 -- --
Other 4,729,000 2,859,000 3,459,000
------------ ------------ ------------
Total expenses 62,880,000 50,719,000 55,612,000
------------ ------------ ------------
Operating income (loss) 8,037,000 (670,000) (403,000)
Other income (loss)
Investment income (loss), net 416,000 652,000 (125,000)
Interest expense (33,000) (76,000) (40,000)
------------ ------------ ------------
Total other income (loss) 383,000 576,000 (165,000)
------------ ------------ ------------
Income (loss) before income taxes 8,420,000 (94,000) (568,000)
Income tax provision (benefit) 3,391,000 (34,000) (220,000)
------------ ------------ ------------
Net income (loss) before accretion of redeemable
common stock 5,029,000 (60,000) (348,000)
Accretion of redeemable common stock (34,000) (26,000) (397,000)
------------ ------------ ------------
Net income (loss) available for common shareholders $ 4,995,000 $ (86,000) $ (745,000)
============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ 0.20 $ -- $ (0.03)
Weighted average shares outstanding 24,431,000 25,093,000 25,861,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ 0.18 $ -- $ (0.03)
Weighted average shares outstanding 27,330,000 25,093,000 25,861,000
See notes to financial statements.
23
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
Series A Common Stock
---------------------------------------- Accumulated
Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Committed Capital Earnings Income (Loss) Total
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance December 31, 2000 20,870,000 $ 3,596,000 100,000 $ 6,318,000 $ 8,244,000 $ (511,000) $17,747,000
Comprehensive income,
net of tax:
Net loss (348,000) (348,000)
Net unrealized gains
on investments 1,036,000 1,036,000
Less:
Reclassification
adjustment for
losses included in
net loss (469,000) (469,000)
-----------
Total comprehensive
income 219,000
Retirement upon
voluntary
repurchases of
common stock (149,000) (150,000) (94,000) (244,000)
Retirement upon
mandatory redemption 10,000 10,000
Accretion to
redemption value (397,000) (397,000)
Issuance of common
stock committed 33,000 150,000 (150,000) --
Common stock
committed 15,000 75,000 75,000
Producer stock option
expense 96,000 96,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2001 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 (60,000) (60,000)
Net unrealized losses
on investments (211,000) (211,000)
Less:
Reclassification
adjustment for
gains included in
net loss 132,000 132,000
-----------
Total
comprehensive loss (139,000)
Retirement upon
voluntary
repurchases of
common stock (274,000) (272,000) (184,000) (456,000)
Retirement upon
mandatory redemption 71,000 71,000
Accretion to
redemption value (26,000) (26,000)
Producer stock option
expense 4,000 4,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
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 5,029,000 5,029,000
Net unrealized gains
on investments 86,000 86,000
24
Less:
Reclassification
adjustment for losses
included in net
income (7,000) (7,000)
-----------
Total comprehensive
income 5,108,000
Retirement upon
voluntary
repurchases of
common stock (398,000) (363,000) (351,000) (714,000)
Retirement upon
mandatory redemption 1,000 1,000
Accretion to
redemption value (34,000) (34,000)
Producer stock option
expense 10,000 10,000
Exercise of stock options 155,000 197,000 197,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2003 20,252,000 $ 3,158,000 $ 25,000 $ 6,510,000 $11,779,000 $ 56,000 $21,528,000
=========== =========== =========== =========== =========== =========== ===========
See notes to financial statements.
25
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Year Ended December 31,
--------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 5,029,000 $ (60,000) $ (348,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 4,077,000 4,339,000 4,578,000
Losses on write-off of fixed assets 1,772,000 255,000 381,000
Impairment of goodwill and intangible assets 538,000 -- --
Provision for bad debts 399,000 393,000 342,000
Losses on equity investee -- -- 896,000
Common stock awarded to non-employees -- -- 75,000
Producer stock option expense 10,000 4,000 96,000
Investment impairment loss -- -- 642,000
Amortization of premium or discount of investments 84,000 76,000 47,000
Realized (gains) losses on sales of investments, net 12,000 (219,000) 138,000
Unrealized (gains) losses on trading securities, net (1,709,000) 1,034,000 --
Changes in operating assets and liabilities:
Purchases of trading securities, net (333,000) (5,276,000) --
Accounts receivable (1,350,000) (934,000) (1,003,000)
Prepaid expenses and deposits 1,319,000 (1,065,000) 236,000
Income taxes receivable and payable (337,000) 2,403,000 3,585,000
Deferred tax assets (863,000) (134,000) (133,000)
Accounts payable and accrued liabilities 1,884,000 604,000 15,000
Deferred compensation payable 2,016,000 (115,000) 1,359,000
Other operating assets and liabilities (598,000) (895,000) 14,000
------------ ------------ ------------
Net cash provided by operating activities 11,950,000 410,000 10,920,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (5,902,000) (959,000) (10,150,000)
Proceeds from sales and maturities of available-for-sale
securities 4,884,000 8,633,000 8,049,000
Proceeds from note receivable -- -- 5,750,000
Purchases of fixed assets (4,197,000) (5,580,000) (16,458,000)
Acquisition of prospectdigital assets -- (225,000) --
Equity in and advances to investee -- -- (358,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (5,215,000) 1,869,000 (13,167,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from loans payable 191,000 5,321,000 5,250,000
Payments toward loans payable -- (10,071,000) (2,765,000)
Proceeds from note payable -- 7,350,000 --
Payments toward note payable (109,000) (42,000) --
Repurchases of redeemable common stock (1,185,000) (964,000) (500,000)
Voluntary repurchases of common stock (517,000) (456,000) (244,000)
------------ ------------ ------------
Net cash provided by (used in) in financing activities (1,620,000) 1,138,000 1,741,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 5,115,000 3,417,000 (506,000)
Cash and cash equivalents, beginning of period 4,793,000 1,376,000 1,882,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 9,908,000 $ 4,793,000 $ 1,376,000
============ ============ ============
Supplemental cash flow information:
Taxes Paid $ 5,110,000 $ 7,000 $ 14,000
Interest Paid $ 517,000 $ 411,000 $ 180,000
See notes to financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGAN HOLDING CORP. AND SUBSIDIARIES
1. Organization and Summary of Significant Accounting Policies
a. Organization
Regan Holding Corp. (the "Company") is a holding company, incorporated
in California in 1990, whose primary operating subsidiaries are Legacy Marketing
Group ("Legacy Marketing") and Legacy Financial Services, Inc. ("Legacy
Financial").
