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, 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
July 31, 1997 was:
Common Stock-Series A 26,269,588
Common Stock-Series B 609,574
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
1997 1996
(Unaudited) (Audited)
ASSETS:
Cash and cash equivalents $ 5,715,030 $ 2,202,596
Investments 4,320,689 7,947,207
Accounts receivable 714,885 511,710
Prepaid expenses 453,694 361,950
Marketing supplies inventory 229,214 251,979
Income taxes receivable -- 179,746
-- -------
Total current assets 11,433,512 11,455,188
---------- ----------
Net fixed assets 2,297,298 1,741,388
Organization costs-net 23,783 23,820
Deferred tax assets 1,412,178 1,600,150
Other assets 442,067 604,356
------- -------
TOTAL ASSETS $15,608,838 $15,424,902
=========== ===========
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 105,912 $ 170,738
Income taxes payable 96,488 --
Accrued liabilities 1,616,129 2,032,387
--------- ---------
Total current liabilities 1,818,529 2,203,125
--------- ---------
Loan payable 132,285 132,285
Deferred incentive compensation 76,086 184,456
------ -------
Total non-current liabilities 208,371 316,741
------- -------
TOTAL LIABILITIES 2,026,900 2,519,866
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 2) -- --
REDEEMABLE COMMON STOCK (Note 3) 12,185,720 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,
20,628,014 and 20,800,791 shares
issued and outstanding at
June 30, 1997 and December 31,
1996, respectively 3,396,693 3,532,071
Paid-in capital from redemption and
retirement of common stock 418,193 310,110
Accumulated deficit (2,395,983) (3,332,887)
Net unrealized gains (losses) on
investments (22,685) 52,741
-------- ------
TOTAL SHAREHOLDERS' EQUITY 1,396,218 562,035
--------- -------
TOTAL LIABILITIES, REDEEMABLE
COMMON STOCK & SHAREHOLDERS'
EQUITY $15,608,838 $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 Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME:
Marketing allowances $ 3,018,124 $ 3,045,374 $ 5,260,803 $ 5,556,717
Commission income 1,237,775 1,241,816 2,284,118 2,343,543
Administrative fees 904,766 764,814 1,590,156 1,622,599
Investment income 119,962 182,782 312,583 317,208
Other income 44,040 2,713 111,695 24,816
------ ----- ------- ------
TOTAL INCOME 5,324,667 5,237,499 9,559,355 9,864,883
--------- --------- --------- ---------
EXPENSES:
Salaries and related benefits 2,473,535 2,021,008 5,014,909 3,968,528
Sales promotion and support 677,224 936,113 1,100,906 1,385,573
Occupancy 201,983 129,923 369,712 278,075
Professional fees 149,175 55,122 357,992 281,940
Depreciation and amortization 146,007 117,712 288,734 226,331
Courier and postage 86,520 87,400 203,044 169,329
Equipment 86,983 72,692 159,626 141,237
Stationery and supplies 78,859 69,691 173,654 155,594
Travel and entertainment 75,807 89,186 112,959 106,503
Insurance expense 52,095 45,589 86,461 86,621
Other miscellaneous expenses 47,158 15,705 84,675 38,465
------ ------ ------ ------
TOTAL EXPENSES 4,075,346 3,640,141 7,952,672 6,838,196
--------- --------- --------- ---------
INCOME FROM OPERATIONS 1,249,321 1,597,358 1,606,683 3,026,687
PROVISION FOR INCOME TAXES 515,090 650,747 669,779 1,230,400
------- ------- ------- ---------
NET INCOME $ 734,231 $ 946,611 $ 936,904 $ 1,796,287
======+====== ============== ============ ==============
EARNINGS PER SHARE:
Weighted average shares outstanding 26,848,054 27,610,431 26,672,941 27,613,502
Earnings per share from operations $ .05 $ .06 $ .06 $ .11
Provision for income taxes .02 .02 .02 .04
--- --- --- ---
Earnings per share $ .03 $ .04 $ .04 $ . 07
============= ============= ============= ==============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Paid-in Capital
Retirement
Series A Common Stock 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
six months ended
June 30, 1997 936,904 936,904
Redemption and
retirement of
common stock (172,777) (135,378) 108,083 (27,295)
Unrealized losses on
investments (125,999) (125,999)
Deferred taxes on
unrealized losses 50,573 50,573
---------- ---------- -------- ----------- ----------- ----------
Balance
June 30, 1997 20,628,014 $3,396,693 $418,193 $(2,395,983) $ (22,685) $1,396,218
========== ========== ======== =========== =========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 936,904 $ 1,796,287
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of fixed assets 285,663 224,400
Amortization of organization costs 3,071 1,931
Amortization/accretion of investments (8,192) (17,687)
Realized loss (gain) on sales of investments 28,994 (2,526)
Changes in assets and liabilities
Net change in accounts receivable (203,175) 972,889
Net change in marketing supplies inventory 22,765 24,091
Net change in prepaid expenses (91,744) (149,449)
Net change in income taxes receivable and payable 276,234 69,389
Net change in deferred tax assets 238,545 334,412
Net change in accounts payable (64,826) (555)
Net change in accrued liabilities (416,258) 256,861
Net change in other assets and liabilities 53,919 (251,977)
------ --------
Net cash provided by operating activities 1,061,900 3,258,066
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (20,880,107) (10,008,309)
Proceeds from sales and maturities of investments 24,359,825 6,571,304
Purchases of fixed assets (841,574) (267,682)
Purchase of organization costs (3,034) --
------ --
Net cash provided by (used in) investing activities 2,635,110 (3,704,687)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and retirement of common stock (184,576) (12,810)
Repayment of note payable -- (87,688)
-- -------
