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, 2002 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 0-4366 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 ----- ----- Applicable Only To Corporate Issuers: Indicate the number of shares outstanding of the registrant's common stock, as of August 9, 2002: Common Stock-Series A 24,464,000 Common Stock-Series B 569,000 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Balance Sheet June 30, 2002 December 31, 2001 ------------- ----------------- (Unaudited) Assets Cash and cash equivalents $ 1,314,000 $ 1,376,000 Trading investments 4,392,000 -- Available-for-sale investments 5,489,000 12,571,000 Accounts receivable 1,999,000 2,500,000 Prepaid expenses and deposits 1,990,000 1,057,000 Income taxes receivable 182,000 76,000 ------------ ------------ Total current assets 15,366,000 17,580,000 ------------ ------------ Net fixed assets 25,954,000 24,047,000 Deferred tax assets 1,939,000 1,529,000 Intangible assets 1,568,000 1,370,000 Other assets 937,000 1,501,000 ------------ ------------ Total non current assets 30,398,000 28,447,000 ------------ ------------ Total assets $ 45,764,000 $ 46,027,000 ============ ============ Liabilities, redeemable common stock, and shareholders' equity Liabilities Accounts payable and accrued liabilities $ 7,567,000 $ 8,069,000 Loans payable 6,852,000 4,750,000 ------------ ------------ Total current liabilities 14,419,000 12,819,000 ------------ ------------ Deferred compensation payable 4,404,000 4,356,000 Other liabilities 257,000 222,000 ------------ ------------ Total non current liabilities 4,661,000 4,578,000 ------------ ------------ Total liabilities 19,080,000 17,397,000 ------------ ------------ Redeemable common stock, Series A and B 10,365,000 11,124,000 ------------ ------------ 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: 20,538,000 shares and 20,769,000 shares at June 30, 2002 and December 31, 2001 3,366,000 3,596,000 Common stock committed 25,000 25,000 Paid-in capital 6,496,000 6,424,000 Retained earnings 6,450,000 7,405,000 Accumulated other comprehensive income (loss), net (18,000) 56,000 ------------ ------------ Total shareholders' equity 16,319,000 17,506,000 ------------ ------------ Total liabilities, redeemable common stock, and shareholders' equity $ 45,764,000 $ 46,027,000 ============ ============ 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, ----------------------------------- --------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenue Marketing allowances $ 5,027,000 $ 7,026,000 $ 10,055,000 $ 12,298,000 Commissions 4,287,000 4,737,000 8,310,000 8,627,000 Administrative fees 3,161,000 3,221,000 5,787,000 5,735,000 Other income 101,000 84,000 178,000 148,000 ------------ ------------ ------------ ------------ Total revenue 12,576,000 15,068,000 24,330,000 26,808,000 ------------ ------------ ------------ ------------ Expenses Selling, general and administrative 10,991,000 11,762,000 22,100,000 23,699,000 Depreciation and amortization 1,040,000 1,418,000 2,089,000 2,378,000 Other 750,000 865,000 1,567,000 1,821,000 ------------ ------------ ------------ ------------ Total expenses 12,781,000 14,045,000 25,756,000 27,898,000 ------------ ------------ ------------ ------------ Operating income (loss) (205,000) 1,023,000 (1,426,000) (1,090,000) ------------ ------------ ------------ ------------ Other income Investment income, net 350,000 162,000 397,000 287,000 Interest expense (118,000) (16,000) (227,000) (36,000) ------------ ------------ ------------ ------------ Total other income, net 232,000 146,000 170,000 251,000 ------------ ------------ ------------ ------------ Income (Loss) before income taxes 27,000 1,169,000 (1,256,000) (839,000) Provision for (Benefit from) income taxes 29,000 425,000 (456,000) (326,000) ------------ ------------ ------------ ------------ Net income (loss) $ (2,000) $ 744,000 $ (800,000) $ (513,000) ============ ============ ============ ============ Basic earnings (loss) per share: Earnings (loss) available for common shareholders $ -- $ 0.02 $ (0.03) $ (0.03) Weighted average shares outstanding 25,136,000 25,994,000 25,237,000 25,964,000 Diluted earnings (loss) per share: Earnings (loss) available for common shareholders $ -- $ 0.02 $ (0.03) $ (0.03) Weighted average shares outstanding 25,136,000 29,030,000 25,237,000 25,964,000 See notes to financial statements. 