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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2003
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
____________.
Commission file number 000-19704
Regan Holding Corp.
(Exact name of registrant as specified in its charter)
California 68-0211359
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2090 Marina Avenue, Petaluma, California 94954
(Address of principal executive offices) (Zip Code)
707-778-8638
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes[ ] No[X]
Applicable Only To Corporate Issuers:
Indicate the number of shares outstanding of the registrant's common stock,
as of August 7, 2003:
Common Stock-Series A 23,849,000
Common Stock-Series B 560,000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited)
Assets
Cash and cash equivalents $ 9,982,000 $ 4,793,000
Trading investments 5,449,000 4,261,000
Available-for-sale investments 6,851,000 4,890,000
Accounts receivable, net of allowance of $764,000 and $760,000 at June 30, 2003
and December 31, 2002 4,923,000 3,274,000
Prepaid expenses and deposits 759,000 2,122,000
----------- ------------
Total current assets 27,964,000 19,340,000
----------- ------------
Net fixed assets 25,123,000 25,841,000
Deferred tax assets 1,739,000 1,715,000
Goodwill 1,170,000 1,170,000
Intangible assets, net 285,000 332,000
Other assets 1,583,000 1,649,000
----------- ------------
Total non current assets 29,900,000 30,707,000
----------- ------------
Total assets $57,864,000 $ 50,047,000
=========== ============
Liabilities, redeemable common stock, and
shareholders' equity
Liabilities
Accounts payable and accrued liabilities $10,039,000 $ 8,906,000
Income taxes payable 3,847,000 2,327,000
Current portion of note payable 112,000 109,000
----------- ------------
Total current liabilities 13,998,000 11,342,000
----------- ------------
Deferred compensation payable 5,408,000 4,241,000
Other liabilities 267,000 190,000
Note payable, less current portion 7,140,000 7,199,000
----------- ------------
Total non current liabilities 12,815,000 11,630,000
----------- ------------
Total liabilities 26,813,000 22,972,000
----------- ------------
Redeemable common stock, Series A and B 9,635,000 10,115,000
----------- ------------
Shareholders' equity
Preferred stock, no par value: Authorized: 100,000,000 shares;
No shares issued or outstanding -- --
Series A common stock, no par value:
Authorized: 45,000,000 shares; issued and outstanding:
20,322,000 shares and 20,495,000 shares at June 30, 2003
and December 31, 2002 3,143,000 3,324,000
Common stock committed 25,000 25,000
Paid-in capital 6,508,000 6,499,000
Retained earnings 11,717,000 7,135,000
Accumulated other comprehensive income (loss), net 23,000 (23,000)
----------- ------------
Total shareholders' equity 21,416,000 16,960,000
----------- ------------
Total liabilities, redeemable common stock, and
shareholders' equity $57,864,000 $ 50,047,000
=========== ============
See notes to financial statements.
2
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue
Marketing allowances $ 10,709,000 $ 5,027,000 $ 18,586,000 $ 10,055,000
Commissions 6,217,000 4,272,000 11,262,000 8,281,000
Administrative fees 3,552,000 3,161,000 7,136,000 5,787,000
Other income 1,713,000 205,000 2,540,000 386,000
------------ ------------ ------------ ------------
Total revenue 22,191,000 12,665,000 39,524,000 24,509,000
------------ ------------ ------------ ------------
Expenses
Selling, general and administrative 15,586,000 11,170,000 27,873,000 22,470,000
Depreciation and amortization 1,040,000 1,040,000 2,120,000 2,089,000
Other 785,000 750,000 1,685,000 1,567,000
------------ ------------ ------------ ------------
Total expenses 17,411,000 12,960,000 31,678,000 26,126,000
------------ ------------ ------------ ------------
Operating income (loss) 4,780,000 (295,000) 7,846,000 (1,617,000)
------------ ------------ ------------ ------------
Other income
Investment income, net 65,000 350,000 155,000 397,000
Interest expense (14,000) (28,000) (20,000) (36,000)
------------ ------------ ------------ ------------
Total other income, net 51,000 322,000 135,000 361,000
------------ ------------ ------------ ------------
Income (loss) before income taxes 4,831,000 27,000 7,981,000 (1,256,000)
Provision for (benefit from) income taxes 1,943,000 29,000 3,218,000 (456,000)
------------ ------------ ------------ ------------
Net income (loss) before accretion of redeemable
common stock 2,888,000 (2,000) 4,763,000 (800,000)
Accretion of redeemable common stock (70,000) -- (70,000) --
------------ ------------ ------------ ------------
Net income (loss) available for common shareholders $ 2,818,000 $ (2,000) $ 4,693,000 $ (800,000)
============ ============ ============ ============
Basic earnings (loss) per share:
Earnings (loss) available for common shareholders $ 0.11 $ -- $ 0.19 $ (0.03)
Weighted average shares outstanding 24,530,000 25,136,000 24,636,000 25,237,000
Diluted earnings (loss) per share:
Earnings (loss) available for common shareholders $ 0.10 $ -- $ 0.17 $ (0.03)
Weighted average shares outstanding 27,344,000 25,136,000 27,477,000 25,237,000
See notes to financial statements.