Net cash used in financing activities (184,576) (100,498)
-------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,512,434 (547,119)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,202,596 1,496,631
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,715,030 $ 949,512
============== ==============
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. 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 six months ended June 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
A report on Form 8-K was filed on January 21, 1997, to inform security
holders that in December, 1996, LMG and American National Insurance Company
(collectively, the "Co-defendants") 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. However, the Company's
management believes that the suit is without merit and intends to defend
itself 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 second quarter of 1997, 45,282 shares of redeemable Series A
common stock were redeemed and retired for $35,317. During the first
quarter of 1997, 39,698 shares of redeemable Series A common stock were
redeemed and retired for $27,789 and 752 shares of redeemable Series B
common stock were redeemed and retired for $526. The excess of original
proceeds over the redemption value has been reflected as additional paid-in
capital in the accompanying financial statements. Such amounts totaled
$47,819 during the second quarter of 1997 and $45,830 during the first
quarter of 1997. At June 30, 1997, the number of remaining shares of
redeemable Series A and Series B common stock totaled 5,684,106 and
609,574, respectively.
4. Comprehensive Income
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. The Company does not
believe that SFAS No. 130 will have a material impact on its financial
statements.
5. Segment Reporting
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires publicly-held
companies to report financial and other information about key
revenue-producing segments of the entity for which such information is
available and is utilized by the chief operation decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of
segment financial information to amounts reported in the financial
statements would be provided. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company does not believe SFAS No.
131 will have a material impact on its financial statements.
6. Concentration of Risk
At June 30, 1997, $4.0 million included in cash and cash equivalents was
invested in commercial paper issued by one brokerage firm. The remainder of
the Company's cash and investments was diversified at June 30, 1997.
Item 2. 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 risks and
uncertainties that could cause actual results to differ materially.
Results of Operations
Summary--During the quarter ended June 30, 1997, the Company recorded net
income of $734,000, or $.03 per share, compared with $947,000, or $.04 per
share, during the quarter ended June 30, 1996. During the six months ended June
30, 1997, the Company recorded net income of $937,000, or $.04 per share,
compared with $1,796,000, or $.07 per share, during the six months ended June
30, 1996. As discussed below, the decreases between periods are attributable
primarily to increases in expenses.
Income--Total income increased to $5,325,000 during the quarter ended June 30,
1997, from $5,237,000 during the corresponding quarter in 1996. This increase is
due primarily to increases in administrative fees. Total income decreased to
$9,559,000 during the six months ended June 30, 1997, from $9,865,000 during the
six months ended June 30, 1996. This decrease resulted primarily from decreases
in the volume of premium placed in force.
Sales by the Company's distribution network for the two insurance companies for
which the Company markets and administers insurance policies (the "Carriers"),
resulted in premium placed inforce of approximately $175,834,000 during the
quarter ended June 30, 1997, compared with $183,221,000 during the quarter ended
June 30, 1996, and $322,466,000 during the six months ended June 30, 1997,
compared with $341,627,000 during the six months ended June 30, 1996. These
decreases are attributable largely to changes in product strategies and lower
than anticipated renewal rates on products of one of the Carriers. Such
decreases were offset in part, however, by favorable market acceptance of new
products introduced on behalf of the other Carrier. As a result of the decreases
in premium, marketing allowances and commission income, combined, decreased
slightly to $4,256,000 during the second quarter of 1997, from $4,287,000 during
the comparable period in 1996, and to $7,545,000 during the six months ended
June 30, 1997, from $7,900,000 during the comparable period in 1996.
Administrative fees increased 18%, to $905,000, during the three months ended
June 30, 1997, from $765,000 during the three months ended June 30, 1996, and
remained consistent at $1,590,000 during the six months ended June 30, 1997,
compared with $1,623,000 during the same period in 1996. The increase between
quarters is due to an increase in the number of policies administered and to a
shift in policies administered to those which generate higher administrative
fees. On a year to date basis, the increase in administrative fees resulting
from these factors was offset by a decrease in the number of policies issued and
a reduction in certain administrative fees per policy under the Company's
processing agreement with one of the Carriers.
Investment income represents earnings from investments in marketable securities.
