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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, 2004
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 000-19704
REGAN HOLDING CORP.
(Exact name of Registrant as specified in its charter)
California 68-0211359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2090 Marina Avenue, Petaluma, California 94954
(Address of principal executive offices and Zip Code)
(707) 778-8638
(Registrant's telephone number, including area code)
Securities registered or to be registered pursuant to 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. |_|
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.
$20,698,000
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, 2005, the number of shares outstanding of the registrant's
Series A Common Stock was 23,740,000 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
Certain portions of the Definitive Proxy Statement pursuant to Regulation 14A of
the Securities Exchange Act of 1934 in connection with Regan Holding Corp.'s
Annual Meeting of Stockholders to be held on June 13, 2005 are incorporated by
reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
Page
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Part I
Item 1. Business.................................................................................................... 1
Item 2. Properties.................................................................................................. 4
Item 3. Legal Proceedings........................................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 5
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities........................................................................................... 6
Item 6. Selected Consolidated Financial Data........................................................................ 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 7
Item 7a. Quantitative and Qualitative Disclosure about Market Risk................................................... 19
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 9B. Other Information........................................................................................... 44
Part III
Item 10. Directors and Executive Officers of the Company............................................................. 45
Item 11. Executive Compensation...................................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.............. 45
Item 13. Certain Relationships and Related Transactions.............................................................. 45
Item 14. Principal Accounting Fees and Services...................................................................... 45
Part IV
Item 15. Exhibits and Financial Statement Schedules.................................................................. 46
PART I
Item 1. 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, which involve risks and
uncertainties that could cause actual results to differ materially.
General Development of Business
Regan Holding Corp. ("Regan Holding") is a holding company, incorporated
in the State of California in 1990, whose primary operating subsidiaries are
Legacy Marketing Group ("Legacy Marketing") and Legacy Financial Services, Inc.
("Legacy Financial"). During 2004, Legacy Marketing generated approximately 91%
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"), Investors Insurance Corporation ("Investors Insurance") and Americom
Life & Annuity Insurance Company ("Americom"). The marketing agreements grant
Legacy Marketing 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, Legacy Marketing is responsible
for appointing independent insurance producers (who we refer to as "Producers"),
who have contracted with Legacy Marketing to sell fixed annuity products, with
the applicable insurance carrier. For these sales, the insurance carriers pay
marketing allowances and commissions to Legacy Marketing based on the premium
volume of insurance policies placed inforce. Legacy Marketing is responsible for
paying sales commissions to the Producers.
Legacy Marketing sells fixed annuity products through a network of
approximately 24,400 Producers, of whom approximately 3,600 generated business
for us during 2004. Each Producer has entered into a non-exclusive agreement
with Legacy Marketing, which defines the parties' business relationship. Such
agreements typically may be terminated with up to ninety days prior notice by
either the Producer or Legacy Marketing, with or without cause.
Legacy Marketing's 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 or the size of the Producer's downline network. As a Producer
advances to higher levels within the system, he/she receives higher commissions
on sales made through his/her 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/her 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." There
were approximately 500 Wholesalers who generated business for Legacy Marketing
during 2004.
Legacy Marketing provides tools and services that assist Wholesalers with
recruiting, training and support responsibilities associated with the Producers
in their hierarchy. In addition, Legacy Marketing assists Producers with
programs designed to increase their sales and better serve their clients.
Recruiting and training programs include visual presentations, product
information videos and seminars, and advertising material guidelines. Legacy
Marketing also produces product information, sales brochures, pre-approved
advertisements and recruiting material.
Legacy Marketing works closely with the insurance carriers in product
design and development. Legacy Marketing's actuarial and marketing 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 crediting rate strategies.
1
In addition to the marketing agreements, Legacy Marketing has
administrative agreements with each of the five insurance carriers listed above
and with Indianapolis Life, formerly IL Annuity and Insurance Company ("IL
Annuity"), whose marketing agreement with Legacy Marketing 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. These services include billing,
collecting and remitting premium for the policies. For providing these services,
the insurance carriers pay Legacy Marketing 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
Legacy Marketing from entering into similar arrangements with other insurance
carriers. However, the marketing agreements, in general, prevent Legacy
Marketing from developing and marketing products with other carriers that are
considered unique or proprietary under the terms of the marketing agreements.
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 agreement with Investors
Insurance expires on March 31, 2007, and the administrative agreement with
Investors Insurance expires on March 31, 2008. Both agreements will be renewed
automatically for successive one-year terms unless terminated earlier by either
party upon twelve months prior written notice without cause. Either party may
terminate the agreement 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. The
administrative agreement with IL Annuity expires on December 31, 2005. The
agreement may be renewed by mutual agreement for successive one-year terms.
Either party may terminate the agreement at the end of the initial or renewal
term with six months notice without cause, and may be terminated by either party
immediately for cause. The marketing agreement with Americom was entered into on
June 10, 2004 and Legacy Marketing began marketing Americom products in November
2004. The marketing agreement expires on June 10, 2006 and will automatically
renew for successive one-year periods, unless terminated earlier by either party
with twelve months written notice. Americom may terminate the agreement without
cause by giving Legacy Marketing at least six months written notice and either
party may terminate the agreement immediately for cause.
On July 1, 2002, Regan Holding entered into a Purchase Option Agreement
with SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the
outstanding capital stock of Investors Insurance. Pursuant to the terms of the
agreement, SCOR has granted Regan Holding the right to purchase the outstanding
capital stock of Investors Insurance in exchange for annual option fees. Regan
Holding has paid annual option fees totaling approximately $3.0 million as of
December 31, 2004. Regan Holding has the right to exercise the option at any
time prior to the expiration date on June 30, 2005. If we elect to exercise the
option, we must complete the purchase transaction within two years of exercising
the option. Upon completion of a purchase transaction, the option fees will be
included in the purchase price. If the option expires unused, the fees paid will
be expensed. Before expiration, we can request a refund of fees paid in the
event that the financial rating of Investors Insurance declines as defined in
the agreement. As of December 31, 2004, the Investors Insurance rating has
declined to a level where we can request such a refund. We are exploring various
methods to finance the acquisition of Investors Insurance, including the
issuance of debt or equity securities by Regan Holding or one of its
subsidiaries. As a result, it is possible that we will issue a significant
amount of debt or equity securities to one or more new investors. Any such
issuance of equity securities would likely reduce the percentage ownership of
Regan Holding held by current shareholders.
During the second quarter of 2003, American National reduced the crediting
rates of several 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 products on behalf of American
National decreased during the second half of 2003 and fiscal 2004, and overall
Legacy Marketing revenues also declined during those periods due to this event.
Legacy Marketing has developed new 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 discontinued the
marketing of the AssureMark (SM) product series issued by John Hancock. As a
result, sales of products on behalf of John Hancock decreased during the second
half of 2003 and fiscal 2004. During the first quarter of 2003, Legacy Marketing
discontinued marketing several Transamerica products that were marketed
exclusively by Legacy Marketing, and effective May 2004, Legacy Marketing
discontinued marketing the remaining Transamerica products that were marketed
exclusively by Legacy Marketing. As a result, sales of products on behalf of
Transamerica decreased during fiscal years 2003 and 2004, and overall Legacy
Marketing revenues also declined during those periods due to this event. Legacy
Marketing continues to administer these products and to accept additional
premium payments, subject to applicable additional deposit rules for these
products.
2
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 2004, Legacy Financial
accounted for approximately 9% 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 product
sales in the United States were approximately $91 billion in 2004. Some of
Legacy Marketing's top competitors selling fixed annuity products 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 Legacy Marketing.
However, we believe that Legacy Marketing's business model allows greater
flexibility, as it can adjust the mix of business sold if one, or more, of its
carriers were to experience capital constraints or other events that affect
their business models. Legacy Marketing's competitors may respond more quickly
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 its
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 Legacy Marketing
with competitive challenges. There can be no assurance that Legacy Marketing
will be able to compete successfully. In addition, Legacy Marketing's business
model relies on its Wholesaler distribution network to effectively market its
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, Legacy Marketing has been reasonably successful in expanding and
maintaining its current distribution network. Due to competition among insurance
companies and insurance marketing organizations for successful Wholesalers,
there can be no assurance that Legacy Marketing will be able to retain some or
all of its Wholesaler distribution networks.
Regulatory Environment
On October 29, 2004, the California Attorney General's Office announced
the launch of a formal investigation into possible anti-trust violations and
fraud by insurance companies and brokers, including bid rigging and other
anti-competitive conduct in the insurance industry. Other state authorities have
announced similar investigations. In addition, California Insurance Commissioner
John Garamendi has released for public review a proposed new set of regulations
addressing broker conduct. As currently drafted, the proposed regulations would,
among other things, impose penalties on brokers who fail to disclose all
material facts surrounding their receipt or potential receipt of income from a
third party flowing from a transaction on behalf of a client.
3
In December 2004, the National Association of Insurance Commissioners (the
"NAIC") approved amendments to the NAIC's model Producer Licensing Act. Under
the model Act, producers, like Legacy Marketing's Producers, who have been
appointed by an insurer as its agent and do not receive compensation from a
customer will not be required to disclose the amount of compensation received
from the insurer. However, they must disclose to the customer prior to the sale
of insurance to the customer that they will be receiving compensation from the
insurer, or that the producer represents the insurer and may provide services to
the customer for the insurer. One state has adopted a regulation based on the
model Act and others are considering similar regulations or legislation. In
addition, the NAIC has held a hearing to consider additional regulation and may
in the future propose additional measures affecting producers.
Our core business consists of selling fixed annuity products, on behalf of
insurance carriers, through a network of approximately 24,400 Producers. If the
amendments to the model Act, or similar or additional regulations, were to be
adopted in states that we conduct business, the Producers would have to disclose
to potential purchasers of fixed annuity products, compensation they may receive
from Legacy Marketing or the insurance carriers. They may also have to disclose
that the Producer represents the insurance carriers and may provide services to
the customer on behalf of the carriers. We are unable to predict which states
will adopt the amendments to the model Act and whether other new initiatives may
affect our business and the demand for the fixed annuity products marketed by
Legacy Marketing. It is possible, however, that enactment of the amendments to
the model Act, or similar or additional regulations, could have a material
adverse effect on the insurance industry in general or on our financial
condition and results of operations.
In recent years, the U.S. insurance regulatory framework has come under
increased scrutiny. Some state legislatures have considered laws that may alter
or increase state regulation of insurance, reinsurance, and holding companies.
