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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 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 is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES |_| NO |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. YES |_| NO |X|
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 a large accelerated filer,
accelerated filer, or non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES |_| NO |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter.
$10,609,000
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 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, 2006, the number of shares outstanding of the registrant's
Series A Common Stock was 23,580,000 and the number of shares outstanding of the
registrant's Series B Common Stock was 550,000. 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 5, 2006, 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 1A. Risk Factors................................................................................................ 5
Item 1B. Unresolved Staff Comments................................................................................... 10
Item 2. Properties.................................................................................................. 10
Item 3. Legal Proceedings........................................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 10
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities........................................................................................... 11
Item 6. Selected Consolidated Financial Data........................................................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................................... 22
Item 8. Financial Statements and Supplementary Data................................................................ 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 43
Item 9A. Controls and Procedures..................................................................................... 43
Item 9B. Other Information........................................................................................... 43
Part III
Item 10. Directors and Executive Officers of the Company............................................................. 44
Item 11. Executive Compensation..................................................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............. 44
Item 13. Certain Relationships and Related Transactions............................................................. 44
Item 14. Principal Accounting Fees and Services..................................................................... 44
Part IV
Item 15. Exhibits and Financial Statement Schedules.................................................................. 45
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 2005 Legacy Marketing generated approximately 87%
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 American National Insurance
Company ("American National"), Investors Insurance Corporation ("Investors
Insurance"), Transamerica Life Insurance and Annuity Company ("Transamerica"),
Americom Life & Annuity Insurance Company ("Americom") and John Hancock Variable
Life Insurance Company ("John Hancock"). 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
amount 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 2,400 generated business
for us during 2005. 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 450 Wholesalers who generated business for Legacy Marketing
during 2005.
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, informational
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.
Legacy Marketing also had marketing and administrative agreements with
Indianapolis Life, formerly IL Annuity and Insurance Company ("IL Annuity"), but
the marketing agreement terminated during the first quarter of 2002 and the
administrative agreement is scheduled to expire on April 30, 2006. Under the
terms of the administrative agreements, Legacy Marketing provides clerical,
administrative and accounting services with respect to the insurance policies.
These services include 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.
The marketing agreements and the administrative agreements allow Legacy
Marketing to enter 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
marketing agreement with Americom expires on June 10, 2007, and will
automatically renew for successive one-year periods. Legacy Marketing may
terminate the agreement prior to the renewal period with twelve months written
notice and Americom may terminate the agreement at any time with at least six
months written notice. Either party may terminate the agreement immediately for
cause. The administrative agreement with Americom expires on June 10, 2009, and
may be renewed by Americom for successive one-year periods by giving Legacy
Marketing at least six months notice and subject to certain provisions in the
agreement. At the end of the second renewal period, the agreement will be
automatically renewed for successive one-year periods, unless terminated earlier
by either party upon nine months notice without cause. Americom may terminate
the agreement without cause at any time after the second year of the agreement
by giving Legacy Marketing at least six months notice and paying a termination
fee in accordance with the agreement. Either party may terminate the agreement
immediately for cause.
On June 14, 2005, and in connection with the originally scheduled
expiration of the administrative agreement with IL Annuity on December 31, 2005,
Legacy Marketing agreed with AmerUs Annuity Group Co. ("AmerUs"), the parent
company of IL Annuity, on the process to be followed to transition to AmerUs the
administration of certain IL Annuity insurance contracts, which Legacy Marketing
has been administering under the terms of the administrative agreement since
January 1, 1996. On December 19, 2005, AmerUs and Legacy Marketing agreed to
extend the term of the administrative agreement through April 30, 2006. In the
twelve months ended December 31, 2005, Legacy Marketing received approximately
$1.7 million in gross revenue under the administrative agreement. The expiration
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 November 18, 2005, Regan Holding sold its office buildings in Petaluma,
California for $12.8 million. Regan Holding and the third party buyer (the
"Buyer") further agreed to enter into a ten year lease agreement, concurrently
with the sale of the buildings, whereby we are leasing 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 is
$1.25 per square foot and will increase annually by three percent during the
term of the lease, in addition to monthly taxes and operating expenses. Pursuant
to the terms of the lease, we paid the Buyer a security deposit of $1.0 million
and advance rent of $980,000. The advance rent will be utilized to pay the
monthly base rent, monthly taxes and operating expenses during the first nine
months of the lease term. The security deposit will be reduced if we meet
certain profitability criteria as specified in the Agreement.
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 granted Regan Holding the right to purchase the outstanding
capital stock of Investors Insurance in exchange for annual option fees. Regan
Holding had the right to exercise the option at any time on or prior to June 30,
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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, Regan Holding terminated the Option Agreement. SCOR has
repaid the option fees paid by Regan Holding pursuant to the Option Agreement,
including interest, totaling approximately $3.3 million.
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 2005, Legacy Financial
accounted for approximately 13% 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 ("prospectdigital"), which developed 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. ("VFN"), which was engaged in the business of values-based
investment screening. In January 2006, management of Regan Holding decided to
discontinue the operations of VFN. VFN incurred losses from operations of
$578,000, $1.2 million and $1.7 million for the years ended December 31, 2005,
2004 and 2003. We will incur insignificant costs in connection with exiting the
operations.
Competitive Business Conditions
The fixed annuity business is rapidly evolving and intensely competitive.
Legacy Marketing's primary market is fixed annuity products 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 $79 billion in 2005. 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 our
competitors provide or will soon provide. However, in the highly competitive
fixed annuity marketplace, new distribution models, product innovations and
technological advances may occur at any time and could present 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, product training, and support. 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.
3
Recent Industry Developments
During the past few years, 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. A few states 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 adopt such
regulation, due to self-regulatory initiatives taken by certain industry groups
establishing voluntary compensation disclosure guidelines for agents and brokers
similar to those required by the Model Act.
Also in 2005, the Securities and Exchange Commission informed certain
issuers of equity-indexed 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-indexed annuities, including an obligation to determine the suitability
of such products for their customers, regardless of whether equity-indexed
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 24,400 Producers. If the
amendments to the Model Act or regulations with similar provisions are adopted
by states in which we conduct business, the manner in which we and the Producers
conduct business could be negatively impacted. Similarly, if the initiatives
undertaken by California and other states, the Securities and Exchange
Commission or the NASD with respect to equity-indexed 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 other
initiatives may affect our business and the demand for fixed annuity products
marketed by Legacy Marketing. 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.
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.
4
Employees
As of March 14, 2006, we employed 304 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.
Item 1A. 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 $13.7 million for the year ended December 31, 2005.
The loss was primarily due to a loss at Legacy Marketing resulting from
decreased revenue. We do not know when or if we will become profitable in the
foreseeable future. If our revenue continues to decline and we continue to incur
net losses in future periods, our business and operating results could suffer.
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 American National, Investors
Insurance, Transamerica, Americom and John Hancock. Legacy Marketing also has
administrative agreements with each of these five insurance carriers and IL
Annuity, whose marketing agreement terminated during the first quarter of 2002
and whose administrative agreement is scheduled to expire on April 30, 2006.
During 2005, 23%, 20%, 18% and 11% of our total consolidated revenue resulted
from fixed annuity products Legacy Marketing sold and administered on behalf of
American National, Investors Insurance, Transamerica and Americom. During 2004,
25%, 27% and 24% of our total consolidated revenue was generated from fixed
annuity products Legacy Marketing sold and administered on behalf of American
National, Investors Insurance and Transamerica.
During the first quarter of 2003, Legacy Marketing discontinued marketing
several Transamerica products that were marketed exclusively by Legacy Marketing
and, effective May 3, 2004, Legacy Marketing discontinued marketing the
remaining Transamerica products that were marketed exclusively by Legacy
Marketing primarily because these products no longer met Transamerica's
profitability targets. Legacy Marketing continues to administer these fixed
annuity products and to accept additional premium payments, subject to
applicable additional deposit limitations for these products. Revenue from sales
and administration of Transamerica products decreased $4.0 million in 2005
compared to 2004 and accounted for approximately 18% and 24% of our total
consolidated revenue for the years ended December 31, 2005 and 2004.
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 fixed 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
and administration of American National products declined $2.8 million in 2005
compared to 2004 and $17.1 million in 2004 compared to 2003.
During the third quarter of 2003, the A.M. Best rating of Investors
Insurance was downgraded from an A- rating to a B++ rating. As a result, sales
of fixed annuity products issued by Investors Insurance began to decline
significantly in the second quarter of 2004 and continued to steadily decline
through the end of 2004. Revenue from the sales and administration of Investors
Insurance products decreased $4.5 million in 2005 compared to 2004.
