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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2005
or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
____________
Commission File Number: 0-19704
REGAN HOLDING CORP.
(Exact name of registrant as specified in its charter)
California 68-0211359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2090 Marina Avenue, Petaluma, CA 94954
(Address of principal executive offices) (Zip Code)
707-778-8638
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 5, 2005, there were 23,634,000 shares of Common Stock-Series
A outstanding and 553,000 shares of Common Stock-Series B outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
Assets
Cash and cash equivalents $ 1,021,000 $ 4,348,000
Trading investments 7,915,000 7,900,000
Accounts receivable, net of allowance of $239,000 and $569,000
at September 30, 2005 and December 31, 2004 1,757,000 1,496,000
Option to purchase Investors Insurance Company -- 2,975,000
Income taxes receivable 580,000 755,000
Prepaid expenses and deposits 622,000 705,000
Deferred taxes -- 772,000
------------ ------------
Total current assets 11,895,000 18,951,000
------------ ------------
Net fixed assets 23,714,000 27,675,000
Intangible assets, net 67,000 122,000
Notes receivable 888,000 672,000
Other assets 168,000 198,000
------------ ------------
Total non current assets 24,837,000 28,667,000
------------ ------------
Total assets $ 36,732,000 $ 47,618,000
============ ============
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 5,397,000 $ 5,243,000
Current portion of notes and loan payable 2,888,000 199,000
------------ ------------
Total current liabilities 8,285,000 5,442,000
------------ ------------
Deferred compensation payable 7,957,000 7,748,000
Deferred tax liabilities -- 1,242,000
Other liabilities 121,000 854,000
Notes payable, less current portion 9,536,000 9,708,000
------------ ------------
Total non current liabilities 17,614,000 19,552,000
------------ ------------
Total liabilities 25,899,000 24,994,000
------------ ------------
Redeemable common stock, Series A and B 6,294,000 7,486,000
------------ ------------
Shareholders' equity
Preferred stock, no par value: Authorized: 100,000,000 shares;
No shares issued or outstanding -- --
Series A common stock, no par value:
Authorized: 45,000,000 shares; issued and outstanding: 20,956,000 shares
and 20,912,000 shares at September 30, 2005 and December 31, 2004 3,916,000 3,847,000
Paid-in capital 6,530,000 6,522,000
Retained earnings (deficit) (5,907,000) 4,769,000
------------ ------------
Total shareholders' equity 4,539,000 15,138,000
------------ ------------
Total liabilities, redeemable common stock, and shareholders' equity $ 36,732,000 $ 47,618,000
============ ============
See notes to financial statements.
2
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue
Marketing allowances and commission overrides $ 3,180,000 $ 3,838,000 $ 10,394,000 $ 16,788,000
Trailing commissions 1,004,000 1,165,000 3,133,000 3,655,000
Administrative fees 2,222,000 2,541,000 6,816,000 8,252,000
Other revenue 343,000 337,000 885,000 1,257,000
------------ ------------ ------------ ------------
Total revenue 6,749,000 7,881,000 21,228,000 29,952,000
------------ ------------ ------------ ------------
Expenses
Selling, general and administrative 7,599,000 8,637,000 25,513,000 29,475,000
Depreciation and amortization 1,006,000 1,050,000 3,210,000 3,255,000
Goodwill impairment losses -- -- -- 679,000
Internal use software impairment loss -- -- 2,939,000 --
Other 550,000 603,000 1,824,000 1,775,000
------------ ------------ ------------ ------------
Total expenses 9,155,000 10,290,000 33,486,000 35,184,000
------------ ------------ ------------ ------------
Operating loss (2,406,000) (2,409,000) (12,258,000) (5,232,000)
------------ ------------ ------------ ------------
Other income
Investment income, net 60,000 158,000 474,000 411,000
Interest expense (32,000) (2,000) (45,000) (7,000)
------------ ------------ ------------ ------------
Total other income, net 28,000 156,000 429,000 404,000
------------ ------------ ------------ ------------
Loss before income taxes (2,378,000) (2,253,000) (11,829,000) (4,828,000)
Provision for (benefit from) income taxes 181,000 (850,000) (282,000) (1,856,000)
------------ ------------ ------------ ------------
Net loss before reduction of redeemable
common stock (2,559,000) (1,403,000) (11,547,000) (2,972,000)
Reduction of redeemable common stock -- -- 871,000 29,000
------------ ------------ ------------ ------------
Net loss to common shareholders $ (2,559,000) $ (1,403,000) $(10,676,000) $ (2,943,000)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.11) $ (0.06) $ (0.44) $ (0.12)
Weighted average shares outstanding used to
compute basic and diluted net loss per share 24,220,000 23,672,000 24,285,000 23,865,000
See notes to financial statements.
3
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Retained
Series A Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
Balance December 31, 2004 20,912,000 $ 3,847,000 $ 6,522,000 $ 4,769,000 $ 15,138,000
Net loss (11,547,000) (11,547,000)
Exercise of stock options 44,000 69,000 69,000
Reduction to redemption value of
redeemable common stock 871,000 871,000
Producer stock option expense 8,000 8,000
------------ ------------ ------------ ------------ ------------
Balance September 30, 2005 (unaudited) 20,956,000 $ 3,916,000 $ 6,530,000 $ (5,907,000) $ 4,539,000
============ ============ ============ ============ ============
See notes to financial statements.
