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 March 31, 1996, 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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
1179 N. McDowell Blvd., Petaluma, California 94954
____________________________________________ _____
(Address of Principal Executive Offices) (Zip Code)
(707) 778-8638
______________
(Registrant's Telephone Number, Including Area Code)
_______________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's common
stock, as of March 31, 1996 was:
Common Stock-Series A 27,005,885
Common Stock-Series B 610,688
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1996 1995
ASSETS: (Unaudited) (Audited)
___________ _________
Cash and cash equivalents $ 878,785 $ 1,496,631
Investments at market value 6,965,458 5,067,426
Accounts receivable 579,584 1,507,128
Income taxes receivable - 5,687
Prepaid expenses 306,010 106,539
Marketing supplies inventory 136,329 178,714
___________ ___________
Total Current Assets 8,866,166 8,362,125
___________ ___________
Net fixed assets 1,644,805 1,687,025
Organization costs-net
of amortization 18,341 19,306
Deferred tax assets 1,939,899 2,097,660
Other assets 291,203 138,685
___________ ___________
TOTAL ASSETS $12,760,414 $12,304,801
___________ ___________
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' DEFICIT:
LIABILITIES:
Accounts payable $ 60,561 $ 77,569
Income taxes payable 351,236 -
Fractional shares payable 44,879 44,879
Accrued liabilities 700,061 1,248,231
Note payable-current portion 12,303 87,688
___________ ___________
Total Current Liabilities 1,169,040 1,458,367
___________ ___________
Loan payable 132,285 132,285
Deferred incentive compensation 119,694 172,272
___________ ___________
Total Non-Current Liabilities 251,979 304,557
___________ ___________
TOTAL LIABILITIES 1,421,019 1,762,924
___________ ___________
CONTINGENCIES (Note 3) - -
REDEEMABLE COMMON STOCK 12,682,750 12,682,750
___________ ___________
SHAREHOLDERS' DEFICIT:
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:
27,005,885 shares 3,802,071 3,802,071
Series B common stock, no par value:
Authorized: 615,242 shares
Issued and outstanding:
610,688 shares - -
Accumulated deficit (5,197,706) (6,047,382)
Unrealized gains on investments
(net of taxes) 52,280 104,438
___________ ___________
TOTAL SHAREHOLDERS' DEFICIT (1,343,355) (2,140,873)
___________ ___________
TOTAL LIABILITIES, REDEEMABLE
COMMON STOCK AND SHAREHOLDERS'
DEFICIT $12,760,414 $12,304,801
___________ ___________
The accompanying notes are an integral part of these financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
For the Three For the Three
Months Ended Months Ended
March 31, 1996 March 31, 1995
______________ ______________
REVENUE:
Marketing allowances $ 2,511,343 $ 2,573,692
Commission income 1,101,727 875,736
Administrative fees 857,785 761,738
Investment income 134,426 57,079
Other income 22,103 16,434
______________ _____________
Total Revenue 4,627,384 4,284,679
______________ _____________
EXPENSES:
Salaries and related benefits 1,947,520 1,317,157
Depreciation and amortization 108,619 74,133
Equipment expense 68,545 33,361
Occupancy expense 148,152 129,072
Travel and entertainment 17,317 25,870
Stationery and supplies 85,903 23,382
Courier and postage 81,929 59,574
Other miscellaneous expenses 59,586 21,242
______________ _____________
Subtotal-
General & Administrative 2,517,571 1,683,791
______________ _____________
Advertising and sales promotion 425,707 216,368
Other producer related expenses 23,753 28,958
______________ _____________
Subtotal -Producer Related 449,460 245,326
______________ _____________
Professional fees 226,818 126,183
Interest expense 4,206 4,057
______________ _____________
Total Expenses 3,198,055 2,059,357
______________ _____________
Income before income taxes 1,429,329 2,225,322
Provision for income taxes 579,653 1,000,000
______________ _____________
NET INCOME $ 849,676 $ 1,225,322
______________ _____________
Weighted average shares
outstanding 27,616,573 27,509,908
Earnings per share $ 0.03 $ 0.04
______________ _____________
The accompanying notes are an integral part of these financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Statement of Shareholders' Deficit
(Unaudited)
Unrealized
Series A Common Stock Accumulated Gains
Shares Amount Deficit (Losses) Total
______ ______ _______ __________ _____
Balance
December 31,
1995 27,005,885 $3,802,071 $(6,047,382) $104,438 $(2,140,873)
Net income for
the three
months ended
March 31, 1996 849,676 849,676
Unrealized losses
on investments (87,129) (87,129)
Deferred taxes
on unrealized
losses 34,971 34,971
__________ __________ ___________ ________ ___________
Balance
March 31, 1996 27,005,885 $3,802,071 $(5,197,706) $ 52,280 $(1,343,355)
