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Previous: CYCOMM INTERNATIONAL INC, NT 10-Q, 2000-08-14 |
Next: REGAN HOLDING CORP, 10-Q, EX-10.1, 2000-08-14 |
UNITED STATES
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, 2000, 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.
|
California (State or Other Jurisdiction of Incorporation or Organization) |
68-0211359 (I.R.S. Employer Identification No.) |
|
2090 Marina Avenue, Petaluma, California (Address of Principal Executive Offices) |
94954 (Zip Code) |
(707) 778-8638
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, 2000:
| Common Stock — Series A | 25,663,200 | |||
| Common Stock — Series B | 588,623 |
PART I FINANCIAL INFORMATION
REGAN HOLDING CORP. AND SUBSIDIARIES
Item 1. Financial Statements
| June 30, 2000 | December 31, 1999 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | 2,347,690 | $ | 1,094,759 | |||||||
| Investments | 12,681,435 | 20,861,973 | |||||||||
| Accounts receivable | 2,307,782 | 2,625,867 | |||||||||
| Prepaid expenses | 1,513,959 | 1,223,177 | |||||||||
| Income taxes receivable | 2,338,728 | 2,893,701 | |||||||||
| Deferred income taxes — current | 833,176 | 895,841 | |||||||||
| Total current assets | 22,022,770 | 29,595,318 | |||||||||
| Net fixed assets | 13,851,406 | 12,168,135 | |||||||||
| Deferred income taxes — non current | 3,218,806 | 2,030,993 | |||||||||
| Prepaid software licensing fees | 862,857 | 779,375 | |||||||||
| Other assets | 2,555,017 | 2,018,575 | |||||||||
| Total non-current assets | 20,488,086 | 16,997,078 | |||||||||
| TOTAL ASSETS | $ | 42,510,856 | $ | 46,592,396 | |||||||
| LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS’ EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Accounts payable and accrued liabilities | $ | 4,516,232 | $ | 5,200,636 | |||||||
| Accrued sales convention costs | 2,091,600 | 2,248,913 | |||||||||
| Margin loan payable | — | 3,088,918 | |||||||||
| Other current liabilities | 381,723 | 107,384 | |||||||||
| Total current liabilities | 6,989,555 | 10,645,851 | |||||||||
| Loans payable | 2,232,285 | 2,256,418 | |||||||||
| Incentive compensation payable | 99,223 | 469,720 | |||||||||
| Deferred compensation payable | 2,330,441 | 1,364,713 | |||||||||
| Other liabilities | 240,659 | 167,641 | |||||||||
| Total non-current liabilities | 4,902,608 | 4,258,492 | |||||||||
| TOTAL LIABILITIES | 11,892,163 | 14,904,343 | |||||||||
| COMMITMENTS AND CONTINGENCIES | — | — | |||||||||
| REDEEMABLE COMMON STOCK, Series A and B | 11,353,538 | 11,563,285 | |||||||||
| 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: 20,920,223 and 20,863,520 shares at June 30, 2000 and December 31, 1999, respectively | 3,637,555 | 3,659,367 | |||||||||
| Common stock committed | 100,000 | — | |||||||||
| Paid-in capital from retirement of common stock | 927,640 | 927,640 | |||||||||
| Paid-in capital from non-employee stock options | 4,444,366 | 2,892,000 | |||||||||
| Retained earnings | 10,774,585 | 13,217,865 | |||||||||
| Accumulated other comprehensive income — net | (618,991 | ) | (572,104 | ) | |||||||
| TOTAL SHAREHOLDERS’ EQUITY | 19,265,155 | 20,124,768 | |||||||||
| TOTAL LIABILITIES, REDEEMABLE COMMON | |||||||||||
| STOCK AND SHAREHOLDERS’ EQUITY | $ | 42,510,856 | $ | 46,592,396 | |||||||
See accompanying notes to condensed consolidated financial statements
Page 2
REGAN HOLDING CORP. AND SUBSIDIARIES
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||
| June 30, | June 30, | |||||||||||||||||