As of December 31, 2003, Legacy Marketing had marketing agreements with
Transamerica Life Insurance and Annuity Company ("Transamerica"), American
National Insurance Company ("American National"), John Hancock Variable Life
Insurance Company ("John Hancock"), and Investors Insurance Corporation
(collectively, the "carriers"). During 2002, Legacy Marketing terminated its
marketing agreement with IL Annuity and Insurance Company ("IL Annuity"). The
marketing agreements grant Legacy Marketing the exclusive right to market
certain fixed annuity and life insurance products issued by the carriers (the
"policies"). In addition, Legacy Marketing is responsible for appointing
independent insurance producers who contract with Legacy Marketing to sell
policies. For providing these services, the carriers pay Legacy Marketing
commissions and marketing allowances.
Legacy Marketing also has administrative agreements with the carriers
(including IL Annuity) pursuant to which Legacy Marketing provides clerical,
administrative, and accounting services with respect to the policies. These
services include billing, collecting and remitting premium for the policies. For
providing these services, the carriers pay Legacy Marketing administrative fees.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial,
the Company sells variable annuity and life insurance products, mutual funds and
debt and equity securities. Legacy Financial has entered into sales agreements
with investment companies that give it the non-exclusive right to sell
investment products on behalf of those companies. Sales of investment products
are conducted through Legacy Financial's network of independent registered
representatives.
b. Basis of Presentation
The 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. and its subsidiaries after
elimination of intercompany accounts and transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
c. Revenue Recognition
When a policyholder remits a premium payment with an accurate and
completed application for an insurance policy, the policy is placed inforce and
Legacy Marketing recognizes marketing allowances and commission income. Legacy
Marketing's carriers grant policyholders a contractual right to terminate the
insurance contract ten to thirty days after a policy is placed inforce. This
return period varies depending on the carrier, the type of policy and the
jurisdiction in which the policy is sold. Legacy Marketing gathers historical
product return data that does not vary significantly from quarter to quarter,
and has historically been predictive of future events. Returns are estimated
using this data and have been reflected in the Consolidated Financial
Statements. Legacy Marketing recognizes administrative fees on a per transaction
basis as services are performed, with the amount of the fee depending on the
type of policy and type of service.
Legacy Financial recognizes commission revenue when clients remit
payment with a signed and completed variable annuity or investment contract.
Under the terms of the sales agreements between Legacy Financial and
27
various investment companies, Legacy Financial is compensated based upon
predetermined percentages of actual sales levels.
d. Cash and Cash Equivalents
Cash and cash equivalents include marketable securities with an
original maturity of ninety days or less.
e. Investments
The Company's investments are classified as available-for-sale or
trading securities and are carried at fair value. For available-for-sale
securities, unrealized gains and losses, net of the related tax effect, are
reported as a separate component of shareholders' equity. For trading
securities, unrealized gains and losses are reported in Selling, general and
administrative expenses.
Premiums and discounts are amortized or accreted over the life of the
related investment as an adjustment to yield using the effective interest
method. Interest income is recognized when earned. Realized gains and losses on
sales of investments are recognized in the period sold using the specific
identification method for determining cost.
Investments classified as available-for-sale are periodically reviewed
to determine if declines in fair value below cost are other-than-temporary.
Significant and sustained decreases in quoted market prices, a series of
historical and projected operating losses by the investee or other factors are
considered as part of the review. If the decline in fair value has been
determined to be other-than-temporary, an impairment loss is recorded in
Investment income and the individual security is written down to a new cost
basis.
f. Fixed Assets
Fixed assets are stated at cost, including capitalized interest during
construction of $24,000 during 2003, less accumulated depreciation and
amortization. The Company capitalizes consulting fees, and salaries and benefits
for employees who are directly associated with the development of software for
internal use when both of the following occur:
o The preliminary project stage is completed and therefore the
project is in the application development stage; and
o Management authorizes and commits to funding a software
project and it is probable that the project will be completed
and the software will be used to perform the function desired.
Modifications or enhancements made to an existing software product that
result in additional functionality are also capitalized. When the new software
is placed in production, we begin amortizing the asset over its estimated useful
life. Training and maintenance costs are accounted for as expenses as they
occur.
Depreciation is computed using the straight-line method over the
estimated useful life of each type of asset, as follows:
Computer hardware and purchased software 3-5 years
Internal use software development costs 3-5 years
Leasehold improvements 2-10 years
Furniture and equipment 5 years
Building 40 years
g. Goodwill and Other Intangible Assets
Goodwill and Other Intangible assets were acquired in the Company's
purchase of Values Financial Network, Inc. in 2000 and prospectdigital, LLC in
2002. Prior to January 1, 2002, goodwill was amortized on a straight-line basis
over 10 years, which is its estimated useful life. Pursuant to Statement of
Financial Accounting
28
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the
Company ceased amortizing goodwill beginning January 1, 2002 (see Note 4). As
required by SFAS 142, the Company performs an annual goodwill impairment test.
The impairment test of SFAS 142 requires the Company to measure fair value of
the reporting unit. The Company established fair value by preparing a forecast
of the discounted value of future cash flows expected to be derived from VFN.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives of 5 years.
h. Impairment of Long-Lived Assets
In accordance with Statement of Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
reviews long-lived assets and intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable. Measurement of the impairment of long-lived assets is based upon
management's estimate of undiscounted future cash flows. We periodically review
capitalized internal use software to determine if the carrying value is fully
recoverable. If there are future cash flows directly related to the software or
the business unit of which it is a part, as applicable, we record an impairment
loss when the present value of the future cash flows is less than the carrying
value. If software, or components of software, in development are abandoned, the
Company takes a charge to write off the capitalized amount in the period the
decision is made to abandon it.
i. Redeemable Common Stock
Redeemable common stock is carried at the greater of the issuance value
or the redemption value. Periodic adjustments to reflect increases or decreases
in redemption value are recorded as accretion, with an offsetting adjustment to
retained earnings.
j. Income Taxes
The Company provides deferred taxes based on the enacted tax rates in
effect on the dates temporary differences between the book and the tax bases of
assets and liabilities reverse.
k. Stock Options
The Company has a stock-based employee compensation plan (see Note 12)
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 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
income (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation:
2003 2002 2001
------------- --------- -------------
Net income (loss) available for common
shareholders, as reported: $ 4,995,000 $ (86,000) $ (745,000)
Deduct: Total stock-based employee
compensation expense
determined under fair value method for all
awards, net of related tax effects (424,000) (478,000) (411,000)
------------- --------- -------------
Pro forma net income (loss) available for
common shareholders $ 4,571,000 $(564,000) $ (1,156,000)
Earnings (loss) per share:
Basic - as reported $ 0.20 $ -- $ (0.03)
Basic - pro forma $ 0.19 $ (0.02) $ (0.04)
Diluted - as reported $ 0.18 $ -- $ (0.03)
Diluted - pro forma $ 0.17 $ (0.02) $ (0.04)
29
The fair value of the employee option grants for pro forma disclosure purposes
was estimated using the minimum value method, with the following assumptions:
2003 2002 2001
------------ ------------ ------------
Risk-free interest rates 1.45%-3.20% 4.08%-4.52% 4.50%-4.88%
Expected life 3-5 years 3-5 years 3-5 years
Dividend yield None None None
l. 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 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.