3
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Series A Common Stock Common
------------------------------- Stock Paid-in
Shares Amount Committed Capital
------------ ----------- --------- ----------
Balance December 31, 2002 20,495,000 $ 3,324,000 $25,000 $6,499,000
Comprehensive income, net of tax:
Net income
Net unrealized gains on investments
Less: reclassification adjustment for losses included
in net income
Total comprehensive income
Retirement upon voluntary repurchases of common stock (173,000) (181,000)
Accretion to redemption value
Producer stock option expense 9,000
----------- ----------- ------- ----------
Balance June 30, 2003 (unaudited) 20,322,000 $ 3,143,000 $25,000 $6,508,000
=========== =========== ======= ==========
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
----------- ------------- ------------
Balance December 31, 2002 $ 7,135,000 $ (23,000) $ 16,960,000
Comprehensive income, net of tax:
Net income 4,763,000 4,763,000
Net unrealized gains on investments 56,000 56,000
Less: reclassification adjustment for losses included
in net income (10,000) (10,000)
-------------
Total comprehensive income 4,809,000
Retirement upon voluntary repurchases of common stock (111,000) (292,000)
Accretion to redemption value (70,000) (70,000)
Producer stock option expense 9,000
------------ ---------- -------------
Balance June 30, 2003 (unaudited) $11,717,000 $ 23,000 $ 21,416,000
============ ========== =============
See notes to financial statements.
4
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
For the Six Months Ended June 30,
---------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 4,763,000 $ (800,000)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating
activities:
Depreciation and amortization 2,120,000 2,089,000
Losses on write-off of fixed assets 73,000 243,000
Provision for bad debts 46,000 121,000
Producer stock option expense 9,000 4,000
Amortization premium or discount on investments 36,000 39,000
Realized (gains) losses on sales of investments, net 16,000 (211,000)
Unrealized (gains) losses on trading securities, net (614,000) 433,000
Changes in operating assets and liabilities:
Purchases of trading securities, net (573,000) (4,816,000)
Accounts receivable (1,695,000) 370,000
Prepaid expenses and deposits 1,363,000 (933,000)
Income taxes receivable and payable 1,520,000 (106,000)
Deferred tax assets (55,000) (361,000)
Accounts payable and accrued liabilities 1,133,000 (492,000)
Deferred compensation payable 1,167,000 48,000
Other operating assets and liabilities 143,000 (116,000)
----------- -----------
Net cash provided by (used in) operating activities 9,452,000 (4,488,000)
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (5,868,000) (959,000)
Proceeds from sales and maturities of available-for-sale securities 3,931,000 8,081,000
Purchases of fixed assets (1,428,000) (3,497,000)
Acquisition of prospectdigital assets -- (225,000)
----------- -----------
Net cash provided by (used in) investing activities (3,365,000) 3,400,000
----------- -----------
Cash flows from financing activities:
Proceeds from loans payable -- 2,362,000
Payments toward notes payable (56,000) (260,000)
Repurchases of redeemable common stock (550,000) (691,000)
Voluntary repurchases of common stock (292,000) (385,000)
----------- -----------
Net cash provided by (used in) financing activities (898,000) 1,026,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 5,189,000 (62,000)
Cash and cash equivalents, beginning of period 4,793,000 1,376,000
----------- -----------
Cash and cash equivalents, end of period $ 9,982,000 $ 1,314,000
=========== ===========
See notes to financial statements.