Moreover, the NAIC and state insurance regulators regularly re-examine existing
laws and regulations, often focusing on modifications to holding company
regulations, interpretations of existing laws, and the development of new laws.
Changes in these laws and regulations or their interpretation could have a
material adverse effect on our financial condition or results of operations. In
addition, the U.S. Congress has considered statutes that would impose certain
national uniform standards and repeal the McCarran-Ferguson antitrust exemption
for the business of insurance. While no legislation is currently pending, the
U.S. Congress could adopt laws or regulations that could have a material adverse
effect on our financial condition or results of operations.
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 Legacy Financial could harm its 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 in general and
Legacy Financial's business in particular.
Employees
As of March 14, 2005, we employed 358 persons. 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. In May 2004, we completed
construction of the building in Rome and moved our employees located in Rome to
the new building.
4
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 2004.
5
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
As of March 15, 2005, Regan Holding Corp.'s Series A Common Stock was held
by approximately 1,300 shareholders of record and our Series B Common Stock was
held by approximately 9,700 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. 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,
--------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Selected Income Statement Data:
Total revenue $ 37,385,000 $ 70,917,000 $ 50,049,000 $ 55,209,000 $ 42,432,000
Net income (loss) $ (7,467,000) $ 5,029,000 $ (60,000) $ (348,000) $ (3,564,000)
Earnings (loss) per share - basic:
Before cumulative effect of accounting
change $ (0.29) $ 0.20 $ -- $ (0.03) $ (0.15)
Cumulative effect of accounting change -- -- -- -- (0.01)
------------ ------------ ------------ ------------ ------------
$ (0.29) $ 0.20 $ -- $ (0.03) $ (0.16)
Earnings (loss) per share - diluted:
Before cumulative effect of accounting
change $ (0.29) $ 0.18 $ -- $ (0.03) $ (0.15)
Cumulative effect of accounting change -- -- -- -- (0.01)
------------ ------------ ------------ ------------ ------------
$ (0.29) $ 0.18 $ -- $ (0.03) $ (0.16)
Selected Balance Sheet Data:
Total assets $ 47,618,000 $ 57,115,000 $ 50,047,000 $ 46,260,000 $ 43,114,000
Total non current liabilities $ 19,552,000 $ 13,536,000 $ 11,630,000 $ 4,578,000 $ 3,578,000
Redeemable common stock $ 7,486,000 $ 8,964,000 $ 10,115,000 $ 11,124,000 $ 11,237,000
Cash dividends declared -- -- -- -- --
Selected Operating Data:
Total fixed premium placed inforce (1) $800 million $2.15 billion $1.3 billion $1.6 billion $1.1 billion
Total fixed policies placed inforce (1) 13,000 36,000 24,000 30,000 20,000
Policies maintained at year end 123,000 127,000 107,000 101,000 89,000
<FN>
(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.
</FN>
6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our
audited financial statements and related notes included herein.
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 market conditions
and the changing interest rate environment; population growth rates and
demographic patterns; the interruption, deterioration, or termination of our
relationships with the insurance carriers who provide our products or the agents
who market and sell them; the ability to develop and market new products to keep
up with the evolving industry in which we operate; increased governmental
regulation, especially regulations affecting insurance, reinsurance, and holding
companies; the ability to attract and retain talented and productive personnel;
the ability to effectively fund our working capital requirements; the risk of
substantial litigation or insurance claims; and other factors referred to in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 is a holding company whose primary operating subsidiaries
are Legacy Marketing and Legacy Financial.
On July 1, 2002, Regan Holding entered into a Purchase Option Agreement
with SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the
outstanding capital stock of Investors Insurance. Pursuant to the terms of the
agreement, SCOR has granted Regan Holding the right to purchase the outstanding
capital stock of Investors Insurance in exchange for annual option fees. Regan
Holding has paid annual option fees totaling approximately $3.0 million as of
December 31, 2004. Regan Holding has the right to exercise the option at any
time prior to the expiration date on June 30, 2005. If we elect to exercise the
option, we must complete the purchase transaction within two years of exercising
the option. Upon completion of a purchase transaction, the option fees will be
included in the purchase price. If the option expires unused, the fees paid will
be expensed. Before expiration, we can request a refund of fees paid in the
event that the financial rating of Investors Insurance declines as defined in
the agreement. As of December 31, 2004, the Investors Insurance rating has
declined to a level where we can request such a refund. We are exploring various
methods to finance the acquisition of Investors Insurance, including the
issuance of debt or equity securities by Regan Holding or one of its
subsidiaries. As a result, it is possible that we will issue a significant
amount of debt or equity securities to one or more new investors. Any such
issuance of equity securities would likely reduce the percentage ownership of
Regan Holding held by current shareholders.
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, 2004, Legacy Marketing
had marketing agreements with Investors Insurance, American National, John
Hancock, Transamerica and Americom. 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
Producers, who have contracted with Legacy Marketing to sell these products,
with the applicable insurance carrier. 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. 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.
7
Recent Industry Developments
On October 29, 2004, the California Attorney General's Office announced
the launch of a formal investigation into possible anti-trust violations and
fraud by insurance companies and brokers, including bid rigging and other
anti-competitive conduct in the insurance industry. Other state authorities have
announced similar investigations. In addition, California Insurance Commissioner
John Garamendi has released for public review a proposed new set of regulations
addressing broker conduct. As currently drafted, the proposed regulations would,
among other things, impose penalties on brokers who fail to disclose all
material facts surrounding their receipt or potential receipt of income from a
third party flowing from a transaction on behalf of a client.
In December 2004, the NAIC approved amendments to the NAIC's model
Producer Licensing Act. Under the model Act, producers, like Legacy Marketing's
Producers, who have been appointed by an insurer as its agent and do not receive
compensation from a customer will not be required to disclose the amount of
compensation received from the insurer. However, they must disclose to the
customer prior to the sale of insurance to the customer that they will be
receiving compensation from the insurer, or that the producer represents the
insurer and may provide services to the customer for the insurer. One state has
adopted a regulation based on the model Act and others are considering similar
regulations or legislation. In addition, the NAIC has held a hearing to consider
additional regulation and may in the future propose additional measures
affecting producers.
Our core business consists of selling fixed annuity products, on behalf of
amendments to the insurance carriers, through a network of approximately 24,400
Producers. If the amendments to the model Act, or similar or additional
regulations, were to be adopted in states that we conduct business, the
Producers would have to disclose to potential purchasers of fixed annuity
products, compensation they may receive from Legacy Marketing or the insurance
carriers. They may also have to disclose that the Producer represents the
insurance carriers and may provide services to the customer on behalf of the
carriers. We are unable to predict which states will adopt the amendments to the
model Act and whether other new initiatives may affect our business and the
demand for the fixed annuity products marketed by Legacy Marketing. It is
possible, however, that enactment of the amendments to the model Act, or similar
or additional regulations, could have a material adverse effect on the insurance
industry in general or on our financial condition and results of operations.
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, who have contracted
with Legacy Marketing to sell fixed annuity products, with various states'
departments of insurance and the applicable insurance carriers.
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 judgments 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.
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 the project is
therefore in the application development stage; and
8
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.
We review our goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount of goodwill may not be
recoverable, or at least once a year. We are required to test our goodwill for
impairment at the reporting unit level by measuring the fair value of the
reporting unit. The Company establishes fair value by preparing a forecast of
the discounted value of future cash flows expected to be derived by the
reporting unit.
We review our other long-lived assets, including property and equipment
and other intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. We periodically review capitalized internal use software to
determine if the carrying value is fully recoverable. Recoverability is measured
by a comparison of the assets' carrying amount to their expected future
undiscounted cash flows. If such assets are considered to be impaired, the
impairment to be recognized is measured based on the amount by which the
carrying amount of the asset exceeds the present value of future discounted cash
flows.
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 after valuation
allowance 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.
Regan Holding Corp. Consolidated Results of Operations
Year ended December 31, 2004 compared with year ended December 31, 2003
We had a consolidated net loss of $7.5 million in 2004, compared to
consolidated net income of $5.0 million in 2003. The unfavorable change of $12.5
million was primarily due to a net loss incurred by Legacy Marketing in 2004,
compared to net income in 2003, partially offset by decreased net losses by
Values Financial Network and Legacy Financial.
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 were primarily
due to increased net income by Legacy Marketing, partially offset by increased
losses by Values Financial Network, Inc. primarily due to asset impairment
losses.
Legacy Marketing Results of Operations
Year ended December 31, 2004 compared with year ended December 31, 2003
Legacy Marketing had a net loss of $5.9 million in 2004, compared to net
income of $7.2 million in 2003. The decline in results was primarily due to
decreased revenue, partially offset by decreased expenses.
Legacy Marketing's revenue decreased $34.0 million (50%) in 2004 compared
to 2003 primarily due to decreased marketing allowances and commissions.
Marketing allowances and commissions decreased $28.8 million (56%) primarily due
to decreased sales of fixed annuity products issued by Legacy Marketing's
carriers. The low interest rate environment continues to cause many carriers
that issue declared rate fixed annuity products, such as American National, to
reduce crediting rates and compensation paid to Legacy Marketing and its network
of Producers on certain products. As a result, sales of the affected products
were lower in 2004 than in 2003. The affected products accounted for
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approximately 8% and 34% of our total consolidated revenue for the years ended
December 31, 2004 and 2003. Revenue derived from sales and administration of
American National products decreased $17.1 million in 2004 compared to 2003.
Legacy Marketing has developed new products with American National that may
result in increased sales for Legacy Marketing in the long term.
Legacy Marketing's product sales were also negatively affected by
Transamerica and Legacy Marketing deciding to discontinue the marketing of
Transamerica products that were marketed exclusively by Legacy Marketing,
effective May 3, 2004. The discontinued products accounted for approximately 24%
and 25% of our total consolidated revenue for the years ended December 31, 2004
and 2003. Revenue derived from sales and administration of Transamerica products
decreased $8.5 million in 2004 compared to 2003. Legacy Marketing continues to
administer the discontinued products and to accept additional premium payments,
subject to applicable additional deposit rules for these products.
Legacy Marketing also experienced a decrease in sales of fixed annuity
products issued by Investors Insurance in 2004. We believe the decrease was
primarily attributable to a downgrade in the A.M. Best credit rating of
Investors Insurance from an A- rating to a B++ rating in September 2003. Revenue
derived from sales and administration of Investors Insurance products decreased
$5.3 million in 2004 compared to 2003.
Administrative fees decreased $3.6 million (26%) compared to 2003
primarily due to decreased issuing fees, appointment fees and operating expense
reimbursements from insurance carriers contracted with Legacy Marketing
resulting from decreased fixed annuity product sales.
