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 September 30, 1997, 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)
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
--- ---
The number of shares outstanding of the registrant's common stock, as of
October 31, 1997 was:
Common Stock-Series A 26,190,711
Common Stock-Series B 609,574
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(Unaudited) (Audited)
ASSETS:
Cash and cash equivalents $ 1,606,776 $ 2,202,596
Investments 9,206,571 7,947,207
Accounts receivable 1,022,676 511,710
Prepaid expenses 563,454 361,950
Marketing supplies inventory 211,720 251,979
Income taxes receivable -- 179,746
----------- -----------
Total current assets 12,611,197 11,455,188
----------- -----------
Net fixed assets 2,502,948 1,741,388
Organization costs-net 29,431 23,820
Deferred tax assets 1,470,877 1,600,150
Other assets 417,614 604,356
----------- -----------
TOTAL ASSETS $17,032,067 $15,424,902
=========== ===========
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 164,839 $ 170,738
Income taxes payable 348,074 --
Accrued liabilities 1,886,703 2,032,387
----------- -----------
Total current liabilities 2,399,616 2,203,125
----------- -----------
Loan payable 132,285 132,285
Deferred incentive compensation 132,727 184,456
----------- -----------
Total non-current liabilities 265,012 316,741
----------- -----------
TOTAL LIABILITIES 2,664,628 2,519,866
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE COMMON STOCK 11,988,205 12,343,001
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value,
100,000,000 shares authorized,
no shares issued or outstanding -- --
Series A common stock, no par value,
45,000,000 shares authorized,
20,625,014 and 20,800,791 shares
issued and outstanding at
September 30, 1997 and
December 31, 1996, respectively 3,396,663 3,532,071
Paid-in capital from redemptions and
retirement of common stock 529,223 310,110
Accumulated deficit (1,565,377) (3,332,887)
Net unrealized gains on investments 18,725 52,741
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 2,379,234 562,035
----------- -----------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & SHAREHOLDERS' EQUITY $17,032,067 $15,424,902
=========== ===========
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME:
Marketing allowances $ 3,231,598 $ 2,262,869 $ 8,492,401 $ 7,819,586
Commission income 1,448,541 965,994 3,732,659 3,309,537
Administrative fees 950,330 684,811 2,515,183 2,289,044
Investment income 164,185 189,719 476,768 506,927
Other income 54,695 4,627 191,693 47,809
----------- ----------- ----------- -----------
TOTAL INCOME 5,849,349 4,108,020 15,408,704 13,972,903
----------- ----------- ----------- -----------
EXPENSES:
Salaries and related benefits 2,673,329 2,126,998 7,688,238 6,095,526
Sales promotion and support 642,647 330,655 1,743,553 1,719,844
Occupancy 272,472 140,740 642,184 418,815
Professional fees 159,196 211,495 517,188 493,435
Depreciation and amortization 199,456 122,163 459,219 348,494
Courier and postage 166,651 97,428 369,695 266,757
Stationery and supplies 109,422 61,173 269,048 216,767
Equipment 93,459 77,054 267,113 218,291
Travel and entertainment 83,812 68,147 196,771 174,650
Insurance 42,636 41,021 129,097 127,642
Other miscellaneous expenses 10,040 16,262 123,686 51,111
----------- ----------- ----------- -----------
TOTAL EXPENSES 4,453,120 3,293,136 12,405,792 10,131,332
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,396,229 814,884 3,002,912 3,841,571
PROVISION FOR INCOME TAXES 565,623 329,971 1,235,402 1,560,371
----------- ----------- ----------- -----------
NET INCOME $ 830,606 $ 484,913 $ 1,767,510 $ 2,281,200
=========== =========== =========== ===========
EARNINGS PER SHARE:
Weighted average shares outstanding 26,865,131 27,584,620 26,937,299 27,603,756
Earnings per share from operations $ .05 $ .03 $ .11 $ .14
Provision for income taxes .02 .01 .04 .06
----------- ----------- ----------- -----------
Earnings per share $ .03 $ .02 $ .07 $ .08
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Paid-in
Series A Common Stock Capital from
--------------------- Retirement of Accumulated Unrealized
Shares Amount Common Stock Deficit Gains/(Losses) Total
------ ------ ------------- ----------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1997 20,800,791 $ 3,532,071 $ 310,110 $ (3,332,887) $ 52,741 $ 562,035
Net income for the
nine months ended
September 30, 1997 1,767,510 1,767,510
Redemptions and
retirement of
common stock (175,777) (135,408) 219,113 83,705
Unrealized losses on
investments (56,982) (56,982)
Deferred taxes on
unrealized losses 22,966 22,966
---------- ----------- ----------- ------------ ---------- -----------
Balance
September 30, 1997 20,625,014 $ 3,396,663 $ 529,223 $ (1,565,377) $ 18,725 $ 2,379,234