| 2000 | 1999 | 2000 | 1999 | |||||||||||||||
| INCOME: | ||||||||||||||||||
| Marketing allowances | $ | 4,361,968 | $ | 8,200,700 | $ | 8,535,727 | $ | 16,076,790 | ||||||||||
| Commission income | 3,711,388 | 4,758,236 | 7,262,251 | 8,799,224 | ||||||||||||||
| Administrative fees | 2,242,747 | 2,344,173 | 4,465,632 | 4,632,416 | ||||||||||||||
| Seminar income | 140,087 | 85,715 | 202,218 | 216,504 | ||||||||||||||
| Other income | 191,550 | 17,503 | 332,675 | 70,816 | ||||||||||||||
| Total income | 10,647,740 | 15,406,327 | 20,798,503 | 29,795,750 | ||||||||||||||
| EXPENSES: | ||||||||||||||||||
| Salaries and related benefits | 6,326,789 | 5,893,568 | 12,577,798 | 11,450,881 | ||||||||||||||
| Sales promotion and support | 1,663,919 | 1,799,408 | 3,028,646 | 3,816,241 | ||||||||||||||
| Non-employee stock options | 168,366 | 1,941,000 | 1,552,366 | 2,022,000 | ||||||||||||||
| Professional fees | 1,337,289 | 442,819 | 2,384,059 | 828,792 | ||||||||||||||
| Occupancy | 782,979 | 386,185 | 1,541,627 | 768,143 | ||||||||||||||
| Depreciation and amortization | 721,262 | 246,909 | 1,318,945 | 809,177 | ||||||||||||||
| Stationery and supplies | 165,383 | 176,260 | 374,718 | 354,281 | ||||||||||||||
| Courier and postage | 224,695 | 280,506 | 431,986 | 525,334 | ||||||||||||||
| Travel and entertainment | 243,562 | 157,383 | 393,584 | 250,831 | ||||||||||||||
| Equipment | 394,542 | 260,358 | 756,984 | 439,392 | ||||||||||||||
| Insurance | 107,773 | 121,367 | 256,067 | 209,484 | ||||||||||||||
| Other | 117,014 | 71,973 | 323,270 | 124,987 | ||||||||||||||
| Total expenses | 12,253,573 | 11,777,736 | 24,940,050 | 21,599,543 | ||||||||||||||
| OPERATING INCOME (LOSS) | (1,605,833 | ) | 3,628,591 | (4,141,547 | ) | 8,196,207 | ||||||||||||
| OTHER INCOME — NET | ||||||||||||||||||
| Investment income — net | 259,221 | 353,804 | 512,521 | 552,462 | ||||||||||||||
| Losses on disposals of fixed assets | (172,148 | ) | — | (359,046 | ) | — | ||||||||||||
| Total other income — net | 87,073 | 353,804 | 153,475 | 552,462 | ||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | (1,518,760 | ) | 3,982,395 | (3,988,072 | ) | 8,748,669 | ||||||||||||
| PROVISION FOR (BENEFIT FROM) INCOME TAXES | (592,647 | ) | 1,660,378 | (1,535,888 | ) | 3,632,904 | ||||||||||||
| NET INCOME (LOSS) | $ | (926,113 | ) | $ | 2,322,017 | $ | (2,452,184 | ) | $ | 5,115,765 | ||||||||
| EARNING PER SHARE | ||||||||||||||||||
| Weighted average shares outstanding — basic | 26,296,798 | 26,437,347 | 26,321,076 | 26,418,217 | ||||||||||||||
| Basic earnings per share | $ | (0.04 | ) | $ | 0.09 | $ | (0.09 | ) | $ | 0.19 | ||||||||
| Weighted average shares outstanding — diluted | 28,581,043 | 27,314,729 | 28,621,576 | 27,280,434 | ||||||||||||||
| Diluted earnings per share | $ | (0.03 | ) | $ | 0.09 | $ | (0.09 | ) | $ | 0.19 | ||||||||
See accompanying notes to condensed consolidated financial statements
Page 3
REGAN HOLDING CORP. AND SUBSIDIARIES
| Paid-in | ||||||||||||||||||
| Capital from | ||||||||||||||||||
| Series A Common Stock | Common | Retirement | ||||||||||||||||
| Stock | of | |||||||||||||||||
| Shares | Amount | Committed | Common Stock | |||||||||||||||
| Balance | ||||||||||||||||||
| January 1, 2000 | 20,863,520 | $ | 3,659,367 | $ | — | $ | 927,640 | |||||||||||
| Comprehensive Losses: | ||||||||||||||||||
| Net loss for the six months ended June 30, 2000 | ||||||||||||||||||
| Net unrealized losses on investments | ||||||||||||||||||
| Less: losses included in net loss | ||||||||||||||||||