Other revenue decreased $1.6 million (61%) compared to 2003 primarily due
to a performance bonus earned during the first half of 2003 on sales of fixed
annuity and life products under the terms of one of Legacy Marketing's insurance
carrier partner contracts. The contract was amended to terminate the bonus
program effective July 1, 2003.
During the year ended December 31, 2004, Legacy Marketing sold and
administered products primarily on behalf of three unaffiliated insurance
carriers: American National, Transamerica and Investors Insurance. As indicated
below, the agreements with these carriers generated a significant portion of our
total consolidated revenue:
2004 2003
----------- -----------
American National 25% 37%
Transamerica 24% 25%
Investors Insurance 27% 23%
Legacy Marketing also performs administrative services for products issued
by John Hancock and IL Annuity.
Our consolidated revenues were derived primarily from sales and
administration of the following fixed annuity products:
2004 2003
---- ----
BenchMark (SM) series (sold on behalf of American National) 24% 37%
SelectMark (SM) series (sold on behalf of Transamerica) 24% 25%
MarkOne (SM) series (sold on behalf of Investors Insurance) 23% 23%
Legacy Marketing's expenses decreased $16.5 million (29%) in 2004 compared
to 2003 primarily due to decreased selling, general and administrative expenses
and decreased other expenses. Selling, general and administrative expenses
decreased $14.9 million (30%) primarily due to decreased sales promotion and
support expenses, compensation, professional fees, and stationery and supplies.
Sales promotion and support expenses decreased primarily due to decreased
Producer-related bonuses and incentive trip expenses, and decreased sales
support expenses resulting from decreased sales. Compensation decreased
primarily due to decreased headcount, reduction in temporary help, reduced
employee overtime and decreased incentive-based compensation as a result of a
decline in sales and operating results. Professional fees decreased primarily
due to decreased consulting fees and reduced legal expenses. Stationery and
supplies decreased primarily due to a decline in sales. Other expenses decreased
$2.0 million (53%) due to decreased losses on write-offs of fixed assets,
primarily as a result of the write-off of $1.1 million in software costs in
2003, and decreased leased equipment costs.
Legacy Marketing recognized investment income of $524,000 in 2004 compared
to $409,000 in 2003. This increase was primarily due to higher realized gains on
sales of investment securities during 2004.
Due to the expiration of some unexercised Producer stock options in 2004,
Legacy Marketing wrote off $984,000 of deferred tax assets and established a
valuation allowance of $802,000 for remaining deferred tax assets associated
with unexercised Producer stock options. In addition, Legacy Marketing
established an additional valuation allowance of $776,000 during 2004 related
primarily to its state net operating loss carryforward.
10
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. 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.
Furthermore, during the third quarter of 2003, Legacy Marketing discontinued the
marketing of the AssureMark (SM) fixed annuity product series issued by John
Hancock. As a result, sales of annuity products on behalf of John Hancock
decreased during 2003.
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 our insurance carrier partner contracts.
Legacy Marketing's expenses increased $10.6 million (23%) primarily due to
increased selling, general and administrative expenses and other expenses. 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.
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.
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.
Legacy Financial Results of Operations
Year ended December 31, 2004 compared with year ended December 31, 2003
Legacy Financial incurred net losses of $441,000 during 2004, compared to
net losses of $683,000 during 2003. The reduction in net loss was primarily due
to increased revenue.
Legacy Financial revenue increased $288,000 (10%) in 2004 compared to 2003
primarily due to increased commission income as a result of increased sales
volume.
11
Legacy Financial expenses decreased $217,000 (5%) in 2004 compared to
2003. The decrease was primarily due to a decrease in selling, general and
administrative expenses of $206,000 (6%). The decrease was mainly attributable
to a decrease in compensation resulting from decreased headcount, reduction in
temporary help and decreased employee incentive-based compensation.
As a result of some stock options expiring unexercised in 2004, Legacy
Financial established a valuation allowance of $83,000 for the deferred tax
assets associated with unexercised stock options issued to Legacy Financial
representatives.
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 2006.
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 reimbursable 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.
Values Financial Network, Inc. Results of Operations
Year ended December 31, 2004 compared with year ended December 31, 2003
Values Financial Network, Inc. ("VFN") incurred a net loss of $751,000 in
2004 compared to a net loss of $1.0 million in 2003. The reduction in net loss
was primarily due to a reduction in goodwill, intangibles and long-lived asset
impairment losses, in addition to a reduction in depreciation and amortization
resulting from the related reduction in intangible and asset balances.
When we purchased VFN in 2000, part of the purchase price was allocated to
goodwill. Before January 1, 2002, we 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," which is required to be applied for all fiscal years
starting after December 15, 2001, we ceased amortizing goodwill on January 1,
2002. As required by SFAS 142, we perform an annual goodwill impairment test.
The impairment test of SFAS 142 requires us to measure fair value of the
reporting unit. We established fair value by preparing a forecast of the
discounted value of future cash flows expected to be derived from VFN.
During 2002, we revised the business model for VFN to focus on corporate
and individual producer sales and our projections supported the balance of
goodwill. In early 2003 we further refined our 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, we updated our 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 we recorded a goodwill impairment loss of $491,000
during 2003. Projections of future cash flows supported the remaining balance of
goodwill at that time.
When we 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 independent appraisal. In connection with the updated measurement of the fair
value of the VFN asset group as discussed above, we recorded a long-lived asset
impairment loss of $394,000 during 2003, included in Other expenses.
During the second quarter of 2004, due to the failure of VFN to produce
revenues as projected, particularly in the corporate arena, we decided to cease
actively marketing to the corporate market. As a result, management lowered its
expectations for future sales. This event met the criteria of a "triggering
event" for testing the recoverability of long-lived assets as required by
Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for
12
the Impairment or Disposal of Long-Lived Assets". Accordingly, we compared the
carrying amount of VFN's long-lived assets to the projected sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset group. Based on the fact that the sum of the undiscounted cash
flows exceeded VFN's assets, we concluded no impairment had occurred to the
long-lived assets. As a result of performing the impairment tests required under
SFAS 144, we were then required under the provisions of SFAS 142 to perform a
goodwill impairment test using the revised cash flows forecast discounted at an
appropriate cost of capital. The results of this test indicated that our
goodwill was not recoverable. Accordingly, we recorded a goodwill impairment
loss on the remaining balance of $679,000 during the second quarter of 2004.
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, discussed above. 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.
Imagent Online Results of Operations
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. 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, 2004 compared with year ended December 31, 2003
Imagent Online had a net loss of $515,000 in 2004 compared to a net loss
of $606,000 in 2003. The reduction in net loss was primarily due to decreased
compensation expense resulting from reduced headcount.
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 $42,000 was primarily
due to increased revenues in 2003.
Other Segments Results of Operations
Year ended December 31, 2004 compared with year ended December 31, 2003
During 2004, combined net income from Legacy Advisory Services and Legacy
Re, which is inactive, was $148,000 compared to combined net income of $122,000
in 2003. The favorable change was primarily due to increased advisory fee
revenues, partially offset by an increase in professional fees.
Year ended December 31, 2003 compared with year ended December 31, 2002
During 2003, combined net income from Legacy Advisory Services and Legacy
Re was $122,000, compared to combined net income of $61,000 in 2002. This
favorable change of $61,000 was primarily due to increased advisory fee
revenues.
Liquidity and Capital Resources
Net cash used by operating activities was $4.4 million in 2004 compared to
net cash provided by operating activities of $12.7 million in 2003. The change
was primarily due to (1) decreased operating results, (2) decreased accounts
payable and accrued liabilities, primarily due to the payment of bonuses to
Wholesalers based on their achievement of predetermined 2003 sales targets,
payments of employee 2003 incentive bonuses and payments associated with a
13
Producer incentive trip, (3) increase in income taxes receivable due to a
pre-tax loss in 2004, (4) a smaller decrease in prepaid expenses and deposits in
2004 compared to 2003 and a (5) decrease in the write-off of fixed assets. These
amounts were partially offset by decreased accounts receivable primarily due to
a decline in sales volume and decreased deferred tax assets, primarily due to a
write-off of deferred tax assets associated with unexercised stock options and
an increase in the valuation allowance related to unexercised stock options and
Legacy Marketing's state net operating loss carryforward.
Net cash used in investing activities was $3.4 million in 2004 compared to
$6.0 million in 2003. The decrease was primarily due to reduced purchases and
increased liquidation of available-for-sale securities to meet operating cash
needs. The decrease was partially offset by increased purchases of fixed assets
primarily due to construction costs related to our new servicing facility
building in Rome, Georgia and an increase in computer software purchases.
Net cash provided by financing activities was $2.2 million in 2004
compared to net cash used in financing activities of $1.6 million in 2003. The
change was primarily due to proceeds from our construction loan and mortgage
loan to finance the new building in Rome, Georgia, and proceeds from exercise of
stock options.
During 2003, we began construction of a new building in Rome, Georgia and
established a $2.7 million loan facility to finance construction costs. During
April 2004, we refinanced our construction loan replacing it with a $2.9 million
variable interest rate note indexed to LIBOR plus 1.9%. The note is payable over
ten years in monthly installments of principal, amortized on the basis of a
20-year term, and interest. At the end of the ten years, we must pay the balance
of the principal due on the note. The outstanding balance of the note as of
December 31, 2004 was $2.8 million. To manage interest expense, we entered into
an interest rate swap agreement for the notional amount of the note, to modify
its interest characteristics from a variable rate to a fixed rate. The swap
agreement involves the exchange of interest obligations from April 2004 through
April 2014 whereby we pay a fixed rate of 6.8% in exchange for LIBOR plus 1.9%.
We are obligated to repurchase certain shares of our common stock. Cash
paid to repurchase some of these shares totaled $966,000 in 2004 and $1.2
million in 2003. Based upon the estimated fair market values of the Series A and
B Redeemable Common Stock as of December 31, 2004, the redemption of all
eligible shares during 2005 would require $5.9 million. 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, 2004, 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 $ 9,907,000 $ 199,000 $ 441,000 $ 506,000 $ 8,761,000
Operating Leases 1,975,000 749,000 1,073,000 153,000 --
----------- ----------- ----------- ----------- -----------
Total Contractual Cash Obligations $11,882,000 $ 948,000 $ 1,514,000 $ 659,000 $ 8,761,000
=========== =========== =========== =========== ===========
During 2003, we amended our Shareholder Agreement with Lynda L. Regan,
Chief Executive Officer of the Company and Chairman of our Board of Directors.
