<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999, 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)
<TABLE>
<S> <C>
California 68-0211359
---------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2090 Marina Avenue, Petaluma, California 94954
---------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(707) 778-8638
--------------
(Registrant's Telephone Number, Including Area Code)
Proceedings During The Preceding Five Years:
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 July 31, 1999:
Common Stock-Series A 25,767,260
Common Stock-Series B 598,416
Page 1 of 20
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,100,195 $ 5,916,731
Investments 20,500,087 16,987,628
Accounts receivable 2,483,262 1,704,265
Prepaid expenses 1,448,286 768,913
Income taxes receivable -- 884,089
Deferred income taxes-current 651,903 359,421
Marketing supplies inventory 617,099 385,616
----------------- -----------------
Total Current Assets 30,800,832 27,006,663
----------------- -----------------
Net fixed assets 7,989,777 2,982,267
Deferred income taxes-non current 2,094,498 904,974
Prepaid software licensing fees 687,656 --
Other assets 426,037 392,109
----------------- -----------------
Total Non-Current Assets 11,197,968 4,279,350
----------------- -----------------
TOTAL ASSETS $ 41,998,800 $ 31,286,013
================= =================
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 304,628 $ 418,821
Accrued sales convention costs 1,599,919 894,713
Accrued liabilities 3,802,807 4,388,401
Software licensing fees payable 600,000 --
Income taxes payable 599,409 --
----------------- -----------------
Total Current Liabilities 6,906,763 5,701,935
----------------- -----------------
Loans payable 2,263,383 132,285
Incentive compensation payable 476,450 530,523
Deferred compensation payable 526,890 --
----------------- -----------------
Total Non-Current Liabilities 3,266,723 662,808
----------------- -----------------
TOTAL LIABILITIES 10,173,486 6,364,743
----------------- -----------------
Commitments and contingencies -- --
REDEEMABLE COMMON STOCK, Series A and B 10,899,863 11,225,431
----------------- -----------------
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: 20,805,034 and 20,530,224
shares at June 30, 1999 and December 31, 1998, respectively 3,599,625 3,248,874
Paid-in capital from retirement of common stock 870,858 888,109
Paid-in capital from producer stock options 2,047,000 25,000
Retained earnings 14,703,540 9,587,775
Accumulated other comprehensive income-net (295,572) (53,919)
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 20,925,451 13,695,839
----------------- -----------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY $ 41,998,800 $ 31,286,013
================= =================
</TABLE>
See accompanying notes to consolidated financial statements
Page 2 of 20
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
INCOME:
Marketing allowances $ 8,200,700 $ 7,299,358 $16,076,790 $11,679,636
Commission income 4,758,236 3,453,208 8,799,224 5,593,692
Administrative fees 2,344,173 1,725,134 4,632,416 3,074,350
Investment income 353,804 286,061 552,462 501,104
Other income 103,218 98,000 287,320 157,238
------------ ------------ ----------- -----------
TOTAL INCOME 15,760,131 12,861,761 30,348,212 21,006,020
------------ ------------ ----------- -----------
EXPENSES:
Salaries and related benefits 5,893,568 4,236,744 11,450,881 7,723,470
Sales promotion and support 1,799,408 940,070 3,816,241 1,954,927
Producer stock options 1,941,000 6,250 2,022,000 12,500
Professional fees 442,819 293,493 828,792 574,402
Litigation settlement -- 1,104,401 -- 1,104,401
Depreciation and amortization 246,909 224,133 809,177 429,000
Occupancy 386,185 232,870 768,143 471,490
Courier and postage 280,506 150,372 525,334 313,128
Equipment 260,358 146,712 439,392 255,385
Stationery and supplies 176,260 203,410 354,281 328,200
Travel and entertainment 157,383 158,580 250,831 243,382
Insurance 121,367 45,084 209,484 84,641
Miscellaneous 71,973 62,376 124,987 100,083
------------ ------------ ----------- -----------
TOTAL EXPENSES 11,777,736 7,804,495 21,599,543 13,595,009
------------ ------------ ----------- -----------
INCOME FROM OPERATIONS 3,982,395 5,057,266 8,748,669 7,411,011
PROVISION FOR INCOME TAXES 1,660,378 2,038,123 3,632,904 2,985,952
------------ ------------ ----------- -----------
NET INCOME $ 2,322,017 $ 3,019,143 $ 5,115,765 $ 4,425,059
============ ============ =========== ===========
EARNINGS PER SHARE:
Weighted average shares outstanding-
basic 26,437,347 26,592,383 26,418,217 26,643,344
Basic earnings per share $ .09 $ .11 $ .19 $ .17
============ ============ =========== ===========
Weighted average shares outstanding-
diluted 27,314,729 26,592,383 27,280,434 26,643,344
Diluted earnings per share $ .09 $ .11 $ .19 $ .17
============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 20
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Paid-in
Paid-in Capital Capital Accumulated
Series A Common Stock from from Other
--------------------- Retirement of Producer Retained Comprehensive
