Item 1. Description of Business
Except for historical information contained herein, the matters discussed in this report contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties that could cause actual results to differ materially.
General Development of Business
Regan Holding Corp. is a holding company, incorporated in the State of California, whose primary operating subsidiaries are Legacy Marketing Group ("Legacy Marketing") and Legacy Financial Services, Inc. ("Legacy Financial"). During 2003, Legacy Marketing generated approximately 96% of our consolidated revenues. Legacy Marketing designs, markets and administers fixed annuity products on behalf of certain unaffiliated insurance carriers in each of the United States, except Alabama and New York.
Legacy Marketing has marketing agreements with Transamerica Life Insurance and Annuity Company ("Transamerica"), American National Insurance Company ("American National"), John Hancock Variable Life Insurance Company ("John Hancock"), and Investors Insurance Corporation. The marketing agreements grant us the exclusive right to market certain proprietary fixed annuity products issued by these insurance carriers. Fixed annuity products are insurance products that are sold to purchasers in the form of insurance policies. Under the terms of these agreements, we are responsible for appointing independent insurance producers (who we refer to as "Producers") who have contracted with us to sell fixed annuity products. For these services, the insurance carriers pay us marketing allowances and commissions based on the premium volume of insurance policies placed inforce. We are responsible for paying sales commissions to the Producers.
Legacy Marketing sells fixed annuity products through a network of approximately 27,000 Producers, of whom approximately 7,000 generated business for us during 2003. Each Producer has entered into a non-exclusive agreement with Legacy Marketing Group which defines the parties' business relationship. Such agreements typically may be terminated with up to ninety days prior written notice by either the Producer or Legacy Marketing, with or without cause.
Our sales network is built on a multi-level structure in which Producers may recruit other Producers. Recruited Producers are referred to as "downline" Producers within the original Producer's network. Recruited Producers may also recruit other Producers, creating a hierarchy under the original Producer. The standard Producer contract contains a nine-level design in which a Producer may advance from one level to the next based on sales commission amounts and the size of the Producer's downline network. As a Producer advances to higher levels within the system, he receives higher commissions on sales made through his downline network. This creates a financial incentive for Producers to build a hierarchy of downline Producers, which contributes to their financial growth and to the growth of Legacy Marketing. If a Producer leaves the network, his downline Producers can still receive sales commissions. Advancements to higher levels can occur as often as every three months. Producers at the highest levels are called "Wholesalers." We had approximately 500 Wholesalers who generated business for Legacy Marketing during 2003.
We provide tools and services that assist Wholesalers with recruiting, training and support responsibilities associated with the Producers in their hierarchy. In addition, we assist Producers with programs designed to increase their sales and better serve their clients. Recruiting and training programs include visual presentations, product videos and seminars, advertising material guidelines and sales flip charts. We also produce product information, sales brochures, pre-approved advertisements and recruiting material.
Legacy Marketing works closely with the insurance carriers in product design and development. Our marketing and actuarial departments work with the insurance carriers to design proprietary fixed annuity products to be marketed by Legacy Marketing. All of these products include guarantees for the benefit of policyholders and are guaranteed by the issuing insurance carriers. These guarantees generally include:
o a contractually guaranteed minimum interest rate,
o a contractually guaranteed maximum administrative fee, and
o the ability to allocate among various Cash Value Strategies(TM).
In addition to the marketing agreements, Legacy Marketing has administrative agreements with each of the four insurance carriers listed above and with IL Annuity and Insurance Company ("IL Annuity"), whose marketing agreement with us terminated effective during the first quarter of 2002. Under the terms of the administrative agreements, we provide clerical, administrative and accounting services with respect to the insurance policies. These services include billing, collecting and remitting premium for the policies. For providing these services, the insurance carriers pay us a fee per transaction, with the amount of the fee depending on the type of policy and type of service. Administrative services with respect to the insurance policies are performed at our headquarters in Petaluma, California and at our facilities in Rome, Georgia.
Neither the marketing agreements nor the administrative agreements prevent us from entering into similar arrangements with other insurance carriers. However, the marketing agreements with Transamerica and John Hancock, in general, prevent us from marketing products with other carriers which are defined as unique and proprietary under the terms of our marketing agreements with Transamerica and John Hancock.
The marketing agreement with American National expires on November 15, 2007, and the administrative agreement with American National expires on February 15, 2008. Both agreements may be renewed by mutual agreement for successive one-year terms. The agreements may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause. The marketing and administrative agreements with Transamerica and John Hancock do not have fixed terms but may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.
Legacy Marketing discontinued marketing life insurance products issued by American National effective during the first quarter of 2003. These products accounted for a nominal amount of revenue during each of the years ending December 31, 2003, 2002, and 2001. Legacy Marketing will continue to administer American National life insurance products, including acceptance of renewal premium. Certain Legacy Marketing employees who were supporting the life insurance product operations were either terminated or reassigned to other positions in Legacy Marketing.
During the second quarter of 2003, American National reduced the crediting rates of several annuity products marketed by Legacy Marketing. In addition, American National lowered the commission rates that they pay to Legacy Marketing for sales of these products. As a result, sales of annuity products on behalf of American National decreased during the second half of 2003 and overall Legacy Marketing revenues also declined due to this event. Legacy Marketing has developed new annuity products with American National that may result in increased sales for Legacy Marketing in the long term.
The marketing and administrative agreements with John Hancock were entered into in January 2001, and we began marketing and administering products during the fourth quarter of 2001.
During the third quarter of 2003, Legacy Marketing began discontinuing the marketing of the AssureMark (SM) fixed annuity product issued by John Hancock. As a result, sales of annuity products on behalf of John Hancock decreased during the second half of 2003 and will continue to decrease during 2004. Legacy Marketing plans to develop new annuity products with John Hancock that may result in increased sales in the long term.
In June 2002, Legacy Marketing entered into marketing and administrative services agreements with Investors Insurance Corporation, an unaffiliated insurance carrier. Under these agreements, Legacy Marketing will sell and administer annuity products on behalf of Investors Insurance Corporation. Legacy Marketing has an option to buy Investors Insurance Corporation. The option expires on June 30, 2005. If Legacy Marketing exercises the option, it must complete the purchase transaction within two years of exercising the option. Sales on behalf of Investors Insurance Corporation began in June 2002.
During the first quarter of 2003, Legacy Marketing discontinued the marketing of several annuity products issued by Transamerica. Legacy Marketing will continue to administer these annuity products and to accept additional premium payments, subject to applicable additional deposit rules for these products. The discontinued products accounted for approximately 3%, 31%, and 59% of our total consolidated revenue for the years ended December 31, 2003, 2002, and 2001. Sales of recently introduced Transamerica products have partially offset the effect of the discontinued Transamerica products. However, effective in May 2004 Legacy Marketing will discontinue marketing Transamerica products. We intend to continue providing administrative services.
Through our wholly-owned broker-dealer subsidiary, Legacy Financial, we sell variable annuity and life insurance products, mutual funds, and debt and equity securities. Legacy Financial has entered into sales agreements with investment companies that give it the non-exclusive right to sell investment products on behalf of those companies. Sales of investment products are conducted through Legacy Financial's network of independent registered representatives (who we refer to as "Representatives"). Under the sales agreements, we are compensated based upon predetermined percentages of the sales generated by the Representatives. The agreements may be terminated by either party upon thirty days prior written notice. During 2003, Legacy Financial accounted for approximately 4% of our consolidated revenues.
Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the U.S. Securities and Exchange Commission, National Association of Securities Dealers, Municipal Securities Rulemaking Board, and various state agencies. As a result of federal and state broker-dealer registration and self-regulatory organization memberships, Legacy Financial is subject to regulation that covers many aspects of its securities business. This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel. Also, these regulations include supervisory and organizational procedures intended to ensure compliance with securities laws and prevent improper trading on material nonpublic information. Rules of the self-regulatory organizations are designed to promote high standards of commercial honor and just and equitable principles of trade. A particular focus of the applicable regulations concerns the relationship between broker-dealers and their customers. As a result, many aspects of the broker-dealer customer relationship are subject to regulation, including "suitability" determinations as to customer transactions, limitations in the amounts that may be charged to customers, and correspondence with customers.
During 2000, through our wholly owned subsidiary Imagent Online, we invested in prospectdigital, LLC, which was developing an Internet-based customer relationship management product. In January 2002, we purchased all of the remaining outstanding equity interests in prospectdigital. Prospectdigital has generated nominal revenues to date.
In December 2000, we acquired the assets and name of Values Financial Network, Inc. Values Financial Network is engaged in the business of values-based investment screening, and has generated minimal revenues to date.
Competitive Business Conditions
The fixed annuity business is rapidly evolving and intensely competitive. Legacy Marketing's primary market is fixed annuities sold through independent producers. In addition, Legacy Marketing administers the products sold by Producers on behalf of the issuing insurance carriers. Fixed annuity sales in the United States were approximately $88 billion in 2003. Some of Legacy Marketing's top competitors selling fixed annuities through independent sales channels are Allianz Life of North America, American Equity Investment Life, Jefferson Pilot Financial Insurance Company, and AmerUs Group. These competitors may have greater financial resources than we do. However, our business model allows us greater flexibility, as we can adjust the mix of business sold if one, or more, of our carriers were to experience capital constraints or other events that effect their business models. Our competitors may respond more quickly than us to new or emerging products and changes in customer requirements. We are not aware of any significant new means of competition, products or services that our competitors provide or will soon provide. However, in the highly competitive fixed annuity marketplace, new distribution models, product innovations and technological advances may occur at any time and could present us with competitive challenges. There can be no assurance that we will be able to compete successfully. In addition, our business model relies on our Wholesaler distribution network to effectively market our products competitively. Maintaining relationships with these Wholesaler distribution networks requires introducing new products and services to the market in an efficient and timely manner, offering competitive commission schedules, and providing superior marketing, training, and support. In the recent past, we have been reasonably successful in expanding and maintaining our current distribution network. We are not aware of any Wholesaler who may discontinue marketing our products. Due to competition among insurance companies and insurance marketing organizations for successful Wholesalers, there can be no assurance that we will be able to retain some or all of our Wholesaler distribution networks.
Regulatory Environment
State legislators, state insurance regulators and the National Association of Insurance Commissioners continually reexamine existing laws and regulations, and may impose changes in the future that materially adversely affect our business, results of operations and financial condition. In particular, rate rollback legislation and legislation to
control premiums, policy terminations and other policy terms may affect the marketability of policies or the amount of premiums that can be charged for such policies, and thus the commissions we can earn. Recently a committee of the U.S. House of Representatives has been considering the advisability of enacting federal statutes that would impose certain national uniform insurance regulatory standards to be applied by state insurance regulators. No such legislation has yet been introduced. A bill entitled "The Federal Insurance Consumer Protection Act of 2003" (S. 1373), has been introduced in the U.S. Senate which, if enacted, would establish comprehensive and exclusive federal regulation over all "interstate insurers," including all property and casualty insurers selling in more than one state, with no option for such insurers to remain regulated by the states. This legislation would repeal the McCarran-Ferguson antitrust exemption for the business of insurance. It would also establish a Federal Insurance Regulatory Commission within the Department of Commerce that would have exclusive regulatory jurisdiction over property and casualty and life insurers that do business in more than one U.S. jurisdiction. The legislation would establish comprehensive federal regulatory oversight over such insurers, including licensing, solvency supervision, accounting and auditing practices, form and rate approval, and market conduct examination. The legislation also would establish a National Insurance Guaranty Fund, which may be empowered to collect pre-funded assessments that are different from, and potentially greater than, current state guaranty fund assessment levels. We cannot predict whether these or other proposals will be adopted, or what impact, if any, such proposals may have on our business, financial condition or results of operation.
Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and various state agencies. This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel. Any proceeding alleging violation of, or noncompliance with, laws and regulations applicable to us or our subsidiaries could harm our business, financial condition, results of operations, and business prospects. In addition, changes in federal legislation, state legislation, court decisions and administrative policies could significantly and adversely affect the securities industry generally and our business in particular.
Employees
As of February 29, 2004, we employed 482 employees. None of our employees is represented by a collective bargaining agreement. We consider our relations with our employees to be good, and we will continue to strive to provide a positive work environment for our employees.
Financial Information about Segments
The financial information about segments required by Item 101(b) of Regulation S-K is contained in our financial statements and supplementary data, Part II, Item 8 of this Form 10-K.
Financial Information about Geographic Areas
During the last three fiscal years, we have not depended on revenue from sources outside the United States. Also during that time, all long-lived assets have been located in the United States.
Item 2.
Item 2. Properties
In June 2001, we purchased the building that houses our headquarters and most of Legacy Marketing's operations in Petaluma, California. During 2003 we began construction of a building in Rome, Georgia. Upon completion, our employees located in Rome will move to the new building.
Item 3.
Item 3. Legal Proceedings
We are involved in various claims and legal proceedings arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these cases, we believe that the ultimate disposition of these claims will not have a material adverse effect on our financial condition, cash flows or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of security holders during the fourth quarter of 2003.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
As of March 15, 2004, Regan Holding Corp.'s Series A Common Stock was held by approximately 1,000 shareholders of record and our Series B Common Stock was held by approximately 10,000 shareholders of record. There is no established public trading market for our stock.
Our Board of Directors may, at its sole discretion, declare and pay dividends on common stock, subject to capital and solvency restrictions under California law. To date, we have not paid any dividends on our common stock. Our ability to pay dividends is dependent on the ability of our wholly-owned subsidiaries to pay dividends or make other distributions to us. As of December 31, 2003, we do not anticipate paying dividends on any of our outstanding common stock in the foreseeable future.
Item 6.
Item 6. Selected Consolidated Financial Data
(1) When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is placed inforce. Inforce premium and policies are statistics of our carriers but are factors that directly affect our revenue.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained in this document, including Management's Discussion and Analysis of Financial Condition and Results of Operations, that are not historical facts, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of Regan Holding Corp. and its businesses to be materially different from that expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, among other things, the following: general economic and business conditions; political and social conditions; government regulations, especially regulations affecting the insurance industry; demographic changes; the ability to adapt to changes resulting from acquisitions or new ventures; and various other factors referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Regan Holding Corp. assumes no obligation to update forward-looking statements to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.
General Overview of Our Business
Regan Holding Corp. is a holding company, whose primary operating subsidiaries are Legacy Marketing and Legacy Financial.
Legacy Marketing designs, markets and administers fixed annuity products on behalf of certain unaffiliated insurance carriers in each of the United States, except Alabama and New York. As of December 31, 2003, Legacy Marketing had marketing agreements with Transamerica, American National, John Hancock, and Investors Insurance Corporation. The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity products issued by these insurance carriers. Legacy Marketing is responsible for appointing independent insurance producers who have contracted with Legacy Marketing to sell these products. For these services, the insurance carriers pay Legacy Marketing commissions and marketing allowances.
Legacy Marketing also has administrative agreements with each of the insurance carriers listed above, and with IL Annuity, whose marketing agreement with us was terminated effective during the first quarter of 2002. Under the terms of the administrative agreements, Legacy Marketing provides clerical, administrative and accounting services with respect to the insurance policies. For providing these services, the insurance carriers pay Legacy Marketing administrative fees.
Through our wholly-owned broker-dealer subsidiary, Legacy Financial, we sell variable annuity and life insurance products, mutual funds, and debt and equity securities. Sales of investment products are conducted through Legacy Financial's network of independent registered representatives.
The results of our operations are generally affected by the conditions that affect other companies that market annuity and life insurance products, and third-party administrators of those products. These conditions are increased competition, changes in the regulatory and legislative environments, and changes in general economic and investment conditions.
Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations is based in large part on the consolidated financial statements of Regan Holding Corp., which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.
Legacy Marketing has marketing and administrative agreements with certain insurance carriers, listed above. Under the terms of the marketing agreements, Legacy Marketing is responsible for appointing producers with various states' departments of insurance, who have contracted with Legacy Marketing to sell fixed annuity products to the general public.
Under the terms of the administrative agreements, Legacy Marketing provides clerical, administrative and accounting services with respect to the insurance policies. For providing these services, the insurance carriers pay Legacy Marketing issuing, maintenance, and termination fees on a per transaction basis, with the amount of the fee depending on the type of policy and type of service.
There are no significant management judgements associated with reporting these revenues. When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is considered inforce and Legacy Marketing recognizes marketing allowances and commission income. Legacy Marketing's carriers grant policyholders a contractual right to terminate the insurance contract ten to thirty days after a policy is placed inforce. This return period varies depending on the carrier, the type of policy and the jurisdiction in which the policy is sold. Legacy Marketing gathers historical product return data that does not vary significantly from quarter to quarter, and has historically been predictive of future events. Returns are estimated using this data and have been reflected in the Consolidated Financial Statements. Legacy Marketing recognizes administrative fees on a per transaction basis as services are performed, with the amount of the fee depending on the type of policy and type of service.
We capitalize external consulting fees, and salaries and benefits for employees who are directly associated with the development of software for internal use when both of the following occur:
o The preliminary project stage is completed and therefore the project is in the application development stage; and
o Management authorizes and commits to funding a software project and it is probable that the project will be completed and the software will be used to perform the function desired.
Modifications or enhancements made to an existing software product that result in additional functionality are also capitalized. When the new software is placed in production, we begin amortizing the asset over its estimated useful life. Training and maintenance costs are accounted for as expenses as they occur. We periodically review capitalized internal use software to determine if the carrying value is fully recoverable. If there are future cash flows directly related to the software we record an impairment loss when the present value of the future cash flows is less than the carrying value. If software, or components of software, in development are abandoned, the Company takes a charge to write off the capitalized amount in the period the decision is made to abandon it.
During 2003, we completed our evaluation of an internal use software project that we initially licensed in 1998 with the intent to modify and customize the licensed software prior to deployment. We began this project intending to replace our administration system after the vendor of our existing administration system required us to migrate from the existing system to an alternative platform. In late 2002, we learned from our vendor that we might be able to retain our existing system. Modification and customization of the licensed software was suspended in December of 2002. A financial analysis completed in the first quarter of 2003 indicated that remaining on the existing system may provide greater benefit than converting to a new system. In the third quarter of 2003, our vendor concluded that we could continue to use our existing system for an extended period. We have completed a rigorous evaluation of our Company-wide technological needs, which included an assessment of the viability of the existing system. As a result of this assessment we concluded that we would use both systems and in the fourth quarter of 2003 we recorded a write-off of $1.1 million associated with abandoned components of the software cost. Our assessment supports the remaining $3.3 million balance.
When the Company purchased Values Financial Network, Inc. ("VFN") in 2000, part of the purchase price was for goodwill. Before January 1, 2002, the Company amortized the goodwill on a straight-line basis over 10 years, which was its estimated useful life. Pursuant to Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased amortizing goodwill on January 1, 2002. As required by SFAS 142, the Company performs an annual goodwill impairment test. The impairment test of SFAS 142 requires the Company to measure fair value of the reporting unit. The Company established fair value by preparing a forecast of the discounted value of future cash flows expected to be derived from VFN.
During 2002, the Company revised the business model for VFN to focus on corporate and individual producer sales and its projections supported the balance of goodwill. In early 2003 the Company further refined its business model for VFN, including identifying a new market and committing additional resources to develop the business. During 2003, due to the failure of VFN to produce revenues as projected, the Company updated its annual measurement of fair value of VFN. The fair value measurement based on a revised cash flow forecast was predicated on VFN realizing a lower level of sales. This forecast of cash flows did not support the balance of goodwill, and the Company recorded a goodwill impairment loss of $491,000 during 2003. Current projections support the remaining balance of goodwill.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will, or will not, be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management believes it is more likely than not that the deferred tax assets will be realized.
Investments classified as available-for-sale are periodically reviewed to determine if declines in fair value below cost are other-than-temporary. Significant and sustained decreases in quoted market prices, a series of historical and projected operating losses by the investee or other factors are considered as part of the review. If the decline in fair value has been determined to be other-than-temporary, an impairment loss is recorded in investment income and the individual security is written down to a new cost basis. During 2001, we determined that certain
investment securities had other-than-temporary declines in fair value below cost. As a result, in 2001 we recorded impairment losses of $642,000, and the individual securities were written down to a new cost basis.
Regan Holding Corp. Consolidated
Year ended December 31, 2003 compared with year ended December 31, 2002
We had consolidated net income of $5.0 million in 2003, compared to consolidated net losses of $60,000 in 2002. The improved results are primarily due to increased net income at Legacy Marketing, partially offset by increased losses at Values Financial Network, Inc. primarily due to asset impairment losses.
Year ended December 31, 2002 compared with year ended December 31, 2001
We had consolidated net losses of $60,000 in 2002, compared to consolidated net losses of $348,000 in 2001. The improved results are primarily due to reduced losses at Values Financial Network, Inc. and Legacy Financial, and the recognition of net income at our Other segments in 2002 compared to net losses in 2001, partially offset by lower net income at Legacy Marketing.
Legacy Marketing
Year ended December 31, 2003 compared with year ended December 31, 2002
During 2003, Legacy Marketing's net income totaled $7.2 million, compared to net income of $1.6 million during 2002. This increase of $5.6 million is primarily due to increased revenues, partially offset by increased expenses and decreased investment income in 2003 compared to 2002.
During 2003, Legacy Marketing's revenue increased $20.2 million (42%) primarily due to increased commissions and marketing allowances. Marketing allowances and commissions increased $16.3 million (46%). Legacy Marketing's sales increase was driven by sales of declared rate and equity index annuities, reflecting a shift in the marketplace toward more traditional fixed income-based annuities. The overall increase in commissions and marketing allowances during 2003 was offset in part by the effect of discontinuing several annuity products issued by Transamerica. Legacy Marketing will continue to administer these annuity products and to accept additional premium payments, subject to applicable additional deposit limitations for these products. The discontinued products accounted for approximately 3% and 31% of our total consolidated revenue during 2003 and 2002. Sales of recently introduced Transamerica products have partially offset the effect of the discontinued Transamerica products. However, effective in May 2004 Legacy Marketing will discontinue marketing Transamerica products. We intend to continue providing administrative services. In addition, during the second quarter of 2003, American National reduced the crediting rates of several annuity products marketed by Legacy Marketing and lowered the commission rates that they pay to Legacy Marketing for sales of these products. As a result, sales of annuity products on behalf of American National began to decrease during the second quarter of 2003. This trend continued throughout the remainder of 2003. It is possible that overall consolidated revenues may also decline due to this event. Legacy Marketing has developed new annuity products with American National that may result in increased sales for Legacy Marketing in the long term. Furthermore, during the third quarter of 2003, Legacy Marketing began discontinuing the marketing of the AssureMark (SM) fixed annuity product issued by John Hancock. As a result, sales of annuity products on behalf of John Hancock decreased during 2003. Legacy Marketing plans to develop new annuity products with John Hancock that may result in increased sales in the long term.