3 REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity (Unaudited) Series A Common Stock Common --------------------- Stock Shares Amount Committed ------ ------ --------- Balance January 1, 2002 20,769,000 $ 3,596,000 $ 25,000 Comprehensive losses, net of tax: Net loss Net unrealized losses on investments Less: reclassification adjustment for gains included in net loss Total comprehensive loss Retirement upon redemption (231,000) (230,000) Non-employee stock option expense ------------- ------------- ------------- Balance June 30, 2002 (unaudited) 20,538,000 $ 3,366,000 $ 25,000 ============= ============= ============= Accumulated Other Paid-in Retained Comprehensive Capital Earnings Income (Loss) Total ------- -------- ------------- ----- Balance January 1, 2002 $ 6,424,000 $ 7,405,000 $ 56,000 $ 17,506,000 Comprehensive losses, net of tax: Net loss (800,000) (800,000) Net unrealized losses on investments (201,000) (201,000) Less: reclassification adjustment for gains included in net loss 127,000 127,000 ------------- Total comprehensive loss (874,000) Retirement upon redemption 68,000 (155,000) (317,000) Non-employee stock option expense 4,000 4,000 ------------- ------------- ------------- ------------- Balance June 30, 2002 (unaudited) $ 6,496,000 $ 6,450,000 $ (18,000) $ 16,319,000 ============= ============= ============= ============= See notes to financial statements. 4 REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Unaudited) For the Six Months Ended June 30, --------------------------------- 2002 2001 ---- ---- Cash flows from operating activities: Net loss $ (800,000) $ (513,000) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 2,089,000 2,378,000 Losses on write-off of fixed assets 243,000 341,000 Losses on equity investee -- 524,000 Common stock awarded to producers -- 50,000 Producer stock option expense 4,000 80,000 Amortization/accretion of investments 39,000 -- Realized (gains) losses on sales of investments, net (211,000) 93,000 Changes in operating assets and liabilities: Accounts receivable 501,000 251,000 Prepaid expenses and deposits (933,000) 321,000 Income taxes receivable and payable (106,000) 424,000 Deferred tax assets (361,000) (750,000) Accounts payable and accrued liabilities (502,000) (810,000) Deferred compensation payable 48,000 735,000 Other operating assets and liabilities (116,000) (436,000) ------------ ------------ Net cash provided by (used in) operating activities (105,000) 2,688,000 ------------ ------------ Cash flows from investing activities: Purchases of investments (5,599,000) (1,036,000) Proceeds from sales and maturities of investments 8,338,000 7,948,000 Purchases of fixed assets (3,497,000) (13,333,000) Acquisition of prospectdigital assets (225,000) -- Proceeds from qualified intermediary used for building purchase -- 5,750,000 Equity in and advances to investee -- (155,000) ------------ ------------ Net cash used in investing activities (983,000) (826,000) ------------ ------------ Cash flows from financing activities: Proceeds from loans payable 2,362,000 5,250,000 Payments toward loans payable (260,000) (2,765,000) Repurchases of common stock (1,076,000) (62,000) ------------ ------------ Net cash provided by financing activities 1,026,000 2,423,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents (62,000) 4,285,000 Cash and cash equivalents, beginning of period 1,376,000 1,882,000 ------------ ------------ Cash and cash equivalents, end of period $ 1,314,000 $ 6,167,000 ============ ============ 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, 2002 are not necessarily indicative of the results to be expected for the entire year. Users of these Consolidated Financial Statements are encouraged to refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 for additional disclosure. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. 2. Investments The Company's investments are classified as either available-for-sale or trading securities, and are carried at fair value. For available-for-sale securities, net unrealized gains and losses are reported as a separate component of shareholders' equity. For trading securities, net unrealized gains and losses are reported as investment income or loss. 3. Goodwill and Other Intangible Assets On January 1, 2002, the Company adopted Financial Accounting Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets. FAS 142 eliminates the requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. As of June 30, 2002, the balance of intangible assets included $1.2 million of goodwill that was being amortized over ten years prior to January 1, 2002. As required by FAS 142, the Company is no longer amortizing goodwill. The Company completed a transitional goodwill impairment test during the six months ended June 30, 2002 and determined that goodwill was not impaired. As required by FAS 142, the Company will perform an annual goodwill impairment test by December 31, 2002. The following table provides comparative net income (loss) and earnings (loss) per share had the non-amortization provision of FAS 142 been adopted for all periods presented: For the Three Months Ended June 30, For the Six Months Ended June 30, ----------------------------------- --------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net income (loss) $ (2,000) $ 744,000 $ (800,000) $ (513,000) Adjustments: Goodwill amortization, net of tax benefit of $12,000 and $26,000 - 19,000 - 39,000 -------------------------------------------------------------- Adjusted net income (loss) $ (2,000) $ 763,000 $ (800,000) $ (474,000) ============================================================== Basic earnings (loss) per share: Reported basic earnings (loss) per share $- $0.02 $(0.03) $(0.03) Adjusted basic earnings (loss) per share $- $0.02 $(0.03) $(0.03) Diluted earnings (loss) per share: Reported diluted earnings (loss) per share $- $0.02 $(0.03) $(0.03) Adjusted diluted earnings (loss) per share $- $0.02 $(0.03) $(0.03) 6 4. Acquisition of prospectdigital, LLC In January 2002, the Company acquired, through its wholly owned subsidiary, Imagent Online, LLC, the remaining 67% of the outstanding stock of prospectdigital, LLC for $225,000 in cash. The Company has accounted for this transaction as a purchase of assets. Prospectdigital is now a wholly owned subsidiary. The results of prospectdigital's operations have been included in the Consolidated Financial Statements since the date of acquisition. Prospectdigital provides an on-line marketing service to insurance agents and registered representatives selling annuities and life insurance. To date prospectdigital has had nominal revenue and has used its capital to develop software to support its business and fund operating expenses. Prior to the acquisition, the Company owned 33% of prospectdigital and its investment was accounted for under the equity method. The Company recorded 98.8% of the losses of prospectdigital to reflect a hypothetical liquidation at book value at each balance sheet date. During 2000, the Company loaned $1.1 million to prospectdigital. The loan bears interest equal to the Prime Rate. In 2001, the Company extended a $400,000 line of credit to prospectdigital. The line of credit bears interest at 8.0%. As of the acquisition date, prospectdigital had drawn $358,000 from the line of credit. Under the terms of the purchase agreement, prospectdigital remains liable for payment of $1.5 million of indebtedness, plus accrued interest, to the Company. This amount is eliminated in consolidation. The Company is required to pay up to $475,000, based on a percentage of future profits, to the former co-owners after prospectdigital has earned in excess of $1.5 million, plus accrued interest on its indebtedness. The fair value of non-cash assets acquired and liabilities assumed was $940,000 and $350,000. 5. Loans Payable During 2001, the Company purchased the office building which houses its headquarters for $10.6 million. In conjunction with the acquisition, the Company entered into a loan agreement for $4.8 million. The property collateralized the loan, which bore interest at a rate equal to LIBOR plus 3.50%, adjusted monthly. Interest on the loan was due and payable monthly. The unpaid principal balance was due and payable on July 31, 2002, however the Company obtained long-term financing in July 2002 in the amount of $7.4 million. The new loan is payable over ten years in monthly installments of principal and interest based on a 25-year term. At the end of ten years, the Company must pay the balance of principal due on the loan. For the first five years, the interest rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%, adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease in the interest rate. The maximum interest rate is 10.50%. From time to time, to better manage cash flows, the Company borrows on its margin account rather than sell securities that are maturing in the short term. During the six months ended June 30, 2002, the Company obtained loans totaling $2.1 million. 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 available-for-sale investment portfolio. In July 2002, the Company repaid the loans using the remaining proceeds from the long-term financing discussed above. 6. Commitments and Contingencies 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 claims, management believes, based on discussions with legal counsel, that the ultimate disposition of these claims will not have a material adverse effect on the Company's financial condition, cash flows or results of operations. 7 7. Earnings (Loss) per Share Per-share Income/(Loss) Shares Amount ------------- ------ ------ For the three months ended June 30, 2002 Basic and diluted loss available to common shareholders $ (2,000) 25,136,000 $- ============ ============ ==== For the three months ended June 30, 2001 Net income $ 744,000 Accretion of redeemable common stock (269,000) ------------ Income available to common shareholders 475,000 25,994,000 $0.02 Effect of dilutive securities--employee and producer stock options -- 3,036,000 ------------ ------------ Diluted earnings per share $ 475,000 29,030,000 $0.02 ============ ============ ===== For the six months ended June 30, 2002 Basic and diluted loss available to common shareholders $(800,000) 25,237,000 $(0.03) ============ ========== ====== For the six months ended June 30, 2001 Net loss $ (513,000) Accretion of redeemable common stock (269,000) ------------ Basic and diluted loss available to common shareholders $ (782,000) 25,964,000 $(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 and the diluted loss per share calculation for the six months ended June 30, 2001 excludes antidilutive stock options of 3 million. 