Under the terms of the amended agreement, upon the death of Ms. Regan, we 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 us. The purchase price to be paid
by us shall be equal to 125% of the fair market value of the shares. As of
December 31, 2004, we believe that 125% of the fair market value of the shares
owned by Ms. Regan was equal to $26.0 million. We have purchased four life
insurance policies with a combined face amount of $33 million for the purpose of
funding this potential obligation upon Ms. Regan's death.
We used $4.4 million of cash in our operations and incurred consolidated
net losses of $7.5 million during the year ended December 31, 2004. If our
consolidated net losses continue, or if requests to repurchase redeemable common
stock increase significantly, a cash shortfall could ultimately occur. We
believe that existing cash balances, together with anticipated cash flow from
operations, will provide sufficient funding for the foreseeable future. In
addition, we do not anticipate having significant capital purchases in 2005.
However, in the event that a cash shortfall occurs, we believe that adequate
financing could be obtained to meet our cash flow needs. There can be no
assurances that such financing would be available on favorable terms.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
14
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. We
continue to assess the potential impact that the adoption of SFAS No. 123(R)
could have on our financial position, results of operations or statement of cash
flows.
RISK FACTORS
RISKS RELATED TO OUR COMPANY
We have experienced losses in recent years and if losses continue, our business
could suffer.
We had a net loss of $7.5 million for the year ended December 31, 2004.
The loss was primarily due to a loss at Legacy Marketing resulting from
decreased revenue. The decrease in revenue was due to decreased sales of
declared rate annuities resulting from a continuing low interest rate
environment during 2004. The low interest rate environment caused many carriers
that issue declared rate annuities to reduce the crediting rates and
compensation paid on some of their products, which negatively impacted sales of
declared rate annuities. Legacy Marketing's annuity sales were also negatively
affected by the Company discontinuing marketing Transamerica products effective
May 3, 2004.
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, Investors Insurance Corporation, and Americom Life &
Annuity Insurance Company. Legacy Marketing has also entered into administrative
agreements with each of the five insurance carriers and IL Annuity and Insurance
Company, whose marketing agreement terminated during the first quarter of 2002.
During 2004, 25%, 24%, and 27%, of our total consolidated revenue resulted from
agreements with American National, Transamerica, and Investors Insurance. During
2003, 37%, 25%, and 23% of our total consolidated revenue was generated from
agreements with American National, Transamerica, and Investors Insurance.
Effective May 3, 2004, Legacy Marketing discontinued marketing
Transamerica products that were marketed exclusively by Legacy Marketing
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 24% and 25% of our total consolidated revenue for the years ended
December 31, 2004 and 2003. Revenue from sales and administration of
Transamerica products decreased $8.5 million in 2004 compared to 2003 and
accounted for approximately 24% of our total consolidated revenue for the year
ended December 31, 2004.
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, 2004, 2003, and 2002. Legacy Marketing will continue
to administer American National life insurance products, including acceptance of
renewal premium.
During the second quarter of 2003, American National, which sets the
crediting rates for the American National products marketed by Legacy Marketing,
reduced the crediting rates of several such annuity products marketed by Legacy
Marketing. In addition, American National lowered the commission rates that it
pays 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. Sales and administration of these products declined from
$11.6 million during the first six months of 2003 to $6.2 million during the
second half of 2003, a 47% decline. In addition, sales and administration of
these products declined from $26.3 million in 2003 to $9.2 million in 2004.
Legacy Marketing developed the BenchMark Reliance (SM) annuity product during
2003 and expects to develop 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 discontinued the
marketing of the AssureMark (SM) fixed annuity product series issued by John
Hancock. As a result, sales of annuity products on behalf of John Hancock
decreased during the remainder of 2003. Revenues from sales of John Hancock
products decreased $1.5 million in 2004 compared to 2003, and $1.9 million in
2003 compared to 2002.
15
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 sells and
administers annuity products on behalf of Investors Insurance.
On July 1, 2002, Regan Holding entered into a Purchase Option Agreement
with SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the
outstanding capital stock of Investors Insurance. Pursuant to the terms of the
agreement, SCOR has granted us the right to purchase the outstanding capital
stock of Investors Insurance in exchange for annual option fees. We have paid
annual option fees totaling approximately $3.0 million as of December 31, 2004.
We have the right to exercise the option at any time prior to the expiration
date on June 30, 2005. If we elect to exercise the option, we must complete the
purchase transaction within two years of exercising the option. Upon completion
of a purchase transaction, the option fees will be included in the purchase
price. If the option expires unused, the fees paid will be expensed. Before
expiration, we can request a refund of fees paid in the event that the financial
rating of Investors Insurance declines as defined in the agreement. As of
December 31, 2004, the Investors Insurance rating has declined to a level where
we can request such a refund. We are exploring various methods to finance the
acquisition of Investors Insurance, including the issuance of debt or equity
securities by Regan Holding or one of our subsidiaries. As a result, it is
possible that we will issue a significant amount of debt or equity securities to
one or more new investors. Any such issuance of equity securities would likely
reduce the percentage ownership of Regan Holding held by current shareholders.
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 Legacy Marketing's insurance carriers could be disruptive to our business
and harm our results of operations and financial condition.
Our consolidated revenues may decrease significantly due to the discontinuation
of the marketing of Transamerica products.
Effective May 3, 2004, Legacy Marketing discontinued marketing
Transamerica products that were marketed exclusively by Legacy Marketing. As a
result, sales of Transamerica products decreased during 2004. Sales of
Transamerica products represented 24% and 25% of our consolidated revenue during
the years ended December 31, 2004 and 2003. The failure to develop new products
or the failure to increase the sales of other new annuity products could
adversely affect 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, Chief
Operating Officer 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.
16
o The relationship between Legacy Marketing and our insurance carriers.
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 balances 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 can be 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 and available-for-sale marketable security positions at December
31, 2004, 2003 and 2002 were $4.3 million, $15.8 million and $9.7 million.
Significant repurchases of our common stock could materially decrease our cash
position.
As of December 31, 2004, we were obligated to redeem 2,853,000 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 at December 31, 2004, we
were 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. Based upon the estimated fair market values of the Series A and
B Redeemable Common Stock as of December 31, 2004, the redemption of all
eligible shares during 2005 would require $5.9 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 by us, if any, shall be equal to 125% of the fair market value
of the shares. As of December 31, 2004, we believe 125% of the fair market value
of the shares owned by Ms. Regan was equal to $26.0 million. We have purchased
four life insurance policies with a combined face amount of $33 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.
17
RISKS RELATED TO OUR INDUSTRY
We may not be able to compete successfully with competitors that may have
greater resources than we do.
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 $91 billion in 2004. Legacy Marketing had a
1% market share of the 2004 fixed annuity sales in the United States based on
Legacy Marketing's $800 million of inforce premiums placed in 2004 as a
percentage of the $91 billion of annuities sold in the United States during
2004. 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 and other resources than we do
which allow them to respond more quickly than us under certain circumstances.
Some of Legacy Marketing's competitors are insurance companies that only sell
their own annuity products. Legacy Marketing, however, sells annuity products
issued by several different insurance carriers. Legacy Marketing, therefore, has
the flexibility to develop and sell a wide variety of annuity products by using
its established relationships with its current insurance carrier partners or by
approaching new insurance carriers to form relationships whereby Legacy
Marketing develops new annuity products to sell. This flexibility allows Legacy
Marketing to simultaneously leverage the resources of several insurance carriers
and eliminates Legacy Marketing's dependence on any one source for annuity
products. Legacy Marketing is not aware of any significant new means of
competition, products or services that its 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 Legacy Marketing with competitive challenges. There
can be no assurance that Legacy Marketing will be able to compete successfully.
In addition, Legacy Marketing's business model relies on Wholesaler distribution
networks to effectively market its 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, Legacy Marketing has been reasonably
successful in expanding and maintaining its current Wholesaler distribution
network. Due to competition among insurance companies and insurance marketing
organizations for successful Wholesalers, there can be no assurance that Legacy
Marketing will be able to retain some or all of its Wholesaler distribution
networks.
We may face increased governmental regulation and legal uncertainties, which
could result in diminished financial performance.
On October 29, 2004, the California Attorney General's Office announced
the launch of a formal investigation into possible anti-trust violations and
fraud by insurance companies and brokers, including bid rigging and other
anti-competitive conduct in the insurance industry. Other state authorities have
announced similar investigations. In addition, California Insurance Commissioner
John Garamendi has released for public review a proposed new set of regulations
addressing broker conduct. As currently drafted, the proposed regulations would,
among other things, impose penalties on brokers who fail to disclose all
material facts surrounding their receipt or potential receipt of income from a
third party flowing from a transaction on behalf of a client.
In December 2004, the NAIC approved amendments to the NAIC's model
Producer Licensing Act. Under the model Act, producers, like Legacy Marketing's
Producers, who have been appointed by an insurer as its agent and do not receive
compensation from a customer will not be required to disclose the amount of
compensation received from the insurer. However, they must disclose to the
customer prior to the sale of insurance to the customer that they will be
receiving compensation from the insurer, or that the producer represents the
insurer and may provide services to the customer for the insurer. One state has
adopted a regulation based on the model Act and others are considering similar
regulations or legislation. In addition, the NAIC has held a hearing to consider
additional regulation and may in the future propose additional measures
affecting producers.
Our core business consists of selling fixed annuity products, on behalf of
insurance carriers, through a network of approximately 24,400 Producers. If the
amendments to the model Act, or similar or additional regulations, were to be
adopted in states that we conduct business, the Producers would have to disclose
to potential purchasers of fixed annuity products, compensation they may receive
from Legacy Marketing or the insurance carriers. They may also have to disclose
that the Producer represents the insurance carriers and may provide services to
the customer on behalf of the carriers. We are unable to predict which states
will adopt the amendments to the model Act and whether other new initiatives may
affect our business and the demand for the fixed annuity products marketed by
Legacy Marketing. It is possible, however, that enactment of the amendments to
the model Act, or similar or additional regulations, could have a material
adverse effect on the insurance industry in general or on our financial
condition and results of operations.
18
In recent years, the U.S. insurance regulatory framework has come under
increased scrutiny. Some state legislatures have considered laws that may alter
or increase state regulation of insurance, reinsurance, and holding companies.
Moreover, the NAIC and state insurance regulators regularly re-examine existing
laws and regulations, often focusing on modifications to holding company
regulations, interpretations of existing laws, and the development of new laws.