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 agreements immediately for cause. The marketing and administrative
agreements with Transamerica and John Hancock do not have fixed terms but may be
5
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 Americom expires on June 10, 2007 and will
automatically renew for successive one-year periods. Legacy Marketing may
terminate the agreement prior to the renewal period with twelve months written
notice and Americom may terminate the agreement at any time with at least six
months written notice. Either party may terminate the agreement immediately for
cause. The administrative agreement with Americom expires on June 10, 2009, and
may be renewed by Americom for successive one-year periods by giving Legacy
Marketing at least six months notice and subject to certain provisions in the
agreement. At the end of the second renewal period, the agreement will be
automatically renewed for successive one-year periods, unless terminated earlier
by either party upon nine months notice without cause. Americom may terminate
the agreement without cause at any time after the second year of the agreement
by giving Legacy Marketing at least six months notice and paying a termination
fee in accordance with the agreement. Either party may terminate the agreement
immediately for cause.
On June 14, 2005, and in connection with the originally scheduled
expiration of the administrative agreement with IL Annuity on December 31, 2005,
Legacy Marketing agreed with AmerUs Annuity Group Co. ("AmerUs"), the parent
company of IL Annuity, on the process to be followed to transition to AmerUs the
administration of certain IL Annuity insurance contracts, which Legacy Marketing
has been administering under the terms of the administrative agreement since
January 1, 1996. On December 19, 2005, AmerUs and Legacy Marketing agreed to
extend the term of the administrative agreement through April 30, 2006. In the
twelve months ended December 31, 2005, Legacy Marketing received approximately
$1.7 million in gross revenue under the administrative agreement. The expiration
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.
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.
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 in attracting and retaining key personnel. We have no agreements with
these individuals requiring them to maintain their employment with us. If we
lose one or more of these key employees, particularly Lynda L. Regan, Chairman
of the Board and Chief Executive Officer, or R. Preston Pitts, President and
Chief Financial Officer, 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
in 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 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 and motivate Producers and
provide them with superior product training.
o The degree of market acceptance of the products marketed on behalf of
our insurance carriers.
o The relationship between Legacy Marketing and our insurance carriers.
6
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 and administration
of fixed annuity products. The historical crediting rates of fixed annuity
products are directly affected by financial market conditions. Changes in market
conditions can affect demand for these fixed 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 and result 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 fixed annuity products that we sell. The
market for these products is extremely competitive. New products are constantly
being developed to replace existing products in the marketplace. If we are
unable to keep pace with the development of such new products, our cash inflows
could decrease. Due to this changing environment in which we operate, we are
unable to predict whether our cash inflows will be sufficient to support future
operating requirements. Our failure to obtain additional funding when needed
could delay new product introduction or business expansion opportunities, which
could cause a decrease in our operating results and financial condition. We are
unaware of any material limitations on our ability to obtain additional funding.
If additional funds are raised through the issuance of equity securities, the
ownership percentage of our then-current shareholders would be reduced.
Furthermore, any equity securities issued in the future may have rights,
preferences, or privileges senior to that of our existing common stock.
Our cash and investments at December 31, 2005 and 2004 totaled $11.9
million and $12.2 million.
Significant repurchases of our common stock could materially decrease our cash
position.
As of December 31, 2005, we were obligated to redeem 2,657,000 shares of
Series A common stock at the option of the holders of these shares. Of the
550,000 shares of Series B common stock outstanding at December 31, 2005, 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 in November of 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 value as of
December 31, 2005, the redemption of all eligible shares of Series A redeemable
common stock during 2006 would require $1.8 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. In addition, we would also 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. 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, 2005, we believe 125% of the fair market value of the shares owned
by Ms. Regan was equal to $8.8 million. We have purchased life insurance
coverage for the purpose of funding this potential obligation. There can be no
assurances, however, that the proceeds from this insurance coverage 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 insurance proceeds 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.
7
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 product
sales in the United States were approximately $79 billion in 2005. Legacy
Marketing had a 0.6% market share of the 2005 fixed annuity product sales in the
United States based on Legacy Marketing's $480 million of inforce premiums
placed in 2005 as a percentage of the $79 billion of fixed annuities sold in the
United States during 2005. 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.
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, product training, and
support. In the recent past, Legacy Marketing has been reasonably successful in
expanding and maintaining its current Wholesaler distribution network. However,
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.
During the past few years, 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. A few states 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 adopt such
regulation, due to self-regulatory initiatives taken by certain industry groups
establishing voluntary compensation disclosure guidelines for agents and brokers
similar to those required by the Model Act.
Also in 2005, the Securities and Exchange Commission informed certain
issuers of equity-indexed 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-indexed annuities, including an obligation to determine the suitability
of such products for their customers, regardless of whether equity-indexed
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.
8
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 regulations with similar provisions are adopted
by states in which we conduct business, the manner in which we and the Producers
conduct business could be negatively impacted. Similarly, if the initiatives
undertaken by California and other states, the Securities and Exchange
Commission or the NASD with respect to equity-indexed 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 other
initiatives may affect our business and the demand for fixed annuity products
marketed by Legacy Marketing. 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.
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.
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 fixed annuity products that Legacy Marketing markets. This
favorable income tax treatment results in our policyholders paying no income tax
on their earnings in the fixed annuity products until they take a cash
distribution. We believe that the tax deferral features contained within the
fixed 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 the marketing and
administration of fixed 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.
9
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own an office building in Rome, Georgia, which is used to accommodate
some of Legacy Marketing Group's operating activities. We financed the property
with a mortgage loan, which totaled $2.8 million at December 31, 2005. We
currently lease two office buildings in Petaluma, California, which serve as the
principal executive offices of Legacy Marketing and Legacy Financial.
Item 3. Legal Proceedings
We are involved in various claims and legal proceedings arising in the
ordinary course of business. In addition, from time to time we have received
requests for information from agencies or other bodies that regulate our
business. In December 2005, Legacy Financial, a registered investment advisor
and a wholly owned subsidiary of the Company, received subpoenas from the
Securities and Exchange Commission relating to its investigation into the
activities of certain registered representatives. We have been cooperating with
this investigation. Although it is difficult to predict the ultimate outcome of
these matters, we believe that the ultimate disposition of these matters 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 2005.
10
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
As of March 15, 2006, 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 9,600 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.
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)
- ----------------------- ------------ ---------- ------------- ----------------
October 1, 2005
through
October 31, 2005 18,000 (1) $ 1.09 N/A N/A
November 1, 2005
through
November 30, 2005 15,000 (1) $ 1.09 N/A N/A
December 1, 2005
through
December 31, 2005 9,000 (1) $ 1.01 N/A N/A
- ----------------------- ------------ ---------- ------------- -----------------
Total 42,000 $ 1.06
- ----------------------
(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.
11
Item 6. Selected Consolidated Financial Data
Year Ended December 31,
-----------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------- ------------- ------------- ------------ -------------
Selected Income Statement Data:
Total revenue $ 28,126,000 $ 37,385,000 $ 70,917,000 $ 50,049,000 $ 55,209,000
Net income (loss) $(13,711,000) $ (7,467,000) $ 5,029,000 $ (60,000) $ (348,000)
Earnings (loss) per share - basic: $ (0.53) $ (0.29) $ 0.20 $ -- $ (0.03)
Earnings (loss) per share - diluted: $ (0.53) $ (0.29) $ 0.18 $ -- $ (0.03)
Selected Balance Sheet Data:
Total assets $ 30,400,000 $ 47,618,000 $ 57,115,000 $ 50,047,000 $ 46,260,000
Total non current liabilities $ 13,558,000 $ 19,552,000 $ 13,536,000 $ 11,630,000 $ 4,578,000
Redeemable common stock $ 6,219,000 $ 7,486,000 $ 8,964,000 $ 10,115,000 $ 11,124,000
Cash dividends declared -- -- -- -- --
Selected Operating Data:
Total fixed premium placed inforce (1) $480 million $800 million $2.15 billion $1.3 billion $ 1.6 billion
Total fixed policies placed inforce (1) 7,000 13,000 36,000 24,000 30,000
Policies maintained at year end 111,000 123,000 127,000 107,000 101,000
- ----------------------
(1) When a policyholder remits a premium payment with an accurate and completed
application for an insurance policy, the policy is placed inforce. Inforce
premium and policies are statistics of our carriers but are factors that
directly affect our revenue.