2. Investments
The cost and fair value of investment securities, at December 31, 2003 and 2002
are as follows:
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
----- ----- ------ -----
December 31 , 2003
Available for sale investments
Corporate bonds, maturing in 1 to 5 years $ 3,812,000 $ 52,000 $ -- $ 3,864,000
Bond Funds 2,033,000 42,000 -- 2,075,000
-----------------------------------------------------------
Total available for sale investments $ 5,845,000 $ 94,000 $ -- $ 5,939,000
===========================================================
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
----- ----- ------ -----
December 31, 2002
Available for sale investments
Corporate bonds, maturing in:
1 to 5 years $ 4,588,000 $ 4,000 $ -- $ 4,592,000
5 to 10 years -- -- -- --
Longer than 10 years 340,000 -- (42,000) 298,000
-----------------------------------------------------------
Total available for sale investments $ 4,928,000 $ 4,000 $ (42,000) $ 4,890,000
===========================================================
2003 2002 2001
--------- --------- ---------
Gross realized gains $ 6,000 $ 281,000 $ 92,000
Gross realized losses $ (18,000) $ (62,000) $(230,000)
30
3. Fixed Assets
December 31,
-----------------------------
2003 2002
------------ ------------
Computer hardware and purchased
software $ 8,075,000 $ 7,796,000
Internal use software development costs 15,742,000 16,345,000
Leasehold improvements 1,361,000 1,324,000
Furniture and equipment 3,108,000 3,169,000
Building 9,446,000 7,798,000
Land 2,718,000 2,703,000
------------ ------------
40,450,000 39,135,000
Accumulated depreciation and amortization (16,172,000) (13,294,000)
------------ ------------
Total $ 24,278,000 $ 25,841,000
============ ============
When the Company purchased Value Financial Network, Inc. ("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 in Note 4 below, the Company recorded a long-lived asset impairment
loss of $394,000 during 2003, included in Other expenses.
During 2003, we completed our 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. 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 have completed a rigorous evaluation of our
Company-wide technological needs, which included an assessment of the viability
of the existing system. As a result of this assessment we concluded that we
would use both systems and in the fourth quarter of 2003 we recorded a write-off
of $1.1 million associated with the abandoned components of the software costs.
Our assessment supports the remaining $3.3 million balance.
4. Goodwill and Other Intangible Assets
When the Company purchased the assets of VFN in 2000, part of the
purchase price was for goodwill. Before January 1, 2002, the Company amortized
the goodwill on a straight-line basis over 10 years, which was its estimated
useful life. Pursuant to Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased
amortizing goodwill on January 1, 2002. As required by SFAS 142, the Company
performs an annual goodwill impairment test. The impairment test of SFAS 142
requires the Company to measure fair value of the reporting unit. The Company
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 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 goodwill impairment
loss of $491,000 during 2003.
The following table provides comparative net loss and loss per share
had the non-amortization provision of SFAS 142 been adopted for all periods
presented:
For the Year Ended December 31,
--------------------------------------
2003 2002 2001
---------- -------- ---------
Net income (loss) $5,029,000 $(60,000) $(348,000)
Adjustments:
Goodwill amortization, net of tax benefit of
$-, $- and $52,000 for years ended December
31, 2003, 2002 and 2001 -- -- 78,000
---------- -------- ---------
Adjusted net income (loss) $5,029,000 $(60,000) $(270,000)
========== ======== =========
Reported basic income (loss) per share $ 0.20 $ -- $ (0.03)
Adjusted basic income (loss) per share $ 0.20 $ -- $ (0.03)
Reported basic and diluted income (loss) per share $ 0.18 $ -- $ (0.03)
Adjusted basic and diluted income (loss) per share $ 0.18 $ -- $ (0.03)
The carrying amount of goodwill was $679,000 and $1.2 million as of
December 31, 2003 and December 31, 2002.
31
Acquired intangible assets, all subject to amortization:
December 31,
------------------------------------------------
2003 2002
---------------------- ----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Copyrights $ 203,000 $(145,000) $ 250,000 $(100,000)
Software license $ 223,000 $ (85,000) $ 223,000 $ (41,000)
--------- --------- --------- ---------
Total $ 426,000 $(230,000) $ 473,000 $(141,000)
========= ========= ========= =========
The aggregate amortization expense for the years ended December 31,
2003, 2002 and 2001 was $89,000, $91,000 and $102,000. The estimated
amortization expense for each of the next two years ended December 31, 2005 is
$74,000, and the estimated amortization expense for the years ended December 31,
2006 and 2007 are $45,000 and $3,000.
5. Accounts Payable and Accrued Liabilities
December 31,
-----------------------------
2003 2002
----------- -----------
Accrued compensation $ 3,351,000 $ 2,346,000
Accrued sales bonus 2,022,000 --
Accrued sales convention costs 1,381,000 1,664,000
Commissions payable 832,000 1,204,000
Payable to insurance carrier 345,000 1,097,000
Accounts payable 548,000 728,000
Accrued production premium
deficiency 206,000 637,000
Miscellaneous accrued expenses 2,105,000 1,230,000
----------- -----------
Total $10,790,000 $ 8,906,000
=========== ===========
6. Loan Payable and Note Payable
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 bridge loan agreement for $4.8 million. In July 2002, the Company
replaced the bridge loan with permanent financing in the amount of $7.4 million.
This note is payable over ten years in monthly installments of principal and
interest based on a 25-year term. At the end of ten years, the Company must pay
the balance of principal due on the note. For the first five years, the interest
rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%,
adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease
in the interest rate. The maximum interest rate is 10.50%. As of December 31,
2003, the Company made payments of $151,000 toward the principal balance of the
note. The required principal payments over the next five years are: $116,000,
$125,000, $135,000, $144,000, and $154,000.
During 2003, we began construction of a new building in Rome, Georgia
and established a $2.7 million loan facility to be drawn against to finance
construction costs. The interest rate is equal to LIBOR plus 2.10%. The interest
rate as of December 31, 2003 was 3.24%. The loan matures on October 27, 2004. As
of December 31, 2003, $2.5 million was available under the construction loan.