__________ __________ ___________ ________ ___________
The accompanying notes are an integral part of these financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three For the Three
Months Ended Months Ended
March 31, 1996 March 31, 1995
______________ ______________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 849,676 $ 1,225,322
Adjustments to reconcile
net income to cash provided
by operating activities:
Depreciation and amortization 107,655 70,184
Amortization of organization costs 964 3,949
Accretion/amortization of investments (6,192) (13,785)
Net change in accounts receivable 927,544 (247,102)
Net change in prepaid expenses (199,471) (85,113)
Net change in marketing supplies inventory 42,385 (16,729)
Net change in deferred income taxes 192,732 788,319
Net change in accounts payable (17,008) (10,448)
Net change in income taxes receivable
and payable 356,923 128,681
Net change in accrued liabilities (548,170) (184,313)
Net change in other assets and liabilities (205,095) -
_________ _________
Net cash provided by operating activities 1,501,943 1,658,965
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (4,972,364) (2,004,832)
Proceeds from sales and maturities
of investments 2,993,395 506,000
Purchases of fixed assets (65,435) (160,821)
___________ ___________
Net cash used in investing activities (2,044,404) (1,659,653)
___________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable (75,385) (75,385)
___________ ___________
Net cash used in financing activities (75,385) (75,385)
___________ ___________
DECREASE IN CASH AND CASH EQUIVALENTS (617,846) (76,073)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,496,631 651,189
___________ ___________
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 878,785 $ 575,116
___________ ___________
Interest paid $ 4,206 $ 4,057
Income taxes paid $ 381,600 $ 196,300
The accompanying notes are an integral part of these financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Financial Information
The accompanying consolidated financial statements are
prepared in conformity with generally accepted accounting
principles and include the accounts of Regan Holding Corp.,
and its wholly-owned subsidiaries, Legacy Marketing Group,
Legacy Financial Services, Inc., and LifeSurance
Corporation. 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
presentation of the Company's financial position and results
of operations. The results for the three months ended March
31, 1996 and 1995 are not necessarily indicative of the
results to be expected for the entire year.
2. Modifications to Agreements
Effective March 1, 1996, Marketing and Processing Agreements
between the Company and American National Insurance Company
("American National") were amended to reduce certain
administrative fees earned by the Company. These reductions
in rates are expected to result in lower revenues to the
Company. The amount of the decrease will depend on the
volume of policies sold and administered. In addition,
during April 1996, certain investment strategy features of
the annuity policies offered by American National were
eliminated. Such changes could impact the volume of the
Company's sales of annuity policies.
3. Contingencies
During 1991 and 1992, the Company sold 5,698,452 shares of
Series A Common Stock pursuant to the terms of the 701 Asset
Accumulator Program. Current management is investigating
whether some of these sales were made without compliance
with the applicable securities laws of one or more states.
In the event that this is the case, the Company may be
required to rescind some of these sales. The costs of
rescission, if any, cannot be estimated at this time.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
Summary -- The Company recorded net income of $850,000, or $.03 per
share, during the three months ended March 31, 1996, compared
with $1,225,000, or $.04 per share, during the three months ended
March 31, 1995. This decrease is attributable primarily to
increases in operating expenses, as discussed below.
Revenue -- The Company's primary sources of revenue are marketing
allowances, commission overrides, and administrative fees.
Marketing allowances and commission overrides are directly
related to sales of annuities and life insurance products.
Administrative fees are a function not only of product sales but
also of agent appointments and insurance policies inforce each
month.
Sales by the Company's distribution system resulted in policy
premium placed inforce for American National Insurance Company
("American National") of approximately $158,000,000 during the
three months ended March 31, 1996, compared to approximately
$145,000,000 during the three months ended March 31, 1995,
representing a 9% increase.
