We lease approximately 30,500 square feet of office space in Rome, Georgia, for the remainder of Legacy Marketing’s operations. This lease expires in December 2001.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Except for historical information contained herein, certain of the matters discussed in this Form 10-K are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” involve certain risks and uncertainties. All forecasts and projections in this report are “forward-looking statements” and are based on management’s current expectations of the Company’s near term results, based on current information available. Actual results could differ materially.
In 2000, “Other” segment above includes Legacy Advisory Services, Inc., Legacy Reinsurance Company, and Values Financial Network, Inc. In 1999 and 1998, “Other” segment includes Legacy Advisory Services, Inc. and Legacy Reinsurance Company. These entities’ operations do not currently represent amounts that are material to our results and, accordingly, were not separated for purposes of this disclosure.
shift in product mix to products which yielded higher commission income, partially offset by a 2.3% decrease in overall fixed annuity premium placed inforce for the Carriers. This decrease is attributable primarily to the poor performance of bond investments underlying the annuities’ crediting rates during the latter half of 1999.
During 2000, Legacy Marketing marketed and administered fixed annuity and life insurance products on behalf of three unaffiliated insurance carriers: American National, IL Annuity, and Transamerica. The agreements with these carriers generated a significant portion of the Company’s total consolidated revenue at the dates indicated, as follows (sales on behalf of Transamerica began in the third quarter of 1998):
The shift between Carrier’s products is primarily attributable to more favorable acceptance of Transamerica’s annuity products in the marketplace, which is expected to continue for the foreseeable future.
Equipment expenses increased approximately $183,000, or 28.7%, in 2000 from 1999, and increased approximately $309,000, or 94.1%, in 1999 from 1998 primarily due to increases in leased office space and increases in employment, both of which are discussed above.
the volume of sales by Legacy Financial’s distribution network of registered representatives.
Sales promotion and support expenses increased approximately $323,000, or 126.0%, in 2000 from 1999, and increased approximately $200,000, or 352.5%, in 1999 from 1998, primarily due to increased expenses incurred to stimulate sales and to greater attendance at the annual sales convention.
Expenses - Regan Holding Corp.’s expenses decreased approximately $1.1 million, or 17.1%, in 2000 from 1999, and increased approximately $3.7 million, or 153.0%, in 1999 from 1998. The decrease in 2000 expenses is primarily due to a decrease in the number of non-employee stock options granted during 2000, compared to 1999. In 2001, grants to the highest performing Wholesalers are still expected to occur which will result in additional expense in the first quarter. The increase in 1999 expenses compared to 1998 is primarily due to: (i) $2.9 million in stock option expenses related to stock options that were granted to Legacy Marketing Producers during 1999 and 1998; (ii) awards of the Company’s common stock to Wholesalers, which resulted in recognition of approximately $420,000 in related expenses during 1999; and (iii)
increases in legal and consulting fees related to various Company strategic planning projects.
Results of Operations - Imagent was formed in 2000 and recorded a net loss of approximately $580,000, primarily due to equity investment losses related to its investment in a start-up company, as discussed above. Such losses by the start-up company are expected to continue for the foreseeable future.
Results of Operations - Other segments consist of Legacy Advisory Services, Inc., Legacy Reinsurance Company, and Values Financial Network, Inc. in 2000. In 1999 and 1998, Other segments included Legacy Advisory Services, Inc. and Legacy Reinsurance Company. Combined net losses from these entities increased to approximately $266,000 in 2000, compared to approximately $17,000 in 1999 and approximately $3,000 in 1998. The increased losses in 2000 from 1999 are primarily due to such losses incurred by Values Financial Network, Inc. Such losses are expected to continue through the first half of 2001.
Cash and short-term investment-grade securities represented 28.7% of the Company’s total consolidated assets at December 31, 2000, compared with 47.1% at December 31, 1999. This decrease is primarily due to a decrease in combined cash and short-term investment balances of approximately $9.7 million at December 31, 2000, compared to December 31, 1999, which is attributable to: (i) purchases of fixed assets of approximately $5.6 million related to capitalization of salaries and benefits paid to develop internal use software and purchases to upgrade computer hardware and software; (ii) cash of approximately $2.4 million paid to acquire the assets of Values Financial Network, Inc; (iii) Imagent’s investment in and loan to an insurance-related start-up company for approximately $1.5 million; and (iv) repurchases of the Company’s common stock for approximately $1.0 million. These decreases in cash and investment were partially offset by cash provided by operating activities of approximately $248,000.