7. Deferred Compensation Payable
The Company sponsors a qualified defined contribution 401(k) plan,
which is available to all employees. The 401(k) plan allows employees to defer,
on a pre-tax basis, up to 15% of their annual compensation as contributions to
the 401(k) plan, subject to a maximum of $12,000. The Company matches 50% of
each employee's contributions, up to 6% of their annual compensation, subject to
a maximum of $6,000. The Company's matching contributions were $405,000,
$434,000, and $439,000 for the years ended December 31, 2003, 2002, and 2001.
32
The Company also sponsors a non-qualified tax deferred compensation
plan, which is available to certain employees who, because of Internal Revenue
Code limitations, are prohibited from contributing the maximum percentage of
salary to the 401(k) Plan. Under this deferred compensation plan, certain
employees may defer, on a pre-tax basis, a percentage of annual compensation,
including bonuses. The Company matches 50% of each employee's contributions, up
to a maximum of 6% of annual compensation, less amounts already matched under
the 401(k) plan. The Company made matching contributions of $32,000, $59,000,
and $55,000 during the years ended December 31, 2003, 2002, and 2001. As of
December 31, 2003 and 2002, employee contributions and Company matching
contributions, net of accumulated investment losses, totaled $610,000 and
$650,000.
The Company also sponsors a non-qualified tax deferred compensation
plan under which producers who earn a minimum of $100,000 may defer, on a
pre-tax basis, up to 50% of annual commissions. In addition, the Company will
match producer contributions for those producers who earn over $250,000 in
annual commissions at rates ranging from 1% to 5% of amounts deferred, depending
on the level of annual commissions earned. During the years ended December 31,
2003, 2002, and 2001, matching contributions related to the producer commission
deferral plan were $16,000, $19,000, and $36,000. As of December 31, 2003 and
2002, producer contributions and Company matching contributions, net of
accumulated investment losses, totaled $5.7 million and $3.6 million. The
liability to the employee or Producer is credited or charged based on the
performance of the investment option selected by the participant.
8. Performance Bonus
During 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
$2.0 million during 2003. These amounts are included in Other revenue. The
carrier paid Legacy Marketing Group in full during 2003 and both parties agreed
to terminate the bonus program effective July 1, 2003.
9. 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 expense of $2.0 million during the
year ended December 31, 2003 related to the sales incentive program. These
amounts are included in selling, general and administrative expenses.
10. Commitments and Contingencies
The Company leases office and warehouse premises and certain office
equipment under non-cancelable operating leases. Related rent expense of
$531,000, $585,000, and $1.6 million is included in occupancy costs for the
years ended December 31, 2003, 2002, and 2001. Total rentals for leases of
equipment included in equipment expense were $1.0 million, $1.1 million, and
$922,000 for the years ended December 31, 2003, 2002, and 2001.
The Company's future minimum annual lease commitments under all
operating leases as of December 31, 2003 are as follows:
Year Ended December 31,
2004 $ 610,000
2005 465,000
2006 323,000
2007 219,000
2008 18,000
Thereafter 3,000
------------
Total minimum lease payments $ 1,638,000
============
During 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
33
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
December 31, 2003, the Company believes that 125% of the fair market value of
the shares owned by Ms. Regan was equal to $28.3 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 our financial condition, cash flows or results of
operations.
As part of the Company's agreements with certain of its insurance
producers, the Company may, under certain circumstances, be obligated to offer
to purchase the business of the producers. At December 31, 2003, there were no
outstanding commitments by the Company relating to such obligations.
11. Redeemable Common Stock
Between 1990 and 1992, the Company issued Series A and Series B
redeemable common stock to certain shareholders. The Company is obligated to
repurchase the redeemable common stock at the current fair market value. Because
there is no active trading market for the Company's stock that would establish
market value, the Company's Board of Directors approved a redemption value for
Series A redeemable common stock of $2.21 per share and $2.20 per share, and a
redemption value for Series B redeemable common stock of $1.82 and $1.82 per
share, as of December 31, 2003 and 2002, based on an independent appraisal of
the stock value obtained by management. The appraisal also determined that
non-redeemable stock had a value of $1.69 per share at December 31, 2003.
Series A Series B Total
Redeemable Common Redeemable Common Redeemable Common
Stock Stock Stock
---------------------------- ---------------------------- ---------------------------
Carrying Carrying Carrying
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance January 1, 2001 4,511,000 $ 9,479,000 584,000 $ 1,758,000 5,095,000 $ 11,237,000
Redemptions and retirement of common
stock (232,000) (500,000) (3,000) (10,000) (235,000) (510,000)
Accretion to redemption value -- 397,000 -- -- -- 397,000
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2001 4,279,000 9,376,000 581,000 1,748,000 4,860,000 11,124,000
Redemptions and retirement of common
stock (457,000) (996,000) (21,000) (39,000) (478,000) (1,035,000)
Accretion to redemption value -- 26,000 -- -- -- 26,000
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2002 3,822,000 8,406,000 560,000 1,709,000 4,382,000 10,115,000
Redemptions and retirement of common
stock (533,000) (1,173,000) (7,000) (12,000) (540,000) (1,186,000)
Accretion to redemption value -- 34,000 -- -- -- 35,000
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2003 3,289,000 $ 7,267,000 553,000 $ 1,697,000 3,842,000 $ 8,964,000
============ ============ ============ ============ ============ ============
The Company recorded redeemable common stock accretion of $70,000 and
$26,000 and related to Series A redeemable common stock for the years ended
December 31, 2003 and 2002. The carrying value of Series B redeemable common
stock is greater than the redemption value, and has not been accreted.
Holders of Series A redeemable common stock may redeem their holdings
without limitation. Holders of Series B redeemable common stock may only redeem
up to 10% of their holdings once per year, limited to a specified twenty-day
period during November.
34
12. Stock Options and Stock Awards
The Company currently sponsors two stock-based compensation plans.
Under both plans, the exercise price of each option equals the estimated fair
value of the underlying common stock on the date of grant, as estimated by
management, except for incentive stock options granted to shareholders who own
10% or more of the Company's outstanding stock, where the exercise price equals
110% of the estimated fair value. Both plans are administered by committees,
which are appointed by the Company's Board of Directors.
Producer Option Plan -- Under the Regan Holding Corp. Producer Stock
Option and Award plan (the "Producer Option Plan"), the Company may grant to
Legacy Marketing producers and Legacy Financial registered representatives
shares of the Company's common stock and non-qualified stock options (the
"Producer Options") to purchase the Company's common stock. A total of 12.5
million shares have been reserved for grant under the Producer Option Plan.