5
REGAN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying Consolidated Financial Statements are prepared in
conformity with accounting principles generally accepted in the United
States of America and include the accounts of Regan Holding Corp. (the
"Company") and its wholly owned subsidiaries. All intercompany transactions
have been eliminated.
The statements are unaudited but reflect all adjustments, consisting only
of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of the Company's consolidated financial
position and results of operations. The results for the three months and
six months ended June 30, 2003 are not necessarily indicative of the
results to be expected for the entire year. These unaudited Consolidated
Financial Statements should be read in conjunction with the audited
Consolidated Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002 filed by the Company with
the Securities and Exchange Commission on March 31, 2003.
2. Stock Options
The Company has a stock-based employee compensation plan 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 income (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
earnings (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation:
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
------------- --------- ------------- -------------
Net income (loss) available for common
shareholders, as reported: $ 2,818,000 $ (2,000) $ 4,693,000 $ (800,000)
Deduct: Total stock-based employee
compensation expense determined under the fair
value method for all awards, net of related
tax effects (105,000) (123,000) (207,000) (234,000)
------------- --------- ------------- -------------
Pro forma net income (loss) available for
common shareholders $ 2,713,000 $(125,000) $ 4,486,000 $ (1,034,000)
============= ========= ============= =============
Earnings (loss) per share:
Basic - as reported $ 0.11 $ -- $ 0.19 $ (0.03)
Basic - pro forma $ 0.11 $ -- $ 0.18 $ (0.04)
Diluted - as reported $ 0.10 $ -- $ 0.17 $ (0.03)
Diluted - pro forma $ 0.10 $ -- $ 0.16 $ (0.04)
3. Recent Accounting Pronouncement
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 will
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,
6
2003. The Company's management anticipates that the implementation of SFAS
150 will not have a material effect on its consolidated results of
operations or financial position.
4. Performance Bonus
During the first quarter of 2003, Legacy Marketing Group began earning a
quarterly performance bonus from sales of fixed annuity and life products
under the terms of one of its insurance carrier partner contracts. Amounts
are earned when fixed and determinable and all revenue recognition criteria
have been met. The Company has recorded revenue of $1.4 million and $2
million for the three months and six months ended June 30, 2003. These
amounts are included in Other income.
5. 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. As of June 30, 2003, Legacy
Marketing Group had accrued an estimated liability of $2 million related
to the sales incentive program.
6. Commitments and Contingencies
During the second quarter of 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. The purchase price based on
the fair market value of Ms. Regan's shares at June 30, 2003 was equal to
$28.2 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 its financial condition, cash flows or
results of operations.
7. Earnings (Loss) per Share
Per-share
Income/(Loss) Shares Amount
------------- ------ ------
For the three months ended June 30, 2003
Net income $ 2,888,000
Accretion of redeemable common stock (70,000)
-----------
Income available to common shareholders 2,818,000 24,530,000 $ 0.11
Effect of dilutive securities--employee and
producer stock options -- 2,814,000
----------- ----------
Diluted earnings per share $ 2,818,000 27,344,000 $ 0.10
=========== ========== ========
For the three months ended June 30, 2002
Basic and diluted loss available to
common shareholders $ (2,000) 25,136,000 $ --
=========== ========== ========
For the six months ended June 30, 2003
Net income $ 4,763,000
Accretion of redeemable common stock (70,000)
-----------
Income available to common shareholders 4,693,000 24,636,000 $ 0.19
Effect of dilutive securities--employee and
producer stock options -- 2,841,000
----------- ----------
Diluted earnings per share $ 4,693,000 27,477,000 $ 0.17
=========== ========== ========
For the six months ended June 30, 2002
Basic and diluted loss available to common
shareholders $ (800,000) 25,237,000 $ (0.03)
=========== ========== ========
The diluted loss per share calculations for both the three months and six
months ended June 30, 2002 exclude antidilutive stock options of 4.1
million.