Administrative fees increased $1.9 million (16%) during 2003 compared to 2002 primarily due to increased issuing and maintenance fees. Other income increased $2.0 million during 2003 compared to 2002. This increase was primarily due to a performance bonus earned on sales of fixed annuity and life products under the terms of one of the Company's insurance carrier partner contracts. The Company and the insurance carrier agreed to terminate the bonus program effective July 1, 2003.
As of December 31, 2003, Legacy Marketing sold products on behalf of four unaffiliated insurance carriers: Transamerica, American National, John Hancock and Investors Insurance Corporation. Legacy Marketing also performs administrative services for products of IL Annuity. The agreements with the following carriers generated a significant portion of the Company's total consolidated revenue (sales on behalf of Investors Insurance Corporation began in the second quarter of 2002):
2003 2002 ---- ---- American National 37% 17% Transamerica 25% 52% Investors Insurance Corporation 23% 6% IL Annuity 6% 12% John Hancock 3% 8%
Although Legacy Marketing sells and administers several products on behalf of the insurance carriers, our consolidated revenues are derived primarily from sales and administration of the following annuity product series:
2003 2002 ---- ---- BenchMark(SM) series (sold on behalf of American National) 37% 16% SelectMark(SM) series (sold on behalf of Transamerica) 25% 51% MarkOne(SM) series (sold on behalf of Investors Insurance Corporation) 23% 6% VisionMark(SM) series (sold on behalf of IL Annuity) 4% 11% AssureMark(SM) series (sold on behalf of John Hancock) 3% 8%
As indicated above, American National reduced the crediting rates on several annuity products and we will cease marketing Transamerica products effective in May 2004. As a result of these events our sales of Transamerica and American National products will likely decrease.
Legacy Marketing's expenses increased $10.6 million (23%) primarily due to increased selling, general and administrative expenses and other. The increase in selling, general and administrative expenses of $9.7 million (24%) was primarily due to increases in compensation, sales promotion and support expenses, insurance, occupancy, and courier expenses. Compensation increased primarily due to salary increases, incentive based compensation based on our consolidated year-to-date results, temporary help due to increased business volume, and benefits. Sales promotion and support expenses increased primarily due to bonuses for our top independent insurance producers based on their achievement, for the year 2003, of predetermined annual sales targets which were paid in the first quarter of 2004. Increased insurance expenses reflected rising prices for errors and omissions and workers' compensation insurance coverage. The increase in courier expenses was related to increased business volume. Other expenses increased $1.2 million (47%) primarily due to the $1.1 million write-off of internal use software.
Legacy Marketing recognized investment income of $409,000 in 2003 compared to $638,000 in 2002. This decrease was primarily due to lower realized gains on sales of investment securities during 2003.
Year ended December 31, 2002 compared with year ended December 31, 2001
During 2002, Legacy Marketing's net income totaled $1.6 million, compared to net income of $2.8 million during 2001. This decrease of $1.2 million was primarily due to decreased revenues, partially offset by decreased expenses and the recognition of investment income in 2002 compared to investment losses in 2001.
Legacy Marketing's revenue decreased $5.6 million (10%) primarily due to decreased marketing allowances and commission income. Marketing allowances and commission revenue, combined, decreased $5.9 million (14%) due to a decrease in sales of fixed annuity and life policies. The sales decrease was primarily due to a shift in the marketplace toward more traditional fixed income-based annuities. Administrative fees increased $307,000 (3%) primarily due to an increase in the number of policies administered year over year, partially offset by a lower number of policies issued in 2002.
Legacy Marketing's expenses decreased $2.9 million (6%) primarily attributable to decreases in selling, general and administrative expenses. The decrease in selling, general and administrative expenses of $2.9 million (7%) was primarily due to decreases in professional fees, commissions, compensation, and occupancy expenses. Professional fees decreased primarily due to lower consulting fees related to internal use software maintenance, and reduced legal expenses. The decrease in commissions was primarily related to lower sales. Compensation decreased primarily due to the effect of attrition, as Legacy Marketing's headcount decreased 4% in 2002. The decreased occupancy expense was primarily a result of our purchasing the building that houses our headquarters, which resulted in no rent expense after June 2001, partially offset by increased interest expense from financing the building purchase.
Legacy Marketing recognized investment income of $638,000 in 2002 compared to investment losses of $239,000 in 2001. This shift was primarily because 2001 included impairment losses of $642,000 related to other-than-temporary declines in the value of certain investment securities.
Legacy Financial
Year ended December 31, 2003 compared with year ended December 31, 2002
Legacy Financial incurred net losses of $683,000 during 2003, compared to net losses of $595,000 during 2002. Results declined primarily due to increased expenses partially offset by increased revenues.
Legacy Financial revenue increased $460,000 (18%) during 2003 compared to 2002, primarily due to increased reimburseable insurance premiums and increased sponsorship revenues, partially offset by decreased marketing allowances and commissions related to lower overall sales volume and changes in product mix.
Legacy Financial expenses increased $582,000 (17%) in 2003 compared to 2002. The increase was primarily due to an increase in selling, general and administrative expenses and other expenses. Selling, general and administrative expenses increased $359,000 (11%) primarily attributable to increased sales promotion expenses, increased errors and omissions insurance premiums, and increased incentive compensation. Other expenses increased $223,000 (71%) primarily due to increased equipment maintenance expenses and increased insurance costs.
Legacy Financial has incurred cumulative losses since its inception in 1995. We have committed to make sufficient contributions to support Legacy Financial's operations through February 2005.
Year ended December 31, 2002 compared with year ended December 31, 2001
Legacy Financial incurred net losses of $595,000 during 2002, compared to net losses of $837,000 during 2001. The improved results were primarily due to increased revenues.
Legacy Financial revenue increased $387,000 (18%) primarily due to increases in the volume of sales resulting from a more attractive product mix for Legacy Financial's distribution network of registered representatives.
Legacy Financial's total expenses were unchanged during 2002 compared to 2001.
Values Financial Network, Inc.
Year ended December 31, 2003 compared with year ended December 31, 2002
Values Financial Network, Inc. incurred net losses of $1.0 million during 2003, compared to net losses of $520,000 during 2002. The increased losses were due to goodwill, intangibles, and long-lived asset impairment losses during 2003. Revenues increased $23,000 (329%) during 2003 compared to 2002 primarily due to rental income from a tenant who began subleasing office space from VFN in the second quarter of 2003. Expenses excluding the impairment losses were relatively unchanged during 2003 compared to 2002.
When the Company purchased the assets of Values Financial Network, Inc. ("VFN") in 2000, part of the purchase price was for goodwill. Before January 1, 2002, the Company amortized the goodwill on a straight-line basis over 10 years, which was its estimated useful life. Pursuant to Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased amortizing goodwill on January 1, 2002. As required by SFAS 142, the Company performed a transitional and annual goodwill impairment test during 2002. The impairment test of SFAS 142 required the Company to measure fair value of the reporting unit. The Company established fair value by preparing a forecast of the discounted value of future cash flows expected to be derived from VFN.
During 2002, the Company revised the business model for VFN to focus on corporate and individual producer sales and its projections supported the balance of goodwill. During 2003 the Company further refined its business model for VFN, including identifying a new market and committing additional resources to develop the business. During 2003 the Company updated its annual measurement of fair value of VFN due to the failure of VFN to produce revenues as projected. The fair value measurement based on a revised cash flow forecast was predicated on VFN realizing a lower level of sales. This forecast of cash flows did not support the balance of goodwill, and the Company recorded a goodwill impairment loss of $491,000 during 2003.
Additionally, when the Company purchased VFN in 2000, among the assets acquired were long lived assets comprising a website, which incorporates sales lead management, investment screening and asset allocation functionalities, and copyrights related to two books. These assets were recorded at fair value, as determined by an
independent appraisal. In connection with the updated measurement of the fair value of the VFN asset group as discussed above, the Company recorded a long-lived asset impairment loss of $394,000 during 2003, included in Other expenses.
Year ended December 31, 2002 compared with year ended December 31, 2001
Values Financial Network, Inc. incurred net losses of $520,000 during 2002, compared to net losses of $1.2 million during 2001, primarily due to reduced expenses partially offset by lower revenues. Total revenues decreased $38,000 (84%) primarily due to decreased sales leads revenue. Total expenses decreased $1.2 million (58%) in 2002 primarily resulting from the termination of employees and decreased IT consulting fees.
Imagent Online
In 2000, we purchased, through Imagent Online, a 33.3% ownership interest in a development stage company named prospectdigital, LLC ("prospectdigital") for $403,000.
In January 2002, we purchased all of the remaining outstanding stock of prospectdigital for $225,000 in cash, a non-recourse note payable in the amount of $75,000 and payable out of the future profits of prospectdigital, and $100,000 of contingent consideration based on future income. Under the terms of the purchase agreement, prospectdigital remained liable for payment of the $1.5 million indebtedness, plus accrued interest, due to us. Prospectdigital is now a wholly owned subsidiary, and the results of prospectdigital's operations have been included in the Consolidated Financial Statements since the date of acquisition.
Year ended December 31, 2003 compared with year ended December 31, 2002
Imagent Online had net losses of $606,000 during 2003, compared to net losses of $648,000 during 2002. This favorable change of $39,000 was primarily due to increased revenues at prospectdigital in 2003.
Year ended December 31, 2002 compared with year ended December 31, 2001
Imagent Online had net losses of $648,000 during 2002, compared to net losses of $660,000 during 2001. This favorable change of $12,000 was primarily due to increased revenues at prospectdigital in 2002. As discussed above, prospectdigital's results of operations are included in the Consolidated Financial Statements since our acquisition of it in January 2002. Prior to the acquisition, we accounted for our investment in prospectdigital under the equity method of accounting. Accordingly, our share of prospectdigital's losses during 2001 were included in other expenses. Imagent Online had no revenue in 2001, and its expenses primarily consisted of its share of prospectdigital's losses.
Other Segments
Year ended December 31, 2003 compared with year ended December 31, 2002
During 2003, combined net income from Legacy Advisory Services and Legacy Re, which is inactive, was $122,000, compared to combined net income of $61,000 in 2002. This favorable change of $61,000 is primarily due to increased advisory fee revenues.
Year ended December 31, 2002 compared with year ended December 31, 2001
During 2002, combined net income from Legacy Advisory Services, Legacy Re and Concept Strategies, Inc. was $61,000, compared to combined net losses of $371,000 in 2001. This favorable change of $432,000 is primarily due to closing the operations of our LifeSurance Corporation subsidiary in late 2001.
Liquidity and Capital Resources
We require cash for the following purposes: (i) to fund operating expenses, which consist primarily of selling, general and administrative expenses; (ii) to purchase and develop fixed assets, primarily internal use software and computer hardware, in order to increase operational efficiency; (iii) to fund continued product development; and (iv) as a reserve to cover possible redemptions of certain shares of our common stock, which are redeemable at the option of the shareholders. Our primary source of cash is from operating activities.