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
------------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $(11,547,000) $ (2,972,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,210,000 3,255,000
Losses on write-off of fixed assets 3,051,000 64,000
Impairment of goodwill -- 679,000
Reduction of allowance for doubtful accounts (330,000) (249,000)
Gains on trading securities, net (211,000) (181,000)
Other 8,000 (84,000)
Changes in operating assets and liabilities:
Sales (purchases) of trading securities, net 196,000 (485,000)
Accounts receivable 69,000 2,183,000
Prepaid expenses and deposits 83,000 (15,000)
Income taxes receivable 175,000 (1,987,000)
Deferred taxes (470,000) 110,000
Accounts payable and accrued liabilities 154,000 (5,132,000)
Deferred compensation payable 209,000 638,000
Other operating assets and liabilities (703,000) 913,000
------------ ------------
Net cash used in operating activities: (6,106,000) (3,263,000)
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (2,101,000)
Proceeds from sales and maturities of available-for-sale securities -- 5,536,000
Purchases of fixed assets (2,245,000) (6,629,000)
Proceeds from (issuance of) notes receivable, net (216,000) 65,000
Option to purchase Investors Insurance Company 2,975,000 (1,775,000)
------------ ------------
Net cash provided by (used in) investing activities: 514,000 (4,904,000)
------------ ------------
Cash flows from financing activities:
Proceeds from notes and loan payable 2,680,000 5,025,000
Payments of notes payable (163,000) (2,461,000)
Repurchases of redeemable common stock (321,000) (851,000)
Stock option exercises 69,000 --
Voluntary repurchases of common stock -- (145,000)
------------ ------------
Net cash provided by financing activities: 2,265,000 1,568,000
------------ ------------
Net decrease in cash and cash equivalents (3,327,000) (6,599,000)
Cash and cash equivalents, beginning of period 4,348,000 9,908,000
------------ ------------
Cash and cash equivalents, end of period $ 1,021,000 $ 3,309,000
============ ============
See notes to financial Statements.
5
REGAN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in
conformity with accounting principles generally accepted in the United
States of America and include the accounts of Regan Holding Corp. (the
"Company") and its wholly owned subsidiaries. All intercompany transactions
have been eliminated.
The Consolidated Financial Statements are unaudited but reflect all
adjustments, consisting only of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair statement of the Company's
consolidated financial position and results of operations. The results for
the three months and nine months ended September 30, 2005, are not
necessarily indicative of the results to be expected for the entire year.
These unaudited Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
2004, which was filed by the Company with the Securities and Exchange
Commission on March 31, 2005.
2. Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement No. 154, "Accounting Changes and Error Corrections, a replacement
of Accounting Principles Board ("APB") Opinion No. 20 and FASB Statement
No. 3" ("FAS 154"). FAS 154 provides guidance on the accounting for, and
reporting of, a change in accounting principle, in the absence of explicit
transition requirements specific to a newly adopted accounting principle.
Previously, most voluntary changes in accounting principles were required
to be recognized by way of a cumulative effect adjustment within net income
during the period of the change. FAS 154 requires retrospective application
to prior periods' financial statements, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of
the change. FAS 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005. The Company does not believe that
the adoption of FAS 154 will have a material effect on its consolidated
financial position, results of operations or cash flows.
3. Stock Options
The Company has a stock-based employee compensation plan and accounts for
this plan under the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected in
the 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 loss and loss per share
if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," to stock-based employee compensation:
6
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss available for common shareholders, as reported $ (2,559,000) $ (1,403,000) $(10,676,000) $ (2,943,000)
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related tax effects (10,000) (75,000) (43,000) (212,000)
------------ ------------ ------------ ------------
Pro forma net loss available for common shareholders $ (2,569,000) $ (1,478,000) $(10,719,000) $ (3,155,000)
============ ============ ============ ============
Loss per share:
Basic and diluted - as reported $ (0.11) $ (0.06) $ (0.44) $ (0.12)
Basic and diluted - pro forma $ (0.11) $ (0.06) $ (0.44) $ (0.13)
In December 2004, the FASB issued SFAS No. 123R, "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 fair value of the award on
the date of grant. This eliminates the exception to account for such awards
using the intrinsic method previously allowable under APB Opinion No. 25.
In April 2005, the Securities and Exchange Commission adopted a rule that
delayed the compliance dates for adoption of SFAS 123R, which the Company
had previously been required to adopt no later than July 1, 2005. The SEC's
rule allows companies to implement SFAS 123R at the beginning of their next
fiscal year. As a result, the Company intends to adopt SFAS 123R effective
January 1, 2006. The Company continues to assess the potential impact of
the adoption of SFAS No. 123R on its financial position, results of
operations or statement of cash flows.