Such earnings decreased to $120,000 during the quarter ended June 30, 1997, from
$183,000 during the quarter ended June 30, 1996, and to $313,000 during the six
months ended June 30, 1997, from $317,000 during the six months ended June 30,
1996. The decrease between quarters is due primarily to decreases in the amount
of assets invested and to losses incurred during the second quarter of 1997 on
sales of assets under investment.
Expenses--Expenses totaled $4,075,000 during the quarter ended June 30, 1997,
compared with $3,640,000 during the quarter ended June 30, 1996, and $7,953,000
during the six months ended June 30, 1997, compared with $6,838,000 during the
six months ended June 30, 1996. These increases are largely attributable to
increases in salaries and related expenses, which constitute the Company's
predominant expense.
Salaries and related benefits expense increased 22%, to $2,474,000, during the
quarter ended June 30, 1997, from $2,021,000 during the comparable period in
1996. This increase is due to an increase in the average number of full-time
equivalent employees to 182 during the quarter ended June 30, 1997, from 147
during the comparable period in 1996. Salaries and related benefits expense
increased 26%, to $5,015,000, during the six months ended June 30, 1997, from
$3,969,000 during the comparable period in 1996. This increase was also due to
an increase in the average number of full time equivalent employees to 177
during the six months ended June 30, 1997, from 140 during the comparable period
in 1996. These increases in employment are largely attributable to preparation
for projected increases in sales of annuity, life, and variable 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.
Sales promotion and support expense decreased, as a percentage of income, to 13%
during the three months ended June 30, 1997, from 18% during the same period in
1996, and to 12% during the six months ended June 30, 1997, from 14% during the
same period in 1996. These decreases are due primarily to an increase in the
second quarter of 1996 in the accrual for the Company's annual national sales
incentive meeting.
Professional fees increased to $149,000 during the quarter ended June 30, 1997,
from $55,000 during the same quarter in 1996, and to $358,000 during the six
months ended June 30, 1997, from $282,000 during the same period in 1996, due
primarily to consulting costs incurred during the second quarter of 1997 related
to information systems development.
Occupancy expense increased to $202,000 during the quarter ended June 30, 1997,
from $130,000 during the quarter ended June 30, 1996, and to $370,000 during the
six months ended June 30, 1997, from $278,000 during the six months ended June
30, 1996. These increases are due primarily to rent and other occupancy expenses
related to the leasing of additional office space, which became effective in
November, 1996.
Provision for Income Taxes--The Company files consolidated returns for federal
income tax purposes. In prior years, the Company experienced both federal and
state net operating losses ("NOLS") that can be used to offset taxes payable in
current and future profitable years. The federal NOL carryforwards were fully
utilized as of December 31, 1996. In addition, the Company has recorded federal
and state alternative minimum tax ("AMT") credit carryforward benefits. Included
in deferred tax assets at June 30, 1997, are state NOL tax benefits of $157,000
and federal and state AMT credit carryforwards of $869,000 and $347,000,
respectively. The state NOL carryforwards expire December 31, 1997. The AMT
credit carryforwards have no expiration date. Realization of the state NOL
carryforwards is dependent on generating sufficient taxable income prior to the
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.
Liquidity and Capital Resources
The Company's business is not capital intensive. Cash and investments, combined,
remained consistent at $10.0 million at June 30, 1997, compared with $10.1
million at June 30, 1996. The Company's assets remained liquid, with cash and
investments representing 64% of the Company's total assets at June 30, 1997,
compared to 65% at December 31, 1996.
At June 30, 1997, $4.0 million included in cash and cash equivalents was
invested in commercial paper issued by one brokerage firm. The remainder of the
Company's cash and investments was diversified at June 30, 1997.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 3 of Part I of the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by this reference.
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: August 12, 1997 Signature: /s/ Lynda Regan
Lynda Regan,
Chief Executive Officer
Date: August 12, 1997 Signature: /s/ R. Preston Pitts
R. Preston Pitts,
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the unaudited
financial statements contained in the Company's quarterly report on Form 10-Q
for the quarter ended June 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> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,715,030
<SECURITIES> 4,320,689
<RECEIVABLES> 912,844
<ALLOWANCES> (197,959)
<INVENTORY> 229,214
<CURRENT-ASSETS> 11,433,512
<PP&E> 3,817,592
<DEPRECIATION> (1,520,294)
<TOTAL-ASSETS> 15,608,838
<CURRENT-LIABILITIES> 1,818,529
<BONDS> 0
12,185,720
0
<COMMON> 3,396,693
<OTHER-SE> 395,508
<TOTAL-LIABILITY-AND-EQUITY> 1,396,218
<SALES> 5,160,665
<TOTAL-REVENUES> 5,324,667
<CGS> 0
<TOTAL-COSTS> 4,075,346
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,249,321
<INCOME-TAX> 515,090
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 734,231
<EPS-PRIMARY> .03
<EPS-DILUTED> 0
</TABLE>