Changes in these laws and regulations or their interpretation could have a
material adverse effect on our financial condition or results of operations. In
addition, the U.S. Congress has considered statutes that would impose certain
national uniform standards and repeal the McCarran-Ferguson antitrust exemption
for the business of insurance. While no legislation is currently pending, the
U.S. Congress could adopt laws or regulations that could have a material adverse
effect on our financial condition or results of operations.
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 Legacy Financial could harm its 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 Legacy Marketing markets. 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 Legacy
Marketing markets 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.
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 the 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.
We did not have any investments in fixed income instruments as of December
31, 2004.
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, 2004 and
2003. The original cost and fair values of our marketable equity securities are
shown below:
19
Original Cost Fair Value
------------- ----------
December 31, 2004 $6,353,000 $7,900,000
December 31, 2003 $5,633,000 $6,308,000
During April 2004 the Company entered into a variable rate mortgage on its
facility in Rome, Georgia. To manage interest expense on the note, we entered
into an interest rate swap agreement for the notional amount of the note, to
modify its interest characteristics from a variable rate to a fixed rate. The
swap agreement involves the exchange of interest obligations from April 2004
through April 2014 whereby we pay a fixed rate of 6.8% in exchange for LIBOR
plus 1.9%.
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 REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 29, 2005
21
REGAN HOLDING CORP. AND SUBSIDIARES
Consolidated Balance Sheet
December 31,
-------------------------------
2004 2003
----------- -----------
Assets
Cash and cash equivalents $ 4,348,000 $ 9,908,000
Trading investments 7,900,000 6,308,000
Available-for-sale investments -- 5,939,000
Option to purchase Investors Insurance Company 2,975,000 1,200,000
Accounts receivable, net of allowance of $569,000 and $866,000 at
December 31, 2004 and 2003 1,496,000 4,225,000
Income taxes receivable 755,000 --
Prepaid expenses and deposits 705,000 803,000
Deferred tax assets 772,000 1,356,000
----------- -----------
Total current assets 18,951,000 29,739,000
----------- -----------
Net fixed assets 27,675,000 24,278,000
Deferred tax assets -- 1,170,000
Goodwill -- 679,000
Intangible assets, net 122,000 196,000
Notes receivable 672,000 827,000
Other assets 198,000 226,000
----------- -----------
Total non current assets 28,667,000 27,376,000
----------- -----------
Total assets $47,618,000 $57,115,000
=========== ===========
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 5,243,000 $10,790,000
Income taxes payable -- 1,990,000
Current portion of notes payable and other borrowings 199,000 307,000
----------- -----------
Total current liabilities 5,442,000 13,087,000
----------- -----------
Deferred compensation payable 7,748,000 6,257,000
Deferred tax liabilities 1,242,000 --
Other liabilities 854,000 196,000
Notes payable, less current portion 9,708,000 7,083,000
----------- -----------
Total non current liabilities 19,552,000 13,536,000
----------- -----------
Total liabilities 24,994,000 26,623,000
----------- -----------
Redeemable common stock, Series A and B 7,486,000 8,964,000
----------- -----------
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 or outstanding: 20,912,000 and
20,252,000 at December 31, 2004 and 2003 3,847,000 3,158,000
Common stock committed -- 25,000
Paid-in capital 6,522,000 6,510,000
Retained earnings 4,769,000 11,779,000
Accumulated other comprehensive income -- 56,000
----------- -----------
Total shareholders' equity 15,138,000 21,528,000
----------- -----------
Total liabilities, redeemable common stock, and shareholders' equity $47,618,000 $57,115,000
=========== ===========
<FN>
See notes to financial statements.
</FN>
22
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Year Ended December 31,
---------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Revenue
Marketing allowances and commission overrides $ 20,203,000 $ 48,396,000 $ 32,323,000
Trailing commissions 4,792,000 5,130,000 4,899,000
Administrative fees 10,288,000 13,875,000 12,007,000
Other revenue 2,102,000 3,516,000 820,000
------------ ------------ ------------
Total revenue 37,385,000 70,917,000 50,049,000
------------ ------------ ------------
Expenses
Selling, general and administrative 38,414,000 53,583,000 43,521,000
Depreciation and amortization 4,282,000 4,077,000 4,339,000
Goodwill impairment losses 679,000 491,000 --
Other 2,342,000 4,729,000 2,859,000
------------ ------------ ------------
Total expenses 45,717,000 62,880,000 50,719,000
------------ ------------ ------------
Operating income (loss) (8,332,000) 8,037,000 (670,000)
Other income
Investment income, net 531,000 416,000 652,000
Interest expense (9,000) (33,000) (76,000)
------------ ------------ ------------
Total other income, net 522,000 383,000 576,000
------------ ------------ ------------
Income (loss) before income taxes (7,810,000) 8,420,000 (94,000)
Provision for (benefit from) income taxes (343,000) 3,391,000 (34,000)
------------ ------------ ------------
Net income (loss) before accretion of redeemable
common stock (7,467,000) 5,029,000 (60,000)
Reduction (accretion) of redeemable common stock 512,000 (34,000) (26,000)
------------ ------------ ------------
Net income (loss) available for common shareholders $ (6,955,000) $ 4,995,000 $ (86,000)
============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.29) $ 0.20 $ --
Weighted average shares outstanding 23,880,000 24,431,000 25,093,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.29) $ 0.18 $ --
Weighted average shares outstanding 23,880,000 27,330,000 25,093,000
<FN>
See notes to financial statements.
</FN>
23
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the years ended December 31, 2004, 2003 and 2002
Series A Common Stock Common
---------------------------- Stock Paid-in Retained
Shares Amount Committed Capital Earnings
-------------- ------------- ----------- -------------- -------------
Balance December 31, 2001 20,769,000 $ 3,596,000 $ 25,000 $ 6,424,000 $ 7,405,000
Comprehensive loss, net of tax:
Net loss (60,000)
Net unrealized gains on investments
Less:
Reclassification of net realized gains
Total comprehensive loss
Retirement of common stock upon
voluntary repurchases (274,000) (272,000) (184,000)
Retirement of redeemable common stock 71,000
Accretion to redemption value of
redeemable common stock (26,000)
Producer stock option expense 4,000 -
-------------- ------------- ----------- -------------- -------------
Balance December 31, 2002 20,495,000 3,324,000 25,000 6,499,000 7,135,000
Comprehensive income, net of tax:
Net income 5,029,000
Net unrealized gains on investments
Less:
Reclassification of net realized losses
Total comprehensive income
Retirement of common stock upon
voluntary repurchases (398,000) (363,000) (351,000)
Retirement of redeemable common stock 1,000
Accretion to redemption value of
redeemable common stock (34,000)
Producer stock option expense 10,000
Producer stock option expense 155,000 197,000
-------------- ------------- ----------- -------------- -------------
Balance December 31, 2003 20,252,000 3,158,000 25,000 6,510,000 11,779,000
Comprehensive loss, net of tax:
Net loss (7,467,000)
Net unrealized gains on investments
Less:
Reclassification of net realized gains
Total comprehensive loss
Retirement of common stock upon
voluntary repurchases (181,000) (278,000) (55,000)
Issuance of common stock committed 25,000 (25,000)
Exercise of stock options 841,000 942,000
Reduction to redemption value of
redeemable common stock 512,000
Producer stock option expense 12,000 -
-------------- ------------- ----------- -------------- -------------
Balance December 31, 2004 20,912,000 $ 3,847,000 $ -- $ 6,522,000 $ 4,769,000
============== ============= =========== ============== =============
Accumulated
Other
Comprehensive
Income (loss) Total
------------ --------------
Balance December 31, 2001 $ 56,000 $ 17,506,000
Comprehensive loss, net of tax:
Net loss (60,000)
Net unrealized gains on investments 53,000 53,000
Less:
Reclassification of net realized gains (132,000) (132,000)
--------------
Total comprehensive loss (139,000)
Retirement of common stock upon
voluntary repurchases (456,000)
Retirement of redeemable common stock 71,000
Accretion to redemption value of
redeemable common stock (26,000)
Producer stock option expense 4,000
------------ --------------
Balance December 31, 2002 (23,000) 16,960,000
Comprehensive income, net of tax:
Net income 5,029,000
Net unrealized gains on investments 72,000 72,000
Less:
Reclassification of net realized losses 7,000 7,000
--------------
Total comprehensive income 5,108,000
Retirement of common stock upon
voluntary repurchases (714,000)
Retirement of redeemable common stock 1,000
Accretion to redemption value of
redeemable common stock (34,000)
Producer stock option expense 10,000
Producer stock option expense 197,000
------------ --------------
Balance December 31, 2003 56,000 21,528,000
Comprehensive loss, net of tax:
Net loss (7,467,000)
Net unrealized gains on investments 24,000 24,000
Less:
Reclassification of net realized gains (80,000) (80,000)
--------------
Total comprehensive loss (7,523,000)
Retirement of common stock upon
voluntary repurchases (333,000)
Issuance of common stock committed -
Exercise of stock options 942,000
Reduction to redemption value of
redeemable common stock 512,000
Producer stock option expense 12,000
------------ --------------
Balance December 31, 2004 $ -- $ 15,138,000
============ ==============
<FN>
See notes to financial statements.