12
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; 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 under Item 1A. Risk Factors.
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
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, 2005, Legacy Marketing had
marketing agreements with American National, Investors Insurance, Transamerica,
Americom and John Hancock. 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.
On June 14, 2005, and in connection with the originally scheduled
expiration of the administrative agreement with IL Annuity on December 31, 2005,
Legacy Marketing agreed with AmerUs Annuity Group Co. ("AmerUs"), the parent
company of IL Annuity, on the process to be followed to transition to AmerUs the
administration of certain IL Annuity insurance contracts, which Legacy Marketing
has been administering under the terms of the administrative agreement since
January 1, 1996. On December 19, 2005, AmerUs and Legacy Marketing agreed to
extend the term of the administrative agreement through April 30, 2006. In the
twelve months ended December 31, 2005, Legacy Marketing received approximately
$1.7 million in gross revenue under the administrative agreement. The expiration
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 November 18, 2005, Regan Holding sold its office buildings in Petaluma,
California for $12.8 million. Regan Holding and the third party buyer (the
"Buyer") further agreed to enter into a ten year lease agreement, concurrently
with the sale of the buildings, whereby we are leasing 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 is
$1.25 per square foot and will increase annually by three percent during the
term of the lease, in addition to monthly taxes and operating expenses. Pursuant
to the terms of the lease, we paid the Buyer a security deposit of $1.0 million
13
and advance rent of $980,000. The advance rent will be utilized to pay the
monthly base rent, monthly taxes and operating expenses during the first nine
months of the lease term. The security deposit will be reduced if we meet
certain profitability criteria as specified in the Agreement.
On July 1, 2002, Regan Holding entered into a Purchase Option Agreement
with SCOR, a 100% owner of the outstanding capital stock of Investors Insurance
Corporation. Pursuant to the terms of the agreement, SCOR granted Regan Holding
the right to purchase the outstanding capital stock of Investors Insurance in
exchange for annual option fees. Regan Holding 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, Regan
Holding terminated the Option Agreement. SCOR has repaid the option fees paid by
Regan Holding pursuant to the Option Agreement, including interest, totaling
approximately $3.3 million.
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.
The results of our operations are generally affected by the conditions that
affect other companies that market fixed 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.
Recent Industry Developments
During the past few years, 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. A few states 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 adopt such
regulation, due to self-regulatory initiatives taken by certain industry groups
establishing voluntary compensation disclosure guidelines for agents and brokers
similar to those required by the Model Act.
14
Also in 2005, the Securities and Exchange Commission informed certain
issuers of equity-indexed 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-indexed annuities, including an obligation to determine the suitability
of such products for their customers, regardless of whether equity-indexed
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 24,400 Producers. If the
amendments to the Model Act or regulations with similar provisions are adopted
by states in which we conduct business, the manner in which we and the Producers
conduct business could be negatively impacted. Similarly, if the initiatives
undertaken by California and other states, the Securities and Exchange
Commission or the NASD with respect to equity-indexed 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 other
initiatives may affect our business and the demand for fixed annuity products
marketed by Legacy Marketing. 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.
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.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements and related notes,
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
15
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
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 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 any deferred tax assets after valuation allowance
will be realized.
Regan Holding Corp. Consolidated Results of Operations
Year ended December 31, 2005 compared with year ended December 31, 2004
We had a consolidated net loss of $13.7 million in 2005, compared to a
consolidated net loss of $7.5 million in 2004. The $6.2 million increase in
losses was primarily due to higher net losses incurred by Legacy Marketing,
Values Financial Network and Imagent Online. Excluding the $2.9 million
impairment charge for internal use software, our consolidated net loss was $10.8
million in 2005.
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.
Legacy Marketing Results of Operations
Year ended December 31, 2005 compared with year ended December 31, 2004
Legacy Marketing's revenue decreased $9.2 million (27%) in 2005 compared to
2004 primarily due to decreased marketing allowances and commissions and
administrative fees. Marketing allowances and commissions decreased $7.2 million
(32%) primarily due to decreased sales of fixed annuity products issued by
Legacy Marketing's carriers.
Legacy Marketing experienced a decrease in sales of fixed annuity products
issued by Investors Insurance in 2005 compared to 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. As a
16
result, sales of fixed annuity products issued by Investors Insurance began to
decline significantly in the second quarter of 2004 and continued to steadily
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 annuity products in the second
half of 2005. Revenues from the sales and administration of Investors Insurance
products decreased $4.5 million in 2005 compared to 2004 and accounted for 20%
and 27% of our total consolidated revenue for the years ended December 31, 2005
and 2004.
Over the last two years, the low interest rate environment has caused many
carriers that issue declared rate annuities, such as American National, to
reduce crediting rates and compensation on certain products. Sales of these
products accounted for approximately 3% and 9% of our total consolidated revenue
for the years ended December 31, 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 2005 were lower compared to 2004. Revenue derived from sales and
administration of American National products decreased $2.8 million in 2005
compared to 2004 and accounted for approximately 23% and 25% of our total
consolidated revenue for the years ended December 31, 2005 and 2004.
Legacy Marketing's fixed annuity 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. Revenues derived from sales and administration
of Transamerica products decreased $4.0 million in 2005 compared to 2004 and
accounted for 18% and 24% of our total consolidated revenue for the years ended
December 31, 2005 and 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 fixed annuity product sales were positively impacted in
2005, as compared to 2004, by revenue derived from sales and administration of
products issued by Americom. In June 2004, Legacy Marketing entered into
marketing and administrative services agreements with Americom and began
marketing and administering Americom products in November 2004. Revenue derived
from sales and administration of Americom products was $3.2 million in 2005 and
accounted for approximately 11% of our total consolidated revenue for the year
ended December 31, 2005.
Administrative fees decreased $1.7 million (16%) in 2005 compared to 2004
primarily due to decreased issuing and maintenance fees resulting from decreased
fixed annuity product sales.
During the year ended December 31, 2005, Legacy Marketing sold and
administered products primarily on behalf of three unaffiliated insurance
carriers: American National, Investors Insurance and Transamerica. As indicated
below, the agreements with these carriers generated a significant portion of our
total consolidated revenue:
2005 2004
---- ----
American National 23% 25%
Investors Insurance 20% 27%
Transamerica 18% 24%
Our consolidated revenues were derived primarily from sales and
administration of the following fixed annuity products:
2005 2004
---- ----
BenchMark (SM) series (sold on behalf of American National) 22% 24%
SelectMark (SM) series (sold on behalf of Transamerica) 18% 24%
MarkOne (SM) series (sold on behalf of Investors Insurance) 13% 23%
Legacy Marketing's operating expenses decreased $2.9 million (7%) in 2005
compared to 2004 primarily due to decreased selling, general and administrative
expenses. Excluding the $2.9 million impairment charge for internal use
software, Legacy Marketing's expenses decreased $5.8 million (15%) in 2005
compared to 2004. Selling, general and administrative expenses decreased $5.6
million (16%) primarily due to decreased compensation and benefits and
professional fees. Compensation and benefits decreased primarily due to
decreased employee headcount and a reduction in temporary help. Professional
fees decreased primarily due to decreased consulting fees.
Legacy Marketing has established a valuation allowance related primarily to
its federal and state deferred tax assets, which increased $3.0 million in 2005.
17
Year ended December 31, 2004 compared with year ended December 31, 2003
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 causes 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 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 and accounted for 25%
and 37% of our total consolidated revenue for the years ended December 31, 2004
and 2003.
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. Revenue derived from sales and administration of
Transamerica products decreased $8.5 million in 2004 compared to 2003 and
accounted for approximately 24% and 25% of our total consolidated revenue for
the years ended December 31, 2004 and 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 and accounted for 27% and 22% of our total
consolidated revenue for the years ended December 31, 2004 and 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.
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.
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.
Legacy Financial Results of Operations
Year ended December 31, 2005 compared with year ended December 31, 2004
Legacy Financial revenue decreased $115,000 (3%) in 2005 compared to 2004
primarily due to decreased commission income and advisory fees as a result of
decreased sales volume and a decrease in other income.
Legacy Financial operating expenses decreased $329,000 (8%) in 2005
compared to 2004, which was primarily due to a decrease in selling, general and
administrative expenses of $346,000 (10%). This decrease was mainly attributable
to a decrease in compensation and benefits and professional fees. Compensation
and benefits decreased as the result of decreased headcount, a reduction in
temporary help and decreased management fees paid to Legacy Marketing. In
addition, professional fees decreased mainly due to lower legal costs and
advisory expenses.