| Deferred tax on net unrealized losses | ||||||||||||||||||
| Total comprehensive losses | ||||||||||||||||||
| Redemption and retirement of common stock | (25,606 | ) | (40,045 | ) | ||||||||||||||
| Issuance of common stock | 16,950 | 18,233 | ||||||||||||||||
| Common stock committed | 65,359 | 100,000 | ||||||||||||||||
| Non-employee stock option expense | ||||||||||||||||||
| Balance June 30, 2000 | ||||||||||||||||||
| (Unaudited) | 20,920,223 | $ | 3,637,555 | $ | 100,000 | $ | 927,640 | |||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
| Paid-in | ||||||||||||||||||
| Capital from | Accumulated | |||||||||||||||||
| Non- | Other | |||||||||||||||||
| employee | Retained | Comprehensive | ||||||||||||||||
| Options | Earnings | Income | Total | |||||||||||||||
| Balance | ||||||||||||||||||
| January 1, 2000 | $ | 2,892,000 | $ | 13,217,865 | $ | (572,104 | ) | $ | 20,124,768 | |||||||||
| Comprehensive Losses: | ||||||||||||||||||
| Net loss for the six months ended June 30, 2000 | (2,452,184 | ) | (2,452,184 | ) | ||||||||||||||
| Net unrealized losses on investments | (69,184 | ) | (69,184 | ) | ||||||||||||||
| Less: losses included in net loss | (8,746 | ) | (8,746 | ) | ||||||||||||||
| Deferred tax on net unrealized losses | 31,043 | 31,043 | ||||||||||||||||
| Total comprehensive losses | (2,499,071 | ) | ||||||||||||||||
| Redemption and retirement of common stock | 8,904 | (31,141 | ) | |||||||||||||||
| Issuance of common stock | 18,233 | |||||||||||||||||
| Common stock committed | 100,000 | |||||||||||||||||
| Non-employee stock option expense | 1,552,366 | 1,552,366 | ||||||||||||||||
| Balance June 30, 2000 | ||||||||||||||||||
| (Unaudited) | $ | 4,444,366 | $ | 10,774,585 | $ | (618,991 | ) | $ | 19,265,155 | |||||||||
See accompanying notes to condensed consolidated financial statements
Page 4
REGAN HOLDING CORP. AND SUBSIDIARIES
| For the Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2000 | 1999 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income (loss) | $ | (2,452,184 | ) | $ | 5,115,765 | ||||||
| Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization of fixed assets | 1,289,974 | 773,543 | |||||||||
| Losses on disposals of fixed assets | 359,046 | — | |||||||||
| Amortization of intangible assets | 28,971 | 35,634 | |||||||||
| Common stock awarded to producers | 100,000 | 369,905 | |||||||||
| Non-employee stock option grants | 1,552,366 | 2,022,000 | |||||||||
| Amortization of investments | (65,165 | ) | (17,866 | ) | |||||||
| Realized losses on sales of investments | 8,746 | 87,652 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Net change in accounts receivable | 318,085 | (778,997 | ) | ||||||||
| Net change in prepaid expenses | (290,782 | ) | (910,856 | ) | |||||||
| Net change in income taxes receivable | 554,973 | 1,483,498 | |||||||||
| Net change in deferred income taxes | (1,094,103 | ) | (1,322,974 | ) | |||||||
| Net change in prepaid software licensing fees | (83,482 | ) | (87,656 | ) | |||||||
| Net change in accounts payable and accrued liabilities | (684,404 | ) | (699,787 | ) | |||||||
| Net change in accrued sales convention costs | (157,313 | ) | 705,206 | ||||||||
| Net change in other assets and liabilities | 34,055 | 403,255 | |||||||||
| Net cash provided by (used in) operating activities | (581,217 | ) | 7,178,322 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of investments | (6,828,720 | ) | (12,955,988 | ) | |||||||
| Proceeds from sales of investments | 14,987,749 | 8,973,058 | |||||||||