Shares Amount Common Stock Options Earnings Income Total
------ ------ ------------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1999 20,530,224 $3,248,874 $ 888,109 $ 25,000 $ 9,587,775 $ (53,919) $ 13,695,839
Comprehensive Income:
Net income for the
six months ended
June 30, 1999 5,115,765 5,115,765
Net unrealized gains on
investments (400,685) (400,685)
Deferred tax on net
unrealized gains 159,032 159,032
------------
Total Comprehensive
Income 4,874,112
------------
Redemption and
retirement of
common stock (26,454) (26,454) (17,251) (43,705)
Stock awarded to
producers 291,264 369,905 369,905
Exercise of stock
Options 10,000 7,300 7,300
Producer stock option
expense 2,022,000 2,022,000
---------- ---------- ----------- ----------- ----------- --------- ------------
Balance
June 30, 1999 20,805,034 $3,599,625 $ 870,858 $ 2,047,000 $14,703,540 $(295,572) $ 20,925,451
========== ========== =========== =========== =========== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 20
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,115,765 $ 4,425,059
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of fixed assets 773,543 394,424
Amortization of intangible assets 35,634 34,578
Common stock awarded to producers 369,905 --
Producer stock option expense 2,022,000 12,500
Amortization/accretion of investments (17,866) (28,075)
Realized gains on sales of investments 87,652 --
Changes in assets and liabilities
Net change in accounts receivable (778,997) (1,237,002)
Net change in prepaid expenses (679,373) (26,612)
Net change in income taxes receivable and payable 1,483,498 313,162
Net change in deferred tax assets (1,322,974) 196,453
Net change in marketing supplies inventory (231,483) (47,177)
Net change in prepaid and deferred software licensing fees (87,656) --
Net change in accounts payable (114,193) (78,440)
Net change in accrued sales convention costs 705,206 (53,263)
Net change in accrued liabilities (585,594) 2,570,300
Net change in other assets and liabilities 403,255 69,287
------------ ------------
Net cash provided by operating activities 7,178,322 6,545,194
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (12,955,988) (5,873,148)
Proceeds from sales and maturities of investments 8,973,058 1,416,606
Purchases of fixed assets (5,781,053) (679,001)
------------ ------------
Net cash used in investing activities (9,763,983) (5,135,543)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 2,132,500 -
Payments toward note payable (1,402) -
Redemption and retirement of common stock (369,273) (192,935)
Proceeds from stock option exercises 7,300 -
------------ ------------
Net cash provided by (used in) financing activities 1,769,125 (192,935)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (816,536) 1,216,716
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,916,731 5,194,332
------------ ------------
Cash and cash equivalents, end of period $ 5,100,195 $ 6,411,048
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 20
<PAGE>
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. (the "Company") and its wholly-owned
subsidiaries, Legacy Marketing Group ("LMG"), Legacy Financial Services,
Inc., Legacy Advisory Services, Inc., Legacy Reinsurance Company, 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 consolidated balance sheet data at December 31,
1998, was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting principles. The
results for the six months ended June 30, 1999 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, 1998 for additional disclosure.
2. Building Purchase and Loan
On May 7, 1999, the Company purchased for $4.3 million the building in
Petaluma, California, in which the Company's headquarters were formerly
located. In conjunction with the building acquisition, the Company paid
$2.2 million of the purchase price in cash and entered into a loan payable
for the remaining $2.1 million. The loan has a ten year term and is payable
in monthly installments plus one balloon payment of approximately $1.8
million, due on May 10, 2009. The loan bears interest at 0.5% per annum
above the Prime Rate, as published in the West Coast Edition of the Wall
Street Journal. The loan is fully guaranteed by each of the Company's
subsidiaries. In addition, the loan agreement contains certain covenants
with which the Company must comply, including restrictions on indebtedness
or investments outside the ordinary course of business and restrictions on
dividends or other changes in the Company's capital structure. One of the
covenants requires management to obtain lender approval prior to
repurchasing non-redeemable common stock. On August 12, 1999 the Lender
waived this requirement for repurchases through July 31, 1999. One of the
covenants requires management non-redeemable common stock. On August 12,
1999 the under waive this requirement for repurchases through July 31,
1999. Pursuant to the loan agreement, the Company was required to place
approximately $650,000 in reserve to cover loan payments in the event of
default and to provide for certain repair costs.