18
Year ended December 31, 2004 compared with year ended December 31, 2003
Legacy Financial revenue increased $436,000 (13%) in 2004 compared to 2003
primarily due to increased commission income and advisory fee revenue as a
result of increased sales volume.
Legacy Financial expenses decreased $115,000 (3%) in 2004 compared to 2003.
The decrease was primarily due to a decrease in selling, general and
administrative expenses of $136,000 (4%), which was mainly attributable to a
decrease in compensation and benefits resulting from decreased headcount,
reduction in temporary help and decreased employee incentive-based compensation,
partially offset by an increase in professional fees due to higher legal and
consulting costs.
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.
Values Financial Network, Inc. Results of Operations
In January 2006, we decided to discontinue the operations of VFN. We will
incur insignificant costs in connection with exiting the operations.
Year ended December 31, 2005 compared with year ended December 31, 2004
VFN incurred a net loss of $1.4 million in 2005 compared to a net loss of
$751,000 in 2004. The increase in net loss was primarily due to an increase in
the valuation allowance against VFN's deferred tax assets of $1.0 million and a
valuation allowance of $201,000 recorded for a long-lived asset. These expenses
were partially offset by decreased goodwill impairment losses of $679,000
resulting from a goodwill impairment charge in 2004 and a decrease in
compensation and benefits and professional fees in 2005.
Year ended December 31, 2004 compared with year ended December 31, 2003
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.
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.
In connection with the updated measurement of the fair value of VFN as
discussed above, we also 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
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.
19
Imagent Online Results of Operations
Year ended December 31, 2005 compared with year ended December 31, 2004
Imagent Online had a net loss of $962,000 in 2005 compared to a net loss of
$515,000 in 2004. The increased losses were primarily due to higher selling,
general and administrative expenses and depreciation expense. Selling, general
and administrative expenses increased in 2005 mainly due to increased
compensation and benefits expense resulting from increased headcount.
Depreciation expense increased in 2005 primarily due to accelerating
depreciation on certain capitalized software, which was replaced by a new
version.
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.
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 was
$5.6 million and $4.4 million in 2005 and 2004. Our cash provided by operating
activities was $12.7 million in 2003. Our cash used in operating activities
during 2005 was primarily the result of our net loss and an increase in deposits
and other assets resulting from the prepayment of rent and a lease deposit in
connection with the sale/leaseback of our Petaluma office buildings. These
amounts were partially offset by non-cash charges, including depreciation and
amortization and losses on write-off of fixed assets. In addition, our income
tax receivable declined due to an income tax refund received in 2005.
Our net loss in 2004 was significantly offset by non-cash charges, as well
as a decrease in accounts receivable, which was primarily due to a decrease in
sales volume, and an increase in deferred compensation payable. Significant uses
of cash included an increase in income taxes receivable due to a pre-tax loss
and a decrease in accounts payable and accrued liabilities. 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.
Our cash provided by operating activities of $12.7 million in 2003 was
primarily the result of our net income, significant non-cash charges, a decrease
in prepaid expenses and deposits and an increase in accounts payable and accrued
liabilities and deferred compensation payable. These amounts were partially
offset by unrealized gains on trading securities and a decrease in accounts
receivable.
Net cash provided by investing activities of $12.6 million in 2005
primarily consisted of the proceeds from the sale of our office buildings in
Petaluma, California, and 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 $2.7 million.
Net cash used in investing activities of $3.4 million in 2004 consisted
primarily of purchases of fixed assets of $7.7 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 $5.9
million.
Net cash used in investing activities of $6.0 million in 2003 consisted
primarily of purchases of fixed assets of $4.2 million and purchases of
available-for-sale securities of $1.0 million.
Net cash used in financing activities in 2005 of $7.4 million was primarily
due to the payoff of the mortgage loan in conjunction with the sale of our
office buildings in Petaluma, California.
Net cash provided by financing activities in 2004 of $2.2 million primarily
reflected net proceeds of $2.7 million from our mortgage loan to finance our
office building in Rome, Georgia, and proceeds from the exercise of stock
options, partially offset by repurchases of our common stock.
Net cash used in financing activities in 2003 of $1.6 million was primarily
the result of repurchases of our common stock.
20
In April 2004, we completed construction of our office 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
due on the note. The outstanding balance of the note as of December 31, 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 are obligated to repurchase certain shares of our common stock. Cash
paid to repurchase some of these shares totaled $365,000 in 2005 and $966,000 in
2004. Based upon the estimated fair market values of the Series A Redeemable
Common Stock as of December 31, 2005, the redemption of all eligible shares
during 2006 would require $1.8 million.
We lease office and warehouse premises and certain office equipment under
non-cancelable operating leases. As of December 31, 2005, 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 3 - 5 years After 5 years
Debt $ 2,751,000 $ 78,000 $ 174,000 $ 199,000 $ 2,300,000
Operating Leases 10,081,000 999,000 2,520,000 1,904,000 4,658,000
------------ ----------- ----------- ----------- -----------
Total Contractual Cash Obligations $ 12,832,000 $ 1,077,000 $ 2,694,000 $ 2,103,000 $ 6,958,000
============ =========== =========== =========== ===========
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, 2005, we believe that 125% of the fair market value of the shares
owned by Ms. Regan was equal to $8.8 million. We have purchased life insurance
coverage for the purpose of funding this potential obligation upon Ms. Regan's
death.
We used $3.0 million of cash in our operations and incurred consolidated
net losses of $13.7 million in 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, 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.
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. We do
not believe that the adoption of FAS 154 will have a material effect on its
consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), 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
21
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 we 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, we adopted SFAS 123R effective
January 1, 2006. We do not believe that adoption of SFAS 123R will have a
material impact on our financial position, results of operations or statement of
cash flows.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Our investments are categorized as trading securities.
We had an investment in a short-term fixed income security of $996,000 as
of December 31, 2005, which matured in January 2006 and yielded a return of
4.8%. This investment was classified as a cash equivalent at December 31, 2005.
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 was above original cost at December 31, 2005 and
2004. The original cost and fair values of our marketable equity trading
securities are shown below:
Original Cost Fair Value
------------- -------------
December 31, 2005 $ 7,394,000 $ 8,010,000
December 31, 2004 $ 6,353,000 $ 7,900,000
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.
22
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.:
We have audited the accompanying consolidated balance sheet of Regan Holding
Corp. and its subsidiaries (the "Company") as of December 31, 2005, and the
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our audit also included the
financial statement schedule for the year ended December 31, 2005 listed in the
Index at Item 15(a)(2). Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Regan Holding Corp.
and its subsidiaries as of December 31, 2005 and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein for the year ended December
31, 2005.
/s/ Burr, Pilger & Mayer, LLP
San Francisco, California
March 3, 2006
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Regan Holding Corp.:
In our opinion, the consolidated balance sheet as of December 31, 2004 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 2004 present
fairly, in all material respects, the financial position of Regan Holding Corp.
and its subsidiaries at December 31, 2004, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 15(a)(2), as of December 31,
2004 and for the two years then ended, present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statements schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules 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
23
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
----------------------------
2005 2004
------------ ------------
Assets
Cash and cash equivalents $ 3,862,000 $ 4,348,000
Trading investments 8,010,000 7,900,000
Option to purchase Investors Insurance Company -- 2,975,000
Accounts receivable, net of allowance of $227,000 and $569,000 at
December 31, 2005 and 2004 1,716,000 1,496,000
Income taxes receivable -- 755,000
Prepaid expenses and deposits 1,572,000 705,000
Deferred tax assets -- 772,000
------------ ------------
Total current assets 15,160,000 18,951,000
------------ ------------
Net fixed assets 13,424,000 27,675,000
Intangible assets, net 48,000 122,000
Notes receivable, net of allowance of $202,000 at December 31, 2005 680,000 672,000
Other assets 1,088,000 198,000
------------ ------------
Total non current assets 15,240,000 28,667,000
------------ ------------
Total assets $ 30,400,000 $ 47,618,000
============ ============
Liabilities, redeemable common stock, and shareholders' equity
Liabilities
Accounts payable and accrued liabilities $ 5,484,000 $ 5,243,000
Income taxes payable 2,650,000 --
Current portion of notes payable and other borrowings 78,000 199,000
------------ ------------
Total current liabilities 8,212,000 5,442,000
------------ ------------
Deferred compensation payable 8,044,000 7,748,000
Deferred tax liabilities -- 1,242,000
Deferred gain on sale of building 2,724,000 --
Other liabilities 117,000 854,000
Notes payable, less current portion 2,673,000 9,708,000
------------ ------------
Total non current liabilities 13,558,000 19,552,000
------------ ------------
Total liabilities 21,770,000 24,994,000
------------ ------------
Redeemable common stock, Series A and B 6,219,000 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 or outstanding: 20,959,000 and
20,912,000 at December 31, 2005 and 2004 3,921,000 3,847,000
Paid-in capital 6,561,000 6,522,000
Retained earnings (deficit) (8,071,000) 4,769,000
------------ ------------
Total shareholders' equity 2,411,000 15,138,000
------------ ------------
Total liabilities, redeemable common stock, and shareholders' equity $ 30,400,000 $ 47,618,000
============ ============
See notes to financial statements.