4. Loss per Share
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss $ (2,559,000) $ (1,403,000) $(11,547,000) $ (2,972,000)
Reduction of redeemable common stock -- -- 871,000 29,000
------------ ------------ ------------ ------------
Net loss available for common shareholders $ (2,559,000) $ (1,403,000) $(10,676,000) $ (2,943,000)
============ ============ ============ ============
Weighted average shares used to compute basic and
diluted net loss per share 24,220,000 23,672,000 24,285,000 23,865,000
============ ============ ============ ============
Basic and diluted net loss per share $ (0.11) $ (0.06) $ (0.44) $ (0.12)
============ ============ ============ ============
As the Company incurred net losses in the periods presented, options to
purchase 7.9 million and 15.5 million shares of the Company's common stock
as of September 30, 2005 and 2004 were excluded from the computation of
diluted net loss per share, as the effect would have been antidilutive.
5. Comprehensive Loss
Total comprehensive loss for the three and nine months ended September 30,
2005, was $2,559,000 and $11,547,000. For the three and nine months ended
September 30, 2004, total comprehensive loss was $1,434,000 and $3,028,000.
6. 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 Corporation ("Investors
Insurance"). Pursuant to the terms of the agreement, SCOR granted the
Company the right to purchase the outstanding capital stock of Investors
7
Insurance in exchange for annual option fees. The Company had the right to
exercise the option at any time on or prior to June 30, 2005, or terminate
the Option Agreement in accordance with its terms before such date if the
A.M. Best rating of Investors Insurance declined below a specified level.
The A.M. Best rating of Investors Insurance fell below the specified level.
On June 22, 2005, the Company terminated the Option Agreement, and SCOR has
repaid the option fees paid by the Company pursuant to the Option
Agreement, including interest, totaling approximately $3.3 million.
7. Notes and Loan Payable
The Company has a mortgage on its office building in Petaluma, California.
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. 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 September 30, 2005, the balance due
on the note was $7.0 million.
The Company also has a mortgage on its office building in Rome, Georgia.
The note has a variable interest rate indexed to 30-day LIBOR plus 1.9% and
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 September 30, 2005, 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 a variable rate indexed to 30-day LIBOR
plus 1.9%.
The Company has obtained a loan from its investment broker. The loan bears
interest at the lender's base lending rate plus a surcharge based on the
amount of the loan (7.75% at September 30, 2005), and is collateralized by
the Company's investment portfolio. As of September 30, 2005, $2.7 million
remained payable under this arrangement.
8. Income Taxes
The rate of benefit for income taxes for the three months and nine months
ended September 30, 2005, differs from the federal and state statutory rate
primarily due to the establishment of a valuation allowance against
existing deferred tax assets in the amount of $1.1 million and $4.3
million.
9. 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.
In April 2004 the Company entered into an interest rate swap agreement with
a current notional amount of $2.8 million to hedge the interest expense
associated with its LIBOR-based borrowings. The Company designated the
interest rate swap as a qualifying cash flow hedge under SFAS 133.
10. Impairment of Goodwill
During the second quarter of 2004, due to the failure of Values Financial
Network, Inc. ("VFN"), a wholly owned subsidiary of the Company, 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
8
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 of $679,000 during the second quarter
of 2004.
11. Impairment of Internal Use Software
In 1998, the Company began a project intending to replace its existing
policy administration system with new licensed software after the vendor of
the existing policy administration system required the Company to migrate
from the existing 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. As a result of an evaluation of the
Company-wide technological needs, which included an assessment of the
viability of the existing system, it was concluded that the Company would
use both systems. 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.
In 2004, the Company began the process of creating a new technology
architecture, the intent of which was to implement a multi-tiered structure
that would allow the Company to continue to use its existing administration
system to administer its current business while using the new
administration system for new products and carriers.
In 2005, the Company conducted further independent research, including
consultation with industry experts about software solutions currently
available in the marketplace and the benefits that companies, which are
employing these systems, are receiving. In the second quarter of 2005, the
Company concluded that the advances in technology and functionality that
these new designs have delivered, along with the associated financial
benefits, are greater than the Company would realize by completing its
plans to implement its new administration system. In addition, the vendor
of the Company's new administration system announced that it will no longer
be providing the appropriate updates for the system to the licensed users
for all future regulatory changes, and that it will be the responsibility
of each company that uses the system to modify the system for such changes.
As a result, management determined that the internal use software project
associated with the new administration system had been impaired, and in the
second quarter of 2005, the Company recorded a write-off of $2.9 million
associated with abandoned components of the internal use software project.