Aggregate principal payments for the five years subsequent to June 30, 1999
are as follows:
<TABLE>
<CAPTION>
Year Principal
---- ----------
<S> <C> <C>
Six Months ended December 31, 1999 $ 12,763
Year ended December 31, 2000 $ 27,166
Year ended December 31, 2001 $ 29,509
Year ended December 31, 2002 $ 32,053
Year ended December 31, 2003 $ 34,817
Thereafter $1,994,114
</TABLE>
3. Deferred Compensation Payable
During 1999, $432,380 in commissions were deferred by Producers under the
Regan Holding Corp. Producer Commission Deferral Plan and $83,528 in
compensation was deferred by key employees under the Regan Holding Corp.
Key Employee Deferred Compensation Plan. Such amounts have been recorded as
a liability in the accompanying financial statements, plus accumulated
Company matching contributions and earnings of $5,398 and $5,584
respectively.
4. Software Licensing Fees
In March, 1999, LMG entered into a license agreement with The Leverage
Group, Inc. (the "Agreement"), pursuant to which LMG has the non-exclusive
right to use certain computer software programs in administering policies
on behalf of the carriers with whom the Company contracts. For this right,
LMG incurred an initial licensing fee of $800,000, with whom the company
contracts of which $200,000 was paid in April, 1999 and two installments of
$300,000 each become payable in September, 1999 and March, 2000. In
addition, LMG agreed to pay monthly licensing charges of $8,333 per month,
increasing each year to $22,667 per month during the eighth year, plus cost
of living adjustments each year. The term of the Agreement extends through
March 2007, but may be terminated by LMG with six months written notice
after March 2004. The $800,000 initial licensing fee has been recorded as
Prepaid Software Licensing Fees, net of the current portion of $101,875 and
net of
Page 6 of 20
<PAGE>
amortization. The unpaid portion of the initial licensing fee payable,
equal to $600,000, has been recorded as Software Licensing Fees Payable.
The monthly licensing fees are being expensed as incurred.
5. 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 six months ended June 30, 1999, 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
Shares Amount Shares Amount Shares Amount
----------- ------------- ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1999 5,171,447 $ 9,428,047 599,128 $ 1,797,384 5,770,575 $ 11,225,431
Redemption and
retirement of
common stock (195,840) (323,432) (712) (2,136) (196,552) (325,568)
----------- ------------- ----------- --------------- ----------- --------------
Balance
June 30, 1999 4,975,607 $ 9,104,615 598,416 $ 1,795,248 5,574,023 $ 10,899,863
=========== ============= =========== =============== =========== ==============
</TABLE>
6. Stock Option Expense
During the second quarter of 1999, the Company recorded $2,022,000 of
expense related to stock options that were granted to independent insurance
producers in 1998 and 1999. This charge was a result of the Company's
decision to waive the options' vesting provisions, thereby converting the
options from "variable" options to "fixed" options pursuant to guidance
prescribed in Statement of Financial Accounting Standards No. 123, as
interpreted by Emerging Issues Task Force Issue 96-18. This charge reflects
a re-measurement of the options based upon management's best estimate of
the fair value of the options at the date the vesting provisions were
waived. The fair value of the options was estimated using the Black-Sholes
option-pricing model with the following assumptions: risk free interest
rates ranging from 4.82 to 5.27; expected volatility ranging from 24.26 to
25.0; and expected lives ranging from 5 to 1 years. A dividend yield
assumption was not applicable, as the Company's stock is not publicly
traded nor does the Company pay dividends.
7. Recent Accounting Pronouncements--Internal Use Software Cost
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred
for computer software developed or obtained for internal use. The adoption
of SOP 98-1 did not have a material impact on the consolidated results of
operations or consolidated financial position of the Company during the six
months ended June 30, 1999.
8. Amendments to Marketing and Processing Agreements
In August, 1999, LMG and American National amended the terms of the
Marketing Agreement and the Insurance Processing Agreement to extend the
terms to October 1, 1999. LMG and American National are in the process of
negotiating a five year extension.
9. Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform with 1999 classifications. Such reclassifications had no impact on
net income or retained earnings.
10. Segment information
Page 7 of 20
<PAGE>
The table below presents information about the Company's operating
segments:
<TABLE>
<CAPTION>
Legacy Legacy
Marketing Financial Reconciling
Group Services, Inc. Other Items Total
----------- -------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net income (loss) for the
three months ended June 30:
1999 $ 3,799,007 $ (49,335) $ 2,178,016 $ (3,605,671) $ 2,322,017
1998 $ 3,127,663 $ (47,229) $ 3,019,697 $ (3,080,988) $ 3,019,143
Net income (loss) for the six
months ended June 30:
1999 $ 7,337,209 $(135,299) $ 4,828,131 $ (6,914,276) $ 5,115,765
1998 $ 4,671,447 $(134,412) $ 4,424,501 $ (4,536,477) $ 4,425,059
Total assets at:
June 30, 1999 $43,888,220 $ 971,060 $30,782,638 $(33,643,118) $41,998,800
December 31, 1998 $30,087,878 $ 816,741 $27,110,236 $(26,728,842) $31,286,013
</TABLE>
"Other" items above include Regan Holding Corp. (stand-alone) and its
remaining subsidiaries, LifeSurance Corporation, Legacy Advisory Services,
Inc., and Legacy Reinsurance Company. Such entities operations do not
currently factor significantly into management decision making and,
accordingly, were not separated for purpose of this disclosure.
"Reconciling Items" consist solely of eliminations of inter-company amounts
such as investment in, and income from, subsidiaries.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Except for historical information contained herein, certain of the matters
discussed in this Form 10-Q are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These "forward-looking
statements" involve certain risks and uncertainties. All forecasts and
projections in this report are "forward-looking statements," and are based on
management's current expectations of the Company's near-term results, based on
current information available. Actual results could differ materially.
Results of Operations
- ---------------------
Summary--The Company's net income for the quarter ended June 30, 1999
decreased approximately $697,000 or 23.1%, from the corresponding quarter
in 1998 and increased approximately $691,000 or 15.6%, during the six months
ended June 30, 1999, compared with the corresponding period in 1998. The
increase in the six month period and the decrease in the three month period are
due primarily to increases in revenue, net of adjustments to stock options
expense, 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 three insurance companies
for which the Company markets and administers policies (the "Carriers"). Levels
of marketing allowances and commission overrides are directly related to, and
increase with, the volume of sales of such products. Administrative fees are a
function not only of product sales, but also administration of policies inforce
and Producer appointments. Total income increased $2.9 million, or 22.5%, during
the three months ended June 30, 1999, compared to the three months ended June
30, 1998. For the six months ended June 30, 1999, total income increased $9.3
million, or 44.5%, over the corresponding six month period in 1998.
Marketing allowances and commission income, combined, increased
approximately $2.2 million, or 20.5%, in the second quarter of 1999, compared to
the second quarter of 1998. Such allowances and commissions increased
approximately $7.6 million, or 44.0%, for the six months ended June 30, 1999
compared with the six
Page 8 of 20
<PAGE>
months ended June 30, 1998. These increases are due primarily to increases in
the volume of sales by the Company's distribution network on behalf of the
Carriers. Premium placed inforce for the Carriers totaled approximately $529.9
million and $1.0 billion during the three months and six months ended June 30,
1999, respectively, compared to $452.5 million and $730.8 million during the
same periods in 1998, representing increases of 17.1% and 40.5%. Also
contributing to increases in income during the first six months of 1999 was a
shift in sales mix to sales of products which yield higher marketing allowances
and commission income.
Although premium placed inforce, and the resulting Company's revenues,
increased between periods, preliminary marketing statistics indicate that third
quarter premium and revenue will increase less than in prior quarters or may
even decrease. This trend is attributed to higher interest rates negatively
affecting bond values which, in turn, lowers the annuity policies' crediting
rates. Management believes that this downward trend is temporary; however, no
assurance can be given.