24
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Years Ended December 31,
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
Revenue
Marketing allowances and commission overrides $ 13,639,000 $ 20,203,000 $ 48,396,000
Trailing commissions 4,095,000 4,792,000 5,130,000
Administrative fees 8,873,000 10,584,000 14,083,000
Other revenue 1,519,000 1,806,000 3,308,000
------------ ------------ ------------
Total revenue 28,126,000 37,385,000 70,917,000
------------ ------------ ------------
Expenses
Selling, general and administrative 33,015,000 38,414,000 53,583,000
Depreciation and amortization 4,109,000 4,282,000 4,077,000
Goodwill impairment losses -- 679,000 491,000
Internal use software impairment loss 2,939,000 -- --
Other 2,559,000 2,342,000 4,729,000
------------ ------------ ------------
Total expenses 42,622,000 45,717,000 62,880,000
------------ ------------ ------------
Operating income (loss) (14,496,000) (8,332,000) 8,037,000
Other income
Investment income, net 595,000 531,000 416,000
Interest expense (79,000) (9,000) (33,000)
------------ ------------ ------------
Total other income, net 516,000 522,000 383,000
------------ ------------ ------------
Income (loss) before income taxes (13,980,000) (7,810,000) 8,420,000
Provision for (benefit from) income taxes (269,000) (343,000) 3,391,000
------------ ------------ ------------
Net income (loss) before accretion of redeemable
common stock (13,711,000) (7,467,000) 5,029,000
Reduction (accretion) of redeemable common stock 871,000 512,000 (34,000)
------------ ------------ ------------
Net income (loss) available for common shareholders $(12,840,000) $ (6,955,000) $ 4,995,000
============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.53) $ (0.29) $ 0.20
Weighted average shares outstanding 24,259,000 23,880,000 24,431,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ (0.53) $ (0.29) $ 0.18
Weighted average shares outstanding 24,259,000 23,880,000 27,330,000
See notes to financial statement.
25
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the years ended December 31, 2005, 2004, and 2003
Accumulated
Series A Common Stock Common Retained Other
------------------------ Stock Paid-in Earnings Comprehensive
Shares Amount Committed Capital (Deficit) Income (loss) Total
---------- ---------- ---------- ----------- ------------ --------- -----------
Balance December 31, 2002 20,495,000 $3,324,000 $ 25,000 $ 6,499,000 $ 7,135,000 $ (23,000) $16,960,000
Comprehensive income, net of tax:
Net income 5,029,000 5,029,000
Net unrealized gains on investments 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 (398,000) (363,000) (351,000) (714,000)
Retirement of redeemable common stock 1,000 1,000
Accretion to redemption value of
redeemable common stock (34,000) (34,000)
Producer stock option expense 10,000 10,000
Exercise of stock options 155,000 197,000 197,000
---------- ---------- ---------- ----------- ------------ --------- -----------
Balance December 31, 2003 20,252,000 3,158,000 25,000 6,510,000 11,779,000 56,000 21,528,000
Comprehensive loss, net of tax:
Net loss (7,467,000) (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 (181,000) (278,000) (55,000) (333,000)
Issuance of common stock committed 25,000 (25,000) --
Exercise of stock options 841,000 942,000 942,000
Reduction to redemption value of
redeemable common stock 512,000 512,000
Producer stock option expense 12,000 12,000
---------- ---------- ---------- ----------- ------------ --------- -----------
Balance December 31, 2004 20,912,000 3,847,000 -- 6,522,000 4,769,000 -- 15,138,000
Comprehensive loss, net of tax:
Net loss (13,711,000) (13,711,000)
Retirement of common stock upon
mandatory repurchases 31,000 31,000
Exercise of stock options 47,000 74,000 74,000
Reduction to redemption value of
redeemable common stock 871,000 871,000
Producer stock option expense 8,000 8,000
---------- ---------- ---------- ----------- ------------ --------- -----------
Balance December 31, 2005 20,959,000 $3,921,000 $ -- $ 6,561,000 $ (8,071,000) $ -- $ 2,411,000
========== ========== ========== =========== ============ ========= ===========
See notes to financial statements.
26
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Years Ended December 31,
2005 2004 2003
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(13,711,000) $ (7,467,000) $ 5,029,000
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 4,109,000 4,282,000 4,077,000
Losses on write-off of fixed assets 3,213,000 67,000 1,772,000
Amortization of deferred gain on sale of building (33,000) -- --
Impairment of goodwill and intangible assets -- 679,000 538,000
Provision for (reduction of) doubtful accounts (140,000) (62,000) 399,000
Deferred taxes (470,000) 3,034,000 (863,000)
Amortization of premium or discount on investments -- 40,000 84,000
Gains on trading securities, net (344,000) (869,000) (1,709,000)
Realized (gains) losses on sales of investments, net -- (133,000) 12,000
Producer stock option expense 8,000 12,000 10,000
Changes in operating assets and liabilities:
Sales (purchases) of trading securities, net 234,000 (720,000) (333,000)
Accounts receivable 122,000 2,791,000 (1,350,000)
Prepaid expenses and deposits (867,000) 98,000 1,319,000
Income taxes receivable and payable 3,405,000 (2,745,000) (337,000)
Accounts payable and accrued liabilities 241,000 (5,547,000) 1,884,000
Deferred compensation payable 296,000 1,491,000 2,016,000
Other operating assets and liabilities (1,692,000) 686,000 177,000
------------ ------------ ------------
Net cash provided by (used in) operating activities (5,629,000) (4,363,000) 12,725,000
------------ ------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities -- (2,101,000) (5,902,000)
Proceeds from sales of available-for-sale securities -- 5,536,000 2,914,000
Proceeds from maturities of available-for-sale securities -- 2,500,000 1,970,000
Option to purchase Investors Insurance Corporation 2,975,000 (1,775,000) (600,000)
Proceeds (payments) from notes receivable (210,000) 155,000 (175,000)
Proceeds from disposal of fixed assets 12,570,000 -- --
Purchases of fixed assets (2,745,000) (7,672,000) (4,197,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 12,590,000 (3,357,000) (5,990,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from loans payable -- 2,155,000 191,000
Payments toward loans payable -- (2,346,000) --
Proceeds from note payable -- 2,870,000 --
Payments toward notes payable (7,156,000) (162,000) (109,000)
Repurchases of redeemable common stock (365,000) (966,000) (1,185,000)
Proceeds from exercise of common stock options 74,000 942,000 --
Voluntary repurchases of common stock -- (333,000) (517,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities: (7,447,000) 2,160,000 (1,620,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (486,000) (5,560,000) 5,115,000
Cash and cash equivalents, beginning of period 4,348,000 9,908,000 4,793,000
------------ ------------ ------------
Cash and cash equivalents, end of period $ 3,862,000 $ 4,348,000 $ 9,908,000
============ ============ ============
Supplemental cash flow information:
Taxes paid / (refunds received) $ (3,209,000) $ (650,000) $ 5,110,000
Interest paid $ 678,000 $ 634,000 $ 517,000
See notes to financial statements.
27
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, 2005, Legacy Marketing had marketing agreements with
American National Insurance Company ("American National"), Investors Insurance
Corporation ("Investors Insurance"), Transamerica Life Insurance and Annuity
Company ("Transamerica"), Americom Life & Annuity Insurance Company ("Americom")
and John Hancock Variable Life Insurance Company ("John Hancock") (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 and
with IL Annuity, whose administrative agreement is scheduled to expire on April
30, 2006. Pursuant to the administrative agreements, 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
28
relatively short-term nature or comparable market information available at the
respective balance sheet dates.
e. Cash and Cash Equivalents
Cash and cash equivalents include marketable securities with an original
maturity 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, 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. 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
cash flows is less than the carrying value. If software, or components of
software, in development are abandoned, the Company takes a charge to write off
the capitalized amount in the period the decision is made to abandon it.
i. Redeemable Common Stock
Redeemable common stock is carried at the greater of the issuance value or
the redemption value. Periodic adjustments to reflect increases or decreases in
redemption value are recorded as accretion, with an offsetting adjustment to
retained earnings.