</FN>
24
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Year Ended December 31,
-----------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (7,467,000) $ 5,029,000 $ (60,000)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 4,282,000 4,077,000 4,339,000
Losses on write-off of fixed assets 67,000 1,772,000 255,000
Impairment of goodwill and intangible assets 679,000 538,000 --
Provision for (reduction of) doubtful accounts (62,000) 399,000 393,000
Deferred taxes 3,034,000 (863,000) (134,000)
Amortization of premium or discount on investments 40,000 84,000 76,000
Unrealized (gains) losses on trading securities, net (869,000) (1,709,000) 1,034,000
Realized (gains) losses on sales of investments, net (133,000) 12,000 (219,000)
Producer stock option expense 12,000 10,000 4,000
Changes in operating assets and liabilities:
Purchases of trading securities, net (720,000) (333,000) (5,276,000)
Accounts receivable 2,791,000 (1,350,000) (934,000)
Prepaid expenses and deposits 98,000 1,319,000 (1,065,000)
Income taxes receivable and payable (2,745,000) (337,000) 2,403,000
Accounts payable and accrued liabilities (5,547,000) 1,884,000 604,000
Deferred compensation payable 1,491,000 2,016,000 (115,000)
Other operating assets and liabilities 686,000 177,000 (319,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities (4,363,000) 12,725,000 986,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (2,101,000) (5,902,000) (959,000)
Proceeds from sales of available-for-sale securities 5,536,000 2,914,000 8,633,000
Proceeds from maturities of available-for-sale securities 2,500,000 1,970,000 --
Option to purchase Investors Insurance Corporation (1,775,000) (600,000) (600,000)
Proceeds (payments) from notes receivable 155,000 (175,000) 24,000
Acquisition of prospectdigital assets -- -- (225,000)
Purchases of fixed assets (7,672,000) (4,197,000) (5,580,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (3,357,000) (5,990,000) 1,293,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from loans payable 2,155,000 191,000 5,321,000
Payments toward loans payable (2,346,000) -- (10,071,000)
Proceeds from note payable 2,870,000 -- 7,350,000
Payments toward notes payable (162,000) (109,000) (42,000)
Repurchases of redeemable common stock (966,000) (1,185,000) (964,000)
Proceeds from exercise of common stock options 942,000 -- --
Voluntary repurchases of common stock (333,000) (517,000) (456,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities: 2,160,000 (1,620,000) 1,138,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (5,560,000) 5,115,000 3,417,000
Cash and cash equivalents, beginning of period 9,908,000 4,793,000 1,376,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 4,348,000 $ 9,908,000 $ 4,793,000
============ ============ ============
Supplemental cash flow information:
Taxes paid / (refunds received) $ (650,000) $ 5,110,000 $ 7,000
Interest paid $ 634,000 $ 517,000 $ 411,000
<FN>
See notes to financial statements.
</FN>
25
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, 2004, 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"), Investors Insurance Corporation ("Investors
Insurance"), and Americom Life & Annuity Insurance Company ("Americom")
(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, with the applicable carrier. 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 various investment
companies, Legacy Financial is compensated based upon predetermined percentages
of actual sales levels.
d. Fair value of financial instruments
The carrying values of the Company's financial instruments, including cash
equivalents, trading investments, accounts receivable, accounts payable, accrued
liabilities and notes payable approximate their market values based on their
relatively short-term nature or comparable market information available at the
respective balance sheet dates.
26
e. Cash and Cash Equivalents
Cash and cash equivalents include marketable securities with an original
or remaining maturity of ninety days or less at the time of purchase.
f. 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.
g. 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
h. 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 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.
i. 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. The Company
periodically reviews 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
27
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.
j. 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.
k. Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance
with the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires the Company to measure all derivatives at fair value and to
recognize them in the balance sheet as an asset or liability. For derivatives
designated as cash flow hedges, changes in fair value of the derivative are
reported as other comprehensive income and are subsequently reclassified into
earnings when the hedged transaction affects earnings. Changes in fair value of
derivative instruments not considered hedging instruments and ineffective
portions of hedges are recognized in earnings in the current period.
l. 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.
m. Stock Options
The Company has a stock-based employee compensation plan (see Note 13) 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:
2004 2003 2002
------------- ------------- ---------
Net income (loss) available for common
shareholders, as reported $ (6,955,000) $ 4,995,000 $ (86,000)
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related tax effects (258,000) (424,000) (478,000)
------------- ------------- ---------
Pro forma net income (loss) available for common
shareholders $ (7,213,000) $ 4,571,000 $(564,000)
============= ============= =========
Earnings (loss) per share:
Basic - as reported $ (0.29) $ 0.20 $ --
Basic - pro forma $ (0.30) $ 0.19 $ (0.02)
Diluted - as reported $ (0.29) $ 0.18 $ --
Diluted - pro forma $ (0.30) $ 0.17 $ (0.02)
28
The fair value of the employee option grants for pro forma disclosure
purposes was estimated using the minimum value method, with the following
assumptions:
2004 2003 2002
------------ ------------ ------------
Risk-free interest rates 2.84%-4.03% 1.45%-3.20% 4.08%-4.52%
Expected life 3-5 years 3-5 years 3-5 years
Dividend yield None None None
n. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which establishes standards for transactions in which an entity exchanges its
equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. The
Company continues to assess the potential impact that the adoption of SFAS No.
123(R) could have on its financial position, results of operations or statement
of cash flows.
2. Investments
The Company had no available for sale investments at December 31, 2004.
The cost and fair value of investment securities at December 31, 2003 were as
follows:
Unrealied Unrealized
Cost Basis Gains Gains Fair 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
=========== =========== =========== ===========
2004 2003 2002
----------- ----------- -----------
Gross realized gains $ 162,000 $ 6,000 $ 281,000
Gross realized losses $ (33,000) $ (18,000) $ (62,000)
3. Fixed Assets
December 31,
------------------------------
2004 2003
------------ ------------
Computer hardware and purchased software $ 10,465,000 $ 8,075,000
Internal use software development costs 18,560,000 15,742,000
Leasehold improvements 1,361,000 1,361,000
Furniture and equipment 3,213,000 3,108,000
Building 10,884,000 9,446,000
Land 3,092,000 2,718,000
------------ ------------
47,575,000 40,450,000
Accumulated depreciation and amortization (19,900,000) (16,172,000)
------------ ------------
Total $ 27,675,000 $ 24,278,000
============ ============
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, the Company completed its evaluation of an internal use
software project that it initially licensed in 1998 with the intent to modify
and customize the licensed software prior to deployment. The Company began this
project intending to replace its administration system after the vendor of its
existing administration system required the Company to migrate from the existing
29
system to an alternative platform. In late 2002, the Company learned from its
vendor that it might be able to retain its 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, the Company's vendor concluded that
the Company could continue to use its existing system for an extended period.
The Company has completed a rigorous evaluation of its Company-wide
technological needs, which included an assessment of the viability of the
existing system. As a result of this assessment the Company concluded that it
would use both systems and in the fourth quarter of 2003 the Company recorded a
write-off of $1.1 million associated with the abandoned components of the
software costs.
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.
During the second quarter of 2004, due to the failure of VFN to produce
revenues as projected, particularly in the corporate arena, management decided
to cease actively marketing to the corporate market. As a result, management
lowered its expectations for future sales. This event met the criteria of a
"triggering event" for testing the recoverability of long-lived assets as
required by Statement of Financial Accounting Standards No. 144 ("SFAS 144")
"Accounting for the Impairment or Disposal of Long-Lived Assets". Accordingly,
the Company compared the carrying amount of VFN's long-lived assets to the
projected sum of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset group. Based on the fact that the sum of the
undiscounted cash flows exceeded VFN's assets, the Company concluded no
impairment had occurred to the long-lived assets.
As a result of performing the impairment tests required under SFAS 144,
the Company was then required under the provisions of SFAS 142 to perform a
goodwill impairment test using the revised cash flows forecast discounted at an
appropriate cost of capital. The results of this test indicated that the
Company's goodwill was not recoverable. Accordingly, the Company recorded a
goodwill impairment loss on the remaining goodwill balance of $679,000 during
the second quarter of 2004.
Acquired intangible assets, all subject to amortization:
December 31,
-----------------------------------------------------
2004 2003
------------------------ ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
--------- ------------ --------- ------------
Copyrights $ 203,000 $(174,000) $ 203,000 $(145,000)
Software license 223,000 (130,000) 223,000 (85,000)
--------- --------- --------- ---------
Total $ 426,000 $(304,000) $ 426,000 $(230,000)
========= ========= ========= =========
The aggregate amortization expense for the years ended December 31, 2004,
2003 and 2002 was $74,000, $89,000 and $91,000. The estimated amortization
expense for the years ended December 31, 2005, 2006 and 2007 is $74,000, $45,000
and $4,000.
30
5. Option to Purchase Investors Insurance Corporation
On July 1, 2002, the Company entered into a Purchase Option Agreement with
SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the outstanding
capital stock of Investors Insurance. Pursuant to the terms of the agreement,
SCOR has granted the Company the right to purchase the outstanding capital stock
of Investors Insurance in exchange for annual option fees. The Company has paid
annual option fees totaling $2,975,000 as of December 31, 2004. The Company has
the right to exercise the option at any time prior to the expiration date on
June 30, 2005. If the Company elects to exercise the option, it must complete
the purchase transaction within two years of exercising the option. Upon
completion of a purchase transaction, the option fees will be included in the
purchase price. If the option expires unused, the fees paid will be expensed.
Before expiration, the Company can request a refund of fees paid in the event
that the financial rating of Investors Insurance declines as defined in an
agreement. As of December 31, 2004, the Investors Insurance rating has declined
to a level where the Company can request such a refund.
6. Accounts Payable and Accrued Liabilities
December 31,
----------------------------
2004 2003
----------- -----------
Accrued compensation $ 1,952,000 $ 3,351,000
Accrued sales bonus 95,000 2,022,000
Accrued sales convention costs 112,000 1,381,000
Commissions payable 381,000 832,000
Payable to insurance carrier 237,000 345,000
Accounts payable 391,000 548,000
Accrued production premium deficiency 2,000 206,000
Miscellaneous accrued expenses 2,073,000 2,105,000
----------- -----------
Total $ 5,243,000 $10,790,000
=========== ===========
7. Loan Payable and Note Payable
The Company has a mortgage of $7.1 million on the office building, which
houses its headquarters. Payment in full of this note is due on August 1, 2012.
Payments are due on the note based on a 25-year amortization schedule. On August
1, 2012, the Company must pay the remaining principal due on the note, which
will be approximately $5.9 million. Prior to August 1, 2006 the interest rate on
the note is 6.95%. Thereafter, the interest rate will be equal to LIBOR plus
2.55%, adjusted semi-annually, subject to a maximum semi-annual 1.00%
increase/decrease in the interest rate. The maximum interest rate is 10.50%. As
of December 31, 2004, the Company made payments of $267,000 toward the principal
balance of the note. The required principal payments over the next five years
are: $125,000, $135,000, $144,000, $154,000, and $166,000.
During 2003, the Company began construction of a new building in Rome,
Georgia and established a $2.7 million loan facility to finance construction
costs. The balance due under this loan facility on December 31, 2003 was
$191,000. During April 2004, the Company refinanced its construction loan
replacing it with a $2.9 million variable interest rate note indexed to LIBOR
plus 1.9%. The note is payable over ten years in monthly installments of
principal, amortized on the basis of a 20-year term, and interest. At the end of
the ten years, the Company must pay the balance of the principal due on the
note. The outstanding balance of the note as of December 31, 2004 was $2.8
million. To manage interest expense, the Company entered into an interest rate
swap agreement with a notional amount equal to the principal balance of the
note, which modifies its interest expense from a variable rate to a fixed rate.