Net cash provided by operating activities was $12.0 million for 2003 compared to $410,000 in 2002, primarily due to increased operating results, lower net purchases of trading securities, and the application of a prepaid deposit toward a Producer incentive trip, offset in part by unrealized gains on trading securites in 2003 compared to unrealized losses in 2002.
Net cash used in investing activities was $5.2 million compared to net cash provided by investing activities of $1.9 million for 2002, primarily due to increased purchases and lower sales of available-for-sale securities, partially offset by lower cash outlays for the development of internal use software.
Net cash used in financing activities was $1.6 million for 2003 compared to net cash provided by financing activities of $1.1 million for 2002, primarily due to lower net proceeds from loans and higher repurchases of our common stock during 2003. During 2001, we purchased the office building which houses our headquarters for $10.6 million. In conjunction with the acquisition, we entered into a bridge loan agreement for $4.8 million. In July 2002, we replaced the bridge loan with permanent financing in the amount of $7.4 million. The note is payable over ten years in monthly installments of principal and interest based on a 25-year term. At the end of ten years, we must pay the balance of principal due on the note. For the first five years, the interest rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%, adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease in the interest rate. The maximum interest rate is 10.50%.
During 2003, we began construction of a new building in Rome, Georgia and established a $2.7 million loan facility to be drawn against to finance construction costs. The interest rate is equal to LIBOR plus 2.10%. The interest rate as of December 31, 2003 was 3.24%. The loan matures on October 27, 2004. As of December 31, 2003, $2.5 million was available under the construction loan.
We are obligated to repurchase certain shares of our common stock. At December 31, 2003 and December 31, 2002, the total redemption value of all redeemable common stock outstanding was $9.0 million and $10.1 million. Cash paid to repurchase some of these shares totaled $1.2 million during 2003, and $964,000 during 2002. As the value of our common stock rises, our monetary obligation with respect to the redeemable common stock also increases.
We lease office and warehouse premises and certain office equipment under non-cancelable operating leases. As of December 31, 2003, our total contractual cash obligations, including the building financing discussed above, were as follows:
During 2003, the Company amended its Shareholder Agreement with Lynda L. Regan, Chief Executive Officer of the Company and Chairman of the Company's Board of Directors. Under the terms of the amended agreement, upon the death of Ms. Regan, the Company would have the option (but not the obligation) to purchase from Ms. Regan's estate all shares of common stock that were owned by Ms. Regan at the time of her death, or were transferred by her to one or more trusts prior to her death. In addition, upon the death of Ms. Regan, her heirs would have the option (but not the obligation) to sell their inherited shares to the Company. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares. As of December 31, 2003, the Company believes that 125% of the fair market value of the shares owned by Ms. Regan was equal to $28.3 million. The Company has purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this potential obligation upon Ms. Regan's death.
Management intends to continue to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.
We generated $12.0 million and $410,000 of cash flow from operations in 2003 and 2002. However, if requests to repurchase redeemable common stock increase significantly, a cash shortfall could ultimately occur. Management believes that existing cash and investment balances, together with anticipated cash flow from operations, will provide sufficient funding for the foreseeable future. However, in the event that a cash shortfall were to occur, management believes that adequate financing could be obtained to meet our cash flow needs. There can be no assurances that such financing would be available on favorable terms.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. The provisions of SFAS 150 require that some of these instruments now be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for existing financial instruments beginning on July 1, 2003. The implementation of SFAS 150 had no material effect on the Company's consolidated results of operations or financial position.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue 00-21 ("EITF 00-21). "Accounting for Revenue Arrangements with Multiple Deliverables". EITF 00-21 provides guidance on when and how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The Company adopted EITF 00-21 on July 1, 2003. The adoption of EITF 00-21 did not have a material effect on the Company's consolidated financial position and results of operations.
RISK FACTORS RISKS RELATED TO OUR COMPANY
We have experienced losses in recent years and if losses continue, our business could suffer.
We had net losses of $60,000 and $348,000 for the years ended December 31, 2002 and 2001. We had net income of $5.0 million during 2003. We intend to continue to invest in marketing, operations, technology, and product development. We will need to generate adequate revenues and reduce our operating costs to maintain profitability. If we fail to maintain profitability, our financial condition and prospects could be weakened.
We depend on a limited number of sources for our products, and any interruption, deterioration, or termination of the relationship with any of our insurance carriers could be disruptive to our business and harm our results of operations and financial condition.
Legacy Marketing has marketing agreements with Transamerica Life Insurance and Annuity Company, American National Insurance Company, John Hancock Variable Life Insurance Company, and Investors Insurance Corporation. Legacy Marketing has also entered into administrative agreements with each of the four insurance carriers, and IL Annuity and Insurance Company, whose marketing agreement terminated during the first quarter of 2002. During 2003, 37%, 25%, 23%, 6%, and 3% of our total consolidated revenue resulted from agreements with American National, Transamerica, Investors Insurance Corporation, IL Annuity, and John Hancock.
Legacy Marketing discontinued the marketing of several annuity products issued by Transamerica during the first quarter of 2003 primarily because those products no longer met Transamerica's profitability targets. Legacy Marketing will continue to administer these annuity products and to accept additional premium payments, subject to applicable additional deposit limitations for these products. The discontinued products accounted for approximately 3%, 31%, and 59% of our total consolidated revenue for the years ended December 31, 2003, 2002, and 2001. However, effective in May 2004 Legacy Marketing will discontinue marketing Transamerica products, as a result our sales of Transamerica products will likely decrease. We intend to continue providing administrative services.
In addition, Legacy Marketing discontinued marketing life insurance products issued by American National effective during the first quarter of 2003. These products accounted for a nominal amount of revenue during each of the years ending December 31, 2003, 2002, and 2001. Legacy Marketing will continue to administer American National life insurance products, including acceptance of renewal premium. Two Legacy Marketing employees who were supporting the life insurance product operations were terminated and nine were reassigned to other positions in Legacy Marketing.
During the second quarter of 2003, American National reduced the crediting rates of several annuity products marketed by Legacy Marketing. In addition, American National lowered the commission rates that they pay to Legacy Marketing for sales of these products. As a result, sales of annuity products on behalf of American National began to decrease through the remainder of 2003. We believe this trend may continue for 2004. It is possible that overall consolidated revenues may also decline due to this event. Legacy Marketing is developing new annuity products with American National that may result in increased sales for Legacy Marketing in the long term.
During the third quarter of 2003, Legacy Marketing began discontinuing the marketing of the AssureMark (SM) fixed annuity product issued by John Hancock. As a result, sales of annuity products on behalf of John Hancock decreased during the third quarter and will continue to decrease for the remainder of 2003. Legacy Marketing is developing new annuity products with John Hancock that may result in increased sales in the long term.
In June 2002, Legacy Marketing entered into marketing and administrative services agreements with Investors Insurance Corporation, an unaffiliated insurance carrier. Under these agreements, Legacy Marketing will sell and administer annuity products on behalf of Investors Insurance Corporation. Legacy Marketing has an option to buy Investors Insurance Corporation. The option expires on June 30, 2005. If Legacy Marketing exercises the option, it must complete the purchase transaction within two years of exercising the option. Sales on behalf of Investors Insurance Corporation began in June 2002.
The marketing agreement with American National expires on November 15, 2007, and the administrative agreement with American National expires on February 15, 2008. Both agreements may be renewed by mutual agreement for successive one-year terms. The agreements may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause. The marketing and administrative agreements with Transamerica and John Hancock do not have fixed terms but may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.
Any interruption, deterioration, or termination of the relationship with any of our insurance carriers could be disruptive to our business and harm our results of operations and financial condition.
If we fail to attract and retain key personnel, our business, operating results, and financial condition could be diminished.
Our success depends largely on the skills, experience and performance of certain key members of our management. In the recent past, we have been successful at attracting and retaining key personnel. We have no agreements with these individuals requiring them to maintain their employment with us. If we lose one or more of these key employees, particularly Lynda L. Regan, Chairman of the Board and Chief Executive Officer, or R. Preston Pitts, President and Secretary, our business, operating results, and financial condition could be diminished because we rely on their contacts, insurance carrier and Producer relationships, and strategic direction to drive our revenues. However, we are not aware of any key personnel who are planning to retire or leave our company in the near future. Although we maintain and are the beneficiary of key person life insurance policies on the lives of Lynda L. Regan and R. Preston Pitts, we do not believe the proceeds would be adequate to compensate us for their loss.
Our success also depends on our continued ability to attract, retain, and motivate highly skilled employees. In the recent past, we have been successful attracting and retaining highly skilled personnel. Competition for employees in our industry is intense, particularly for personnel with training and experience. We may be unable to retain our highly skilled employees or to attract, assimilate, or retain other highly qualified employees in the future.
Our performance will depend on the continued growth of Legacy Marketing. If Legacy Marketing fails to grow, our financial performance could suffer.
Our growth is, and for the foreseeable future will continue to be, dependent on Legacy Marketing's ability to design, market and administer fixed annuity products. The ability of Legacy Marketing to successfully perform these services could be affected by many factors, including:
o The ability of Legacy Marketing to recruit, train, and motivate Producers.
o The degree of market acceptance of the products marketed on behalf of our insurance carriers.
o The relationship between Legacy Marketing and our insurance carriers.
o The failure of Legacy Marketing to comply with federal, state and other regulatory requirements applicable to the sale or administration of insurance products.
o Competition from other financial services companies in the sale and administration of insurance products.
A large percentage of our revenue is derived from sales of fixed annuities. The historical crediting rates of fixed annuities are directly affected by financial market conditions. Changes in market conditions can affect demand for these annuities. Our future success depends on our ability to introduce and market new products and services that are financially attractive and address our customers' changing demands. We may experience difficulties that delay or prevent the successful design, development, introduction, marketing, or administration of our products and services. These delays may cause customers to forego purchases of our products and services and instead purchase those of our competitors. The failure to be successful in our sales efforts could significantly decrease our revenue and operating results, resulting in weakened financial condition and prospects.
We may be unable to effectively fund our working capital requirements, which could have a material adverse effect on our operating results and earnings.
If our cash inflows and existing cash and investments become insufficient to support future operating requirements or the redemption of our common stock, we will need to obtain additional funding either by incurring additional debt or issuing equity to investors in either the public or private capital markets. Our cash flows are primarily dependent upon the commissions we receive based on the premium generated from the sale of annuity products that we sell. The market for these products is extremely competitive. New products are constantly being developed to replace existing products in the marketplace. If we are unable to keep pace with the development of such new products, our cash inflows could decrease. Due to this changing environment in which we operate, we are unable to predict whether our cash inflows will be sufficient to support future operating requirements. Our failure to obtain additional funding when needed could delay new product introduction or business expansion opportunities which could cause a decrease in our operating results and financial condition. We are unaware of any material limitations on our ability to obtain additional funding. If additional funds are raised through the issuance of equity securities, the ownership percentage of our then-current shareholders would be reduced. Furthermore, any equity securities issued in the future may have rights, preferences, or privileges senior to that of our existing common stock.
Our cash positions at December 31, 2003 and December 31, 2002 were $9.9 million and $4.8 million.
Significant repurchases of our common stock could materially decrease our cash position.