Total stock options granted to Producers for 2003, 2002, and 2001 were 15,000,
10,000, and 265,000. Total expenses recorded for Producer stock option grants
were $10,000, $4,000, and $96,000 during 2003, 2002 and 2001. The Producer stock
options granted for each of the three years ended December 31, 2003 vested
immediately upon the grant date. The fair value of the Producer options were
estimated using the Black-Scholes option-pricing model with the following
assumptions:
2003 2002 2001
---- ---- ----
Risk-free interest rates 3.19% 4.78% 5.13%-6.80%
Volatility 27% 27% 27%-31%
Dividend yield None None None
Expected life 6 years 6 years 6-10 years
The following table summarizes information with respect to shares of
Series A common stock awarded to non-employees:
2001
----
Share grants 48,000
Fair value per share $1.53-$1.65
Expense recorded $ 75,000
There were no shares of Series A common stock awarded to non-employees
during 2003 and 2002. The share grant for 2001 listed above includes 15,000
shares of Series A common stock that the Company was obligated to award to a
service provider, but had not been issued as of December 31, 2003.
Employee Option Plan -- Under the Regan Holding Corp. 1998 Stock Option
Plan (the "Employee Option Plan"), the Company may grant to employees and
directors incentive stock options and non-qualified options to purchase the
Company's common stock (collectively referred to herein as "Employee Options").
A total of 8.5 million shares have been reserved for grant under the Employee
Option Plan. The Employee Options generally vest over four or five years and
expire in ten years, except for incentive stock options granted to shareholders
who own 10% or more of the outstanding shares of the Company's stock, which
expire in five years. The Company uses the intrinsic value method of accounting
for stock-based awards granted to employees and, accordingly, does not recognize
compensation expense for its stock-based awards to employees.
Stock option activity under both plans was as follows:
Total
Weighted average
Shares Exercise Price
------ --------------
Outstanding at December 31, 2000 13,376,000 $ 1.28
Granted 2,976,000 $ 1.62
Exercised -- $ --
Forfeited (788,000) $ 1.25
Outstanding at December 31, 2001 15,564,000 $ 1.35
Granted 1,153,000 $ 1.68
Exercised -- $ --
Forfeited (768,000) $ 1.22
Outstanding at December 31, 2002 15,949,000 $ 1.38
Granted 788,000 $ 1.69
Exercised (155,000) $ 1.27
Forfeited (797,000) $ 1.38
Outstanding at December 31, 2003 15,785,000 $ 1.39
Exercisable at December 31, 2001 11,512,000 $ 1.31
Exercisable at December 31, 2002 12,407,000 $ 1.32
Exercisable at December 31, 2003 13,106,000 $ 1.35
35
The following table summarizes information about stock options
outstanding at December 31, 2003 under both plans:
Options Outstanding Options Exercisable
------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of exercise prices Shares Contractual Life Price Shares Price
------------------------ ------ ---------------- ----- ------ -----
$ 0.73-$0.84 1,449,000 1.6 $ 0.73 1,449,000 $ 0.73
$ 1.03 120,000 1.1 $ 1.03 120,000 $ 1.03
$ 1.27-$1.40 5,601,000 1.5 $ 1.27 5,556,000 $ 1.27
$ 1.53 4,119,000 3.7 $ 1.53 3,507,000 $ 1.53
$ 1.61 1,987,000 3.8 $ 1.61 1,798,000 $ 1.61
$ 1.65-$1.68 1,810,000 7.3 $ 1.67 661,000 $ 1.66
$ 1.69-$1.70 699,000 9.2 $ 1.69 15,000 $ 1.69
13. Income Taxes
Deferred tax assets and liabilities are recognized as temporary
differences between amounts reported in the financial statements and the future
tax consequences attributable to those differences that are expected to be
recovered or settled.
The provisions for (benefit from) federal and state income taxes
consist of amounts currently (receivable) payable and amounts deferred which,
for the periods indicated, are shown below:
For the Year Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Current income taxes:
Federal $ 3,311,000 $ 76,000 $ (92,000)
State 944,000 24,000 5,000
----------- ----------- -----------
Total current 4,255,000 100,000 (87,000)
----------- ----------- -----------
Deferred income taxes:
Federal (696,000) (170,000) (117,000)
State (168,000) 36,000 (16,000)
----------- ----------- -----------
Total deferred (864,000) (134,000) (133,000)
----------- ----------- -----------
Income tax (benefit) expense $ 3,391,000 $ (34,000) $ (220,000)
=========== =========== ===========
36
The Company's deferred tax assets (liabilities) consist of the
following:
December 31,
--------------------------
2003 2002
----------- -----------
Producer stock option and stock awards $ 2,186,000 $ 2,182,000
Producer deferred compensation 2,492,000 1,696,000
Accrued sales convention costs 543,000 663,000
State net operating loss carryforward, less
valuation allowance of $385,000 and $362,000,
net of federal taxes 250,000 248,000
Alternative minimum tax credit carryforward 263,000 304,000
Capital loss 357,000 353,000
Unrealized losses -- 427,000
Other 1,090,000 817,000
----------- -----------
Subtotal deferred tax assets 7,181,000 6,690,000
----------- -----------
Fixed asset depreciation (2,985,000) (3,611,000)
Deferred gain on building sale (1,364,000) (1,364,000)
Unrealized gains (306,000) --
----------- -----------
Subtotal deferred tax liabilities (4,655,000) (4,975,000)
----------- -----------
Deferred tax assets, net $ 2,526,000 $ 1,715,000
=========== ===========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
deferred tax assets will, or will not, be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences become deductible. Management
believes it is more likely than not that the deferred tax assets will be
realized.
The benefits from income taxes differ from the benefits computed by
applying the statutory federal income tax rate (34%) to income before taxes, as
follows:
For the Year Ended December 31,
-------------------------------------
2003 2002 2001
---------- ---------- ----------
Federal income tax expense (benefit) at
statutory rate (34%) $2,863,000 $ (32,000) $ (193,000)
Increases (reductions) in income taxes resulting
from:
State franchise taxes, net of federal income
tax benefit 526,000 40,000 (7,000)
Other 2,000 (42,000) (20,000)
---------- ---------- ----------
Income tax provision (benefit) $3,391,000 $ (34,000) $ (220,000)
========== ========== ==========
As of December 31, 2003, the Company has state net operating loss
carryforwards of $8.6 million that are expected to be utilized in the future.