8. Comprehensive Income (loss)
Total comprehensive income (loss) for the three months ended June 30, 2003
and 2002 was $2,934,000 and $(113,000). For the six months ended June 30,
2003 and 2002, total comprehensive income (loss) was $4,809,000 and
$(874,000).
7
9. Segment Information
Total Revenue
---------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------------- ------------- ------------ --------------
Legacy Marketing
Group $21,573,000 $12,066,000 $ 38,394,000 $ 23,413,000
Legacy Financial
Services, Inc. 654,000 680,000 1,236,000 1,226,000
Imagent Online, LLC 48,000 21,000 88,000 41,000
Values Financial
Network, Inc. 9,000 1,000 11,000 3,000
Other 64,000 30,000 112,000 63,000
Intercompany
Eliminations (157,000) (133,000) (317,000) (237,000)
----------- ----------- ------------ ------------
Total $22,191,000 $12,665,000 $ 39,524,000 $ 24,509,000
=========== =========== ============ ============
Net Income (Loss)
--------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Legacy Marketing
Group $3,358,000 $ 445,000 $5,772,000 $ 159,000
Legacy Financial
Services, Inc. (219,000) (143,000) (487,000) (366,000)
Imagent Online, LLC (146,000) (161,000) (300,000) (331,000)
Values Financial
Network, Inc. (144,000) (155,000) (285,000) (288,000)
Other 39,000 12,000 63,000 26,000
Intercompany
Eliminations -- -- -- --
---------- ---------- ---------- ----------
Total $2,888,000 $ (2,000) $4,763,000 $ (800,000)
========== ========== ========== ==========
Total Assets
-----------------------------
June 30, December 31,
2003 2002
---- ----
Legacy Marketing
Group $ 59,286,000 $51,294,000
Legacy Financial
Services, Inc. 1,486,000 1,188,000
Imagent Online, LLC 726,000 852,000
Values Financial
Network, Inc. 2,692,000 2,969,000
Other 384,000 194,000
Intercompany
Eliminations (6,710,000) (6,450,000)
------------- -------------
Total $ 57,864,000 $ 50,047,000
============= =============
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain statements contained in this document, including Management's
Discussion and Analysis of Financial Condition and Results of Operations, that
are not historical facts, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results or performance of Regan Holding
Corp. and its businesses to be materially different from 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.
Regan Holding Corp. Consolidated
We had consolidated net income of $2.9 million and $4.8 million during the
three months and six months ended June 30, 2003 compared to consolidated net
losses of $2,000 and $800,000 during the same periods in 2002. These favorable
changes of $2.9 million and $5.6 million are primarily due to increased net
income at Legacy Marketing Group ("Legacy Marketing") and in our Other segment,
partially offset by increased losses by Legacy Financial Services, Inc. ("Legacy
Financial").
Legacy Marketing
During the second quarter of 2003, Legacy Marketing earned net income of
$3.4 million, compared to net income of $445,000 during the second quarter of
2002. For the six months ended June 30, 2003, Legacy Marketing had net income of
$5.8 million, compared to net income of $159,000 during the same period in 2002.
These improved results are primarily due to increased revenue, partially offset
by increased expenses.
During the three months and six months ended June 30, 2003, Legacy
Marketing commissions and marketing allowances increased $7.7 million (88%) and
$11.6 million (67%) compared to the same periods of 2002. 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. In addition, sales on behalf of Investors Insurance Corporation,
which began and were nominal in the second quarter of 2002, contributed $4.3
million and $7.2 million of commissions and marketing allowances during the
three months and six months ended June 30, 2003. 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 Life
Insurance and Annuity Company ("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 a nominal amount of our total consolidated
revenue for the quarter ended June 30, 2003 and approximately 30% of our total
consolidated revenue for the quarter ended June 30, 2002. For the six months
ended June 30, 2003 and 2002, the discontinued products accounted for
approximately 5% and 36% of our total consolidated revenue. Sales of recently
introduced Transamerica products have partially offset the effect of the
discontinued Transamerica products.