9
12. Segment Information
Total Revenue Net Loss
------------------------------------------------------- --------------------------------------------------------
Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
------------------------- -------------------------- -------------------------- ---------------------------
2005 2004 2005 2004 2005 2004 2005 2004
------------ ----------- ------------ ------------ ------------ ------------ ------------- ------------
Legacy Marketing
Group $ 5,989,000 $ 7,116,000 $ 18,923,000 $ 27,523,000 $ (2,015,000) $ (1,162,000) $ (9,773,000) $ (1,747,000)
Legacy Financial
Services, Inc. 804,000 836,000 2,524,000 2,651,000 (18,000) (85,000) (145,000) (195,000)
Imagent Online, LLC 52,000 83,000 150,000 217,000 (434,000) (77,000) (1,341,000) (353,000)
Values Financial
Network, Inc. -- 10,000 4,000 30,000 (92,000) (79,000) (288,000) (677,000)
Intercompany
Eliminations (96,000) (164,000) (373,000) (469,000) -- -- -- --
------------ ----------- ------------ ------------ ------------ ------------ ------------- ------------
Total $ 6,749,000 $ 7,881,000 $ 21,228,000 $ 29,952,000 $ (2,559,000) $ (1,403,000) $ (11,547,000) $ (2,972,000)
============ =========== ============ ============ ============ ============ ============= ============
Total Assets
--------------------------------
September 30, December 31,
2005 2004
------------ ------------
Legacy Marketing Group $ 39,513,000 $ 50,487,000
Legacy Financial Services, Inc. 1,607,000 1,512,000
Imagent Online, LLC 2,416,000 2,514,000
Values Financial Network, Inc. 1,860,000 2,069,000
Other -- 63,000
Intercompany Eliminations (8,664,000) (9,027,000)
------------ ------------
Total $ 36,732,000 $ 47,618,000
============ ============
In June 2005, management of the Company authorized the dissolution of its
Other segment, Legacy Reinsurance Company ("Legacy Re"). The dissolution
became effective in July 2005. Legacy Re did not have any results of
operations in the nine months ended September 30, 2005 and 2004.
13. Potential Sale of Building
On July 25, 2005, the Company entered into a sale/leaseback agreement (the
"Agreement") with a potential buyer. Pursuant to the terms of the
Agreement, the Company will sell its office buildings in Petaluma,
California, to the potential buyer for a purchase price of $13.1 million.
Concurrently with the sale of the buildings, the Company and the potential
buyer will enter into a ten year lease agreement, whereby the Company will
lease back (i) 71,612 square feet for a period not to exceed eighteen
months and (ii) between 35,612 and 51,612 square feet for the remainder of
the lease term. The monthly base rent will be $1.30 per square foot and
will increase annually by three percent during the term of the lease, in
addition to property taxes and operating expenses. Pursuant to the terms of
the lease, the Company will initiate a standby letter of credit in the
amount of $1.0 million, naming the potential buyer as the beneficiary. The
potential buyer will be allowed to draw upon the letter of credit in the
event of a default under the terms of the lease. The extent of such draw by
the potential buyer will be limited to the amount necessary to cure the
default. Additionally, the amount of the letter of credit will be reduced
if the Company meets certain profitability criteria as specified in the
Agreement and at the expiration of the lease the remaining balance will be
returned to the Company. The transactions contemplated by the Agreement
have not yet been consummated and there is no certainty as to when and if
the transactions will close. We currently have the right to terminate the
Agreement and keep the $250,000 down payment paid by the potential buyer.
If the transactions contemplated by the Agreement are consummated, the
Company will pay the outstanding balance on, and all the amounts due under,
the mortgage on the property.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain statements contained in this document, including Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of Regan Holding
Corp. and its businesses to be materially different from those 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 located in our Annual Report on Form 10-K for the year ended December
31, 2004.
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.
Recent Industry Developments
During the past year, several federal, state and insurance self-regulatory
organization proposals have been made that could affect our business. As
discussed below, a few of these proposals have become effective, and others may
be made or adopted.
In December 2004, the National Association of Insurance Commissioners (the
"NAIC") approved amendments to the NAIC's Producer Licensing Model Act (the
"Model 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, are not required to disclose the amount of
compensation received from the insurer. However, under the Model Act, producers
are required to disclose to the customer, prior to selling insurance to that
customer, that the producer will be receiving compensation from the insurer, or
that the producer represents the insurer and may provide services to the
customer for the insurer. Arkansas and Rhode Island have adopted regulations
based on the Model Act and other states are considering similar regulation or
legislation.
In early 2005, the California Department of Insurance had proposed
regulations that would have statutorily imposed fiduciary duties and certain
mandatory disclosure obligations on insurance agents and brokers. In November
2005, the Department announced that it would suspend efforts to push such
regulation at this time.
Also this year, the Securities and Exchange Commission informed certain
issuers of equity-linked annuities that it is examining whether such annuities
need to be registered under the Securities Act of 1933. On August 8, 2005, the
NASD issued guidance to its members indicating that broker-dealers regulated by
the NASD have certain responsibilities with respect to the offer and sale of
equity-linked annuities, including an obligation to determine the suitability of
11
such products for their customers, regardless of whether equity-linked annuities
are deemed to be securities. Finally, some state insurance regulators are
considering whether additional suitability regulations should be implemented
with respect to all sales of fixed annuities, particularly with respect to
senior citizens. In California, Commissioner Garamendi issued a letter on
October 7, 2005, to California life insurance companies urging them to develop
suitability standards for the sale of annuity products to seniors, and the
California Department of Insurance has sponsored a legislative measure that
would require the industry to establish such insurer suitability standards. The
bill may be considered by the California legislature in 2006.
Our core business consists of selling fixed annuity products on behalf of
insurance carriers through a network of approximately 24,500 Producers. If
amendments to the Model Act or regulations with similar provisions are adopted
by states in which we conduct business, the way in which we and the Producers
conduct business could be affected. Similarly, if the initiatives undertaken by
California and other states, the Securities and Exchange Commission or the NASD
with respect to equity-linked and other annuities result in new regulation or
legislation, our operations and those of our Producers could be adversely
affected. We are unable to predict whether or which of these initiatives will
result in new laws or regulations, or whether the recent initiative of IBA West
or other initiatives may affect our business and the demand for fixed annuity
products marketed by Legacy Marketing. It is possible, however, that if such
proposals or initiatives result in new regulation or laws, they could have a
material adverse effect on the insurance industry in general or on our financial
condition and results of operations.