Although premium placed inforce increased, marketing allowance
revenues decreased by 2% during the first quarter of 1996,
compared to the three months ended March 31, 1995, due primarily
to a change in the timing of revenue recognition pursuant to
contractual arrangements. In accordance with the terms of the
Marketing Agreement with American National, the Company
recognized first quarter 1995 marketing allowance revenue at the
time of submission of policy applications. Effective July 1,
1995, the Marketing Agreement was amended to provide for
recognition of marketing allowance revenue by the Company after
the policies become inforce. First quarter 1995 submitted
premium was approximately $183,000,000, compared to premium
placed inforce during first quarter 1995 of approximately
$145,000,000. This timing difference was compounded by the high
volume of premium submitted during the first quarter of 1995,
which was the highest in the Company's history. The resulting
decrease in marketing allowance revenue was offset by increases
during the first quarter of 1996 in sales of life insurance
products and other shifts in the Company's sales mix to products
which yield higher marketing allowances.
Commission revenues increased by approximately 26% during the
three months ended March 31, 1996, when compared to the three
months ended March 31, 1995. This increase is attributable to
the increase in premium placed inforce and to shifts in the
Company's product sales mix to products with higher commission
rates.
Effective March 1, 1996, the Marketing and Processing Agreements
between the Company and American National were further amended to
reduce certain administrative fees earned by the Company. These
reductions in rates are expected to result in lower revenues to
the Company. The amount of the decrease will depend on the
volume of policies sold and administered. In addition, during
April 1996, certain investment strategy features of the annuity
policies offered by American National were eliminated. Such
changes could impact the volume of the Company's sales of annuity
policies.
Investment income represents earnings from investments in
marketable securities. Such earnings increased 136% to $134,000
during the three months ended March 31, 1996, from $57,000 during
the three months ended March 31, 1995, due to increases in
invested assets.
Expenses -- Expenses totaled $3,198,000 during the three months
ended March 31, 1996, compared to $2,059,000 during the three
months ended March 31, 1995. This increase is largely attributed
to planned increases in the Company's employees and
infrastructure to prepare for projected increases in sales of
life insurance and variable products.
As a service organization, the Company's predominant expense is
salaries and related employee benefits. The Company hires new
employees as necessary to support increases in sales and to
provide for anticipated future growth in operations. Total full-
time equivalent employees grew 53% to 138 at March 31, 1996 from
90 at March 31, 1995. As a result, total salaries and related
employee benefits increased to $1,948,000 for the three months
ended March 31, 1996 from $1,317,000 for the three months ended
March 31, 1995.
Advertising and sales promotion expense consists primarily of the
cost of sales promotion meetings and design and printing of sales
brochures for use by producers throughout the Company's
distribution system. The expense totaled $426,000 during the
first quarter of 1996, or 9% of revenues, compared to $216,000
during the first quarter of 1995, or 5% of revenues. This
increase, as a percentage of revenue, is attributable primarily
to expenses incurred during 1996 associated with the annual
national sales convention, which was held in January 1996, and to
costs of a new training program designed to familiarize
producers' administrative personnel with products marketed by the
Company.
Professional fees, which include legal fees, outside accounting
fees and consulting fees totaled $227,000 during the three months
ended March 31, 1996, compared to $126,000 during the three
months ended March 31, 1995. This increase is due primarily to
various consulting projects in process, including consultants
hired to market life insurance products and to coordinate a
Company-wide initiative to analyze and improve operating
processes.
Provision for Income Taxes -- The Company files consolidated
returns for federal income tax purposes.
The Company experienced both federal and state net operating
losses ("NOLs") in prior years that can be used to offset taxes
payable in current and future profitable years. Realization of
the NOL carryforwards is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be
realized. The amount of the deferred tax asset considered
realized could, however, be reduced in the near term if estimates
of future taxable income during the carryforward period are
reduced.
The provision for income taxes was $580,000 and $1,000,000 for
the three months ended March 31, 1996 and 1995, respectively.
The Company's effective tax rate was 41% for the three months
ended March 31, 1996 and 45% for the three months ended March 31,
1995.