8 8. Segment Information Total Revenue Net Income (Loss) ---------------------------------------------------------------------------------------------------------------- Three Months Three Months Six Months Six Months Three Months Three Months Six Months Six Months Ended Ended Ended Ended Ended Ended Ended Ended June 30, June 30, June 30, June 30, June 30, June 30, June 30, June 30, 2002 2001 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- ---- ---- Legacy Marketing Group $ 12,066,000 $ 14,615,000 $23,413,000 $25,977,000 $ 445,000 $ 1,301,000 $ 159,000 $ 1,135,000 Legacy Financial Services, Inc. 589,000 507,000 1,045,000 941,000 (143,000) (153,000) (366,000) (309,000) Imagent Online, LLC 21,000 - 41,000 - (161,000) (52,000) (331,000) (294,000) Values Financial Network, Inc. 1,000 3,000 3,000 8,000 (155,000) (401,000) (288,000) (818,000) Other 32,000 64,000 65,000 98,000 12,000 49,000 26,000 (227,000) Intercompany Eliminations (133,000) (121,000) (237,000) (216,000) - - - - ---------------------------------------------------------------------------------------------------------------- Total $ 12,576,000 $ 15,068,000 $24,330,000 $26,808,000 $ (2,000) $ 744,000 $ (800,000) $ (513,000) ================================================================================================================ The Legacy Marketing Group business segment includes the results of selling and administering fixed annuity and life insurance products and general corporate expenses not allocated to the Company's other segments. Previously, general corporate expenses were reported as a separate business segment. The segment disclosure for the three months and six months ended June 30, 2001 has been restated to reflect the change in the composition of reportable segments. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Regan Holding Corp. Consolidated We had consolidated net losses of $2,000 during the second quarter of 2002 compared to consolidated net income of $744,000 during the second quarter of 2001. This shift is primarily due to decreased net income at Legacy Marketing Group and increased losses at Imagent Online, LLC, partially offset by decreased start-up losses at Values Financial Network, Inc. For the six months ended June 30, 2002, we experienced net losses of $800,000 compared to net losses of $513,000 for the same period in 2001. The increased net losses are primarily due to decreased net income at Legacy Marketing Group, partially offset by decreased start-up losses at Values Financial Network, Inc. and recognition of net income by our other subsidiaries compared to net losses during 2001. Legacy Marketing Group During the second quarter of 2002, Legacy Marketing Group ("Legacy Marketing") earned net income of $445,000, compared to net income of $1,301,000 during the second quarter of 2001. For the six months ended June 30, 2002, Legacy Marketing had net income of $159,000, compared to net income of $1,135,000 during the same period in 2001. These decreases are primarily due to decreased revenue, partially offset by decreased expenses. During the second quarter of 2002, Legacy Marketing commissions and marketing allowances decreased $2.5 million (22%) compared to the second quarter of 2001, and decreased $2.7 million (13%) during the six months ended June 30, 2002 compared to the six months ended June 30, 2001. These decreases are attributable to a decrease in sales of fixed annuity and life insurance policies. Administrative fees decreased $60,000 (2%) during the second quarter of 2002 compared to the same period in 2001 primarily due to decreased issuing fees, partially offset by increased maintenance and other fees. Administrative fees increased $52,000 (1%) during the six months ended June 30, 2002 compared to the six months ended June 30, 2001, primarily due to increased maintenance and other fees, partially offset by decreased issuing fees. In June 2002, Legacy Marketing entered into marketing and administrative services agreements with Investors Insurance Corporation ("IIC"), an unaffiliated insurance carrier. Under these agreements, Legacy Marketing will sell and administer annuity products on behalf of IIC. Sales on behalf of IIC began in June 2002. During the second quarter of 2002, Legacy Marketing also sold products on behalf of American National Insurance Company, Transamerica Life Insurance and Annuity Company, and John Hancock Variable Life Insurance Company. In December 2001, Legacy Marketing began phasing out the marketing of IL Annuity products. The phase out was completed during the first quarter of 2002. Legacy Marketing continues to administer IL Annuity products. As indicated below, the agreements with three of our insurance carriers generated a significant portion of our total consolidated revenue: Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Transamerica 60% 71% 62% 70% American National 14% 6% 13% 7% IL Annuity 11% 16% 13% 17% Although Legacy Marketing markets and administers several products on behalf of several insurance carriers, our consolidated revenues are derived primarily from sales and administration