Overview
On July 25, 2005, we entered into a sale/leaseback agreement (the
"Agreement") with a potential buyer. Pursuant to the terms of the Agreement, we
will sell our office buildings in Petaluma, California to the potential buyer
for a purchase price of $13.1 million. Concurrently with the sale of the
buildings, Regan Holding Corp. and the potential buyer will enter into a ten
year lease agreement, whereby we will lease back (i) 71,612 square feet for a
period not to exceed eighteen months and (ii) between 35,612 and 51,612 square
feet for the remainder of the lease term. The monthly base rent will be $1.30
per square foot and will increase annually by three percent during the term of
the lease, in addition to property taxes and operating expenses. Pursuant to the
terms of the lease, we will initiate a standby letter of credit in the amount of
$1.0 million, naming the potential buyer as the beneficiary. The potential buyer
will be allowed to draw upon the letter of credit in the event of a default
under the terms of the lease. The extent of such draw by the potential buyer
will be limited to the amount necessary to cure the default. Additionally, the
amount of the letter of credit will be reduced if we meet certain profitability
criteria as specified in the Agreement and at the expiration of the lease the
remaining balance will be returned to us. The transactions contemplated by the
Agreement have not yet been consummated and there is no certainty as to when and
if the transactions will close. We currently have the right to terminate the
Agreement and keep the $250,000 down payment paid by the potential buyer. If the
transactions contemplated by the Agreement are consummated, we will pay the
outstanding balance on, and all the amounts due under, the mortgage on the
property.
On June 14, 2005, we agreed with AmerUs Annuity Group Co. ("AmerUs"), the
parent company of IL Annuity, on the process to be followed for the Company to
provide reasonable assistance to AmerUs to transition to AmerUs the
administration of certain IL Annuity insurance contracts in accordance with the
provisions of the administrative agreement between Legacy Marketing and IL
Annuity. Legacy Marketing has been administering these products under the terms
of the administrative agreement since January 1, 1996. The administrative
agreement is scheduled to expire on December 31, 2005. We are in negotiations
with AmerUs with respect to the possible acceleration or deferral of the
expiration date of the administrative agreement. In the nine months ended
September 30, 2005, we received approximately $1.3 million in gross revenue
under the administrative agreement. We are examining our expenses associated
with this block of business and evaluating the impact such termination or
expiration is likely to have on our financial condition and results of
operations. Termination of the administrative agreement will not affect the
commissions earned by Legacy Marketing on additional premium received or assets
under management with respect to the underlying IL Annuity insurance contracts.
On July 1, 2002, we 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 Corporation ("Investors Insurance"). Pursuant to
the terms of the agreement, SCOR granted us the right to purchase the
outstanding capital stock of Investors Insurance in exchange for annual option
fees. We had the right to exercise the option at any time on or prior to June
30, 2005, or terminate the Option Agreement in accordance with its terms before
such date if the A.M. Best rating of Investors Insurance declined below a
specified level. The A.M. Best rating of Investors Insurance fell below the
specified level. On June 22, 2005, we terminated the Option Agreement, and SCOR
has repaid the option fees paid by us pursuant to the Option Agreement,
including interest, totaling approximately $3.3 million.
12
In 1998, we began a project intending to replace our existing policy
administration system with new licensed software after the vendor of the
existing policy administration system required us to migrate from the existing
system to an alternative platform. In late 2002, we learned from the vendor that
we might be able to retain the existing system. Modification and customization
of the licensed software was suspended in December of 2002. As a result of an
evaluation of the Company-wide technological needs, which included an assessment
of the viability of the existing system, it was concluded that we would use both
systems. In the fourth quarter of 2003 we recorded a write-off of $1.1 million
associated with the abandoned components of the software costs.
In 2004, we began the process of creating a new technology architecture,
the intent of which was to implement a multi-tiered structure that would allow
us to continue to use the existing administration system to administer our
current business while using the new administration system for new products and
carriers.
In 2005, we conducted further independent research, including consultation
with industry experts about software solutions currently available in the
marketplace and the benefits that companies, which are employing these systems,
are receiving. In the second quarter of 2005, we concluded that the advances in
technology and functionality that these new designs have delivered, along with
the associated financial benefits, are greater than we would realize by
completing our plans to implement the new administration system. In addition,
the vendor of the new administration system announced that it will no longer be
providing the appropriate updates for the system to the licensed users for all
future regulatory changes, and that it will be the responsibility of each
company that uses the system to modify the system for such changes. As a result,
management determined that the internal use software project associated with the
new administration system has been impaired, and in the second quarter of 2005,
we recorded a write-off of $2.9 million associated with abandoned components of
the internal use software project.
Regan Holding Corp. Consolidated
We had a consolidated net loss of $2.6 million during the three months
ended September 30, 2005, compared to a consolidated net loss of $1.4 million
during the same period in 2004. For the nine months ended September 30, 2005, we
had a consolidated net loss of $11.5 million compared to a consolidated net loss
of $3.0 million during the same period in 2004. The increased losses of $1.2
million and $8.5 million were primarily due to higher net losses incurred by
Legacy Marketing Group ("Legacy Marketing") and Imagent Online, LLC ("Imagent").