Financial Condition
During the three months ended March 31, 1996, the Company
continued to generate positive cash flows from operations, which
resulted in a 20% net increase in cash and investments to
$7,844,000 at March 31, 1996 from $6,564,000 at December 31,
1995. In addition to cash generated by first quarter income,
collections of accounts receivable from American National during
the first quarter of 1996 contributed to positive cash flows
during the period.
Total liabilities decreased to $1,421,000 at March 31, 1996 from
$1,763,000 at December 31, 1995 due primarily to payment of 1995
employee bonuses which had been accrued at December 31, 1995.
This decrease was offset by increases in income taxes payable
resulting from timing differences between recognition and payment
of income taxes.
Liquidity and Capital Resources
The Company's cash flows from operations totaled $1,502,000
during the three months ended March 31, 1996 and were applied
primarily to the purchase of investments in U.S. Treasury
securities and other marketable securities backed by U.S.
Government agencies. As a result, cash and investments increased
$1,280,000, or 20%, during the three month period ended March 31,
1996. Such amounts represented 61% of the Company's total assets
at March 31, 1996.
Contingent Obligations of the Company
During 1991 and 1992, the Company sold 5,698,452 shares of Series
A Common Stock pursuant to the terms of the 701 Asset Accumulator
Program. Current management is investigating whether some of
these sales were made without compliance with the applicable
securities laws of one or more states. In the event that this is
the case, the Company may be required to rescind some of these
sales. The costs of rescission, if any, cannot be estimated at
this time.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 10 Amendment effective March 1, 1996 to the
Marketing and Processing Agreement between
the Company and American National Insurance
Company.*
Exhibit 27 Financial Data Schedule
* Certain confidential commercial and financial
information has been omitted here but filed under
separate cover with the SEC.
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: 5/10/96 Signature: s/Lynda Regan
_______________________
Lynda Regan
President &
Chief Executive Officer
Date: 5/10/96 Signature: s/R. Preston Pitts
_______________________
R. Preston Pitts
Chief Financial Officer
February 13, 1996
Mr. Preston Pitts
Chief Financial Officer
Legacy Marketing Group
Post Office Box 7873
San Francisco, CA 94120-7873
Re: Change in Maintenance Fees and Trailers
Dear Preston:
As per our discussions, this letter will serve as a working
document on our agreement to a change in maintenance fees and
trailer commissions on annuity products until the actual
marketing agreement can be amended.
My understanding of our agreement is that effective March 1,
1996, the maintenance fees on annuities, other than the BenchMark
No Surrender Charge Annuity will be reduced to ___* per policy in
force from ___* and the trail commission will be reduced from
___* to ___* on all in force annuity business and new business.
In order to make this change in trail commission, our previous
agreement to reduce the ___* trail commission to ___* of that
amount during the first three years of our agreement, in order to
offset the accelerated marketing allowance over the first six
months, will be amended to change the amount of the reduction to
pay ___* of the ___* and to extend this reduction period to the
first four years of our agreement.
I believe this represents our agreement on these matters. If so,
please sign and return a copy of this letter and I will begin the
process of amending the actual agreements.
Sincerely,
s/James E. Pozzi
James E. Pozzi
I agree with the proposal outlined above.
s/R. Preston Pitts
R. Preston Pitts
Chief Financial Officer
* Confidential terms have been redacted.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements contained in the Company's quarterly report on
Form 10-Q for the quarter ended March 31, 1996 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 878,785
<SECURITIES> 6,965,458
<RECEIVABLES> 579,584
<ALLOWANCES> 0
<INVENTORY> 136,329
<CURRENT-ASSETS> 8,866,166
<PP&E> 2,521,696
<DEPRECIATION> (876,891)
<TOTAL-ASSETS> 12,760,414
<CURRENT-LIABILITIES> 1,169,040
<BONDS> 132,285
12,682,750
0
<COMMON> 3,802,071
<OTHER-SE> (5,145,426)
<TOTAL-LIABILITY-AND-EQUITY> (1,343,355)
<SALES> 0
<TOTAL-REVENUES> 4,627,384
<CGS> 0
<TOTAL-COSTS> 2,967,031
<OTHER-EXPENSES> 231,024
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,429,329
<INCOME-TAX> 579,653
<INCOME-CONTINUING> 849,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 849,676
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
</TABLE>