of annuity products, as indicated below: 10 Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- SelectMark(R) (sold on behalf of Transamerica) 60% 71% 62% 70% BenchMark(SM) (sold on behalf of American National) 13% 4% 11% 4% VisionMark(R) (sold on behalf of IL Annuity) 8% 15% 12% 16% Legacy Marketing expenses decreased $954,000 (8%) and $950,000 (4%) during the three months and six months ended June 30, 2002 compared to the same periods in 2001. The decreases are primarily due to decreases in selling, general and administrative expenses, and depreciation and amortization. Selling, general and administrative expenses decreased $554,000 (5%) and $861,000 (4%) primarily due to decreases in occupancy, and commission expenses tied to sales of fixed annuity and life insurance products. These decreases were partially offset by increases in professional fees. Depreciation and amortization decreased $345,000 (27%) and $282,000 (13%) primarily due to higher amortization of internal use software assets during 2001. Legacy Financial Services, Inc. Legacy Financial Services, Inc. ("Legacy Financial") incurred net losses of $143,000 during the second quarter of 2002 compared to net losses of $153,000 during the second quarter of 2001, primarily due to increased revenues partially offset by increased expenses. For the six months ended June 30, 2002, Legacy Financial had net losses of $366,000 compared to net losses of $309,000 during the same period in 2001, primarily due to increased expenses partially offset by increased revenues. Legacy Financial revenue increased $82,000 (16%) and $104,000 (11%) during the three months and six months ended June 30, 2002 compared to the same periods in 2001, primarily due to increases in the volume of sales. Legacy Financial expenses increased $23,000 (3%) and $161,000 (11%) during the three months and six months ended June 30, 2002 compared to the same periods in 2001. The quarter to quarter increased expenses are primarily due to an increase in other expenses, partially offset by a decrease in selling, general and administrative expenses. Other expenses increased $48,000 (200%) primarily due to increased litigation related expenses. Selling, general and administrative expenses decreased $25,000 (3%) primarily attributable to decreases in compensation due to a lower number of employees, partially offset by increases in professional fees. The year to year increased expenses are primarily due to an increase in selling, general and administrative expenses and other expenses. Selling, general and administrative expenses increased $98,000 (7%) primarily attributable to increases in professional fees and occupancy. Other expenses increased $63,000 (134%) primarily due to increased litigation related expenses. Imagent Online, LLC In January 2002, Imagent Online, LLC, our wholly owned subsidiary, acquired the remaining 67% of the outstanding stock in prospectdigital, LLC for $225,000 in cash. We are accounting for this transaction as a purchase of assets. Prospectdigital is now a wholly owned subsidiary. The results of prospectdigital's operations have been consolidated in Imagent's financial statements since that date. Prospectdigital provides an on-line marketing service to insurance agents and registered representatives selling annuities and life insurance. To date prospectdigital has had nominal revenue and has used its capital to develop software to support its business and fund operating expenses. Prior to the acquisition, Imagent owned 33% of prospectdigital and its investment was accounted for under the equity method. Imagent recorded 98.8% of the losses of prospectdigital 11 to reflect a hypothetical liquidation at book value at each balance sheet date. During 2000, Imagent loaned $1.1 million to prospectdigital. The loan bears interest equal to the Prime Rate. In 2001, Imagent extended a $400,000 line of credit to prospectdigital. The line of credit bears interest at 8.0%. As of the acquisition date, prospectdigital had drawn $358,000 from the line of credit. Under the terms of the purchase agreement, prospectdigital remains liable for payment of $1.5 million of indebtedness, plus accrued interest, to Imagent. This amount is eliminated in consolidation. Imagent is required to pay up to $475,000, based on a percentage of future profits, to the former co-owners after prospectdigital has earned in excess of $1.5 million, plus accrued interest on its indebtedness. The fair value of non-cash assets acquired and liabilities assumed was $940,000 and $350,000. Imagent had net losses of $161,000 during the second quarter of 2002 compared to net losses of $52,000 during the second quarter of 2001. During the six months ended June 30, 2002, Imagent incurred net losses of $331,000 compared to net losses of $294,000 during the same period in 2001. The increased losses are primarily due to increased start-up expenses for prospectdigital. Values Financial Network, Inc. Values Financial Network, Inc. incurred net losses of $155,000 during the second quarter of 2002 compared to net