$4.9 million of these state net operating losses begin to expire on December 31,
2012. The Company also has, for state income tax purposes, $263,000 in
alternative minimum tax credits which can be used to reduce income taxes in
subsequent years to the extent regular tax exceeds tentative minimum tax. The
credits have no expiration date.
14. Earnings (loss) per Share
The basic and diluted loss per share calculations are based on the
weighted average number of common shares outstanding including shares of
redeemable common stock.
Loss Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
For the year ended December 31, 2003
Net income $ 5,029,000
Accretion of redeemable common stock (34,000)
-------------
Income available to common stockholders 4,995,000 24,431,000 $ 0.20
========
Effect of dilutive securities - employee and
Producer stock options 2,899,000
-------------- -------------
Diluted earnings per share $ 4,995,000 27,330,000 $ 0.18
============= ============= ========
For the year ended December 31, 2002
Net loss $ (60,000)
Accretion of redeemable common stock (26,000)
-------------
Basic and diluted loss available to
common shareholders $ (86,000) 25,093,000 $ --
============= ============= ========
For the year ended December 31, 2001
Net loss $ (348,000)
Accretion of redeemable common stock (397,000)
Basic and diluted loss available to
Common shareholders $ (745,000) 25,861,000 $ (0.03)
============= ============= ========
37
The diluted loss per share calculation for the years ended December 31,
2002 and 2001 excludes antidilutive stock options of 4.1 million and 3.3
million.
15. Segment Information
The Company has identified its reportable segments based on its method
of internal reporting and segregates its business into six primary reportable
segments: Legacy Marketing, Legacy Financial, Imagent Online, Values Financial
Network, and Other. Intersegment transactions are eliminated in consolidation.
The Legacy Marketing 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.
Values
Legacy Legacy Imagent Financial
Marketing Financial Online Network
------------ ------------ ------------ ------------
Year Ended December 31, 2003
Total revenue $ 68,029,000 $ 2,979,000 $ 247,000 $ 30,000
Total expenses 56,373,000 4,057,000 1,260,000 1,760,000
------------ ------------ ------------ ------------
Operating income (loss) 11,656,000 (1,078,000) (1,013,000) (1,730,000)
Other income (loss) 391,000 (8,000) -- --
------------ ------------ ------------ ------------
Income (loss) before tax 12,047,000 (1,086,000) (1,013,000) (1,730,000)
Tax provision (benefit) 4,807,000 (403,000) (407,000) (686,000)
------------ ------------ ------------ ------------
Net income (loss) $ 7,240,000 $ (683,000) $ (606,000) $ (1,044,000)
============ ============ ============ ============
Year Ended December 31, 2002
Total revenue $ 47,859,000 $ 2,519,000 $ 86,000 $ 7,000
Total expenses 45,786,000 3,475,000 1,141,000 841,000
------------ ------------ ------------ ------------
Operating income (loss) 2,073,000 (956,000) (1,055,000) (834,000)
Other income (loss) 571,000 7,000 (2,000) --
------------ ------------ ------------ ------------
Income (loss) before tax 2,644,000 (949,000) (1,057,000) (834,000)
Tax provision (benefit) 1,002,000 (354,000) (409,000) (314,000)
------------ ------------ ------------ ------------
Net income (loss) $ 1,642,000 $ (595,000) $ (648,000) $ (520,000)
============ ============ ============ ============
Year Ended December 31, 2001
Total revenue $ 53,446,000 $ 2,132,000 $ -- $ 45,000
Total expenses 48,615,000 3,475,000 1,142,000 2,004,000
------------ ------------ ------------ ------------
Operating income (loss) 4,831,000 (1,343,000) (1,142,000) (1,959,000)
Other income (loss) (273,000) 14,000 92,000 2,000
------------ ------------ ------------ ------------
Income (loss) before tax 4,558,000 (1,329,000) (1,050,000) (1,957,000)
Tax provision (benefit) 1,807,000 (492,000) (390,000) (726,000)
------------ ------------ ------------ ------------
Net income (loss) $ 2,751,000 $ (837,000) $ (660,000) $ (1,231,000)
============ ============ ============ ============
Total assets
December 31, 2003 $ 54,698,000 $ 2,034,000 $ 622,000 $ 2,019,000
============ ============ ============ ============
December 31, 2002 $ 51,294,000 $ 1,188,000 $ 852,000 $ 2,969,000
============ ============ ============ ============
38
Intercompany
Other Subtotal Eliminations Total
------------ ------------ ------------ ------------
Year Ended December 31, 2003
Total revenue $ 258,000 $ 71,543,000 $ (626,000) $ 70,917,000
Total expenses 56,000 63,506,000 (626,000) 62,880,000
------------ ------------ ------------ ------------
Operating income (loss) 202,000 8,037,000 -- 8,037,000
Other income (loss) -- 383,000 -- 383,000
------------ ------------ ------------ ------------
Income (loss) before tax 202,000 8,420,000 -- 8,420,000
Tax provision (benefit) 80,000 3,391,000 -- 3,391,000
------------ ------------ ------------ ------------
Net income (loss) $ 122,000 $ 5,029,000 $ -- $ 5,029,000
============ ============ ============ ============
Year Ended December 31, 2002
Total revenue $ 134,000 $ 50,605,000 $ (556,000) $ 50,049,000
Total expenses 32,000 51,275,000 (556,000) 50,719,000
------------ ------------ ------------ ------------
Operating income (loss) 102,000 (670,000) -- (670,000)
Other income (loss) -- 576,000 -- 576,000
------------ ------------ ------------ ------------
Income (loss) before tax 102,000 (94,000) -- (94,000)
Tax provision (benefit) 41,000 (34,000) -- (34,000)
------------ ------------ ------------ ------------
Net income (loss) $ 61,000 $ (60,000) $ -- $ (60,000)
============ ============ ============ ============
Year Ended December 31, 2001
Total revenue $ 120,000 $ 55,743,000 $ (534,000) $ 55,209,000
Total expenses 910,000 56,146,000 (534,000) 55,612,000
------------ ------------ ------------ ------------
Operating income (loss) (790,000) (403,000) -- (403,000)
Other income (loss) -- (165,000) -- (165,000)
------------ ------------ ------------ ------------
Income (loss) before tax (790,000) (568,000) -- (568,000)
Tax provision (benefit) (419,000) (220,000) -- (220,000)
------------ ------------ ------------ ------------
Net income (loss) $ (371,000) $ (348,000) $ -- $ (348,000)
============ ============ ============ ============
Total assets
December 31, 2003 $ 403,000 $ 59,776,000 $ (2,661,000) $ 57,115,000
============ ============ ============ ============
December 31, 2002 $ 194,000 $ 56,497,000 $ (6,450,000) $ 50,047,000
============ ============ ============ ============
16. Concentration of Risk
As of December 31, 2003, Legacy Marketing sold its products on behalf
of four unaffiliated insurance carriers: American National, Transamerica, John
Hancock and Investors Insurance Corporation. Effective during the first quarter
of 2002, Legacy Marketing and IL Annuity terminated their marketing agreement.