| Purchases of fixed assets | (3,332,291 | ) | (5,781,053 | ) | |||||||
| Net cash provided by (used in) in investing activities | 4,826,738 | (9,763,983 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Proceeds from margin loan | 1,000,000 | — | |||||||||
| Payments toward margin loan | (4,124,515 | ) | — | ||||||||
| Proceeds from loans payable | 2,100,000 | 2,132,500 | |||||||||
| Payments toward loans payable | (2,124,133 | ) | (1,402 | ) | |||||||
| Return of building loan reserve | 378,717 | — | |||||||||
| Payments for redemption and retirement of common stock | (240,892 | ) | (369,273 | ) | |||||||
| Proceeds from stock option exercises | 18,233 | 7,300 | |||||||||
| Net cash provided by (used in) financing activities | (2,992,590 | ) | 1,769,125 | ||||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,252,931 | (816,536 | ) | ||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,094,759 | 5,916,731 | |||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 2,347,690 | $ | 5,100,195 | |||||||
See accompanying notes to condensed consolidated financial statements
Page 5
REGAN HOLDING CORP. AND SUBSIDIARIES
1. Financial Information
The accompanying condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States 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, LifeSurance Corporation, and Imagent Online, LLC, (“Imagent”.) All intercompany transactions have been eliminated.
The interim financial data as of June 30, 2000 and for the six months ended June 30, 2000 and June 30, 1999 is unaudited; however, in the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The consolidated balance sheet data at December 31, 1999, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results for the six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the entire year. Users of these condensed consolidated financial statements are encouraged to refer to the Annual Report on Form 10-K/ A for the year ended December 31, 1999 for additional disclosure.
Effective January 1, 2000, the Company changed, from five years to three years, the estimated useful life over which certain computer hardware and software is being depreciated. Had this change in estimate not occurred, the Company would have recorded approximately $584,000 in depreciation expense during the three months ended June 30, 2000 and approximately $1,093,000 for the six months ended June 30, 2000.
2. Imagent Online, LLC
During 1999, the Company formed Imagent, a Delaware limited liability company and a wholly-owned subsidiary of the Company. In May 2000, Imagent entered into an agreement with an internet start-up company pursuant to which Imagent purchased a 33% ownership interest in the internet company for $402,500. Imagent’s investment in the internet start-up company is accounted for under the equity method. The Company’s share of the internet company’s losses was approximately $40,000 during the six months ended June 30, 2000. In addition, Imagent agreed to loan $1,100,000 to the internet company, of which $600,000 was loaned in June 2000 and $500,000 was loaned in August 2000. The loan bears interest equal to the Prime Rate, as published in the Wall Street Journal, and will be repaid over two years in equal monthly installments commencing on June 1, 2001.
3. Margin Loan Payable
During the first quarter of 2000, the Company borrowed an additional $1,000,000 under a margin loan agreement with the Company’s investment broker. During the first quarter of 2000, the margin loan was paid in full.