As of December 31, 2003, we are obligated to redeem 3,289,000 shares of Series A Common Stock at the option of the holders of these shares. Of the 553,000 shares of Series B Common Stock outstanding, we are obligated to redeem up to 10% of these shares at the option of the holders of these shares, limited to a specified twenty-day period each year. The price per share is based on the estimated fair market value of the stock on the redemption date. The redemption of all eligible shares during 2004 would require $7.3 million, which would materially decrease our cash position.
Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Regan, our Chief Executive Officer, upon the death of Ms. Regan, the heirs of Ms. Regan will have the option (but not the obligation) to sell to us all or a portion of the shares of the Company owned by Ms. Regan at the time of her death and we will have the obligation to buy those shares. The purchase price to be paid buy us, if any, shall be equal to 125% of the fair market value of the shares. As of December 31, 2003, we believe 125% of the fair market value of the shares owned by Ms. Regan was equal to $28.3 million. We have purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this potential obligation. There can be no assurances, however, that the proceeds from these insurance policies will be available or sufficient to cover the purchase price of the shares owned by Ms. Regan at the time of her death. If the proceeds from the insurance policies were not available or sufficient to cover the purchase price of Ms. Regan's shares at the time of her death, our operating results and financial condition could be adversely affected.
RISKS RELATED TO OUR INDUSTRY
We may not be able to compete successfully with competitors that may have greater resources than we do.
The fixed annuity business is rapidly evolving and intensely competitive. Legacy Marketing's primary market is fixed annuities sold through independent producers. In addition, Legacy Marketing administers the products sold by Producers on behalf of the issuing insurance carriers. Fixed annuity sales in the United States were approximately $88 billion in 2003. Some of Legacy Marketing's top competitors selling fixed annuities through independent sales channels are Allianz Life of North America, American Equity Investment Life, Jefferson Pilot Financial Insurance Company, and AmerUs Group. These competitors may have greater financial resources than we do. However, our business model allows us greater flexibility, as we can adjust the mix of business sold if one or more of our carriers were to experience capital constraints or other events that affect their business models. Our competitors may respond more quickly than us to new or emerging products and changes in customer requirements. We are not aware of any significant new means of competition, products or services that our competitors provide or will soon provide. However, in the highly competitive fixed annuity marketplace, new distribution models, product innovations and technological advances may occur at any time and could present us with competitive challenges. There can be no assurance that we will be able to compete successfully. In addition, our business model relies on Wholesaler distribution networks to effectively market our products competitively. Maintaining relationships with these Wholesaler distribution networks requires introducing new products and services to the market in an efficient and timely manner, offering competitive commission schedules, and providing superior marketing, training, and support. In the recent past, we have been reasonably successful in expanding and maintaining our current Wholesaler distribution network. We are not aware of any Wholesaler who may discontinue marketing our products. Due to competition among insurance companies and insurance marketing organizations for successful Wholesalers, there can be no assurance that we will be able to retain some or all of our Wholesaler distribution networks.
We may face increased governmental regulation and legal uncertainties, which could result in diminished financial performance.
State legislators, state insurance regulators and the National Association of Insurance Commissioners continually reexamine existing laws and regulations, and may impose changes in the future that materially adversely affect our business, results of operations and financial condition. In particular, rate rollback legislation and legislation to control premiums, policy terminations and other policy terms may affect the marketability of policies or the amount of premiums that can be charged for such policies, and thus the commissions we can earn. Recently a committee of the U.S. House of Representatives has been considering the advisability of enacting federal statutes that would impose certain national uniform insurance regulatory standards to be applied by state insurance regulators. No such legislation has yet been introduced. A bill entitled "The Federal Insurance Consumer Protection Act of 2003" (S. 1373), has been introduced in the U.S. Senate which, if enacted, would establish comprehensive and exclusive federal regulation over all "interstate insurers," including all property and casualty insurers selling in more than one state, with no option for such insurers to remain regulated by the states. This legislation would repeal the McCarran-Ferguson antitrust exemption for the business of insurance. It would also establish a Federal Insurance Regulatory Commission within the Department of Commerce that would have exclusive regulatory jurisdiction over property and casualty and life insurers that do business in more than one U.S. jurisdiction. The legislation would establish comprehensive federal regulatory oversight over such insurers, including licensing, solvency supervision, accounting and auditing practices, form and rate approval, and market conduct examination. The legislation also would establish a National Insurance Guaranty Fund, which may be empowered to collect pre-funded assessments that are different from, and potentially greater than, current state guaranty fund assessment levels. We cannot predict whether these or other proposals will be adopted, or what impact, if any, such proposals may have on our business, financial condition or results of operation.
Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and various state agencies. This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel. Any proceeding alleging violation of, or noncompliance with, laws and regulations applicable to us or our subsidiaries could harm our business, financial condition, results of operations, and business prospects. In addition, changes in federal legislation, state legislation, court decisions and administrative policies could significantly and adversely affect the securities industry generally and our business in particular.
Adverse changes in tax laws could diminish the marketability of most of our products, resulting in decreased revenue.
Under the Internal Revenue Code of 1986, as amended, income tax payable by policyholders on investment earnings is deferred during the accumulation period of most of the annuity products that we market. This favorable income tax treatment results in our policyholders paying no income tax on their earnings in the annuity products until they take a cash distribution. We believe that the tax deferral features contained within the annuity products that we market give our products a competitive advantage over other non-insurance investment products where income taxes may be due on current earnings. If the tax code is revised to reduce the tax-deferred status of annuity products or to increase the tax-deferred status of competing products, our business could be adversely impacted because our competitive advantage could be weakened. In addition, some products that we sell receive favorable estate tax treatment under the tax code. If the tax code is revised to change existing estate tax laws, our business could be adversely affected. We cannot predict other future tax initiatives that the federal government may propose that may affect us.
We operate in an industry in which there is significant risk of litigation. Substantial claims against us could diminish our financial condition or results of operation.
As a professional services firm primarily engaged in marketing and administration of annuity products, we encounter litigation in the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with legal counsel, that the ultimate disposition of these claims will not have a material adverse effect on our financial condition, cash flows or results of operations. In addition, companies in the life insurance industry have been subject to substantial claims involving sales practices, agent misconduct, failure to properly supervise agents, and other matters in connection with sale of life insurance, annuities, and other investment products. Increasingly, these lawsuits have resulted in the award of substantial judgments, including material amounts of punitive damages that are disproportionate to the actual damages. In some states juries have substantial discretion in awarding punitive damages that creates the potential for material adverse judgments in litigation. If any similar lawsuit or other litigation is brought against us, such proceedings may materially harm our business, financial condition, or results of operations.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
Our investments are categorized as trading or available-for-sale securities.
Investments in fixed income instruments carry a degree of market risk. Market risk represents the potential for losses due to adverse changes in the fair market value of financial investments. The market risks faced by us relate primarily to our investment portfolio, which exposes us to risks related to interest rates, credit quality and equity prices.
Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. The following table provides information about our fixed income investments, which are sensitive to changes in interest rates. Listed below are cash flows from principal amounts and related weighted average interest rates by expected maturity dates for fixed income investments held at December 31, 2003 and 2002. Actual cash flows could differ from expected amounts.
During 2003 we invested in bond mutual funds which are sensitive to interest rates. The original cost and fair value at December 31, 2003 were $2,033,000 and $2,074,000.
We invest in marketable securities which are predominately investment grade. As a result, we believe we have minimal exposure to credit risk.
Equity price risk is the potential loss arising from changes in the value of equity securities. In general, equity securities have more year-to-year price variability than intermediate term high-grade bonds. However, returns over longer time frames have been consistently higher. Our equity securities consist primarily of investments in broadly diversified mutual funds. As a result of favorable market conditions related to our mutual fund investments, the fair value of our equity securities is above original cost at December 31, 2003. The original cost and fair values of our marketable equity securities are shown below:
Original Cost Fair Value ------------- ---------- December 31, 2003 $5,633,000 $6,308,000 December 31, 2002 $5,295,000 $4,261,000
All of the above risks are monitored on an ongoing basis. A combination of in-house review and consultation with our investment broker is used to analyze individual securities, as well as the entire portfolio.
Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Regan Holding Corp.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Regan Holding Corp. and its subsidiaries (the "Company") at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company changed its method of accounting for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets during the year ended December 31, 2002.
PricewaterhouseCoopers LLP San Francisco, California March 30, 2004
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Balance Sheet
See notes to financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Operations
See notes to financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity
See notes to financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Cash Flows
See notes to financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REGAN HOLDING CORP. AND SUBSIDIARIES
1. Organization and Summary of Significant Accounting Policies
a. Organization
Regan Holding Corp. (the "Company") is a holding company, incorporated in California in 1990, whose primary operating subsidiaries are Legacy Marketing Group ("Legacy Marketing") and Legacy Financial Services, Inc. ("Legacy Financial").
As of December 31, 2003, Legacy Marketing had marketing agreements with Transamerica Life Insurance and Annuity Company ("Transamerica"), American National Insurance Company ("American National"), John Hancock Variable Life Insurance Company ("John Hancock"), and Investors Insurance Corporation (collectively, the "carriers"). During 2002, Legacy Marketing terminated its marketing agreement with IL Annuity and Insurance Company ("IL Annuity"). The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity and life insurance products issued by the carriers (the "policies"). In addition, Legacy Marketing is responsible for appointing independent insurance producers who contract with Legacy Marketing to sell policies. For providing these services, the carriers pay Legacy Marketing commissions and marketing allowances.
Legacy Marketing also has administrative agreements with the carriers (including IL Annuity) pursuant to which Legacy Marketing provides clerical, administrative, and accounting services with respect to the policies. These services include billing, collecting and remitting premium for the policies. For providing these services, the carriers pay Legacy Marketing administrative fees.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial, the Company sells variable annuity and life insurance products, mutual funds and debt and equity securities. Legacy Financial has entered into sales agreements with investment companies that give it the non-exclusive right to sell investment products on behalf of those companies. Sales of investment products are conducted through Legacy Financial's network of independent registered representatives.
b. Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Regan Holding Corp. and its subsidiaries after elimination of intercompany accounts and transactions.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.
c. Revenue Recognition
When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is placed inforce and Legacy Marketing recognizes marketing allowances and commission income. Legacy Marketing's carriers grant policyholders a contractual right to terminate the insurance contract ten to thirty days after a policy is placed inforce. This return period varies depending on the carrier, the type of policy and the jurisdiction in which the policy is sold. Legacy Marketing gathers historical product return data that does not vary significantly from quarter to quarter, and has historically been predictive of future events. Returns are estimated using this data and have been reflected in the Consolidated Financial Statements. Legacy Marketing recognizes administrative fees on a per transaction basis as services are performed, with the amount of the fee depending on the type of policy and type of service.
Legacy Financial recognizes commission revenue when clients remit payment with a signed and completed variable annuity or investment contract. Under the terms of the sales agreements between Legacy Financial and
various investment companies, Legacy Financial is compensated based upon predetermined percentages of actual sales levels.
d. Cash and Cash Equivalents
Cash and cash equivalents include marketable securities with an original maturity of ninety days or less.
e. Investments
The Company's investments are classified as available-for-sale or trading securities and are carried at fair value. For available-for-sale securities, unrealized gains and losses, net of the related tax effect, are reported as a separate component of shareholders' equity. For trading securities, unrealized gains and losses are reported in Selling, general and administrative expenses.