29
j. 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.
k. 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.
l. 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:
2005 2004 2003
-------------- ------------- -------------
Net income (loss) available for common
shareholders, as reported $ (12,840,000) $ (6,955,000) $ 4,995,000
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related tax effects (133,000) (258,000) (424,000)
-------------- ------------- -------------
Pro forma net income (loss) available for common
shareholders $ (12,973,000) $ (7,213,000) $ 4,571,000
============== ============= =============
Earnings (loss) per share:
Basic - as reported $ (0.53) $ (0.29) $ 0.20
Basic - pro forma $ (0.53) $ (0.30) $ 0.19
Diluted - as reported $ (0.53) $ (0.29) $ 0.18
Diluted - pro forma $ (0.53) $ (0.30) $ 0.17
The fair value of the employee option grants for pro forma disclosure
purposes was estimated using the minimum value method, with the following
assumptions:
2005 2004 2003
----------- ----------- -----------
Risk-free interest rates 3.73%-4.43% 2.84%-4.03% 1.45%-3.20%
Expected life 3-5 years 3-5 years 3-5 years
Dividend yield None None None
m. 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
30
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.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), 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
adopted SFAS 123R effective January 1, 2006. The Company does not believe that
the adoption of SFAS 123R will have a material effect 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, 2005 and
2004. The Company's recorded realized gains (losses) from available-for-sale
investments as follows:
2005 2004 2003
---- ---- ----
Gross realized gains $ -- $ 162,000 $ 6,000
Gross realized losses $ -- $ (33,000) $ (18,000)
3. Fixed Assets
December 31,
-----------------------------
2005 2004
------------ ------------
Computer hardware and purchased software $ 6,510,000 $ 10,465,000
Internal use software development costs 15,956,000 18,560,000
Leasehold improvements 1,161,000 1,361,000
Furniture and equipment 2,621,000 3,213,000
Building 3,108,000 10,884,000
Land and land improvements 338,000 3,092,000
------------ ------------
29,694,000 47,575,000
Accumulated depreciation and amortization (16,270,000) (19,900,000)
------------ ------------
Total $ 13,424,000 $ 27,675,000
============ ============
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.
In 1998, the Company 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, the Company 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 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.
31
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 the existing administration system to
administer the Company's 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 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, the Company recorded a write-off of
$2.9 million associated with abandoned components of the internal use software
project.
On November 18, 2005, the Company sold its office buildings in Petaluma,
California for a purchase price of $12.8 million (see Note 18). In connection
with the sale, the Company disposed of the following fixed assets:
Accumulated
Cost Depreciation
----------- --------
Buildings $ 7,776,000 $(843,000)
Land and land improvements 2,754,000 --
Leasehold improvements 86,000 (31,000)
----------- --------
$10,616,000 $(874,000)
=========== ========
4. Goodwill and Other Intangible Assets
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.
32
Acquired intangible assets, all subject to amortization:
December 31,
--------------------------------------------------
2005 2004
---------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
--------- --------- --------- ---------
Copyrights $ 203,000 $(203,000) $ 203,000 $(174,000)
Software license 223,000 (175,000) 223,000 (130,000)
--------- --------- --------- ---------
Total $ 426,000 $(378,000) $ 426,000 $(304,000)
========= ========= ========= =========
Intangible assets are amortized on a straight-line basis over their
estimated useful life of 5 years. The aggregate amortization expense for the
years ended December 31, 2005, 2004 and 2003 was $74,000, $74,000 and $89,000.
The estimated amortization expense for the years ended December 31, 2006 and
2007 is $45,000 and $3,000.
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 Corporation. Pursuant to the terms of the
agreement, SCOR granted the Company the right to purchase the outstanding
capital stock of Investors 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. SCOR has
repaid the option fees paid by the Company pursuant to the Option Agreement,
including interest, totaling approximately $3.3 million.
6. Accounts Payable and Accrued Liabilities
December 31,
--------------------------------
2005 2004
----------- -----------
Accrued compensation $ 1,825,000 $ 1,952,000
Commissions payable 749,000 381,000
Payable to insurance carrier 620,000 387,000
Accrued software costs 675,000 730,000
Accrued sales bonus 485,000 95,000
Accounts payable 206,000 391,000
Miscellaneous accrued expenses 924,000 1,307,000
----------- -----------
Total $ 5,484,000 $ 5,243,000
=========== ===========
7. Loan Payable and Note Payable
The Company 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 December 31, 2005 and 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, 2005, the Company made payments of $119,000 toward
the principal balance of the note. The required principal payments over the next
five years are: $78,000, $84,000, $90,000, $96,000 and $103,000.
As of December 31, 2004, the Company had an outstanding mortgage due of
$7.1 million on its office buildings in Petaluma, California. The note bore
interest at 6.95% and was originally due by August 1, 2012. On November 18,
2005, in connection with the sale of its office buildings in Petaluma,
California (see Note 18), the Company repaid the outstanding mortgage due on the
buildings.
33
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 $14,000. The Company typically matches 50%
of each employee's contributions up to 6% of their annual compensation, subject
to a maximum of $7,000. The Company's matching contributions were $115,000,
$311,000, and $405,000 for the years ended December 31, 2005, 2004, and 2003.
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 typically 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 $0, $23,000, and
$32,000 during the years ended December 31, 2005, 2004, and 2003. As of December
31, 2005 and 2004, employee contributions and Company matching contributions,
including cumulative investment gains, totaled $548,000 and $788,000.
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 2% to 5% of amounts deferred, depending on the
level of annual commissions earned. During the years ended December 31, 2005,
2004, and 2003, matching contributions related to the producer commission
deferral plan were $8,000, $18,000, and $16,000. As of December 31, 2005 and
2004, producer contributions and Company matching contributions, including
cumulative investment gains, totaled $7.5 million and $7.0 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 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
During 2005 and 2004, Legacy Marketing initiated sales incentive programs
for its independent insurance producers and its top producers ("Wholesalers"),
which granted bonuses to the producers and Wholesalers based upon their
achievement of predetermined monthly sales targets. The Company recorded expense
of $910,000 during the year ended December 31, 2005 related to this program, of
which $425,000 was paid as of December 31, 2005. The amount expensed in 2004 was
$392,000. The amounts expensed are included in selling, general and
administrative expenses.
During 2003, Legacy Marketing initiated a sales incentive program for its
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
$298,000, $329,000, and $531,000 is included in occupancy costs for the years
ended December 31, 2005, 2004, and 2003. Total rentals for leases of equipment
included in equipment expense were $727,000, $674,000, and $1.0 million for the
years ended December 31, 2005, 2004, and 2003.
34
The Company's future minimum annual lease commitments under all
non-cancelable operating leases as of December 31, 2005 are as follows:
Year Ended December 31,
2006 $ 999,000
2007 1,503,000
2008 1,017,000
2009 986,000
2010 918,000
Thereafter 4,658,000
-----------
Total minimum lease payments $l0,081,000
===========
During 2003, the Company amended its Shareholder Agreement with Lynda L.
Regan, Chief Executive Officer of the Company and Chairman of the Company's
Board of Directors. Under the terms of the amended agreement, upon the death of
Ms. Regan, the Company would have the option (but not the obligation) to
purchase from Ms. Regan's estate all shares of common stock that were owned by
Ms. Regan at the time of her death, or were transferred by her to one or more
trusts prior to her death. In addition, upon the death of Ms. Regan, her heirs
would have the option (but not the obligation) to sell their inherited shares to
the Company. The purchase price to be paid by the Company shall be equal to 125%
of the fair market value of the shares. As of December 31, 2005, the Company
believes that 125% of the fair market value of the shares owned by Ms. Regan was
equal to $8.8 million. The Company has purchased life insurance coverage 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, 2005, 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 $0.69 per share and $2.03 per share, and a redemption
value for Series B redeemable common stock of $0.57 and $1.67 per share, as of
December 31, 2005 and 2004, 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, 2003 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
Redemptions and retirement of common stock (196,000) (387,000) (3,000) (9,000) (199,000) (396,000)
Reduction to redemption value -- (871,000) -- -- -- (871,000)
---------- ------------ ---------- ------------ ---------- ------------
Balance December 31, 2005 2,657,000 $ 4,531,000 550,000 $ 1,688,000 3,207,000 $ 6,219,000
========== ============ ========== ============ ========== ============
The Company recorded redeemable common stock accretion/(reduction) of
($871,000), ($512,000) and $34,000 related to Series A redeemable common stock
for the years ended December 31, 2005, 2004 and 2003.