The April 2004 swap agreement involves the exchange of interest obligations from
April 2004 through April 2014 whereby the Company pays a fixed rate of 6.8% in
exchange for LIBOR plus 1.9%. As of December 31, 2004, the Company made payments
of $46,000 toward the principal balance of the note. The required principal
payments over the next five years are: $73,000, $78,000, $84,000, $90,000, and
$96,000.
8. 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 $13,000. 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 $311,000, $405,000,
and $434,000 for the years ended December 31, 2004, 2003, and 2002.
31
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 $23,000, $32,000, and
$59,000 during the years ended December 31, 2004, 2003, and 2002. As of December
31, 2004 and 2003, employee contributions and Company matching contributions,
including cumulative investment gains, totaled $788,000 and $610,000.
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, 2004,
2003, and 2002, matching contributions related to the producer commission
deferral plan were $18,000, $16,000, and $19,000. As of December 31, 2004 and
2003, producer contributions and Company matching contributions, including
cumulative investment gains, totaled $7.0 million and $5.7 million. The
liability to the employee or producer is credited or charged based on the
performance of the investment option selected by the participant.
9. 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.
10. Sales Incentive Program
In September 2004, Legacy Marketing Group initiated a sales incentive
program for its independent insurance producers, which granted bonuses to the
producers based upon their achievement of predetermined monthly sales targets.
The Company recorded expense of $392,000 during the year ended December 31, 2004
related to this program, of which $297,000 was paid as of December 31, 2004. The
amounts expensed are included in selling, general and administrative expenses.
During 2003, Legacy Marketing Group initiated a sales incentive program
for its top independent insurance producers ("Wholesalers"). This program
offered bonuses to Wholesalers based primarily on their achievement of
predetermined annual sales targets. Bonuses were 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.
11. Commitments and Contingencies
The Company leases office and warehouse premises and certain office
equipment under non-cancelable operating leases. Related rent expense of
$329,000, $531,000, and $585,000 is included in occupancy costs for the years
ended December 31, 2004, 2003, and 2002. Total rentals for leases of equipment
included in equipment expense were $674,000, $1.0 million, and $1.1 million for
the years ended December 31, 2004, 2003, and 2002.
The Company's future minimum annual lease commitments under all operating
leases as of December 31, 2004 are as follows:
Year Ended December 31,
2005 $ 749,000
2006 582,000
2007 491,000
2008 108,000
2009 45,000
Thereafter -
-----------
Total minimum lease payments $ 1,975,000
===========
32
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, 2004, the Company
believes that 125% of the fair market value of the shares owned by Ms. Regan was
equal to $26.0 million. The Company has purchased four life insurance policies
with a combined face amount of $33 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, 2004, there were no
outstanding commitments by the Company relating to such obligations.
12. 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 $2.03 per share and $2.21 per share, and a redemption
value for Series B redeemable common stock of $1.67 and $1.82 per share, as of
December 31, 2004 and 2003, based on an independent appraisal of the stock value
obtained by management.
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, 2002 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) (1,185,000)
Accretion to redemption value -- 34,000 -- -- -- 34,000
---------- ------------ --------- ------------ ---------- ------------
Balance December 31, 2003 3,289,000 7,267,000 553,000 1,697,000 3,842,000 8,964,000
Redemptions and retirement of common stock (436,000) (966,000) -- -- (436,000) (966,000)
Reduction to redemption value -- (512,000) -- -- -- (512,000)
---------- ------------ --------- ------------ ---------- ------------
Balance December 31, 2004 2,853,000 $ 5,789,000 553,000 $ 1,697,000 3,406,000 $ 7,486,000
========== ============ ========= ============ ========== ============
The Company recorded redeemable common stock accretion of ($512,000),
$34,000 and $26,000 related to Series A redeemable common stock for the years
ended December 31, 2004, 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.
13. 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,
33
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 2004, 2003, and 2002 were 15,000,
15,000, and 10,000. Total expenses recorded for Producer stock option grants
were $12,000, $10,000, and $4,000 during 2004, 2003 and 2002. The Producer stock
options granted for each of the three years ended December 31, 2004 vested
immediately upon the grant date and expire six years from the date of grant. The
fair value of the Producer options were estimated using the Black-Scholes
option-pricing model with the following assumptions:
2004 2003 2002
-------- -------- --------
Risk-free interest rates 3.71% 3.19% 4.78%
Volatility 27% 27% 27%
Dividend yield None None None
Expected life 6 years 6 years 6 years
There were no shares of Series A common stock awarded to non-employees
during 2004, 2003 and 2002.
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, 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
Granted 327,000 $ 1.69
Exercised (841,000) $ 1.12
Forfeited (6,482,000) $ 1.29
Outstanding at December 31, 2004 8,789,000 $ 1.50
Exercisable at December 31, 2002 12,407,000 $ 1.32
Exercisable at December 31, 2003 13,106,000 $ 1.35
Exercisable at December 31, 2004 7,365,000 $ 1.48
34
The following table summarizes information about stock options outstanding
at December 31, 2004 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-$1.03 524,000 2.7 $0.74 524,000 $0.74
$1.27-$1.27 671,000 0.5 $1.27 671,000 $1.27
$1.39-$1.53 3,754,000 2.6 $1.53 3,541,000 $1.53
$1.61-$1.61 1,913,000 2.7 $1.61 1,838,000 $1.61
$1.65-$1.68 1,232,000 5.9 $1.67 658,000 $1.66
$1.69-$1.70 695,000 8.6 $1.69 133,000 $1.69
14. 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,
------------------------------------------
2004 2003 2002
----------- ----------- -----------
Current income taxes:
Federal $(3,341,000) $ 3,311,000 $ 76,000
State (36,000) 944,000 24,000
----------- ----------- -----------
Total current (3,377,000) 4,255,000 100,000
Deferred income taxes:
Federal 2,172,000 (696,000) (170,000)
State 862,000 (168,000) 36,000
----------- ----------- -----------
Total deferred 3,034,000 (864,000) (134,000)
----------- ----------- -----------
Income tax (benefit) expense $ (343,000) $ 3,391,000 $ (34,000)
=========== =========== ===========
35
The Company's deferred tax assets (liabilities) consist of the following:
December 31,
--------------------------
2004 2003
----------- -----------
Producer stock option and stock, awards less valuation
allowance of $885,000 and $0 at December 31, 2004 and 2003 $ 148,000 $ 2,186,000
Producer deferred compensation 3,072,000 2,492,000
Accrued sales convention costs 44,000 543,000
Federal net operating loss carryforward 59,000 --
State net operating loss carryforward, less
valuation allowance of $921,000 and $385,000,
net of federal taxes 244,000 250,000
State alternative minimum tax credit carryforward,
less valuation allowance of $181,000 and $0, net
of federal taxes -- 263,000
Capital loss carryforward 300,000 357,000
Other deferred tax assets, less valuation
allowance of $76,000 and $0, net of federal taxes 1,253,000 1,090,000
----------- -----------
Subtotal deferred tax assets 5,120,000 7,181,000
----------- -----------
Fixed assets depreciation (3,620,000) (2,985,000)
Deferred gain on building sale (1,357,000) (1,364,000)
Unrealized gains (613,000) (306,000)
----------- -----------
Subtotal deferred tax liabilities (5,590,000) (4,655,000)
----------- -----------
Deferred tax assets (liabilities), net $ (470,000) $ 2,526,000
=========== ===========
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. As of
December 31, 2004, the Company had $148,000 of deferred tax assets related to
Producer stock options after a 2004 valuation allowance of $885,000 was
recorded. During 2004, $984,000 of deferred tax assets were expensed due to the
expiration of some unexercised Producer stock options. Based upon the past
experience of Producers exercising stock options, management believes it is more
likely than not that the remaining deferred tax benefits attributable to
producer stock options will be realized and no additional related valuation
allowance is currently deemed necessary.
The provisions for (benefits from) income taxes differ from the provisions
for (benefits from) computed by applying the statutory federal income tax rate
(34%) to income before taxes, as follows:
For the Year Ended December 31,
---------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Federal income tax expense (benefit) at statutory rate (34%) $(2,656,000) $ 2,863,000 $ (32,000)
Increase (reductions) in income taxes resulting from:
State franchise taxes, net of federal income tax benefit 634,000 526,000 40,000
Expired producer stock options unexercised 844,000 -- --
Valuation allowance for remaining producer stock options 759,000 -- --
Other 76,000 2,000 (42,000)
----------- ----------- -----------
Income tax provision (benefit) $ (343,000) $ 3,391,000 $ (34,000)
=========== =========== ===========
As of December 31, 2004, the Company has federal and state net operating
loss carryforwards of $173,000 and $17.4 million, respectively, that are
expected to be utilized in the future. $173,000 of the federal net operating
losses will expire on December 31, 2024 and $4.9 million of the state net
operating losses begin to expire on December 31, 2012. State tax valuation
allowances of $921,000, net of federal taxes, have been provided for a portion
of the state net operating loss carryforward.
36
15. Earnings (loss) per Share
The basic and diluted earnings (loss) per share calculations are based on
the weighted average number of common shares outstanding including shares of
redeemable common stock.
For the Year Ended
December 31,
----------------------------------------
2004 2003 2002
----------- ---------- ------------
Net income (loss) available for common
shareholders, as reported $(6,955,000) $4,995,000 $ (86,000)
=========== ========== ============
Reconciliation of shares used in basic and diluted
earnings per share calculations:
Basic:
Weighted average common shares outstanding 23,880,000 24,431,000 25,093,000
=========== ========== ============
Basic net income (loss) per share $ (0.29) $ 0.20 $ --
=========== ========== ============
Diluted:
Weighted average common shares outstanding 23,880,000 24,431,000 25,093,000
Dilutive effect of stock options -- 2,899,000 --
----------- ---------- ------------
Shares used in diluted net income (loss) per share
calculation 23,880,000 27,330,000 25,093,000
=========== ========== ============
Diluted net income (loss) per share $ (0.29) $ 0.18 $ --
=========== ========== ============
As the Company incurred net losses in the years ended December 31, 2004
and 2002, options to purchase 8.8 million and 15.8 million shares of the
Company's common stock were excluded from the computation of diluted net loss
per share for those periods, as the effect would have been antidilutive. Options
to purchase 699,000 shares of the Company's common stock were excluded from the
computation of diluted net income per share for the year ended December 31,
2003, as the option's exercise prices were greater than the average market price
of the common stock, and, therefore, the effect would have been antidilutive.