During the second quarter of 2003, American National Life Insurance Company
("American National") reduced the crediting rates of several annuity products
marketed by Legacy Marketing. As a result, sales of annuity products on behalf
of American National began to decrease during the second quarter of 2003, and we
believe this trend may continue for the remainder of 2003. It is possible that
in the short term, 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.
In July 2003, Legacy Marketing announced that it would discontinue
marketing the AssureMark (SM) fixed annuity product issued by John Hancock
Variable Life Insurance Company ("John Hancock") beginning in August
9
2003. As a result, sales of annuity products on behalf of John Hancock will
decrease during the remainder of 2003. Legacy Marketing is developing new
annuity products with John Hancock that may result in increased sales in the
long term.
Administrative fees increased $391,000 (12%) and $1.4 million (23%) during
the three months and six months ended June 30, 2003 compared to the same periods
in 2002 primarily due to increased issuing and maintenance fees.
Other income increased $1.4 million (847%) and $2 million (728%) during the
three months and six months ended June 30, 2003 compared to the three months and
six months ended June 30, 2002. This was primarily due to recognition of a
quarterly performance bonus from sales of fixed annuity and life products under
the terms of one of the Company's insurance carrier partner contracts.
As of June 30, 2003, Legacy Marketing sold and administered products on
behalf of four unaffiliated insurance carriers: American National, Transamerica,
Investors Insurance Corporation, and John Hancock. Legacy Marketing also
performs administrative services for products of IL Annuity and Insurance
Company ("IL Annuity"). As indicated below, the agreements with these carriers
generated a significant portion of our total consolidated revenue (sales on
behalf of Investors Insurance Corporation began in the second quarter of 2002):
Three months ended June 30, Six months ended June 30,
----------------------------- --------------------------
2003 2002 2003 2002
------------- ------------- ------------- -----------
American National 46% 14% 44% 13%
Transamerica 20% 59% 22% 62%
Investors Insurance
Corporation 19% - 18% -
IL Annuity 5% 11% 5% 13%
John Hancock 3% 8% 4% 6%
Our consolidated revenues are derived primarily from sales and
administration of the following annuity products:
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- ---------
BenchMark(SM) series (sold on behalf of American National) 46% 12% 43% 11%
SelectMark(R) series (sold on behalf of Transamerica) 20% 59% 22% 61%
MarkOne(SM) series (sold on behalf of Investors Insurance
Corporation) 19% -- 18% --
VisionMark(R) series (sold on behalf of IL Annuity) 3% 8% 4% 12%
AssureMark(SM) series (sold on behalf of John Hancock) 3% 8% 4% 6%
We believe that sales of the BenchMark(SM) series sold on behalf of
American National and sales of the AssureMark(SM) series sold on behalf of John
Hancock may decrease during the remainder of 2003, as mentioned above.
Legacy Marketing expenses increased $4.3 million (37%) and $5.4 million
(23%) during the three months and six months ended June 30, 2003 compared to the
same periods in 2002 primarily due to increases in selling, general and
administrative expenses. Selling, general and administrative expenses increased
$4.4 million (43%) and $5.4 million (27%) primarily due to increases in sales
promotion and support expenses, compensation, insurance, and courier expenses.
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. 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. 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.
During 2002, we began an evaluation of an internal use software project
that we initially licensed in 1998. 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. A financial analysis completed in February 2003 indicated that
10
remaining on the existing system may provide greater benefit than converting to
a new system even after considering the investment to date. In July 2003, our
vendor concluded that we could continue to use our existing system for an
extended period. We are currently performing a rigorous evaluation of our
Company-wide technological needs, which includes an assessment of the viability
of the existing system. We expect to complete this assessment within the next
few months. To date, we have $4.4 million capitalized relating to this software.