Legacy Marketing
During the three months ended September 30, 2005, Legacy Marketing had a
net loss of $2.0 million, compared to a net loss of $1.2 million during the same
period in 2004. For the nine months ended September 30, 2005, Legacy Marketing
had a net loss of $9.8 million, compared to a net loss of $1.7 million during
the same period in 2004. The increased losses were primarily due to decreased
revenue and an increase in the valuation allowance associated with the Company's
deferred tax assets, partially offset by decreased selling, general and
administrative expenses. Additionally, we recorded internal use software
impairment losses in the second quarter of 2005, which contributed to the
increased losses in the nine months ended September 30, 2005. Excluding the
effect of the internal use software impairment losses and the increase in the
deferred tax asset valuation allowances, Legacy Marketing's net loss for the
three months and nine months ended September 30, 2005, would have been $1.1
million and $4.1 million.
During the three months and nine months ended September 30, 2005, Legacy
Marketing's commissions and marketing allowances decreased $664,000 (20%) and
$6.4 million (43%) compared to the same periods in 2004. The decrease was
primarily due to an overall decrease in sales of fixed annuities issued by
Legacy Marketing's carriers.
Legacy Marketing experienced a decrease in sales of fixed annuities issued
by Investors Insurance during the three months and nine months ended September
30, 2005, compared to the same periods in 2004. We believe the decrease in the
nine months ended September 30, 2005 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. As a result, sales of fixed annuities issued by
Investors Insurance began to decline significantly in the second quarter of 2004
and continued to decline through the end of 2004. In addition, we discontinued
selling fixed annuity products issued by Investors Insurance in certain states
during 2005 due to changes in regulatory requirements related to minimum
guaranteed rates, which contributed to the decrease in sales of fixed annuities
13
during the three and nine months ended September 30, 2005, compared to the same
periods in 2004. Revenues from the sales and administration of Investors
Insurance products decreased $961,000 and $3.7 million during the three months
and nine months ended September 30, 2005, compared to the same periods in 2004.
Revenue from sales and administration of Investors Insurance products accounted
for 19% and 21% of our total consolidated revenue during the three months and
nine months ended September 30, 2005.
Over the last two years, the low interest rate environment has caused many
carriers that issue declared rate annuities, such as American National Insurance
Company ("American National"), to reduce crediting rates and compensation on
certain products. Sales of these products accounted for approximately 2% and 3%
of our total consolidated revenue for the three months ended September 30, 2005
and 2004, and 3% and 9% of our total consolidated revenue for the nine months
ended September 30, 2005 and 2004. In addition, the fixed annuity industry is
experiencing a relative shift in sales from declared rate annuities to
equity-indexed annuities. As a result, sales of the American National products
in the third quarter and year-to-date 2005 were lower compared to the same
periods in 2004. Revenue derived from sales and administration of American
National products decreased $607,000 and $2.2 million during the three months
and nine months ended September 30, 2005, compared to the same periods in 2004.
Revenue from sales and administration of American National products accounted
for approximately 21% and 24% of our total consolidated revenue for the three
months and nine months ended September 30, 2005.
Legacy Marketing's annuity sales were also negatively affected by
Transamerica Life Insurance Company ("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 18% and 19% of our total
consolidated revenue for the three months and nine months ended September 30,
2005, and approximately 20% and 26% of our total consolidated revenue for the
three months and nine months ended September 30, 2004. Revenues derived from
sales and administration of Transamerica products decreased $335,000 and $3.7
million during the three months and nine months ended September 30, 2005,
compared to the same periods in 2004. 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's annuity sales were positively impacted in 2005 by
revenue derived from sales and administration of products issued by Americom
Life & Annuity Insurance Company ("Americom"), an unaffiliated insurance
carrier. In June 2004, Legacy Marketing entered into marketing and
administrative services agreements with Americom. Legacy Marketing began
marketing and administering Americom products in November 2004. Revenue derived
from sales and administration of Americom products accounted for approximately
14% and 9% of our total consolidated revenue for the three months and nine
months ended September 30, 2005.
Administrative fees decreased $310,000 (13%) and $1.4 million (17%) during
the three months and nine months ended September 30, 2005, compared to the same
periods in 2004, primarily due to decreased issuing and maintenance fees
resulting from decreased fixed annuity sales.
During the three months and nine months ended September 30, 2005, Legacy
Marketing sold and administered products primarily on behalf of four
unaffiliated insurance carriers: American National, Investors Insurance,
Transamerica and Americom. As indicated below, the agreements with these
carriers generated a significant portion of our total consolidated revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2005 2004 2005 2004
---- ---- ---- ----
American National 21% 26% 24% 24%
Investors Insurance
Corporation 19% 28% 21% 28%
Transamerica 18% 20% 19% 26%
Americom 14% N/A 9% N/A
Legacy Marketing also performs administrative services for products issued
by John Hancock Variable Life Insurance Company and IL Annuity and Insurance
Company.