losses of $401,000 during the second quarter of 2001. During the six months ended June 30, 2002, Values Financial Network, Inc incurred net losses of $288,000 compared to net losses of $818,000 during the same period in 2001. The lower losses are primarily due to decreases in the number of employees, and decreases in professional fees. Other Segments During the second quarter of 2002, combined net income from our other subsidiaries was $12,000, compared to combined net income of $49,000 during the second quarter of 2001. For the six months ended June 30, 2002, combined net income from our other subsidiaries was $26,000, compared to combined net losses of $227,000 during the same period in 2001. This favorable year-to-date change of $253,000 is primarily due to closing the operations of our LifeSurance Corporation subsidiary. Liquidity and Capital Resources We require cash for the following purposes: (i) to fund operating expenses, which consist primarily of selling, general and administrative expenses; (ii) to purchase and develop fixed assets, primarily internal use software and computer hardware, in order to increase operational efficiency; (iii) to fund continued product development; and (iv) as a reserve to cover possible redemptions of certain shares of our common stock, which are redeemable at the option of the shareholders. Our primary source of cash is cash flows from operating activities. Net cash used in operating activities was $105,000 for the six months ended June 30, 2002 compared to net cash provided by operating activities of $2.7 million for the same period in 2001, primarily due to decreased operating results and increased sales support payments. Net cash used in investing activities was $983,000, primarily due to development of internal use software and our purchase of prospectdigital, partially offset by net sales of short-term investment-grade securities. Net cash provided by financing activities was $1 million. This was primarily due to proceeds from loans, partially offset by repurchases of our common stock. From time to time, to better manage cash flows, we borrow on our margin account rather than sell securities that are maturing in the short term. During the six months ended June 30, 2002, we obtained loans totaling $2.1 million. The loans bear interest at 1/2% above the Call Rate, as published in The Wall Street Journal, and are collateralized by our available-for-sale investment portfolio. In July 12 2002, we repaid the loans using the remaining proceeds from long-term financing discussed below. During 2001, we purchased the office building which houses our headquarters for $10.6 million. In conjunction with the acquisition, we entered into a loan agreement for $4.8 million. The property collateralized the loan, which bore interest at a rate equal to LIBOR plus 3.50%, adjusted monthly. Interest on the loan was due and payable monthly. The unpaid principal balance was due and payable on July 31, 2002, however we obtained long-term financing in July 2002 in the amount of $7.4 million. The new loan is payable over ten years in monthly installments of principal and interest based on a 25-year term. At the end of ten years, we must pay the balance of principal due on the loan. For the first five years, the interest rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%, adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease in the interest rate. The maximum interest rate is 10.50%. We intend to continue to retain any earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. We used $105,000 of cash in our operations during the six months ended June 30, 2002 and incurred consolidated net losses of $800,000. If our consolidated net losses continue, or if requests to repurchase redeemable common stock increase significantly, a cash shortfall could ultimately occur. We believe that existing cash and investment balances, together with anticipated cash flow from operations, will provide sufficient funding for the foreseeable future. However, in the event that a cash shortfall occurred, we believe that adequate financing could be obtained to meet our cash flow needs. There can be no assurances that such financing would be available on favorable terms. 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.1 Amendment Twenty-Six to the Marketing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated May 2002. Exhibit 10.2 Amendment Twenty-Five to the Insurance Processing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated May 2002. Exhibit 10.3 Promissory Note by and between Regan Holding Corp. and Washington Mutual Bank, FA, dated July 10, 2002. Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification 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 2002. 14 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 13, 2002 Signature: /s/ R. Preston Pitts -------------------------- R. Preston Pitts President and Chief Operating Officer Date: August 13, 2002 Signature: /s/ G. Steven Taylor -------------------------- G. Steven Taylor Chief Financial Officer 15