4. Loan Payable
In 1999, the Company entered into a loan payable for the purchase of a building (the “1999 Loan”). The 1999 Loan contained certain covenants with which the Company was required to comply, including restrictions on repurchasing non-redeemable common stock. The lender under the 1999 Loan waived this covenant through June 30, 2000. Pursuant to the 1999 Loan agreement, the Company was also required to place approximately $563,000 in reserve to cover loan payments in the event of default and to provide for certain repair costs. During the first quarter of 2000, the lender under the 1999 Loan released approximately $379,000 of such reserves for general use by the Company.
Page 6
In June 2000, the Company refinanced the 1999 Loan. Pursuant to the new loan agreement (the “2000 Loan”), the Company borrowed $2,100,000 at an annual interest rate of 9.01% per annum, payable monthly through August 2010, at which time a balloon payment of approximately $1.8 million becomes due. The 2000 Loan is collateralized by the purchased building, contains no restrictive covenants, and requires no cash reserves.
5. Redeemable Common Stock
The Company is obligated to repurchase certain of its shares of common stock pursuant to various agreements under which the common stock was issued. During the six months ended June 30, 2000, redeemable common stock was redeemed and retired as follows:
| Series A Redeemable | Series B Redeemable | Total Redeemable | |||||||||||||||||||||||
| Common Stock | Common Stock | Common Stock | |||||||||||||||||||||||
| Carrying | Carrying | Carrying | |||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||
| Balance | |||||||||||||||||||||||||
| December 31, 1999 | 4,921,615 | $ | 9,794,014 | 589,757 | $ | 1,769,271 | 5,511,372 | $ | 11,563,285 | ||||||||||||||||
| Redemption and retirement of common stock | (99,646 | ) | (207,494 | ) | (1,134 | ) | (2,253 | ) | (100,780 | ) | (209,747 | ) | |||||||||||||
| Balance | |||||||||||||||||||||||||
| June 30, 2000 | 4,821,969 | $ | 9,586,520 | 588,623 | $ | 1,767,018 | 5,410,592 | $ | 11,353,538 | ||||||||||||||||
6. Stock Option Expense
During the second quarter of 2000, the Company recorded approximately $168,000 of expense related to stock options that were granted to non-employees. This charge reflects a measurement of the options based upon management’s best estimate of the fair value of the options at the date of grant. The fair value of the options was estimated using the Black-Scholes option-pricing model with the following assumptions: risk free interest rates ranging between 6.14% and 6.52%, expected lives ranging from six to 10 years, and expected volatility ranging from 29.86% to 34.17%. A dividend yield assumption was not applicable, as the Company’s stock is not publicly traded nor does the Company pay dividends.
7. Amendments to Marketing and Insurance Processing Agreements
In July 2000, LMG and American National Insurance Company (“American National”) amended the terms of the Marketing Agreement and the Insurance Processing Agreement, pursuant to which LMG markets and administers fixed annuity and life insurance products, to extend the terms to September 30, 2000. LMG and American National are in the process of negotiating an extension of both agreements.