========== =========== =========== ============ ========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
---------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,767,510 $ 2,281,200
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of fixed assets 454,190 345,598
Amortization of organization costs 5,029 2,896
Amortization/accretion of investments (24,547) (26,756)
Realized loss (gain) on sales of investments 28,686 (2,526)
Changes in assets and liabilities
Net change in accounts receivable (510,966) 815,551
Net change in prepaid expenses (201,504) (191,104)
Net change in marketing supplies inventory 40,259 (44,210)
Net change in income taxes receivable and payable 527,820 (181,386)
Net change in deferred tax assets 152,239 438,954
Net change in accounts payable (5,899) 45,551
Net change in accrued liabilities (145,684) 557,415
Net change in other assets and liabilities 135,013 (407,728)
----------- -----------
Net cash provided by operating activities 2,222,146 3,633,455
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (11,060,306) (13,561,338)
Proceeds from sales and maturities of investments 9,739,821 9,270,118
Purchases of fixed assets (1,215,750) (318,057)
Purchase of organization costs (10,640) --
----------- -----------
Net cash used in investing activities (2,546,875) (4,609,277)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and retirement of common stock (271,091) (25,755)
Repayment of note payable -- (87,688)
----------- -----------
Net cash used in financing activities (271,091) (113,443)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (595,820) (1,089,265)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,202,596 1,496,631
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,606,776 $ 407,366
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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 ("LMG"), Legacy Financial Services, Inc., and LifeSurance
Corporation (collectively referred to herein as the "Company"). 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 nine months ended September 30,
1997, are not necessarily indicative of the results to be expected for the
entire year. Users of these financial statements are encouraged to refer to
the Annual Report on Form 10-K for the year ended December 31, 1996, for
additional disclosure.
2. Commitments and Contingencies
In December, 1996, LMG and American National Insurance Company were named
in a lawsuit filed in the Circuit Court of Jefferson County, Alabama,
alleging misrepresentation and price discrimination in connection with the
sale of certain annuity products issued by American National Insurance
Company and marketed by LMG. The outcome of the lawsuit cannot be
determined at this time. However, the Company's management believes that
the suit is without merit and intends to defend the Company vigorously.
3. Redeemable Common Stock
The Company is obligated to repurchase certain of its shares of common
stock, pursuant to various agreements under which the stock was issued.
During the nine months ended September 30, 1997, redeemable common stock
was redeemed and retired as follows:
<TABLE>
<CAPTION>
Series A Redeemable Series B Redeemable Total Redeemable
Common Stock Common Stock Common Stock
------------------- ------------------- ----------------
Carrying Carrying Carrying
(Issuance) (Issuance) (Issuance)
Shares Amount Shares Amount Shares Amount
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1996 5,769,086 $10,512,023 610,326 $ 1,830,978 6,379,412 $12,343,001
Redemptions and
retirement of
common stock (189,817) (352,540) (752) (2,256) (190,569) (354,796)
--------- ----------- ------- ----------- --------- -----------
Balance
September 30, 1997 5,579,269 $10,159,483 609,574 $ 1,828,722 6,188,843 $11,988,205
========= =========== ======= =========== ========= ===========
</TABLE>
4. Reclassification
For comparative purposes, certain prior year amounts have been reclassified
to conform to the current year presentation. Such reclassification had no
impact on the Company's net income or shareholders' equity.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Except for historical information contained herein, the matters discussed
in this report contain forward looking statements that involve risk and
uncertainties that could cause actual results to differ.
Results of Operations
Summary--The Company's net income increased approximately $346,000, or
71.3%, in the third quarter of 1997, from the comparable period in 1996. This
increase is attributable primarily to increases in revenue, as discussed below.
For the nine months ended September 30, 1997, however, the Company's net income
decreased $514,000, or 22.5%, from the nine months ended September 30, 1996.