At December 31, 1999, the Company’s investment portfolio included $12.0 million in equity securities of an affiliate of an insurance carrier with which Legacy Marketing contracts. In the first quarter of 2000, the carrier affiliate repurchased the equity securities from the Company for approximately $12.5 million, pursuant to the terms of the agreement under which the securities were purchased.
During the first quarter of 2000, the Company repaid an existing margin loan in the amount of $3.1 million. In the last quarter of 2000, the Company obtained approximately $2.5 million in advances under the margin loan, primarily to fund the acquisition of assets of Values Financial Network, as described above. These advances were repaid in first quarter of 2001.
The Company, through Imagent, has committed to loan up to $400,000 in additional advances to the start-up company discussed above. No further advances to the start-up are expected to occur.
Generally, the Company’s cash needs are met through cash provided by operating activities, which decreased approximately $7.3 million in 2000, compared to 1999. This decrease is primarily attributable to decreases in Legacy Marketing’s sales volume during 2000. As discussed above, Legacy Marketing's sales increased in the first quarter of 2001 are are expected to continue to increase through 2001. However, if sales decline or if increases in sales are not sufficient to offset increased expenses, operating activities could generate negative cash flows. In addition, the Company is obligated to repurchase certain shares of its common stock pursuant to various contracts under which the shares were issued. If the Company’s net losses continue, or if requests for repurchase of redeemable common stock increase significantly, a cash shortfall could occur. Management believes that existing cash and investment balances, together with anticipated cash flows from operations, will provide sufficient funding for the foreseeable future. However, in the event that a shortfall were to occur, management believes that adequate financing could be obtained to meet the Company’s cash flow needs.
In our opinion, the accompanying consolidated balance sheets 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 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 Note 1, in 2000, the Company changed its method of recognizing revenue for contracts with sales obligation provisions. Additionally, in 1999, the Company changed its method of accounting for the cost of computer software developed or obtained for internal use.
Authorized: 45,000,000 shares; issued and outstanding: 20,869,927 and 20,863,520 at December 31, 2000 and 1999, respectively
Earnings (loss) available for common shareholders before cumulative effect of accounting change
Regan Holding Corp. (the “Company”) is a non-operating holding corporation, incorporated in California in 1990.
The Marketing and Administrative Agreements with American National and IL Annuity expire May 15, 2001, and December 31, 2005, respectively, but may be renewed by mutual agreement for successive one-year terms. The Agreements may be terminated by either party upon 180 days notice without cause, and may be terminated by either party immediately for cause. The Company is currently in the process of re-negotiating the Marketing and Administrative Agreements with American National. The Marketing and Administrative Agreements with Transamerica and John Hancock do not have a fixed term but may be terminated by either party upon twelve months notice without cause, and may be terminated by either party immediately for cause. The Administration Agreements with American National and IL Annuity were amended during 1999 with respect to various policy administration matters. The Administrative Agreement with Transamerica was amended during 2000 to include newly developed products.
Through its wholly owned broker-dealer subsidiary, Legacy Financial Services, Inc. (“LFS”), the Company engages in the offering and sale of variable annuity and life insurance products, mutual funds and debt and equity securities on a fully disclosed basis. LFS has entered into agreements (the “Agreements”) with various entities pursuant to which LFS has a nonexclusive right to solicit sales of investment products offered by such entities through its network of independent registered representatives and to provide certain marketing and administrative services in order to facilitate sales of such products. Under the Agreements, the Company is compensated based upon predetermined percentages of production. The Agreements may be terminated by any party upon 30 days written notice.
Legacy Advisory Services, Inc. (“LAS”) is a wholly owned subsidiary, incorporated in the state of California for the purpose of operating as an “investment advisor,” as defined by and regulated pursuant to the Investment Advisors Act of 1940. LAS is registered with the SEC and has conducted limited operations to date.