Premiums and discounts are amortized or accreted over the life of the related investment as an adjustment to yield using the effective interest method. Interest income is recognized when earned. Realized gains and losses on sales of investments are recognized in the period sold using the specific identification method for determining cost.
Investments classified as available-for-sale are periodically reviewed to determine if declines in fair value below cost are other-than-temporary. Significant and sustained decreases in quoted market prices, a series of historical and projected operating losses by the investee or other factors are considered as part of the review. If the decline in fair value has been determined to be other-than-temporary, an impairment loss is recorded in Investment income and the individual security is written down to a new cost basis.
f. Fixed Assets
Fixed assets are stated at cost, including capitalized interest during construction of $24,000 during 2003, less accumulated depreciation and amortization. The Company capitalizes consulting fees, and salaries and benefits for employees who are directly associated with the development of software for internal use when both of the following occur:
o The preliminary project stage is completed and therefore the project is in the application development stage; and
o Management authorizes and commits to funding a software project and it is probable that the project will be completed and the software will be used to perform the function desired.
Modifications or enhancements made to an existing software product that result in additional functionality are also capitalized. When the new software is placed in production, we begin amortizing the asset over its estimated useful life. Training and maintenance costs are accounted for as expenses as they occur.
Depreciation is computed using the straight-line method over the estimated useful life of each type of asset, as follows:
Computer hardware and purchased software 3-5 years Internal use software development costs 3-5 years Leasehold improvements 2-10 years Furniture and equipment 5 years Building 40 years
g. Goodwill and Other Intangible Assets
Goodwill and Other Intangible assets were acquired in the Company's purchase of Values Financial Network, Inc. in 2000 and prospectdigital, LLC in 2002. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 10 years, which is its estimated useful life. Pursuant to Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased amortizing goodwill beginning January 1, 2002 (see Note 4). As required by SFAS 142, the Company performs an annual goodwill impairment test. The impairment test of SFAS 142 requires the Company to measure fair value of the reporting unit. The Company established fair value by preparing a forecast of the discounted value of future cash flows expected to be derived from VFN. Intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years.
h. Impairment of Long-Lived Assets
In accordance with Statement of Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Measurement of the impairment of long-lived assets is based upon management's estimate of undiscounted future cash flows. We periodically review capitalized internal use software to determine if the carrying value is fully recoverable. If there are future cash flows directly related to the software or the business unit of which it is a part, as applicable, we record an impairment loss when the present value of the future cash flows is less than the carrying value. If software, or components of software, in development are abandoned, the Company takes a charge to write off the capitalized amount in the period the decision is made to abandon it.
i. Redeemable Common Stock
Redeemable common stock is carried at the greater of the issuance value or the redemption value. Periodic adjustments to reflect increases or decreases in redemption value are recorded as accretion, with an offsetting adjustment to retained earnings.
j. Income Taxes
The Company provides deferred taxes based on the enacted tax rates in effect on the dates temporary differences between the book and the tax bases of assets and liabilities reverse.
k. Stock Options
The Company has a stock-based employee compensation plan (see Note 12) and accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under the plan had an exercise price equal to the fair market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income (loss) and income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
The fair value of the employee option grants for pro forma disclosure purposes was estimated using the minimum value method, with the following assumptions:
2003 2002 2001 ------------ ------------ ------------ Risk-free interest rates 1.45%-3.20% 4.08%-4.52% 4.50%-4.88% Expected life 3-5 years 3-5 years 3-5 years Dividend yield None None None
l. Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. The provisions of SFAS 150 require that some of these instruments now be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for existing financial instruments beginning on July 1, 2003. The implementation of SFAS 150 had no material effect on the Company's consolidated results of operations or financial position.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue 00-21 ("EITF -00-21). "Accounting for Revenue Arrangements with Multiple Deliverables". EITF 00-21 provides guidance on when and how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The Company adopted EITF 00-21 on July 1, 2003. The adoption of EITF 00-21 did not have a material effect on the Company's consolidated financial position and results of operations.
2. Investments
2003 2002 2001 --------- --------- --------- Gross realized gains $ 6,000 $ 281,000 $ 92,000 Gross realized losses $ (18,000) $ (62,000) $(230,000)
3. Fixed Assets
December 31, ----------------------------- 2003 2002 ------------ ------------ Computer hardware and purchased software $ 8,075,000 $ 7,796,000 Internal use software development costs 15,742,000 16,345,000 Leasehold improvements 1,361,000 1,324,000 Furniture and equipment 3,108,000 3,169,000 Building 9,446,000 7,798,000 Land 2,718,000 2,703,000 ------------ ------------ 40,450,000 39,135,000 Accumulated depreciation and amortization (16,172,000) (13,294,000) ------------ ------------ Total $ 24,278,000 $ 25,841,000 ============ ============
When the Company purchased Value Financial Network, Inc. ("VFN") in 2000, among the assets acquired were long lived assets comprised of a website, which incorporates sales lead management, investment screening and asset allocation functionalities, and copyrights related to two books. These assets were recorded at fair value, as determined by an independent appraisal. In connection with the updated measurement of the fair value of the VFN asset group as discussed in Note 4 below, the Company recorded a long-lived asset impairment loss of $394,000 during 2003, included in Other expenses.
During 2003, we completed our evaluation of an internal use software project that we initially licensed in 1998 with the intent to modify and customize the licensed software prior to deployment. We began this project intending to replace our administration system after the vendor of our existing administration system required us to migrate from the existing system to an alternative platform. In late 2002, we learned from our vendor that we might be able to retain our existing system. Modification and customization of the licensed software was suspended in December of 2002. A financial analysis completed in the first quarter of 2003 indicated that remaining on the existing system may provide greater benefit than converting to a new system. In the third quarter of 2003, our vendor concluded that we could continue to use our existing system for an extended period. We have completed a rigorous evaluation of our Company-wide technological needs, which included an assessment of the viability of the existing system. As a result of this assessment we concluded that we would use both systems and in the fourth quarter of 2003 we recorded a write-off of $1.1 million associated with the abandoned components of the software costs. Our assessment supports the remaining $3.3 million balance.
4. Goodwill and Other Intangible Assets
When the Company purchased the assets of VFN in 2000, part of the purchase price was for goodwill. Before January 1, 2002, the Company amortized the goodwill on a straight-line basis over 10 years, which was its estimated useful life. Pursuant to Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased amortizing goodwill on January 1, 2002. As required by SFAS 142, the Company performs an annual goodwill impairment test. The impairment test of SFAS 142 requires the Company to measure fair value of the reporting unit. The Company established fair value by preparing a forecast of the discounted value of future cash flows expected to be derived from VFN.
During 2002, the Company revised the business model for VFN to focus on corporate and individual producer sales and its projections supported the balance of goodwill. During 2003 the Company further refined its business model for VFN, including identifying a new market and committing additional resources to develop the business. During 2003 the Company updated its annual measurement of fair value of VFN due to the failure of VFN to produce revenues as projected. The fair value measurement based on a revised cash flow forecast was predicated on VFN realizing a lower level of sales. This forecast of cash flows did not support the balance of goodwill, and the Company recorded a goodwill impairment loss of $491,000 during 2003.
The following table provides comparative net loss and loss per share had the non-amortization provision of SFAS 142 been adopted for all periods presented:
The carrying amount of goodwill was $679,000 and $1.2 million as of December 31, 2003 and December 31, 2002.
Acquired intangible assets, all subject to amortization:
December 31, ------------------------------------------------ 2003 2002 ---------------------- ---------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ Copyrights $ 203,000 $(145,000) $ 250,000 $(100,000) Software license $ 223,000 $ (85,000) $ 223,000 $ (41,000) --------- --------- --------- --------- Total $ 426,000 $(230,000) $ 473,000 $(141,000) ========= ========= ========= =========
The aggregate amortization expense for the years ended December 31, 2003, 2002 and 2001 was $89,000, $91,000 and $102,000. The estimated amortization expense for each of the next two years ended December 31, 2005 is $74,000, and the estimated amortization expense for the years ended December 31, 2006 and 2007 are $45,000 and $3,000.
5. Accounts Payable and Accrued Liabilities
December 31, ----------------------------- 2003 2002 ----------- ----------- Accrued compensation $ 3,351,000 $ 2,346,000 Accrued sales bonus 2,022,000 -- Accrued sales convention costs 1,381,000 1,664,000 Commissions payable 832,000 1,204,000 Payable to insurance carrier 345,000 1,097,000 Accounts payable 548,000 728,000 Accrued production premium deficiency 206,000 637,000 Miscellaneous accrued expenses 2,105,000 1,230,000 ----------- -----------
Total $10,790,000 $ 8,906,000 =========== ===========
6. Loan Payable and Note Payable
During 2001, the Company purchased the office building which houses its headquarters for $10.6 million. In conjunction with the acquisition, the Company entered into a bridge loan agreement for $4.8 million. In July 2002, the Company replaced the bridge loan with permanent financing in the amount of $7.4 million. This note is payable over ten years in monthly installments of principal and interest based on a 25-year term. At the end of ten years, the Company must pay the balance of principal due on the note. For the first five years, the interest rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%, adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease in the interest rate. The maximum interest rate is 10.50%. As of December 31, 2003, the Company made payments of $151,000 toward the principal balance of the note. The required principal payments over the next five years are: $116,000, $125,000, $135,000, $144,000, and $154,000.
During 2003, we began construction of a new building in Rome, Georgia and established a $2.7 million loan facility to be drawn against to finance construction costs. The interest rate is equal to LIBOR plus 2.10%. The interest rate as of December 31, 2003 was 3.24%. The loan matures on October 27, 2004. As of December 31, 2003, $2.5 million was available under the construction loan.
7. Deferred Compensation Payable
The Company sponsors a qualified defined contribution 401(k) plan, which is available to all employees. The 401(k) plan allows employees to defer, on a pre-tax basis, up to 15% of their annual compensation as contributions to the 401(k) plan, subject to a maximum of $12,000. The Company matches 50% of each employee's contributions, up to 6% of their annual compensation, subject to a maximum of $6,000. The Company's matching contributions were $405,000, $434,000, and $439,000 for the years ended December 31, 2003, 2002, and 2001.
The Company also sponsors a non-qualified tax deferred compensation plan, which is available to certain employees who, because of Internal Revenue Code limitations, are prohibited from contributing the maximum percentage of salary to the 401(k) Plan. Under this deferred compensation plan, certain employees may defer, on a pre-tax basis, a percentage of annual compensation, including bonuses. The Company matches 50% of each employee's contributions, up to a maximum of 6% of annual compensation, less amounts already matched under the 401(k) plan. The Company made matching contributions of $32,000, $59,000, and $55,000 during the years ended December 31, 2003, 2002, and 2001. As of December 31, 2003 and 2002, employee contributions and Company matching contributions, net of accumulated investment losses, totaled $610,000 and $650,000.
The Company also sponsors a non-qualified tax deferred compensation plan under which producers who earn a minimum of $100,000 may defer, on a pre-tax basis, up to 50% of annual commissions. In addition, the Company will match producer contributions for those producers who earn over $250,000 in annual commissions at rates ranging from 1% to 5% of amounts deferred, depending on the level of annual commissions earned. During the years ended December 31, 2003, 2002, and 2001, matching contributions related to the producer commission deferral plan were $16,000, $19,000, and $36,000. As of December 31, 2003 and 2002, producer contributions and Company matching contributions, net of accumulated investment losses, totaled $5.7 million and $3.6 million. The liability to the employee or Producer is credited or charged based on the performance of the investment option selected by the participant.