Page 7
8. Segment Information
The table below presents information about the Company’s operating segments:
| Legacy | Legacy | ||||||||||||||||
| Marketing | Financial | ||||||||||||||||
| Group | Services, Inc. | Other | Total | ||||||||||||||
| Three months ended June 30, 2000: | |||||||||||||||||
| Total revenue | $ | 9,666,408 | $ | 672,148 | $ | 309,184 | $ | 10,647,740 | |||||||||
| Total expenses | 9,648,218 | 504,443 | 2,100,912 | 12,253,573 | |||||||||||||
| Operating income (loss) | 18,190 | 167,705 | (1,791,728 | ) | (1,605,833 | ) | |||||||||||
| Other income (loss) | 299,764 | 9,581 | (222,272 | ) | 87,073 | ||||||||||||
| Income (loss) before tax | 317,954 | 177,286 | (2,014,000 | ) | (1,518,760 | ) | |||||||||||
| Tax provision (benefit) | (8,894 | ) | 21,353 | (605,106 | ) | (592,647 | ) | ||||||||||
| Net income (loss) | $ | 326,848 | $ | 155,933 | $ | (1,408,894 | ) | $ | (926,113 | ) | |||||||
| Three months ended June 30, 1999: | |||||||||||||||||
| Total revenue | $ | 14,935,223 | $ | 416,697 | $ | 54,407 | $ | 15,406,327 | |||||||||
| Total expenses | 8,572,760 | 420,394 | 2,784,582 | 11,777,736 | |||||||||||||
| Operating income (loss) | 6,362,463 | (3,697 | ) | (2,730,175 | ) | 3,628,591 | |||||||||||
| Other income | 349,507 | 359 | 3,938 | 353,804 | |||||||||||||
| Income (loss) before tax | 6,711,970 | (3,338 | ) | (2,726,237 | ) | 3,982,395 | |||||||||||
| Tax provision (benefit) | 2,583,609 | (32,757 | ) | (890,474 | ) | 1,660,378 | |||||||||||
| Net income (loss) | $ | 4,128,361 | $ | 29,419 | $ | (1,835,763 | ) | $ | 2,322,017 | ||||||||
| Six months ended June 30, 2000: | |||||||||||||||||
| Total revenue | $ | 18,935,443 | $ | 1,381,551 | $ | 481,509 | $ | 20,798,503 | |||||||||
| Total expenses | 19,367,476 | 934,987 | 4,637,587 | 24,940,050 | |||||||||||||
| Operating income (loss) | (432,033 | ) | 446,564 | (4,156,078 | ) | (4,141,547 | ) | ||||||||||
| Other income (loss) | 544,273 | 13,276 | (404,074 | ) | 153,475 | ||||||||||||
| Income (loss) before tax | 112,240 | 459,840 | (4,560,152 | ) | (3,988,072 | ) | |||||||||||
| Tax provision (benefit) | (219,071 | ) | 83,888 | (1,400,705 | ) | (1,535,888 | ) | ||||||||||
| Net income (loss) | $ | 331,311 | $ | 375,952 | $ | (3,159,447 | ) | $ | (2,452,184 | ) | |||||||
| Six months ended June 30, 1999: | |||||||||||||||||
| Total revenue | $ | 29,003,220 | $ | 658,916 | $ | 133,614 | $ | 29,795,750 | |||||||||
| Total expenses | 16,513,419 | 729,249 | 4,356,875 | 21,599,543 | |||||||||||||
| Operating income (loss) | 12,489,801 | (70,333 | ) | (4,223,261 | ) | 8,196,207 | |||||||||||
| Other income | 547,866 | 658 | 3,938 | 552,462 | |||||||||||||
| Income (loss) before tax | 13,037,667 | (69,675 | ) | (4,219,323 | ) | 8,748,669 | |||||||||||
| Tax provision (benefit) | 5,043,558 | (90,296 | ) | (1,320,358 | ) | 3,632,904 | |||||||||||
| Net income (loss) | $ | 7,994,109 | $ | 20,621 | $ | (2,898,965 | ) | $ | 5,115,765 | ||||||||
| Total Assets: | |||||||||||||||||
| June 30, 2000 | $ | 21,936,202 | $ | 1,526,149 | $ | 19,048,505 | $ | 42,510,856 | |||||||||
| December 31, 1999 | $ | 27,652,585 | $ | 1,300,153 | $ | 17,639,658 | $ | 46,592,396 | |||||||||
“Other” segments above include Regan Holding Corp. (stand-alone) and its remaining subsidiaries, Legacy Advisory Services, Inc., Legacy Reinsurance Company, LifeSurance Company, and Imagent
Page 8
Online, LLC. Such entities’ operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.
9. Subsequent Events
In July 2000, the Company paid $200,000 as a first installment toward the purchase of an ownership interest in a Tennessee corporation engaged in the business of values-based investment screening. The Company is obligated to pay approximately $700,000 as an additional equity investment during the third and fourth quarters of 2000.
10. Reclassifications
Certain amounts in the 1999 consolidated financial statements have been reclassified to conform with 2000 classifications. Such reclassifications had no impact on net income (loss) or shareholders’ equity.