35
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,
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. We granted a total
of 15,000 stock options to Producers in each of the years ended December 31,
2005, 2004 and 2003. Total expenses recorded for Producer stock option grants
were $8,000, $12,000 and $10,000 during 2005, 2004 and 2003. The Producer stock
options granted for each of the three years ended December 31, 2005 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:
2005 2004 2003
------ ------ ------
Risk-free interest rates 3.99% 3.71% 3.19%
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 2005, 2004 and 2003.
Employee Option Plan -- Under the Regan Holding Corp. 1998 Stock Option
Plan (the "Employee Option Plan"), the Company may grant to employees and
directors incentive stock options and non-qualified options to purchase the
Company's common stock (collectively referred to herein as "Employee Options").
A total of 8.5 million shares have been reserved for grant under the Employee
Option Plan. The Employee Options generally vest over four or five years and
expire in ten years, except for incentive stock options granted to shareholders
who own 10% or more of the outstanding shares of the Company's stock, which
expire in five years. The Company uses the intrinsic value method of accounting
for stock-based awards granted to employees and, accordingly, does not recognize
compensation expense for its stock-based awards to employees.
36
Stock option activity under both plans was as follows:
Total
Weighted Average
Shares Exercise Price
---------- -----------
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
Granted 790,000 $ 0.99
Exercised (47,000) $ 1.53
Forfeited (3,496,000) $ 1.51
Outstanding at December 31, 2005 6,036,000 $ 1.43
Exercisable at December 31, 2003 13,106,000 $ 1.35
Exercisable at December 31, 2004 7,365,000 $ 1.48
Exercisable at December 31, 2005 5,524,000 $ 1.42
The following table summarizes information about stock options outstanding
at December 31, 2005 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 1,037,000 6.8 $0.80 987,000 $0.80
$1.27-$1.27 547,000 3.0 $1.27 547,000 $1.27
$1.53-$1.55 1,444,000 4.0 $1.53 1,399,000 $1.53
$1.61-$1.61 1,861,000 1.6 $1.61 1,861,000 $1.61
$1.65-$1.69 1,147,000 6.5 $1.68 730,000 $1.67
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.
37
The provision 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,
-----------------------------------------
2005 2004 2003
----------- ----------- -----------
Current income taxes:
Federal $ 190,000 $(3,341,000) $ 3,311,000
State 11,000 (36,000) 944,000
----------- ----------- -----------
Total current 201,000 (3,377,000) 4,255,000
Deferred income taxes:
Federal (738,000) 2,172,000 (696,000)
State 268,000 862,000 (168,000)
----------- ----------- -----------
Total deferred (470,000) 3,034,000 (864,000)
----------- ----------- -----------
Income tax (benefit) expense $ (269,000) $ (343,000) $ 3,391,000
=========== =========== ===========
The Company's deferred tax assets (liabilities) consist of the following:
December 31,
--------------------------
2005 2004
----------- -----------
Producer stock option and stock awards $ 494,000 $ 1,033,000
Producer deferred compensation 3,204,000 3,072,000
Accrued sales convention costs 8,000 44,000
Deferred gain on sale/leaseback of building 1,085,000 --
Federal net operating loss carryforward 1,795,000 59,000
Federal alternative minimum tax credit carryforward 191,000 --
State net operating loss carryforward, net of federal taxes 1,441,000 1,166,000
State alternative minimum tax credit carryforward,
net of federal taxes 181,000 181,000
Capital loss carryforward -- 300,000
Other deferred tax assets, net of federal taxes 1,088,000 1,328,000
----------- -----------
Subtotal deferred tax assets 9,487,000 7,183,000
Valuation allowance (6,718,000) (2,063,000)
----------- -----------
Subtotal deferred tax assets after valuation allowance 2,769,000 5,120,000
Fixed assets depreciation (2,523,000) (3,620,000)
Deferred gain on building sale -- (1,357,000)
Unrealized gains (246,000) (613,000)
----------- -----------
Subtotal deferred tax liabilities (2,769,000) (5,590,000)
----------- -----------
Deferred tax assets (liabilities), net $ -- $ (470,000)
=========== ===========
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. Due to cumulative
losses in recent year, management established a valuation allowance of $6.7
million as of December 31, 2005. This represents a net increase in 2005 of $4.7
million in the valuation allowance on deferred tax assets from December 31,
2004.
38
The income tax provision (benefit) in 2005, 2004 and 2003 differed from the
amounts computed by applying the statutory federal income tax rate of 34% to
pretax income (loss) as a result of the following:
For the Year Ended December 31,
-----------------------------------------
2005 2004 2003
----------- ----------- -----------
Federal income tax expense (benefit) at statutory rate (34%) $(4,753,000) $(2,656,000) $ 2,863,000
Increase (reductions) in income taxes resulting from:
State franchise taxes, net of federal income tax benefit 184,000 634,000 526,000
Expired producer stock options unexercised 457,000 844,000 --
Valuation allowance for remaining producer stock options (383,000) 759,000 --
Valuation allowance for federal net operating loss carryforward
and other temporary differences 3,954,000 -- --
Valuation allowance for federal alternative minimum tax credit
carryforward 191,000 -- --
Other 81,000 76,000 2,000
----------- ----------- -----------
Income tax provision (benefit) $ (269,000) $ (343,000) $ 3,391,000
=========== =========== ===========
As of December 31, 2005, the Company has federal and primary state net
operating loss carryforwards of $5.3 million and $23.0 million. On December 31,
2024 and 2025, $251,000 and $5.0 million of the federal net operating losses
will expire. On December 31, 2012, $4.9 million of the state net operating
losses will begin to expire. The Company also has federal and state alternative
minimum tax credit carryforwards of $191,000 and $275,000. These credits do not
have an expiration date. Federal and state tax valuation allowances have been
established for all of the federal and state net operating loss carryforwards
and the federal and state tax credit carryforwards.
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,
--------------------------------------------
2005 2004 2003
------------- ------------ -----------
Net income (loss) available for common
shareholders, as reported $ (12,840,000) $ (6,955,000) $ 4,995,000
============= ============ ===========
Reconciliation of shares used in basic and diluted
earnings per share calculations:
Basic:
Weighted average common shares outstanding 24,259,000 23,880,000 24,431,000
============= ============ ===========
Basic net income (loss) per share $ (0.53) $ (0.29) $ 0.20
============= ============ ===========
Diluted:
Weighted average common shares outstanding 24,259,000 23,880,000 24,431,000
Dilutive effect of stock options -- -- 2,899,000
------------- ------------ -----------
Shares used in diluted net income (loss) per share
calculation 24,259,000 23,880,000 27,330,000
============= ============ ===========
Diluted net income (loss) per share $ (0.53) $ (0.29) $ 0.18
============= ============ ===========
As the Company incurred net losses in the years ended December 31, 2005 and
2004, options to purchase 6.0 million and 8.8 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.
39
16. Segment Information
The Company has identified its reportable segments based on its method of
internal reporting and segregates its business into four primary reportable
segments: Legacy Marketing, Legacy Financial, Imagent Online, and Values
Financial Network. 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.
In January 2006, management of the Company decided to discontinue the
operations of VFN. We will incur insignificant costs associated with exiting the
operations.
In June 2005, management of the Company authorized the dissolution of its
Other segement, Legacy Reinsurance Company ("Legacy Re"). The dissolution became
effective in July 2005. Legacy Re did not have any results of operations in the
years ended December 31, 2005, 2004 and 2003.