8. Performance Bonus
During 2003, Legacy Marketing Group earned a performance bonus from sales of fixed annuity and life products under the terms of one of its insurance carrier partner contracts. Amounts were earned when fixed and determinable and all revenue recognition criteria had been met. The Company recorded revenue of $2.0 million during 2003. These amounts are included in Other revenue. The carrier paid Legacy Marketing Group in full during 2003 and both parties agreed to terminate the bonus program effective July 1, 2003.
9. Sales Incentive Program
During 2003, Legacy Marketing Group initiated a sales incentive program for its top independent insurance producers ("Wholesalers"). This program offers bonuses to Wholesalers based primarily on their achievement of predetermined annual sales targets. Bonuses will be paid to qualifying Wholesalers during the first quarter of 2004. The Company recorded expense of $2.0 million during the year ended December 31, 2003 related to the sales incentive program. These amounts are included in selling, general and administrative expenses.
10. Commitments and Contingencies
The Company leases office and warehouse premises and certain office equipment under non-cancelable operating leases. Related rent expense of $531,000, $585,000, and $1.6 million is included in occupancy costs for the years ended December 31, 2003, 2002, and 2001. Total rentals for leases of equipment included in equipment expense were $1.0 million, $1.1 million, and $922,000 for the years ended December 31, 2003, 2002, and 2001.
The Company's future minimum annual lease commitments under all operating leases as of December 31, 2003 are as follows:
Year Ended December 31, 2004 $ 610,000 2005 465,000 2006 323,000 2007 219,000 2008 18,000 Thereafter 3,000 ------------ Total minimum lease payments $ 1,638,000 ============
During 2003, the Company amended its Shareholder Agreement with Lynda L. Regan, Chief Executive Officer of the Company and Chairman of the Company's Board of Directors. Under the terms of the amended
agreement, upon the death of Ms. Regan, the Company would have the option (but not the obligation) to purchase from Ms. Regan's estate all shares of common stock that were owned by Ms. Regan at the time of her death, or were transferred by her to one or more trusts prior to her death. In addition, upon the death of Ms. Regan, her heirs would have the option (but not the obligation) to sell their inherited shares to the Company. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares. As of December 31, 2003, the Company believes that 125% of the fair market value of the shares owned by Ms. Regan was equal to $28.3 million. The Company has purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this potential obligation upon Ms. Regan's death.
The Company is involved in various claims and legal proceedings arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with legal counsel, that the ultimate disposition of these claims will not have a material adverse effect on our financial condition, cash flows or results of operations.
As part of the Company's agreements with certain of its insurance producers, the Company may, under certain circumstances, be obligated to offer to purchase the business of the producers. At December 31, 2003, there were no outstanding commitments by the Company relating to such obligations.
11. Redeemable Common Stock
Between 1990 and 1992, the Company issued Series A and Series B redeemable common stock to certain shareholders. The Company is obligated to repurchase the redeemable common stock at the current fair market value. Because there is no active trading market for the Company's stock that would establish market value, the Company's Board of Directors approved a redemption value for Series A redeemable common stock of $2.21 per share and $2.20 per share, and a redemption value for Series B redeemable common stock of $1.82 and $1.82 per share, as of December 31, 2003 and 2002, based on an independent appraisal of the stock value obtained by management. The appraisal also determined that non-redeemable stock had a value of $1.69 per share at December 31, 2003.
The Company recorded redeemable common stock accretion of $70,000 and $26,000 and related to Series A redeemable common stock for the years ended December 31, 2003 and 2002. The carrying value of Series B redeemable common stock is greater than the redemption value, and has not been accreted.
Holders of Series A redeemable common stock may redeem their holdings without limitation. Holders of Series B redeemable common stock may only redeem up to 10% of their holdings once per year, limited to a specified twenty-day period during November.
12. Stock Options and Stock Awards
The Company currently sponsors two stock-based compensation plans. Under both plans, the exercise price of each option equals the estimated fair value of the underlying common stock on the date of grant, as estimated by management, except for incentive stock options granted to shareholders who own 10% or more of the Company's outstanding stock, where the exercise price equals 110% of the estimated fair value. Both plans are administered by committees, which are appointed by the Company's Board of Directors.
Producer Option Plan -- Under the Regan Holding Corp. Producer Stock Option and Award plan (the "Producer Option Plan"), the Company may grant to Legacy Marketing producers and Legacy Financial registered representatives shares of the Company's common stock and non-qualified stock options (the "Producer Options") to purchase the Company's common stock. A total of 12.5 million shares have been reserved for grant under the Producer Option Plan. Total stock options granted to Producers for 2003, 2002, and 2001 were 15,000, 10,000, and 265,000. Total expenses recorded for Producer stock option grants were $10,000, $4,000, and $96,000 during 2003, 2002 and 2001. The Producer stock options granted for each of the three years ended December 31, 2003 vested immediately upon the grant date. The fair value of the Producer options were estimated using the Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001 ---- ---- ---- Risk-free interest rates 3.19% 4.78% 5.13%-6.80% Volatility 27% 27% 27%-31% Dividend yield None None None Expected life 6 years 6 years 6-10 years
The following table summarizes information with respect to shares of Series A common stock awarded to non-employees:
---- Share grants 48,000 Fair value per share $1.53-$1.65 Expense recorded $ 75,000
There were no shares of Series A common stock awarded to non-employees during 2003 and 2002. The share grant for 2001 listed above includes 15,000 shares of Series A common stock that the Company was obligated to award to a service provider, but had not been issued as of December 31, 2003.
Employee Option Plan -- Under the Regan Holding Corp. 1998 Stock Option Plan (the "Employee Option Plan"), the Company may grant to employees and directors incentive stock options and non-qualified options to purchase the Company's common stock (collectively referred to herein as "Employee Options"). A total of 8.5 million shares have been reserved for grant under the Employee Option Plan. The Employee Options generally vest over four or five years and expire in ten years, except for incentive stock options granted to shareholders who own 10% or more of the outstanding shares of the Company's stock, which expire in five years. The Company uses the intrinsic value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees.
Stock option activity under both plans was as follows:
Total Weighted average Shares Exercise Price ------ -------------- Outstanding at December 31, 2000 13,376,000 $ 1.28 Granted 2,976,000 $ 1.62 Exercised -- $ -- Forfeited (788,000) $ 1.25
Outstanding at December 31, 2001 15,564,000 $ 1.35 Granted 1,153,000 $ 1.68 Exercised -- $ -- Forfeited (768,000) $ 1.22
Outstanding at December 31, 2002 15,949,000 $ 1.38 Granted 788,000 $ 1.69 Exercised (155,000) $ 1.27 Forfeited (797,000) $ 1.38
Outstanding at December 31, 2003 15,785,000 $ 1.39
Exercisable at December 31, 2001 11,512,000 $ 1.31 Exercisable at December 31, 2002 12,407,000 $ 1.32 Exercisable at December 31, 2003 13,106,000 $ 1.35
The following table summarizes information about stock options outstanding at December 31, 2003 under both plans:
13. Income Taxes
Deferred tax assets and liabilities are recognized as temporary differences between amounts reported in the financial statements and the future tax consequences attributable to those differences that are expected to be recovered or settled.
The provisions for (benefit from) federal and state income taxes consist of amounts currently (receivable) payable and amounts deferred which, for the periods indicated, are shown below:
For the Year Ended December 31, ----------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Current income taxes: Federal $ 3,311,000 $ 76,000 $ (92,000) State 944,000 24,000 5,000 ----------- ----------- ----------- Total current 4,255,000 100,000 (87,000) ----------- ----------- ----------- Deferred income taxes: Federal (696,000) (170,000) (117,000) State (168,000) 36,000 (16,000) ----------- ----------- ----------- Total deferred (864,000) (134,000) (133,000) ----------- ----------- ----------- Income tax (benefit) expense $ 3,391,000 $ (34,000) $ (220,000) =========== =========== ===========
The Company's deferred tax assets (liabilities) consist of the following:
December 31, -------------------------- 2003 2002 ----------- ----------- Producer stock option and stock awards $ 2,186,000 $ 2,182,000 Producer deferred compensation 2,492,000 1,696,000 Accrued sales convention costs 543,000 663,000 State net operating loss carryforward, less valuation allowance of $385,000 and $362,000, net of federal taxes 250,000 248,000 Alternative minimum tax credit carryforward 263,000 304,000 Capital loss 357,000 353,000 Unrealized losses -- 427,000 Other 1,090,000 817,000 ----------- ----------- Subtotal deferred tax assets 7,181,000 6,690,000 ----------- ----------- Fixed asset depreciation (2,985,000) (3,611,000) Deferred gain on building sale (1,364,000) (1,364,000) Unrealized gains (306,000) -- ----------- ----------- Subtotal deferred tax liabilities (4,655,000) (4,975,000) ----------- ----------- Deferred tax assets, net $ 2,526,000 $ 1,715,000 =========== ===========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will, or will not, be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management believes it is more likely than not that the deferred tax assets will be realized.
The benefits from income taxes differ from the benefits computed by applying the statutory federal income tax rate (34%) to income before taxes, as follows:
As of December 31, 2003, the Company has state net operating loss carryforwards of $8.6 million that are expected to be utilized in the future. $4.9 million of these state net operating losses begin to expire on December 31, 2012. The Company also has, for state income tax purposes, $263,000 in alternative minimum tax credits which can be used to reduce income taxes in subsequent years to the extent regular tax exceeds tentative minimum tax. The credits have no expiration date.
14. Earnings (loss) per Share
The basic and diluted loss per share calculations are based on the weighted average number of common shares outstanding including shares of redeemable common stock.
The diluted loss per share calculation for the years ended December 31, 2002 and 2001 excludes antidilutive stock options of 4.1 million and 3.3 million.
15. Segment Information
The Company has identified its reportable segments based on its method of internal reporting and segregates its business into six primary reportable segments: Legacy Marketing, Legacy Financial, Imagent Online, Values Financial Network, and Other. Intersegment transactions are eliminated in consolidation. The Legacy Marketing business segment includes the results of selling and administering fixed annuity and life insurance products and general corporate expenses not allocated to the Company's other segments.
16. Concentration of Risk
As of December 31, 2003, Legacy Marketing sold its products on behalf of four unaffiliated insurance carriers: American National, Transamerica, John Hancock and Investors Insurance Corporation. Effective during the first quarter of 2002, Legacy Marketing and IL Annuity terminated their marketing agreement. The agreements with the following carriers generated a significant portion of the Company's total consolidated revenue (sales on behalf of Investors Insurance Corporation began in the second quarter of 2002):
2003 2002 2001 ---- ---- ---- American National 37% 17% 5% Transamerica 25% 52% 68% Investors Insurance Corporation 23% 6% -- IL Annuity 6% 12% 20% John Hancock 3% 8% --
Although Legacy Marketing sells and administers several annuity and life insurance products on behalf of the insurance carriers, its revenues are derived primarily from sales and administration of certain annuity product series:
2003 2002 2001 ---- ---- ---- BenchMark(SM) series (sold on behalf of American National) 37% 16% 4% SelectMark(SM) series (sold on behalf of Transamerica) 25% 51% 67% MarkOne(SM) series (sold on behalf of Investors Insurance Corporation 23% 6% -- VisionMark(SM) series (sold on behalf of IL Annuity) 4% 11% 19% AssureMark(SM) series (sold on behalf of John Hancock) 3% 8% --
During the first quarter of 2003, Legacy Marketing discontinued marketing life insurance products issued by American National. Certain Legacy Marketing employees who were supporting the life insurance product operations were either terminated or reassigned to other positions in Legacy Marketing.