14
Our consolidated revenues were derived primarily from sales and
administration of the following annuity products:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2005 2004 2005 2004
---- ---- ---- ----
BenchMark(SM) series (sold on behalf of American National) 20% 24% 22% 23%
SelectMark(R) series (sold on behalf of Transamerica) 18% 20% 19% 26%
AmeriMark(SM) series (sold on behalf of Americom) 14% N/A 9% N/A
MarkOne(SM) series (sold on behalf of Investors Insurance
Corporation) 11% 19% 14% 24%
Legacy Marketing's expenses decreased $1.3 million (15%) during the three
months ended September 30, 2005, compared to the three months ended September
30, 2004, primarily due to decreases in selling, general and administrative
expenses. Excluding the $2.9 million impairment charge for internal use
software, Legacy Marketing's expenses decreased $4.3 million (14%) during the
nine months ended September 30, 2005, compared to the same period in 2004.
Selling, general and administrative expenses decreased $1.2 million (15%) and
$4.0 million (15%) during the three months and nine months ended September 30,
2005, compared to the same periods in 2004, primarily due to a decrease in
compensation and benefits as the result of reduced employee headcount and
temporary help.
Legacy Marketing has established a valuation allowance related primarily to
its federal and state deferred tax assets, which increased $936,000 and $3.7
million for the three months and nine months ended September 30, 2005.
Legacy Financial Services
During the third quarter of 2005, Legacy Financial Services ("Legacy
Financial") had a net loss of $18,000, compared to a net loss of $85,000 during
the same period in 2004. The reduced losses in the third quarter of 2005 were
primarily due to a decrease in expenses, partially offset by a decrease in
revenue. For the nine months ended September 30, 2005, Legacy Financial had a
net loss of $145,000, compared to a net loss of $195,000 during the same period
in 2004, primarily due to a decrease in the selling, general and administrative
expenses, partially offset by decreased revenues and an increase in the
valuation allowance against Legacy Financial's deferred tax assets.
Legacy Financial's revenue decreased $32,000 (4%) and $127,000 (5%) during
the three and nine months ended September 30, 2005, compared to the same periods
in 2004, primarily due to a decrease in administrative and advisory fees. Legacy
Financial's expenses decreased $88,000 (9%) and $288,000 (10%) during the three
and nine months ended September 30, 2005, compared to the same periods in 2004.
The decrease in expenses during the nine months ended September 30, 2005, was
primarily due to a $251,000 (10%) decrease in selling, general and
administrative expenses. Selling, general and administrative expenses were down
in the nine months of 2005 compared to the same period of 2004 mainly due to
decreased compensation expense resulting from reduced temporary help costs and
management fees to Legacy Marketing, in addition to decreased professional fees.
Legacy Financial has established a valuation allowance related primarily to
its federal and state deferred tax assets, which decreased $25,000 for the third
quarter and increased $52,000 for the nine months ended September 30, 2005.
Imagent
Imagent had a net loss of $434,000 during the three months ended September
30, 2005, compared to a net loss of $77,000 during the same period in 2004.
During the nine months ended September 30, 2005, Imagent had a net loss of $1.3
million, compared to a net loss of $353,000 during the same period in 2004. The
increased losses were primarily due to increased expenses and an increase in the
valuation allowance against Imagent's deferred tax assets. Expenses went up
$275,000 (131%) and $689,000 (86%) during the three months and nine months ended
September 30, 2005, compared to the corresponding 2004 periods, primarily due to
increased employee compensation resulting from an increase in headcount, and
increased depreciation expense.
Imagent has established a valuation allowance related to its federal and
state deferred tax assets, which increased $145,000 and $464,000 for the three
months and nine months ended September 30, 2005.
15
Values Financial Network, Inc.
Values Financial Network, Inc. ("VFN") had a net loss of $92,000 during the
three months ended September 30, 2005, compared to a net loss of $79,000 during
the same period in 2004. During the nine months ended September 30, 2005, VFN
had a net loss of $288,000, compared to a net loss of $677,000 during the same
period in 2004. The increased losses in the third quarter were primarily due to
an increase in the valuation allowance against VFN's deferred tax assets. The
decreased losses in the nine months ended September 30, 2005, were primarily due
to lower expenses, largely as a result of goodwill impairment losses of $679,000
recorded during that period in 2004. Other VFN operating expenses decreased
$52,000 (63%) and $178,000 (63%) during the three months and nine months ended
September 30, 2005, compared to the same periods in 2004, primarily due to
decreased wages and professional fees.
VFN has established a valuation allowance related primarily to its federal
and state deferred tax assets, which increased $35,000 and $111,000 for the
three and nine months ended September 30, 2005.
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,
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 the
goodwill was not recoverable. Accordingly, we recorded a goodwill impairment
loss of $679,000 during the second quarter of 2004.
Liquidity and Capital Resources
Our cash provided by operating activities generally follows the trend in
our revenue and operating results. Our cash used in operating activities in the
nine months ended September 30, 2005 and 2004 of $6.1 million and $3.3 million
was primarily the result of our net loss, partially offset by non-cash charges
including depreciation and amortization and losses on write-off of fixed assets.
Other uses of cash during the first nine months of 2004 included an increase in
income taxes receivable due to a pre-tax loss and a decrease in accounts payable
and accrued liabilities, partially offset by a decrease in accounts receivable.