If our final decision is to abandon the existing software, we estimate that
approximately $1.2 million of this software will have continuing value and be
used to upgrade our existing system. In the event we do make a decision to
abandon the software, we expect to write off the remaining $3.2 million in the
period we make that decision.
Legacy Financial
Legacy Financial incurred net losses of $219,000 during the second quarter
of 2003 compared to net losses of $143,000 during the second quarter of 2002,
primarily due to decreased revenues and increased expenses. For the six months
ended June 30, 2003, Legacy Financial had net losses of $487,000 compared to net
losses of $366,000 during the same period in 2002, primarily due to increased
expenses.
Legacy Financial revenue decreased $26,000 (4%) during the second quarter
of 2003 compared to the same period in 2002, primarily due to decreased
marketing allowances and commissions related to lower overall sales volume and
changes in product mix. On a year-to-date basis, revenue is relatively flat
compared to the prior year.
Legacy Financial expenses increased $118,000 (13%) and $218,000 (12%)
during the three months and six months ended June 30, 2003 compared to the same
periods in 2002. The increase in the second quarter of 2003 expenses is
primarily due to an increase in selling, general and administrative expenses.
Selling, general and administrative expenses increased $104,000 (13%) primarily
attributable to increased incentive compensation, increased errors and omissions
insurance premiums, and increased legal expenses related to routine matters,
partially offset by lower occupancy costs resulting from Legacy Financial's move
to the Company's headquarters during 2002.
On a year-to-date basis, selling, general and administrative expenses
increased $131,000 (8%) primarily due to increased incentive compensation,
increased errors and omissions insurance premiums, and increased legal expenses
related to routine matters, partially offset by lower occupancy costs resulting
from Legacy Financial's move to the Company's headquarters during 2002. Other
expenses increased $87,000 (52%) primarily due to increased insurance costs and
equipment maintenance expenses.
Imagent Online, LLC
Imagent Online, LLC ("Imagent") had net losses of $146,000 during the
second quarter of 2003 compared to net losses of $161,000 during the second
quarter of 2002. During the six months ended June 30, 2003, Imagent had net
losses of $300,000 compared to net losses of $331,000 during the same period in
2002. The reduced losses are primarily due to increased revenues partially
offset by increased expenses. Revenues increased $27,000 (129%) and $47,000
(115%) during the three months and six months ended June 30, 2003 compared to
comparable prior year periods primarily due to increased subscriptions and
licensing revenues. Expenses increased $22,000 (8%) and $15,000 (3%) during the
second quarter and year-to-date periods primarily due to increased depreciation
and amortization, partially offset by decreased postage expenses related to a
direct marketing campaign.
Values Financial Network, Inc.
Values Financial Network, Inc. ("VFN") had net losses of $144,000 during
the second quarter of 2003 compared to net losses of $155,000 during the second
quarter of 2002. During the six months ended June 30, 2003, VFN had net losses
of $285,000 compared to net losses of $288,000 during the same period in 2002.
The reduced losses are primarily due to increased revenues, partially offset by
increased expenses. Revenues increased $8,000 (800%) and $8,000 (267%) during
the quarterly and year-to-date periods primarily due to rental income from a
tenant who began subleasing office space from VFN in the second quarter of 2003.
Expenses increased by a nominal amount during the second quarter of 2003
compared to the same period in 2002, and increased $21,000 (5%) on a
year-to-date basis primarily due to a loss on the disposal of fixed assets.
11
When we purchased VFN in 2000, part of the purchase price was for goodwill.
Before January 1, 2002, we amortized the goodwill on a straight-line basis over
10 years, which was its estimated useful life. Pursuant to Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets," we ceased amortizing goodwill on January 1, 2002. As
required by SFAS 142, we performed a transitional and annual goodwill impairment
test during 2002. The impairment test required by the provisions of SFAS 142
required us to forecast the discounted value of future cash flows expected to be
derived from VFN. During 2002, we revised the business model for VFN to focus on
corporate and individual producer sales and our projections supported the
balance of goodwill. During the first six months of 2003, cash flows did not
meet the forecasted amount. We have further refined our business model for VFN,
including identifying a new market and committing additional resources to
develop the business. We also updated our cash flow forecast to reflect the
business model changes and concluded that these projections support the balance
of goodwill. When we perform our 2003 annual goodwill impairment analysis, we
may conclude that some amount of goodwill impairment has occurred if revenues do
not occur as planned.