Supplementary Data
Quarterly Financial Information (Unaudited)
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of Regan Holding Corp.
Our audits of the consolidated financial statements referred to in our report dated March 30, 2004 also included an audit of the financial schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PriceWaterhouseCoopers LLP San Francisco, California March 30, 2004
Schedule II - Valuation and Qualifying Accounts
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and executed, can provide only a reasonable assurance of achieving the desired control objectives. The Company's Chief Executive Officer and Chief Financial Officer evaluated, with the participation of the Company's management, the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company determined that it should have recorded additional revenue during the first and third quarters of 2003 that it earned for sales of fixed annuity products.
The Company, in consultation with its independent auditors, PricewaterhouseCoopers LLP ("PwC"), has identified deficiencies in the Company's internal control over financial reporting which resulted in two restatements of its financial statements. One of these deficiencies resulted in the amendment of the Company's Form 10-Q for the quarter ended March 31, 2003 in order to restate the Company's consolidated financial statements. Another deficiency resulted in the amendment of the Company's Form 10-Q for the period ended September 30, 2003 in order to restate the Company's consolidated financial statements. Members of the Company's management and PwC have discussed these deficiencies with the Audit Committee of the Company's Board of Directors. PwC has stated that these deficiencies result in a "material weakness" under standards established by the American Institute of Certified Public Accountants. The material weakness was identified as a breakdown in communication between the financial and operational management of the Company and a breakdown in the processes by which transactions are reviewed.
To remedy this weakness, the Board of Directors of the Company approved the formation of a disclosure committee (the "Disclosure Committee") and is appointing executives of the Company to serve on the Disclosure Committee. The Disclosure Committee will, among other things, meet quarterly as part of the closing process and review each financial statement line item and footnote disclosure to ensure the impacts of all business activity and transactions have been appropriately accounted for and disclosed in the consolidated financial statements of the Company. The Disclosure Committee will also review detailed analytics of the Company's performance and assess the need for any additional disclosures based on the relevant reporting period's activity. The Disclosure Committee began reviewing the disclosures made by the Company in its filings with the U.S. Securities and Exchange Commission starting with the Company's Form 10-K for the year ended December 31, 2003.
Except as described above, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. The Company's management, including the Chief Executive Officer and the Chief Financial Officer, also evaluated the Company's internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there have been no such changes during the period covered by this report, except as described above.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company
Information required by Item 10 will be contained in the Company's Definitive Proxy Statement in the section titled "Election of Directors." Such information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information required by Item 11 will be contained in the Company's Definitive Proxy Statement in the section titled "Election of Directors." Such information is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Certain information required by Item 12 will be contained in the Company's Definitive Proxy Statement in the section titled "Election of Directors." Such information is incorporated herein by reference.
Securities Authorized For Issuance Under Equity Compensation Plans
(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.
Item 13. Certain Relationships and Related Transactions
Information required by Item 13 will be contained in the Company's Definitive Proxy Statement in the section titled "Election of Directors." Such information is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
Information concerning principal accountant fees and services will be contained in the Company's Definitive Proxy Statement in the section titled "Audit Fees". Such information and is incorporated by reference herein.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Exhibits and Financial Statement Schedules:
1. The following financial statements are included in Item 8:
(i) Independent Auditors Report.
(ii) Consolidated Balance Sheet as of December 31, 2003 and 2002.
(iii) Consolidated Statement of Operations for the years ended December 31, 2003, 2002, and 2001.
(iv) Consolidated Statement of Shareholders' Equity for the years ended December 31, 2003, 2002, and 2001.
(v) Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002, and 2001.
(vi) Notes to Consolidated Financial Statements.
2. Financial statement schedules - schedule II - valuation and qualifying accounts
3. See(c) below.
(b) Regan Holding Corp. filed a Form 8-K, dated December 23, 2003, filing certain marketing and administrative services agreements and the Purchase Option Agreement with SCOR Life U.S. Re Insurance Company.
(c) Exhibit Index:
3(a) Restated Articles of Incorporation. (3)
3(b)(2) Amended and Restated Bylaws of the Company. (5)
4(a) Amended and Restated Shareholders' Agreement, dated as of June 30, 2003, by and among the Company, Lynda Regan, Alysia Anne Regan, Melissa Louise Regan and RAM Investments.(6)
10(a) Administrative Services Agreement effective January 1, 1991, as amended, between Allianz Life Insurance Company of North America and the Company.(1)
10(b) Marketing Agreement, effective November 15, 2002, between American National Insurance Company and Legacy Marketing Group. (7)
10(c) Administrative Services Agreement, effective February 15, 2003, between American National Insurance Company and Legacy Marketing Group. (7)
10(d) Form of Producer Agreement.(1)
10(e) Settlement Agreement dated June 18, 1993, among the State of Georgia as receiver for and on behalf of Old Colony Life Insurance Company, other related parties and the Company.(1)
10(f) 401(K) Profit Sharing Plan & Trust dated July 1, 1994.(1)
10(g) Marketing Agreement effective January 1, 1996 between IL Annuity and Insurance Company and Legacy Marketing Group.(2)
10(h) Insurance Processing Agreement effective January 1, 1996 between IL Annuity and Insurance Company and Legacy Marketing Group.(2)
10(i) Marketing Agreement effective May 29, 1998 between Transamerica Life Insurance and Annuity Company and Legacy Marketing Group.(4)
- ------------------- (1) Incorporated herein by reference to the Company's annual report on Form 10-K for the year ended December 31, 1994.
(2) Incorporated herein by reference to the Company's annual report on Form 10-K for the year ended December 31, 1995.
(3) Incorporated herein by reference to the Company's quarterly Form 10-Q for the three months and nine months ended September 30, 1996.
(4) Incorporated herein by reference to the Company's Form 8-K, dated June 1, 1998.
(5) Incorporated herein by reference to the Company's quarterly Form 10-Q for the three months and six months ended September 30, 2000.
(6) Incorporated herein by reference to the Company's quarterly Form 10-Q for the three months and six months ended June 30, 2003.
(7) Incorporated herein by reference to the Company's Form 8-K, dated January 29, 2004.
10(i)(1) Amendment One to Marketing Agreement with Transamerica Life Insurance and Annuity Company.(11)
10(i)(2) Amendment Two to Marketing Agreement with Transamerica Life Insurance and Annuity Company.(4)
10(i)(3) Amendment Three to Marketing Agreement with Transamerica Life Insurance and Annuity Company.(8)
10(i)(4) Amendment Four to Marketing Agreement with Transamerica Life Insurance and Annuity Company.(11)
10(i)(5) Amendment Five to Marketing Agreement with Transamerica Life Insurance and Annuity Company.(9)
10(i)(6) Amendment Six to Marketing Agreement with Transamerica Life Insurance and Annuity Company.(10)
10(j)(1) Administrative Services Agreement effective May 29, 1998 between Transamerica Life Insurance and Annuity Company and Legacy Marketing Group, as amended.(1)
10(j)(2) Amendment to the Administrative Services Agreement with Transamerica Life Insurance and Annuity Company.(2)
10(j)(3) Amendment Two to the Administrative Services Agreement with Transamerica Life Insurance and Annuity Company.(2)
10(j)(4) Amendment Three to Administrative Services Agreement with Transamerica Life Insurance and Annuity Company. (4)
10(j)(5) Amendment Four to Administrative Services Agreement with Transamerica Life Insurance and Annuity Company.(6)
10(j)(6) Amendment Five to Administrative Services Agreement with Transamerica Life Insurance and Annuity Company.(11)
10(j)(7) Amendment Six to Administrative Services Agreement with Transamerica Life Insurance and Annuity Company.(9)
10(j)(8) Amendment Seven to Administrative Services Agreement with Transamerica Life Insurance and Annuity Company.(9)
10(j)(9) Amendment Eight to Administrative Services Agreement with Transamerica Life Insurance and Annuity Company.(10)
10(k) Marketing Agreement effective January 18, 2001 between John Hancock Life Insurance Company and Legacy Marketing Group. (11)
10(k)(1) Amendment to the Marketing Agreement with John Hancock Life Insurance Company. (8)
10(l) Administrative Services Agreement effective January 18, 2001 between John Hancock Life Insurance Company and Legacy Marketing Group. (11)
10(l)(1) Amendment to the Administrative Services Agreement with John Hancock Life Insurance Company. (8)
10(m) Agreement of Purchase and Sale, dated March 8, 2001, by and between Regan Holding Corp. and G & W/Lakeville Corporate Center, LLC. (5)
10(n) Promissory Note by and between Regan Holding Corp. and Washington Mutual Bank FA, dated July 10, 2002. (7)
10(o) Producer Stock Award and Stock Option Plan, as amended.(3)
10(o)(1) 1998 Stock Option Plan, as amended.(3)
10(p) Purchase Option Agreement between SCOR Life U.S. Re Insurance Company and the Company executed on November 23, 2003. (11)
10(q) Construction Loan Agreement between SunTrust Bank and the Company executed on October 27, 2003.
21 Subsidiaries of Registrant
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act.
31.2 Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to Section 1350.
32.2 Certification of Chief Financial Officer pursuant to Section 1350.
- ------------------- (1) Incorporated herein by reference to the Company's Form 8-K, dated June 1, 1998.
(2) Incorporated herein by reference to the Company's annual report on Form 10-K for the year ended December 31, 1999.
(3) Incorporated herein by reference to the Company's Definitive Proxy Statement dated July 31, 2001.
(4) Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the six months ended June 30, 2001.
(5) Incorporated herein by reference to the Company's Form 8-K, dated June 21, 2001.
(6) Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the nine months ended September 30, 2001.
(7) Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the six months ended June 30, 2002.
(8) Incorporated herein by reference to the Company's annual report on Form 10-K for the year ended December 31, 2002.
(9) Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the six months ended June 30, 2003.
(10) Incorporated herein by reference to the Company's quarterly report on Form 10-Q for the nine months ended September 30, 2003.
(11) Incorporated herein by reference to the Company's Form 8-K, dated December 23, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGAN HOLDING CORP.
By: Lynda L. Regan Date: March 30, 2004 - ------------------------------- Lynda L. Regan Chairman and Chief Executive Officer
By: /s/ G. Steven Taylor Date: March 30, 2004 - ------------------------------- G. Steven Taylor Principal Accounting and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Lynda L. Regan Date: March 30, 2004 - ------------------------------- Lynda L. Regan Chairman and Chief Executive Officer
By: /s/ R. Preston Pitts Date: March 30, 2004 - ------------------------------- R. Preston Pitts President
By: /s/ Donald Ratajczak Date: March 30, 2004 - ------------------------------- Donald Ratajczak Director
By: /s/ Ute Scott-Smith Date: March 30, 2004 - ------------------------------- Ute Scott-Smith Director
By: /s/ J. Daniel Speight, Jr. Date: March 30, 2004 - ------------------------------- J. Daniel Speight, Jr. Director