The decrease in accounts payable and accrued liabilities was primarily due to
payment of bonuses during 2004 to Wholesalers based upon their achievement of
predetermined 2003 sales targets, payments of 2003 employee incentive bonuses
and payments associated with a Producer incentive trip. The decrease in accounts
receivable was primarily due to a decrease in sales volume.
Net cash provided by investing activities of $514,000 for the nine months
ended September 30, 2005, primarily consisted of a refund of option fees
pursuant to the terms of the Purchase Option Agreement with SCOR totaling $3.0
million, excluding interest, partially offset by purchases of fixed assets
totaling $2.2 million. Net cash used in investing activities of $4.9 million for
the nine months ended September 30, 2004, consisted primarily of purchases of
fixed assets of $6.6 million mainly due to increased computer software costs and
construction costs related to our office building in Rome, Georgia, and option
fees of $1.8 million paid by Regan Holding pursuant to the terms of the SCOR
Purchase Option Agreement. These costs were partially offset by proceeds from
sales of available-for-sale securities totaling $3.4 million.
Net cash provided by financing activities for the nine months ended
September 30, 2005, of $2.3 million primarily reflected proceeds from a loan of
$2.7 million with our investment broker, partially offset by repurchases of our
redeemable common stock of $321,000 and payments on our mortgage loans of
$163,000. Net cash provided by financing activities for the nine months ended
September 30, 2004 of $1.6 million primarily reflected net proceeds of $2.6
million from our mortgage loan to finance our office building in Rome, Georgia,
partially offset by repurchases of our redeemable common stock of $851,000.
In April 2004, we completed construction of a new building in Rome,
Georgia, financing it with a $2.9 million variable interest rate note indexed to
30-day 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
16
due on the note. The outstanding balance of the note as of September 30, 2005,
was $2.8 million. To manage interest expense, we 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 we pay a fixed rate of 6.8% in exchange
for a variable rate indexed to 30-day LIBOR plus 1.9%.
We used $6.1 million of cash in our operations and incurred consolidated
net losses of $11.5 million during the nine months ended September 30, 2005. If
our consolidated net losses continue, or if requests to repurchase redeemable
common stock increase significantly, a cash shortfall could ultimately occur. We
believe that existing cash and investment balances, together with anticipated
cash flow from operations, a federal income tax refund of $3.2 million received
in October 2005 and proceeds from the potential sale of our office buildings in
Petaluma, California, will provide sufficient funding for the foreseeable
future. Furthermore, we have lowered our cost structure by reducing our employee
headcount and eliminating consulting costs on several corporate initiatives.
However, in the event that a cash shortfall does occur, we believe that adequate
financing could be obtained to meet our cash flow needs. There can be no
assurances that such financing would be available on favorable terms.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk, interest rate risk,
credit risk, or equity price risk since December 31, 2004. Please see our Annual
Report on Form 10-K for the year ended December 31, 2004 for more information
concerning Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
We maintain 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
reasonable assurance of achieving the desired control objectives. As of
September 30, 2005, our Chief Executive Officer and Chief Financial Officer
evaluated, with the participation of our management, the effectiveness of our
disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report. Our management, including the Chief Executive Officer and the Chief
Financial Officer, also evaluated our internal control over financial reporting
to determine whether any changes occurred during the quarter covered by this
report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Based on that evaluation,
there have been no such changes during the period covered by this report.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not involved in any material pending legal proceedings.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer
Purchases of Equity Securities
As described in our Annual Report on Form 10-K for the year ended December 31,
2004, we are obligated to redeem certain shares of Series A Common Stock and
Series B Common Stock at the election of the holders of such shares upon the
receipt of such elections. During the third quarter of 2005, we purchased shares
as specified below. We have not publicly announced a plan or program to buy back
shares of our Common Stock and have no control over the amount or timing of
purchases we are required to make under the redemption provisions and subject to
applicable law. All purchases listed below were of redeemable Common Stock we
were obligated to purchase when holders of redeemable shares exercised their
right to put the shares to the Company in accordance with their terms.
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total
Number of (d) Maximum
Shares Number (or
Purchased as Approximate Dollar
(a) Total Part of Publicly Value) of Shares that
Number of (b) Average Announced May yet be Purchased
Shares Price Paid Plans or under the Plans or
Period Purchased per Share Programs (2) Programs (2)
- ---------------- ---------------- ---------------- ---------------- ----------------
July 1, 2005
through
July 31, 2005 7,000 (1) $ 2.03 N/A N/A
August 1, 2005
through
August 31, 2005 32,000 (1) $ 2.03 N/A N/A
- ---------------- ---------------- ---------------- ---------------- ----------------
Total 39,000 $ 2.03
(1) Purchased in satisfaction of our obligation to redeem redeemable shares of
Common Stock.
(2) Not applicable. We do not currently have in place any publicly announced
plans or programs to purchase our outstanding equity securities.
Item 6. Exhibits
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 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAN HOLDING CORP.
Date: November 14, 2005 Signature: /s/ R. Preston Pitts
----------------------------------
R. Preston Pitts
President, Chief Operating Officer
and Chief Financial Officer
20