10-Q 1 p17538_10q.txt 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. 13 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