Values
Legacy Legacy Imagent Financial Intercompany
Marketing Financial Online Network Subtotal Eliminations Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Year Ended December 31, 2005
Total revenue $ 24,824,000 $ 3,558,000 $ 197,000 $ 5,000 $ 28,584,000 $ (458,000) $ 28,126,000
Total expenses 37,056,000 3,667,000 1,774,000 583,000 43,080,000 (458,000) 42,622,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating loss (12,232,000) (109,000) (1,577,000) (578,000) (14,496,000) -- (14,496,000)
Other income 508,000 8,000 -- -- 516,000 -- 516,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss before tax (11,724,000) (101,000) (1,577,000) (578,000) (13,980,000) -- (13,980,000)
Tax provision (benefit) (475,000) 18,000 (615,000) 803,000 (269,000) -- (269,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net loss $(11,249,000) $ (119,000) $ (962,000) $ (1,381,000) $(13,711,000) $ -- $(13,711,000)
============ ============ ============ ============ ============ ============ ============
Year Ended December 31, 2004
Total revenue $ 34,009,000 $ 3,673,000 $ 275,000 $ 39,000 $ 37,996,000 $ (611,000) $ 37,385,000
Total expenses 39,909,000 3,999,000 1,133,000 1,287,000 46,328,000 (611,000) 45,717,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating loss (5,900,000) (326,000) (858,000) (1,248,000) (8,332,000) -- (8,332,000)
Other income 522,000 -- -- -- 522,000 -- 522,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss before tax (5,378,000) (326,000) (858,000) (1,248,000) (7,810,000) -- (7,810,000)
Tax provision (benefit) 530,000 (33,000) (343,000) (497,000) (343,000) -- (343,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (5,908,000) $ (293,000) $ (515,000) $ (751,000) $ (7,467,000) $ -- $ (7,467,000)
============ ============ ============ ============ ============ ============ ============
Year Ended December 31, 2003
Total revenue $ 68,029,000 $ 3,237,000 $ 247,000 $ 30,000 $ 71,543,000 $ (626,000) $ 70,917,000
Total expenses 56,373,000 4,113,000 1,260,000 1,760,000 63,506,000 (626,000) 62,880,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) 11,656,000 (876,000) (1,013,000) (1,730,000) 8,037,000 -- 8,037,000
Other income (loss) 391,000 (8,000) -- -- 383,000 -- 383,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before tax 12,047,000 (884,000) (1,013,000) (1,730,000) 8,420,000 -- 8,420,000
Tax provision (benefit) 4,807,000 (323,000) (407,000) (686,000) 3,391,000 -- 3,391,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 7,240,000 $ (561,000) $ (606,000) $ (1,044,000) $ 5,029,000 $ -- $ 5,029,000
============ ============ ============ ============ ============ ============ ============
Total assets
December 31, 2005 $ 33,532,000 $ 1,751,000 $ 2,995,000 $ 1,653,000 $ 39,931,000 $ (9,531,000) $ 30,400,000
============ ============ ============ ============ ============ ============ ============
December 31, 2004 $ 50,487,000 $ 1,575,000 $ 2,514,000 $ 2,069,000 $ 56,645,000 $ (9,027,000) $ 47,618,000
============ ============ ============ ============ ============ ============ ============
40
17. Concentration of Risk
As of December 31, 2005, Legacy Marketing sold and administered its
products primarily on behalf of three unaffiliated insurance carriers: American
National, Investors Insurance and Transamerica. The agreements with those
carriers generated a significant portion of the Company's total consolidated
revenue:
2005 2004 2003
---- ---- ----
American National 23% 25% 37%
Investors Insurance 20% 27% 23%
Transamerica 18% 24% 25%
Legacy Marketing's revenues are derived primarily from sales and
administration of the following fixed annuity product series:
2005 2004 2003
---- ---- ----
BenchMark(SM) series (American National) 22% 24% 37%
SelectMark(R) series (Transamerica) 18% 24% 25%
MarkOne(SM) series (Investors Insurance) 13% 23% 23%
18. Sale/Leaseback of Office Building
On November 18, 2005, the Company sold its office buildings in Petaluma,
California for $12.8 million. The Company and the third party buyer (the
"Buyer") further agreed to enter into a ten year lease agreement, concurrently
with the sale of the buildings, whereby the Company is leasing 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 is $1.25 per square foot and will increase annually by three percent during
the term of the lease, in addition to monthly taxes and operating expenses.
Pursuant to the terms of the lease, the Company paid the Buyer a security
deposit of $1.0 million and advance rent of $980,000. The advance rent will be
utilized to pay the monthly base rent, monthly taxes and operating expenses
during the first nine months of the lease term. The security deposit will be
reduced if the Company meets certain profitability criteria as specified in the
Agreement.
41
Supplementary Data
Quarterly Financial Information (Unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter Year
------------- -------------- ------------- -------------- -------------
2005
Total revenue $ 7,336,000 $ 7,143,000 $ 6,749,000 $ 6,898,000 $ 28,126,000
Operating loss $ (3,827,000) $ (6,025,000) $ (2,406,000) $ (2,238,000) $(14,496,000)
Net loss $ (3,334,000) $ (5,654,000) $ (2,559,000) $ (2,164,000) $(13,711,000)
Basic and diluted earnings per share:
Loss available to common shareholders $ (0.14) $ (0.20) $ (0.11) $ (0.07) $ (0.53)
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)
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
---------- ---------- ----------- ----------
2005
Allowance for uncollectible accounts $ 569,000 $ 267,000 $ (407,000) $ 429,000
State net operating loss carryforward
valuation allowance $ 921,000 $ 951,000 $ (30,000) $1,842,000
State alternative minimum tax credit
carryforward valuation allowance $ 181,000 $ -- $ -- $ 181,000
Producer stock option deferred tax
valuation allowance $ 885,000 $ 23,000 $ (467,000) $ 441,000
Federal net operating loss carryforward
valuation allowance $ -- $3,954,000 $ -- $3,954,000
Federal alternative minimum tax credit
carryforward valuation allowance $ -- $ 191,000 $ -- $ 191,000
Other $ 76,000 $ 33,000 $ -- $ 109,000
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
Other $ -- $ 76,000 $ -- $ 76,000
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
42
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
reasonable assurance of achieving the desired control objectives. As of December
31, 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.
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 and related notes 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.
43
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 2005 all Section 16(a)
filing requirements applicable to its officers, directors and ten-percent
stockholders were complied with.
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) 6,036,000 $1.43 14,964,000
(1) Includes the Regan Holding Corp. Producer Stock Option and Award Plan
and the Regan Holding Corp. 1998 Stock Option Plan
Regan Holding Corp. stockholders have approved all equity compensation plans.
Item 13. Certain Relationships and Related Transactions
Information required by Item 13 will be contained in the Company's
Definitive Proxy Statement in the section titled "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.
44
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) Reports of Independent Registered Public Accounting
Firms.
(ii) Consolidated Balance Sheet as of December 31, 2005 and
2004.
(iii) Consolidated Statement of Operations for the years ended
December 31, 2005, 2004, and 2003.
(iv) Consolidated Statement of Shareholders' Equity for the
years ended December 31, 2005, 2004, and 2003.
(v) Consolidated Statement of Cash Flows for the years ended
December 31, 2005, 2004, and 2003.
(vi) Notes to Consolidated Financial Statements.
2. Financial statement schedules - schedule II - valuation and
qualifying accounts (included in Item 8)
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)
- --------------------
* Management contract, compensatory plan or arrangement.
(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.
45
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) Commercial Note between SunTrust Bank and the Company executed April
23, 2004. (12)
10(p) Administrative Services Agreement, effective June 5, 2002, between
Investors Insurance Corporation and Legacy Marketing Group. (5)
10(q) Marketing Agreement, effective June 5, 2002, between Investors
Insurance Corporation and Legacy Marketing Group. (5)
10(r) Agreement of Purchase and Sale between Regan Holding Corp. and Basin
Street Properties, dated July 25, 2005, and related Lease, dated
November 18, 2005.
10(s) Amendment to Agreement of Purchase and Sale between Regan Holding
Corp. and Basin Street Properties, dated November 14, 2005.
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.
- --------------------
(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.
46
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, 2006
- ----------------------------------
Lynda L. Regan
Chairman of the Board of Directors and
Chief Executive Officer
By: /s/ R. Preston Pitts Date: March 31, 2006
- ----------------------------------
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, 2006
- ----------------------------------
Lynda L. Regan
Chairman of the Board of Directors and Chief
Executive Officer (Principal Executive Officer)
By: /s/ R. Preston Pitts Date: March 31, 2006
- ----------------------------------
R. Preston Pitts
Director, President
(Principal Financial and Accounting Officer)
By: /s/ Donald Ratajczak Date: March 31, 2006
- ----------------------------------
Donald Ratajczak
Director
By: /s/ Ute Scott-Smith Date: March 31, 2006
- ----------------------------------
Ute Scott-Smith
Director
By: /s/ J. Daniel Speight, Jr Date: March 31, 2006
- ----------------------------------
J. Daniel Speight, Jr.
Director
47