This decrease is due primarily to increases in expenses, as discussed below.
Income--The Company's major sources of income are marketing allowances,
commission overrides and administrative fees from sales and administration of
annuity and life insurance products on behalf of the two insurance companies for
which the Company markets and administers policies (the "Carriers"). Levels of
marketing allowances and commission overrides are directly related to the volume
of sales of such products. Administrative fees are a function not only of
product sales, but also administration of the policies inforce and producer
appointments. Total income increased approximately $1,741,000, or 42.4%, in the
three months ended September 30, 1997, from the corresponding period in 1996,
and increased approximately $1,436,000, or 10.3%, in the nine months ended
September 30, 1997, from the corresponding period in 1996. These increases
resulted primarily from increases in sales volume, as discussed below.
Marketing allowances and commission income, combined, increased
approximately $1,500,000, or 45.0%, in the third quarter of 1997, from the
comparable period in 1996, and increased approximately $1,096,000, or 9.8%,
during the nine months ended September 30, 1997, from the nine months ended
September 30, 1996. These increases are due primarily to increases in the volume
of sales by the Company's distribution network. During the three months ended
September 30, 1997 and 1996, premium placed inforce for the Carriers totaled
approximately $203,445,000 and $139,766,000, respectively, representing a 45.6%
increase. During the nine months ended September 30, 1997 and 1996, premium
placed inforce totaled approximately $525,911,000 and $481,392,000,
respectively, representing a 9.2% increase.
Administrative fees increased approximately $266,000, or 38.8%, during the
three months ended September 30, 1997, compared to the corresponding period in
1996, and increased approximately $226,000, or 9.9%, during the nine months
ended September 30, 1997, compared to the nine months ended September 30, 1996.
These increases are due primarily to increases in the number of policies sold
and administered and to a shift in policies administered to those which generate
higher administrative fees.
During 1997, the Company marketed and administered insurance products for
only two Carriers, American National Insurance Company ("American National") and
IL Annuity and Insurance Company ("IL Annuity"). During the three months ended
September 30, 1997, approximately 32.7% and 61.6% of the Company's total revenue
resulted from agreements with American National and IL Annuity, respectively,
and during the nine months ended September 30, 1997, approximately 42.2%% and
51.0% of the Company's total revenue resulted from agreements with American
National and IL Annuity, respectively. This shift between Carriers is attributed
primarily to changes in product strategies and lower than anticipated renewal
rates on one of the Carrier's products.
Expenses--Total expenses increased approximately $1,160,000, or 35.2%, in
the quarter ended September 30, 1997, from the same quarter in 1996, and
increased approximately $2,274,000, or 22.4%, during the nine months ended
September 30, 1997, from the corresponding period in 1996. These increases are
attributable primarily to increases in compensation, sales promotion and
occupancy expenses as discussed below.
As a service organization, the Company's primary expenses are salaries and
related employee benefits. These expenses increased approximately $546,000, or
25.7%, in the three months ended September 30, 1997, from the comparable period
in 1996, and increased approximately $1,593,000, or 26.1% in the nine months
ended September 30, 1997, from the comparable period in 1996. These increases
are due to an increase in the average number of full-time equivalent employees
to 192 during the third quarter of 1997, from 158 during the third quarter of
1996, a 23.9% increase, and to 179 full time equivalents during the nine months
ended September 30, 1997, from 148 during the comparable period in 1996, a 23.0%
increase. Increases in employment are largely attributable to preparation for
projected increases in sales of insurance products. However, such projected
increases in sales may not be realized if new products are not introduced as
planned or if market acceptance of such products is not as favorable as
anticipated. Salaries and related benefits also increased due to the addition of
personnel at higher pay levels.
Sales promotion and support expense consists primarily of costs related to
the Company's annual national sales conventions and to various sales training
activities. Also included in sales promotion and support expense is the cost of
designing and printing of sales brochures for use by producers. It is expected
that these expenses will continue to be a major element of the Company's cost
structure as attendance at the national sales conventions increases, as the
number of producers marketing products for the Company increases, and as new
products are introduced. This expense represented 11.0% and 8.0% of total
revenues during the three months ended September 30, 1997 and 1996,
respectively. The increase between quarterly periods is due primarily to an
increase in the third quarter of 1997 in the accrual for the Company's annual
national sales conventions.