Other Segment
During the second quarter of 2003, combined net income from our Other
segment was $39,000, compared to combined net income of $12,000 during the
second quarter of 2002. For the six months ended June 30, 2003, combined net
income from our Other segment was $63,000, compared to combined net income of
$26,000 during the same period in 2002. These favorable changes are primarily
due to increased advisory fee revenues.
Liquidity and Capital Resources
Net cash provided by operating activities was $9.5 million for the six
months ended June 30, 2003 compared to net cash used in operating activities of
$4.5 million for the same period in 2002, primarily due to increased operating
results and lower net purchases of trading securities.
Net cash used in investing activities was $3.4 million for the six months
ended June 30, 2003 compared to net cash provided by investing activities of
$3.4 million for the six months ended June 30, 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 $898,000 compared to net cash
provided by financing activities of $1 million, primarily due to net proceeds
from loans during the first half of 2002, partially offset by lower repurchases
of our common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk, interest
rate risk, credit risk, or equity price risk since December 31, 2002. Please see
the Company's Annual Report on Form 10-K for the year ended December 31, 2002
for more information concerning Quantitative and Qualitative Disclosures About
Market Risk.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) designed to
ensure that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the specified time periods. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and executed, can provide only
reasonable assurance of achieving the desired control objectives. As of the date
hereof, 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. Based on that evaluation,
the Company determined that it should have recorded additional revenue during
the first quarter of 2003 that it earned as a performance bonus for sales of
fixed annuity and life products under the terms of one of its insurance carrier
partner contracts. This deficiency was reported to the Company's auditors and to
the audit committee of the Company's Board of Directors. As a result, the
Company restated its Consolidated Financial Statements for the three months
ended March 31, 2003. The Company has instituted changes intended to ensure that
the financial effects of all contracts are more effectively monitored. The
Company's Chief Executive Officer and Chief Financial Officer have 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 quarter covered by this report, except as described
above.
12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of our shareholders at the
Annual Meeting of Shareholders held on June 6, 2003:
For Against Abstain/Withheld
--- ------- ----------------
1. Election of five (5) Directors to hold office
until the Annual Meeting of Shareholders in 2004
and until their successors are duly elected. The
nominees are listed as follows:
a. Lynda L. Regan 16,083,539 -- 80,077
b. R. Preston Pitts 16,074,047 -- 89,569
c. Ute Scott-Smith 15,912,960 -- 250,656
d. J. Daniel Speight, Jr. 16,114,120 -- 49,496
e. Dr. Donald Ratajczak 16,114,343 -- 49,273
2. Ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's
independent auditors for the year ended
December 31, 2003. 15,221,330 928,813 13,473
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4 Amended and Restated Shareholder's Agreement, dated as of
June 30, 2003, by and among the Company, Lynda Regan, Alysia
Anne Regan, Melissa Louise Regan and RAM Investments.
Exhibit 10.1 Amendment Five to the Marketing Agreement by and between
Legacy Marketing Group and Transamerica Life Insurance and
Annuity Company. *
Exhibit 10.2 Amendment Six to the Administrative Services Agreement by
and between Legacy Marketing Group and Transamerica Life
Insurance and Annuity Company.
Exhibit 10.3 Amendment Seven to the Administrative Services Agreement by
and between Legacy Marketing Group and Transamerica Life
Insurance and Annuity Company.
Exhibit 31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2003.
* Certain confidential commercial and financial information has been
omitted from the indicated exhibit, but filed under separate cover with the
U.S. Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAN HOLDING CORP.
Date: August 14, 2003 Signature: /s/ R. Preston Pitts
----------------------------------------
R. Preston Pitts
President and Chief Operating Officer
Date: August 14, 2003 Signature: /s/ G. Steven Taylor
----------------------------------------
G. Steven Taylor
Chief Financial Officer
14