Legacy Reinsurance Company (“LegacyRe”) is a wholly owned subsidiary incorporated in the State of Arizona. The Company has not obtained, and is currently not seeking, state approval for LegacyRe to engage in the reinsurance business. Accordingly, LegacyRe has conducted no business to date.
During 2000, the Company formed Imagent Online, LLC (“Imagent”), a Delaware limited liability company and a wholly owned subsidiary of the Company. In May 2000, Imagent invested in an insurance-related start-up company that is developing an Internet-based customer relationship management product. Imagent has no other operations to date.
In December 2000, the Company acquired the assets and name of Values Financial Network, Inc., and formed Values Financial Network, Inc. (“VFN”), a wholly owned subsidiary of the Company. VFN is a Delaware corporation engaged in the business of values-based investment screening and has conducted limited operations to date.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Marketing allowances and commissions are recognized when policies become inforce. Reserves are recorded as a deduction from marketing and commission revenue to reflect estimated cancellations of policies. Administrative fees are recognized on a per transaction basis as services are performed.
Fixed assets are stated at cost, less accumulated depreciation and amortization. In addition, the Company capitalizes at cost certain consulting fees, salaries and benefits related to the development of software for internal use. Upon retirement or disposition of fixed assets, any gain or loss is included in net income.
Depreciation and amortization expense recorded by the Company totaled approximately $3.5 million during 2000. Effective January 1, 2000, the Company changed, from five years to three years, its estimate of the useful lives over which certain computer hardware and software is being depreciated. Had this change in estimate not occurred, the Company would have recorded approximately $3.3 million in depreciation expense during 2000.
Sales promotion and support costs are expensed as incurred, except for sales brochures and other marketing materials, which are included in inventory at cost until used.
The Company and its subsidiaries file consolidated income tax returns for federal purposes. For financial reporting purposes, the income tax effects of transactions are recognized in the year in which they enter into the determination of recorded income, regardless of when they are recognized for income tax purposes. Accordingly, the provisions for income taxes in the consolidated Statements of Operations include charges or credits for deferred income taxes relating to temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements.
The basic and diluted earnings per share calculations are based on the weighted average number of common shares outstanding, including shares of redeemable common stock. The diluted earnings per share calculation includes the effect of stock options to the extent that the options have a dilutive effect on earnings per share.
Certain 1999 and 1998 balances have been reclassified to conform with the 2000 presentation. Such reclassifications had no effect on net income (loss) or shareholders’ equity.
In 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued SFAS No. 137, which delayed the effective date for implementing SFAS No. 133 until the beginning of 2001. In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No. 133 with the objective of easing the implementation
In May 2000, Imagent purchased a 33.3% ownership interest in a start-up company named prospectdigital for $402,500. Imagent’s investment in prospectdigital is accounted for under the equity method, and its share of prospectdigital’s losses was approximately $721,000 during 2000. In addition, Imagent loaned $1.1 million to prospectdigital in mid-2000. The loan bears interest equal to the Prime Rate, as published in The Wall Street Journal, and will be repaid over two years in equal monthly installments commencing on June 1, 2001. Such amounts invested and advanced, net of the Company’s share of cumulative losses, have been reflected as Equity In and Advances To Investee in the accompanying Balance Sheets at December 31, 2000. In March 2001, Imagent Online extended a $400,000 line of credit to prospectdigital. The line of credit bears interest at 8.0%, and accrued interest will be paid monthly following the first disbursement. Principal may be repaid from time to time and then redrawn as needed.
During both 2000 and 1999, the Company obtained margin loan advances of $2.5 million from its investment broker. The loans bear interest at 1/2% above the Call Rate, as published in The Wall Street Journal, and are collateralized by the Company’s investment portfolio. As of December 31, 2000 and 1999, $2,265,354 and $3,088,918 remained payable under this arrangement, respectively. These amounts were repaid in full in the first quarter of each of the subsequent years.
The Company also sponsors a non-qualified tax deferral compensation plan (the “Key Employee 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 the Key Employee 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. Deferrals of compensation by employees began in 1999. The Company recorded $48,385 and $53,073 in matching contributions in salaries and related benefits
The Company also leases 30,500 square feet of office space in Rome, Georgia, at a rate of $11,438 per month, expiring December 2001.