Occupancy expense increased approximately $131,000, or 93.6%, in the third
quarter of 1997 from the third quarter of 1996, and increased approximately
$223,000, or 53.3%, in the nine months ended September 30, 1997, from the same
period in 1996. These increases are attributable primarily to the leasing of
additional office space in November of 1996, and to increases in telephone and
utilities expenses resulting from increases in employment and an overall
increase in the volume of sales, as discussed above.
Professional fees decreased approximately $53,000, or 24.7%, in the three
months ended September 30, 1997, from the same period in 1996, and increased
approximately $24,000, or 4.8%, during the nine months ended September 30, 1997,
from the same period in 1996. The decrease between quarters is due primarily to
lower legal costs incurred in 1997 related to the Annual Meeting of Shareholders
than were incurred in 1996, as the 1996 meeting was the Company's first. In
spite of this decrease in legal fees during the third quarter of 1997, however,
professional fees increased slightly between nine month periods due to
consulting fees incurred during 1997 related to various information systems
projects in progress.
Depreciation and amortization expense increased approximately $77,000, or
63.3%, in the third quarter of 1997, from the third quarter of 1996, and
increased approximately $111,000, or 31.8%, in the nine months ended September
30, 1997, from the comparable period in 1996. These increases are due primarily
to acquisitions of fixed assets during each respective period in 1997. Such
acquisitions were necessary to improve newly leased office space and to
accommodate increases in employment, as discussed above. The increase in this
expense was partially offset by a change in the mix of fixed assets to those
which are depreciated over a longer period of time, and thereby result in lower
depreciation and amortization expense.
Provision for Income Taxes-- Included in deferred tax assets at September
30, 1997, are state net operating loss ("NOL") tax benefits of $99,000, which
expire December 31, 1997. Realization of the state NOL carryforwards is
dependent on generating sufficient taxable income prior to expiration. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax assets will be realized. The amount of the deferred tax
assets considered realized could, however, be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
Liquidity and Capital Resources
The Company's ability to mobilize its assets remained strong, with cash and
investments representing 63.5% of the Company's total assets at September 30,
1997.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In December, 1996, LMG and American National were named in a lawsuit filed
in the Circuit Court of Jefferson County, Alabama, alleging misrepresentation
and price discrimination in connection with the sale of certain annuity products
issued by American National and marketed by LMG. (See Item 3 of Part I of the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, which
is incorporated herein by this reference.) In August, 1997, the case was
remanded back to the Circuit Court of Jefferson County, Alabama. The outcome of
the lawsuit cannot be determined at this time. The Company's management believes
that the suit is without merit and intends to defend vigorously.
Item 4. Submission of Matters to a Vote of Security-Holders
The following matters were submitted to a vote of the shareholders of the
Company at the Annual Meeting of Shareholders, which was held on August 22,
1997. The results of shareholder votes were as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
(i) Approval of the Regan Holding Corp.
1998 Stock Option Plan 17,988,732 989,669 78,926 --
(ii) Ratification of the Appointment of
Coopers & Lybrand L.L.P., as the
principal independent accountants
for the Company for the year ended
December 31, 1997 19,025,711 2,523 29,093 --
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit 27 Financial Data Schedule
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: November 13, 1997 Signature: /s/ R. Preston Pitts
----------------------- -----------------------------------
R. Preston Pitts,
President
Date: November 13, 1997 Signature: /s/ David A. Skup
----------------------- -----------------------------------
David A. Skup,
Chief Financial Officer
<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 September 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,606,776
<SECURITIES> 9,206,571
<RECEIVABLES> 1,219,756
<ALLOWANCES> (197,080)
<INVENTORY> 211,720
<CURRENT-ASSETS> 12,611,197
<PP&E> 4,191,769
<DEPRECIATION> (1,688,821)
<TOTAL-ASSETS> 17,032,067
<CURRENT-LIABILITIES> 2,399,616
<BONDS> 0
11,988,205
0
<COMMON> 3,396,663
<OTHER-SE> 547,948
<TOTAL-LIABILITY-AND-EQUITY> 2,379,234
<SALES> 5,630,469
<TOTAL-REVENUES> 5,849,349
<CGS> 0
<TOTAL-COSTS> 4,453,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,396,229
<INCOME-TAX> 565,623
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 830,606
<EPS-PRIMARY> $.03
<EPS-DILUTED> 0
</TABLE>
