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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, 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
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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.
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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.
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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 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
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