In December 2000, the Company sold two parcels of land and a building in Petaluma. The building houses LFS personnel and unrelated tenants. Beginning in January 2001, LFS has leased a minor portion of the building pursuant to terms of an operating lease that expires in December 2002. The base rent is $15,400 per month until June 2002, and then increases to $22,400 per month until the lease expires.
The Company’s future minimum annual lease commitments under all operating leases are as follows:
portion of the settlement, net of recovery under its Errors and Omissions insurance policy, was approximately $1.1 million, which was recorded as an expense in 1998.
Management is not aware of any material asserted or unasserted litigation that existed at December 31, 2000.
As part of the Company’s agreements with certain of its insurance producers (the “Producers”), the Company may, under certain circumstances, be obligated to purchase the business of the Producers. At December 31, 2000, there were no outstanding commitments by the Company relating to such obligations.
The following table summarizes transactions affecting redeemable common stock during the years ended December 31, 2000, 1999, and 1998:
The Company recorded redeemable common stock accretion of $494,698 and $787,256 for the years ended December 31, 2000 and 1999, respectively. The issuance value exceeded the redemption value at December 31, 1998. Accordingly, no accretion was recorded during the year ended December 31, 1998.
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 of each year.
Producer Option Plan - Under the Regan Holding Corp. Producer Stock Option and Award plan (the “Producer Option Plan”), the Company may grant to LMG producers and LFS registered representatives non-qualified stock options (the “Producer Options”) to purchase the Company’s common stock. A total of 9,500,000 shares have been reserved for grant under the Producer Option Plan. The Producer Options granted through June 1999 vested ratably over five years following the grant. During the second quarter of 1999, however, the Company waived the Producer Options’ vesting provisions, thereby converting the Producer Options from “variable” to “fixed” options. As a result, the Company recorded $2,867,000 of expense during 1999 representing management’s estimate of the fair value of the Producer Options at the date that the vesting provisions were modified. The fair value of the options was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates ranging from 5.3% to 6.0%, expected volatility ranging from 27.7% to 39.5%, and expected lives ranging from one to five years. A dividend yield assumption was not applicable, as the Company’s stock is not publicly traded nor does the Company pay dividends.
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 5,500,000 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 10% shareholders, which expire in five years. The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for the Employee Option Plan. Accordingly, no compensation expense has been recognized for options granted under the Employee Option Plan. Had the Company elected to recognize compensation expense in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), the Company’s net income (loss) and earnings(loss) per share for the years ended December 31, 2000, 1999, and 1998 would have been reduced (increased) for options granted under the Employee Option Plan to the pro-forma amounts indicated below:
The following table summarizes information about stock options outstanding at December 31, 2000 under both plans:
reduce income taxes in subsequent years to the extent regular tax exceeds tentative minimum tax. The credits have no expiration date.
Following is a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculations:
The Company has identified its reportable segments based on its method of internal reporting and segregates its business into five primary reportable segments: Legacy Marketing Group, Legacy Financial Services, Inc., LifeSurance Corporation, Imagent Online, LLC and Regan Holding (stand-alone). The presentation of the segments has changed compared to previously reported information. In 1998, producer seminar revenue and expenses were reported in Legacy Marketing Group’s results and it is impractical to present them separately for comparative purposes in this footnote. In 1999 and 2000, these operations were reported in LifeSurance Corporation’s results.
The table below presents information about the Company’s operating segments for the years ended December 31, 2000, 1999, and 1998:
The “Other” segment above includes Legacy Advisory Services, Inc., Legacy Reinsurance Company, and Values Financial Network, Inc. in 2000. In 1999 and 1998, the “Other” segment includes Legacy Advisory Services, Inc. and Legacy Reinsurance Company. Such entities’ operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.
As of December 31, 2000, LMG markets its products on behalf of three unaffiliated insurance carriers: American National, IL Annuity, and Transamerica. The agreements with these carriers generated a significant portion of the Company’s total consolidated revenue at the dates indicated as follows (sales on behalf of Transamerica began in the third quarter of 1998):
In February 2001, the Company announced that it was discontinuing the majority of LifeSurance Corporation's operations. Certain employees were terminated and others were transferred to LMG.