The agreements with the following carriers generated a significant portion of
the Company's total consolidated revenue (sales on behalf of Investors Insurance
Corporation began in the second quarter of 2002):
2003 2002 2001
---- ---- ----
American National 37% 17% 5%
Transamerica 25% 52% 68%
Investors Insurance Corporation 23% 6% --
IL Annuity 6% 12% 20%
John Hancock 3% 8% --
Although Legacy Marketing sells and administers several annuity and
life insurance products on behalf of the insurance carriers, its revenues are
derived primarily from sales and administration of certain annuity product
series:
39
2003 2002 2001
---- ---- ----
BenchMark(SM) series (sold on behalf
of American National) 37% 16% 4%
SelectMark(SM) series (sold on behalf of Transamerica) 25% 51% 67%
MarkOne(SM) series (sold on behalf of Investors Insurance
Corporation 23% 6% --
VisionMark(SM) series (sold on behalf of IL Annuity) 4% 11% 19%
AssureMark(SM) series (sold on behalf of John Hancock) 3% 8% --
During the first quarter of 2003, Legacy Marketing discontinued
marketing life insurance products issued by American National. Certain Legacy
Marketing employees who were supporting the life insurance product operations
were either terminated or reassigned to other positions in Legacy Marketing.
40
Supplementary Data
Quarterly Financial Information (Unaudited)
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
2003
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Total revenue $ 17,333,000 $ 22,191,000 $ 16,793,000 $ 14,600,000 $ 70,917,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Operating income
(loss) $ 3,066,000 $ 4,780,000 $ 483,000 $ (292,000) $ 8,037,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Net income (loss) $ 1,875,000 $ 2,888,000 $ 366,000 $ (100,000) $ 5,029,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Basic earnings per
share:
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Earnings (loss)
available to common
shareholders $ 0.08 $ 0.11 $ 0.02 $ (0.01) $ 0.20
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Diluted earnings
per share:
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Earnings (loss)
available to common
shareholders $ 0.07 $ 0.10 $ 0.01 $ -- $ 0.18
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
2002
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Total revenue $ 11,844,000 $ 12,665,000 $ 11,592,000 $ 13,948,000 $ 50,049,000
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Operating income
(loss) $ (1,221,000) $ (205,000) $ (694,000) $ 1,450,000 $ (670,000)
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Net income (loss) $ (798,000) $ (2,000) $ (395,000) $ 1,135,000 $ (60,000)
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Basic earnings
(loss) per share:
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Earnings (loss)
available to common
shareholders $ (0.03) $ -- $ (0.02) $ 0.05 $ --
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Diluted earnings
(loss) per share:
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Earnings (loss)
available to common
shareholders $ (0.03) $ -- $ (0.02) $ 0.04 $ --
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
41
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of Regan Holding Corp.
Our audits of the consolidated financial statements referred to in our report
dated March 30, 2004 also included an audit of the financial schedules listed in
Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PriceWaterhouseCoopers LLP
San Francisco, California
March 30, 2004
42
Schedule II - Valuation and Qualifying Accounts
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
Additions
Balance at charged to Balance at
beginning costs and end of
of period expenses Deductions period
--------- -------- ---------- ------
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
2003
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
Allowance for uncollectible accounts $ 760,000 $ 399,000 $ (293,000) $ 866,000
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
State net operating loss carryforward
valuation allowance $ 362,000 $ 23,000 $ -- $ 385,000
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
2002
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
Allowance for uncollectible accounts $ 437,000 $ 393,000 $ (70,000) $ 760,000
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
State net operating loss carryforward
valuation allowance $ 264,000 $ 98,000 $ -- $ 362,000
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
2001
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
Allowance for uncollectible accounts $ 215,000 $ 342,000 $ (120,000) $ 437,000
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
State net operating loss carryforward
valuation allowance $ -- $ 264,000 $ -- $ 264,000
- ------------------------------------------------------ --------------- -------------- ------------------ -------------
43
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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 as of the end of the period covered by this
report. Based on that evaluation, the Company determined that it should have
recorded additional revenue during the first and third quarters of 2003 that it
earned for sales of fixed annuity products.
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 began 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 end of the period covered by this report.
The Company's management, including the Chief Executive Officer and the Chief
Financial Officer, also evaluated the Company's internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on that evaluation, there have been no such changes during the period
covered by this report, except as described above.
PART III
Item 10. Directors and Executive Officers of the Company
Information required by Item 10 will be contained in the Company's
Definitive Proxy Statement in the section titled "Election of Directors." Such
information is incorporated herein by reference.
44
Item 11. Executive Compensation
Information required by Item 11 will be contained in the Company's
Definitive Proxy Statement in the section titled "Election of Directors." Such
information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Certain information required by Item 12 will be contained in the
Company's Definitive Proxy Statement in the section titled "Election of
Directors." Such information is incorporated herein by reference.
Securities Authorized For Issuance Under Equity Compensation Plans
- --------------------------- ------------------------- ---------------------- -----------------------------------------
(a) (b) (c)
- --------------------------- ------------------------- ---------------------- -----------------------------------------
Number of shares remaining available
Number of shares to be Weighted-average for future issuance under equity
issued upon exercise of exercise price of compensation plans (excluding
Plan category outstanding options outstanding options securities reflected in column (a))
- --------------------------- ------------------------- ---------------------- -----------------------------------------
- --------------------------- ------------------------- ---------------------- -----------------------------------------
Equity compensation
plans approved by
stockholders(1) 15,785,000 $1.39 5,215,000
- --------------------------- ------------------------- ---------------------- -----------------------------------------
(1) Includes the Regan Holding Corp. Producer Stock Option and Award Plan and
the Regan Holding Corp. 1998 Stock Option Plan
Regan Holding Corp. stockholders have approved all equity compensation plans.
Item 13. Certain Relationships and Related Transactions
Information required by Item 13 will be contained in the Company's
Definitive Proxy Statement in the section titled "Election of Directors." Such
information is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services will be
contained in the Company's Definitive Proxy Statement in the section titled
"Audit Fees". Such information and is incorporated by reference herein.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Exhibits and Financial Statement Schedules:
1. The following financial statements are included in
Item 8:
(i) Independent Auditors Report.