37
16. Segment Information
The Company has identified its reportable segments based on its method of
internal reporting and segregates its business into five 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, 2004
Total revenue $ 34,009,000 $ 3,267,000 $ 275,000 $ 39,000
Total expenses 39,909,000 3,840,000 1,133,000 1,287,000
------------ ------------ ------------ ------------
Operating income (loss) (5,900,000) (573,000) (858,000) (1,248,000)
Other income 522,000 -- -- --
------------ ------------ ------------ ------------
Income (loss) before tax (5,378,000) (573,000) (858,000) (1,248,000)
Tax provision (benefit) 530,000 (132,000) (343,000) (497,000)
------------ ------------ ------------ ------------
Net income (loss) $ (5,908,000) $ (441,000) $ (515,000) $ (751,000)
============ ============ ============ ============
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)
============ ============ ============ ============
Total assets
December 31, 2004 $ 50,487,000 $ 1,115,000 $ 2,514,000 $ 2,069,000
============ ============ ============ ============
December 31, 2003 $ 58,780,000 $ 2,036,000 $ 2,347,000 $ 3,410,000
============ ============ ============ ============
38
Intercompany
Other Subtotal Eliminations Total
------------ ------------ ------------ ------------
Year Ended December 31, 2004
Total revenue $ 406,000 $ 37,996,000 $ (611,000) $ 37,385,000
Total expenses 159,000 46,328,000 (611,000) 45,717,000
------------ ------------ ------------ ------------
Operating income (loss) 247,000 (8,332,000) -- (8,332,000)
Other income -- 522,000 -- 522,000
------------ ------------ ------------ ------------
Income (loss) before tax 247,000 (7,810,000) -- (7,810,000)
Tax provision (benefit) 99,000 (343,000) -- (343,000)
------------ ------------ ------------ ------------
Net income (loss) $ 148,000 $ (7,467,000) $ -- $ (7,467,000)
============ ============ ============ ============
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)
============ ============ ============ ============
Total assets
December 31, 2004 $ 460,000 $ 56,645,000 $ (9,027,000) $ 47,618,000
============ ============ ============ ============
December 31, 2003 $ 405,000 $ 66,978,000 $ (9,863,000) $ 57,115,000
============ ============ ============ ============
17. Concentration of Risk
As of December 31, 2004, Legacy Marketing sold and administered its
products primarily on behalf of five unaffiliated insurance carriers: American
National, Transamerica, John Hancock, Investors Insurance and IL Annuity.
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 began in the second quarter of 2002):
2004 2003 2002
---- ---- ----
American National 25% 37% 17%
Transamerica 24% 25% 52%
Investors Insurance 27% 23% 6%
IL Annuity 9% 6% 12%
John Hancock 2% 3% 8%
39
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:
2004 2003 2002
---- ---- ----
BenchMark(SM) series (sold on behalf of American National) 24% 37% 16%
SelectMark(R) series (sold on behalf of Transamerica) 24% 25% 51%
MarkOne(SM) series (sold on behalf of Investors Insurance) 23% 23% 6%
VisionMark(SM) series (sold on behalf of IL Annuity) 7% 4% 11%
SummitMark(SM) series (sold on behalf of Investors Insurance) 4% 0% 0%
AssureMark(SM) series (sold on behalf of John Hancock) 2% 3% 8%
40
Supplementary Data
Quarterly Financial Information (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter Year
------------- -------------- ------------- -------------- ------------
2004
Total revenue $ 11,961,000 $ 10,110,000 $ 7,881,000 $ 7,433,000 $ 37,385,000
Operating loss $ (995,000) $ (1,826,000) $ (2,409,000) $ (3,102,000) $ (8,332,000)
Net loss $ (520,000) $ (1,049,000) $ (1,403,000) $ (4,495,000) $ (7,467,000)
Basic and diluted earnings per share:
Loss available to common shareholders $ (0.02) $ (0.04) $ (0.06) $ (0.17) $ (0.29)
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
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 29, 2005 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 29, 2005
42
Schedule II - Valuation and Qualifying Accounts
Additions Deductions
Balance at charged to charged to Balance
beginning costs and costs and at end of
of period expenses expenses period
--------- --------- --------- ---------
2004
Allowance for uncollectible accounts $ 866,000 $ 94,000 $(391,000) $ 569,000
State net operating loss carryforward
valuation allowance $ 385,000 $ 536,000 $ -- $ 921,000
State alternative minimum tax credit
carryforward valuation allowance $ -- $ 181,000 $ -- $ 181,000
Producer stock option deferred tax
valuation allowance $ -- $ 885,000 $ -- $ 885,000
2003
Allowance for uncollectible accounts $ 760,000 $ 306,000 $(200,000) $ 866,000
State net operating loss carryforward
valuation allowance $ 362,000 $ 23,000 $ -- $ 385,000
2002
Allowance for uncollectible accounts $ 437,000 $ 440,000 $(117,000) $ 760,000
State net operating loss carryforward
valuation allowance $ 264,000 $ 98,000 $ -- $ 362,000
43
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure 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 December 31, 2004. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective. 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 ended
December 31, 2004 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 quarter
ended December 31, 2004.
The Company has a Disclosure Committee, consisting of certain executives
of the Company. The Disclosure Committee meets quarterly as part of the closing
process and reviews 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 also reviews detailed
analytics of the Company's performance and assesses 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.
Item 9B. Other Information
None.
44
PART III
Item 10. Directors and Executive Officers of the Company
Information required by Items 401, 405 and 406 of Regulation S-K will be
contained in the Company's Definitive Proxy Statement in the section titled
"Election of Directors." Such information is incorporated herein by reference.
We have a Finance Code of Professional Conduct that applies to our Chief
Executive Officer, President and Chief Financial Officer, Chief Information
Officer, Chief Operations Officer, Chief Marketing Officer, Vice President of
Product Development, Vice President, LFS Marketing, directors and employees of
the finance organization. The Finance Code of Professional Conduct can be
accessed at our Website at www.legacynet.com. Printed copies may be obtained,
free of charge, by writing to our Chief Financial Officer at 2090 Marina Avenue,
Petaluma, California 94954.
Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the
Securities and Exchange Commission (the "SEC") and the National Association of
Securities Dealers, Inc. Such officers, directors and ten-percent stockholders
are also required by SEC rules to furnish the Company with copies of all such
forms that they file. The Company believes that during 2004 all Section 16(a)
filing requirements applicable to its officers, directors and ten-percent
stockholders were complied with, except that Lynda Regan filed one Form 4 late
on January 14, 2005 that covered seven transactions and Preston Pitts filed one
Form 4 late on January 14, 2005 that covered three transactions.
Item 11. Executive Compensation
Information required by Item 11 will be contained in the Company's
Definitive Proxy Statement in the section titled "Executive Compensation." Such
information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Any information required by Item 12, except for the information set forth
below, will be contained in the Company's Definitive Proxy Statement in the
section titled "Security Ownership of Certain Beneficial Owners and Management."
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) 8,789,000 $1.50 12,211,000
<FN>
(1) Includes the Regan Holding Corp. Producer Stock Option and Award Plan and
the Regan Holding Corp. 1998 Stock Option Plan
</FN>
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 "Certain Relationships and
Related Transactions." Such information is incorporated herein by reference.
Item 14. Principal Accounting 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 is incorporated by reference herein.
45
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Index to Exhibits and Financial Statement Schedules:
1. The following financial statements are included in Item 8:
(i) Report of Independent Registered Public Accounting
Firm.
(ii) Consolidated Balance Sheet as of December 31, 2004 and
2003.
(iii) Consolidated Statement of Operations for the years
ended December 31, 2004, 2003, and 2002.
(iv) Consolidated Statement of Shareholders' Equity for the
years ended December 31, 2004, 2003, and 2002.
(v) Consolidated Statement of Cash Flows for the years
ended December 31, 2004, 2003, and 2002.
(vi) Notes to Consolidated Financial Statements.
2. Financial statement schedules - schedule II - valuation and
qualifying accounts
3. See(b) below.
(b) 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(b)(1) Amendment One to the Marketing Agreement with American National
Insurance Company. (8)
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)
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(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 nine 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.
(8) Incorporated herein by reference to the Company's quarterly Form 10-Q for
the nine months ended September 30, 2003.
46
10(i)(1) Amendment One to Marketing Agreement with Transamerica Life Insurance
and Annuity Company.(10)
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(i)(7) Amendment Seven to Marketing Agreement with Transamerica Life
Insurance and Annuity Company. (5)
10(i)(8) Amendment Ninth to Marketing Agreement with Transamerica Life
Insurance and Annuity Company. (5)
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(j)(10) Amendment Nine to Administrative Services Agreement with Transamerica
Life Insurance and Annuity Company. (5)
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) Promissory Note by and between Regan Holding Corp. and Washington
Mutual Bank FA, dated July 10, 2002. (7)
10(n) Producer Stock Award and Stock Option Plan, as amended.(3)
10(n)(1) 1998 Stock Option Plan, as amended.(3)
10(o) Purchase Option Agreement between SCOR Life U.S. Re Insurance Company
and the Company executed on November 23, 2003. (11)
10(p) Commercial Note between SunTrust Bank and the Company executed April
23, 2004. (12)
10(q) Administrative Services Agreement, effective June 5, 2002, between
Investors Insurance Corporation and Legacy Marketing Group. (5)
10(r) Marketing Agreement, effective June 5, 2002, between Investors
Insurance Corporation and Legacy Marketing Group. (5)
21 Subsidiaries of Regan Holding Corp.
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 Financial 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.
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(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.
(5) Incorporated herein by reference to the Company's registration statement
on Form S-2 (post-effective amendment no. 5) dated July 23, 2004.
(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 January
29, 2004.
(12) Incorporated herein by reference to the Company's quarterly report on From
10-Q for the six months ended June 30, 2004.
47
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: /s/ Lynda L. Regan Date: March 31, 2005
- ----------------------------------
Lynda L. Regan
Chairman of the Board of Directors
and Chief Executive Officer
By: /s/ R. Preston Pitts Date: March 31, 2005
- ----------------------------------
R. Preston Pitts
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 31, 2005
- ----------------------------------
Lynda L. Regan
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ R. Preston Pitts Date: March 31, 2005
- ----------------------------------
R. Preston Pitts
Director, President
(Principal Financial and Accounting Officer)
By: /s/ Donald Ratajczak Date: March 31, 2005
- ----------------------------------
Donald Ratajczak
Director
By: /s/ Ute Scott-Smith Date: March 31, 2005
- ----------------------------------
Ute Scott-Smith
Director
By: /s/ J. Daniel Speight, Jr Date: March 31, 2005
- ----------------------------------
J. Daniel Speight, Jr. Director
48