Approximately 22.8% of the Company's revenue during the three months ended
June 30, 1999 and 36.6% during the six months ended June 30, 1999 was generated
by LMG through sales of the VisionMark Annuity on behalf of IL Annuity. The
current reinsurance carrier, Transamerica, has informed LMG that it will not
reinsure this product beyond September 30, 1999. Management is currently working
to replace the VisionMark product with the VisionMark II, which will be
reinsured by Reinsurance Group of America, and which has been approved for sale
in several states. However, approximately 15.3% of the Company's revenue during
the three months ended June 30, 1999 and 15.4% during the six months ended June
30, 1999 was generated by sales of the VisionMark in Texas and Washington where
the VisionMark II is not yet approved for sale. Management believes that the
VisionMark II will be approved in Texas and Washington before September 30, 1999
or that reinsurance of the VisionMark will be extended until state approval is
obtained. However, if neither of these events occur, the Company's revenue could
be adversely affected beginning the fourth quarter of 1999.
Administrative fees increased approximately $619,000, or 35.9%, in the
second quarter of 1999, compared to the same period in 1998. For the six months
ended June 30, 1999, administrative fees increased approximately $1.6 million,
or 50.7%, over the corresponding period in 1998. These increases are due
primarily to increases in the number of policies sold and administered during
the period.
During the three months ended June 30, 1999, 10.5%, 73.8% and 9.8% of the
Company's total revenue resulted from agreements with American National, IL
Annuity, and Transamerica respectively, compared to 14.0% and 80.7% from
American National and IL Annuity, respectively, during the three months ended
June 30, 1998. During the six months ended June 30, 1999, 8.5%, 76.8%, and 9.4%
of the Company's total revenue resulted from agreements with American National,
IL Annuity, and Transamerica, respectively, compared with 14.3% and 78.9% from
American National and IL Annuity, respectively, during the six months ended June
30, 1998. Sales and administration of Transamerica products did not begin until
the third quarter of 1998.
Expenses--Total expenses increased approximately $4.0 million, or 50.9%,
during the three months ended June 30, 1999 compared to the three months ended
June 30, 1998 and $8.0 million, or 58.9%, during the six months ended June 30,
1999 compared to the corresponding six months of 1998. These increases are
attributable primarily to increases in compensation, sales promotion and support
and stock option expenses, as discussed below.
As a service organization, the Company's primary expenses are salaries and
related employee benefits, which increased approximately $1.7 million, or 39.1%,
during the three months ended June 30, 1999 compared to the same period in 1998,
and approximately $3.7 million, or 48.3%, in the first six months of 1999
compared to the same period in 1998. This increase resulted primarily from an
increase in the average number of full-time equivalent employees, which rose to
418 during the quarter ended June 30, 1999, compared with 265 during the quarter
ended June 30, 1998. This increase in employment was necessary to accommodate
increases in sales volume, as discussed above. Such increases in employment were
primarily in operations at lower pay levels. Therefore, salaries and employee
benefits did not increase as significantly as the increase in the number of
employees.
Page 9 of 20
<PAGE>
Sales promotion and support expense consists primarily of costs relating to
the Company's annual national sales conventions, incentives paid to the
Company's higher-level Producers for recruitment and development of additional
Producers, and costs relating to various sales meetings and training activities.
Also included in sales promotion and support expense is the cost of designing
and printing 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 increased approximately $859,000, or 91.4%, for the
quarter ended June 30, 1999 compared with the quarter ended June 30, 1998, and
approximately $1.9 million, or 95.2%, in the first six months of 1999, compared
to the same period in 1998. These increases are due primarily to awards of the
Company's common stock and additional commissions to wholesalers who recruited
and developed Producers who reached certain sales milestones.
During the second quarter of 1999, the Company recorded $2,022,000 of stock
option expense related to stock options that were granted to independent
insurance Producers in 1998 and 1999. This charge was a result of the Company's
decision to waive the options' vesting provisions, thereby converting the
options from "variable" options to "fixed" options pursuant to guidance
prescribed in Statement of Financial Accounting Standards No. 123, as
interpreted by Emerging Issues Task Force Issue (EITF) 96-18.
Professional fees increased approximately $149,000, or 50.9%, during the
three months ended June 30, 1999 compared with the corresponding period in 1998,
and approximately $254,000, or 44.3%, for the six months ended June 30, 1999
compared with the corresponding period in 1998. These increases are primarily
the result of consulting fees related to various information systems projects.
In order to avoid protracted future litigation, the Company's principal
subsidiary, LMG, together with American National, entered into an agreement to
settle a lawsuit filed in Jefferson County, Alabama, LMG's net cost of the
settlement, approximately $1.1 million, was recorded as an expense during the
second quarter of 1998. No such settlement occurred during 1999.