(ii) Consolidated Balance Sheet as of December
31, 2003 and 2002.
45
(iii) Consolidated Statement of Operations for the
years ended December 31, 2003, 2002, and
2001.
(iv) Consolidated Statement of Shareholders'
Equity for the years ended December 31,
2003, 2002, and 2001.
(v) Consolidated Statement of Cash Flows for the
years ended December 31, 2003, 2002, and
2001.
(vi) Notes to Consolidated Financial Statements.
2. Financial statement schedules - schedule II -
valuation and qualifying accounts
3. See(c) below.
(b) Regan Holding Corp. filed a Form 8-K, dated December 23, 2003,
filing certain marketing and administrative services
agreements and the Purchase Option Agreement with SCOR Life
U.S. Re Insurance Company.
(c) Exhibit Index:
3(a) Restated Articles of Incorporation. (3)
3(b)(2) Amended and Restated Bylaws of the Company. (5)
4(a) Amended and Restated Shareholders' Agreement, dated as of June 30,
2003, by and among the Company, Lynda Regan, Alysia Anne Regan, Melissa
Louise Regan and RAM Investments.(6)
10(a) Administrative Services Agreement effective January 1, 1991, as
amended, between Allianz Life Insurance Company of North America and
the Company.(1)
10(b) Marketing Agreement, effective November 15, 2002, between American
National Insurance Company and Legacy Marketing Group. (7)
10(c) Administrative Services Agreement, effective February 15, 2003, between
American National Insurance Company and Legacy Marketing Group. (7)
10(d) Form of Producer Agreement.(1)
10(e) Settlement Agreement dated June 18, 1993, among the State of Georgia as
receiver for and on behalf of Old Colony Life Insurance Company, other
related parties and the Company.(1)
10(f) 401(K) Profit Sharing Plan & Trust dated July 1, 1994.(1)
10(g) Marketing Agreement effective January 1, 1996 between IL Annuity and
Insurance Company and Legacy Marketing Group.(2)
10(h) Insurance Processing Agreement effective January 1, 1996 between IL
Annuity and Insurance Company and Legacy Marketing Group.(2)
10(i) Marketing Agreement effective May 29, 1998 between Transamerica Life
Insurance and Annuity Company and Legacy Marketing Group.(4)
- -------------------
(1) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1994.
(2) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1995.
(3) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and nine months ended September 30, 1996.
(4) Incorporated herein by reference to the Company's Form 8-K, dated June
1, 1998.
(5) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and six months ended September 30, 2000.
(6) Incorporated herein by reference to the Company's quarterly Form 10-Q
for the three months and six months ended June 30, 2003.
(7) Incorporated herein by reference to the Company's Form 8-K, dated
January 29, 2004.
46
10(i)(1) Amendment One to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(11)
10(i)(2) Amendment Two to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(4)
10(i)(3) Amendment Three to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(8)
10(i)(4) Amendment Four to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(11)
10(i)(5) Amendment Five to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(9)
10(i)(6) Amendment Six to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(10)
10(j)(1) Administrative Services Agreement effective May 29, 1998 between
Transamerica Life Insurance and Annuity Company and Legacy Marketing
Group, as amended.(1)
10(j)(2) Amendment to the Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(2)
10(j)(3) Amendment Two to the Administrative Services Agreement with
Transamerica Life Insurance and Annuity Company.(2)
10(j)(4) Amendment Three to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company. (4)
10(j)(5) Amendment Four to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(6)
10(j)(6) Amendment Five to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(11)
10(j)(7) Amendment Six to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(9)
10(j)(8) Amendment Seven to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(9)
10(j)(9) Amendment Eight to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company.(10)
10(k) Marketing Agreement effective January 18, 2001 between John Hancock
Life Insurance Company and Legacy Marketing Group. (11)
10(k)(1) Amendment to the Marketing Agreement with John Hancock Life Insurance
Company. (8)
10(l) Administrative Services Agreement effective January 18, 2001 between
John Hancock Life Insurance Company and Legacy Marketing Group. (11)
10(l)(1) Amendment to the Administrative Services Agreement with John Hancock
Life Insurance Company. (8)
10(m) Agreement of Purchase and Sale, dated March 8, 2001, by and between
Regan Holding Corp. and G & W/Lakeville Corporate Center, LLC. (5)
10(n) Promissory Note by and between Regan Holding Corp. and Washington
Mutual Bank FA, dated July 10, 2002. (7)
10(o) Producer Stock Award and Stock Option Plan, as amended.(3)
10(o)(1) 1998 Stock Option Plan, as amended.(3)
10(p) Purchase Option Agreement between SCOR Life U.S. Re Insurance Company
and the Company executed on November 23, 2003. (11)
10(q) Construction Loan Agreement between SunTrust Bank and the Company
executed on October 27, 2003.
21 Subsidiaries of Registrant
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
31.2 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Section 1350.
32.2 Certification of Chief Financial Officer pursuant to Section 1350.
- -------------------
(1) Incorporated herein by reference to the Company's Form 8-K, dated June
1, 1998.
(2) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 1999.
(3) Incorporated herein by reference to the Company's Definitive Proxy
Statement dated July 31, 2001.
(4) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the six months ended June 30, 2001.
47
(5) Incorporated herein by reference to the Company's Form 8-K, dated June
21, 2001.
(6) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the nine months ended September 30, 2001.
(7) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the six months ended June 30, 2002.
(8) Incorporated herein by reference to the Company's annual report on Form
10-K for the year ended December 31, 2002.
(9) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the six months ended June 30, 2003.
(10) Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the nine months ended September 30, 2003.
(11) Incorporated herein by reference to the Company's Form 8-K, dated
December 23, 2003.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
By: Lynda L. Regan Date: March 30, 2004
- -------------------------------
Lynda L. Regan
Chairman and Chief Executive Officer
By: /s/ G. Steven Taylor Date: March 30, 2004
- -------------------------------
G. Steven Taylor
Principal Accounting and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Lynda L. Regan Date: March 30, 2004
- -------------------------------
Lynda L. Regan
Chairman and Chief Executive Officer
By: /s/ R. Preston Pitts Date: March 30, 2004
- -------------------------------
R. Preston Pitts
President
By: /s/ Donald Ratajczak Date: March 30, 2004
- -------------------------------
Donald Ratajczak
Director
By: /s/ Ute Scott-Smith Date: March 30, 2004
- -------------------------------
Ute Scott-Smith
Director
By: /s/ J. Daniel Speight, Jr. Date: March 30, 2004
- -------------------------------
J. Daniel Speight, Jr.
Director
49