Occupancy expense increased approximately $153,000, or 65.8%, during the
second quarter of 1999 compared to the second quarter of 1998, and $297,000, or
62.9%, for the six month period ended June 30, 1999, due primarily to
maintenance costs related to additional leased space in Petaluma, California and
Rome, Georgia.
Liquidity and Capital Resources
- -------------------------------
Included in investments at March 31, 1999 is $12.0 million representing an
equity investment in Indianapolis Life Group of Companies ("Indianapolis
Group"), an affiliate of IL Annuity. Management expects that this investment
will be returned to LMG during late 1999 pursuant to the terms of the Investment
and Funding Agreement between LMG, Indianapolis Group and other parties. If,
however, certain events which trigger the return of the investment by year end
do not occur, these funds could be invested in Indianapolis Group for up to
eight years at a yield to equal that earned by the Indianapolis Group on this
investment portfolio.
On May 7, 1999, the Company and its subsidiaries purchased for $4.3
million the building in Petaluma, California, in which the Company's
headquarters were previously located. In conjunction with the building
acquisition, the Company paid $2.2 million of the purchase price in cash and
entered into a loan payable for the remaining $2.1 million. The loan has a ten
year term and is payable in monthly installments plus one balloon payment of
approximately $1.8 million, due on May 10, 2009. The loan bears interest at 0.5%
per annum above the Prime Rate, as published in the West Coast Edition of the
Wall Street Journal. The loan is fully guaranteed by each of the Company's
subsidiaries. In addition, the loan agreement contains certain covenants with
which the company
Page 10 of 20
<PAGE>
must comply, including restrictions on indebtedness or investments outside the
ordinary cause of business and restrictions on dividends or other changes in the
Company's capital structure. Pursuant to the loan agreement, the Company was
required to place approximately $650,000 in reserve to cover loan payments in
the event of default and to provide for certain repair costs. Management
believes that cash and investments on hand, plus cash generated by ongoing
operating activities, are adequate to meet the Company's needs for cash, both on
a long-term and a short-term basis.
Year 2000
- ---------
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., '95 is stored in the system and
represents the year 1995). As a result, the year 1999 (i.e.'99) could be the
maximum date value these systems will be able to accurately process. Management
has developed and fully implemented a plan to insure that the Company will be
year 2000 compliant. This plan consisted of the following four stages: (i)
conducting an inventory of all hardware, software and support systems; (ii)
assessing whether such hardware, software and support systems are year 2000
compliant; (iii) correcting or replacing any non-compliant hardware, software
and support systems; and (iv) testing to ensure that all corrections or
replacements made pursuant to the third phase of the plan are functioning
properly. The four stages of the Company's year 2000 plan have been completed
for mission-critical systems. Management is of the opinion that there are no
significant barriers to being able to conduct normal business operations during
the transition to year 2000 and beyond.
The Company is also working closely with significant customers and vendors
to ensure that their systems will be fully year 2000 compliant. However, there
can be no assurance that potential interruptions due to year 2000 would not have
a material adverse effect on the Company's business, financial condition,
results of operations and business prospects.
Page 11 of 20
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders
The following matters were submitted to a vote of shareholders of the
Company at the Annual Meeting of Shareholders, which was held May 21, 1999.
The results of shareholder votes were as follows:
<TABLE>
<CAPTION>
Withheld/
For Against Abstain
--------- -------- -------
<S> <C> <C> <C>
(i) Election of four Directors to hold office until the Annual Meeting
of Shareholders in 2000 and until their successors are duly
elected
Lynda L. Regan 19,698,038 9,441
R. Preston Pitts 19,698,038 9,441
Steven C. Anderson 19,698,038 9,441
Ute Scott-Smith 19,696,471 11,008
(ii) Ratification of the appointment of PricewaterhouseCoopers LLP
as the Company's independent auditors for the year ended
December 31, 1999 19,694,139 3,883 9,457
(iii) Approval of the Regan Holding Corp. 1998 Stock Option Plan 18,710,928 31,562 1,063,636
(iv) Approval of the Regan Holding Corp. Producer Stock Award and
Option Plan 18,708,749 27,479 1,070,273
</TABLE>
Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934. There was no solicitation in opposition to
management's nominees for Directors of the Company.
<PAGE>
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: September 13, 1999 Signature: /s/ R. Preston Pitts
-------------------------
R. Preston Pitts,
President &
Chief Operating Officer
Date: September 13, 1999 Signature: /s/ David A. Skup
--------------------------
David A. Skup,
Chief Financial Officer
Page 13 of 20