Page 9
PART II
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.
The table below presents information about the Company’s operating segments:
| Legacy | Legacy | ||||||||||||||||
| Marketing | Financial | ||||||||||||||||
| Group | Services, Inc. | Other | Total | ||||||||||||||
| Three months ended June 30, 2000: | |||||||||||||||||
| Total revenue | $ | 9,666,408 | $ | 672,148 | $ | 309,184 | $ | 10,647,740 | |||||||||
| Total expenses | 9,648,218 | 504,443 | 2,100,912 | 12,253,573 | |||||||||||||
| Operating income (loss) | 18,190 | 167,705 | (1,791,728 | ) | (1,605,833 | ) | |||||||||||
| Other income (loss) | 299,764 | 9,581 | (222,272 | ) | 87,073 | ||||||||||||
| Income (loss) before tax | 317,954 | 177,286 | (2,014,000 | ) | (1,518,760 | ) | |||||||||||
| Tax provision (benefit) | (8,894 | ) | 21,353 | (605,106 | ) | (592,647 | ) | ||||||||||
| Net income (loss) | $ | 326,848 | $ | 155,933 | $ | (1,408,894 | ) | $ | (926,113 | ) | |||||||
| Three months ended June 30, 1999: | |||||||||||||||||
| Total revenue | $ | 14,935,223 | $ | 416,697 | $ | 54,407 | $ | 15,406,327 | |||||||||
| Total expenses | 8,572,760 | 420,394 | 2,784,582 | 11,777,736 | |||||||||||||
| Operating income (loss) | 6,362,463 | (3,697 | ) | (2,730,175 | ) | 3,628,591 | |||||||||||
| Other income | 349,507 | 359 | 3,938 | 353,804 | |||||||||||||
| Income (loss) before tax | 6,711,970 | (3,338 | ) | (2,726,237 | ) | 3,982,395 | |||||||||||
| Tax provision (benefit) | 2,583,609 | (32,757 | ) | (890,474 | ) | 1,660,378 | |||||||||||
| Net income (loss) | $ | 4,128,361 | $ | 29,419 | $ | (1,835,763 | ) | $ | 2,322,017 | ||||||||
| Six months ended June 30, 2000: | |||||||||||||||||
| Total revenue | $ | 18,935,443 | $ | 1,381,551 | $ | 481,509 | $ | 20,798,503 | |||||||||
| Total expenses | 19,367,476 | 934,987 | 4,637,587 | 24,940,050 | |||||||||||||
| Operating income (loss) | (432,033 | ) | 446,564 | (4,156,078 | ) | (4,141,547 | ) | ||||||||||
| Other income (loss) | 544,273 | 13,276 | (404,074 | ) | 153,475 | ||||||||||||
| Income (loss) before tax | 112,240 | 459,840 | (4,560,152 | ) | (3,988,072 | ) | |||||||||||
| Tax provision (benefit) | (219,071 | ) | 83,888 | (1,400,705 | ) | (1,535,888 | ) | ||||||||||
| Net income (loss) | $ | 331,311 | $ | 375,952 | $ | (3,159,447 | ) | $ | (2,452,184 | ) | |||||||
| Six months ended June 30, 1999: | |||||||||||||||||
| Total revenue | $ | 29,003,220 | $ | 658,916 | $ | 133,614 | $ | 29,795,750 | |||||||||
| Total expenses | 16,513,419 | 729,249 | 4,356,875 | 21,599,543 | |||||||||||||
| Operating income (loss) | 12,489,801 | (70,333 | ) | (4,223,261 | ) | 8,196,207 | |||||||||||
| Other income | 547,866 | 658 | 3,938 | 552,462 | |||||||||||||
| Income (loss) before tax | 13,037,667 | (69,675 | ) | (4,219,323 | ) | 8,748,669 | |||||||||||
| Tax provision (benefit) | 5,043,558 | (90,296 | ) | (1,320,358 | ) | 3,632,904 | |||||||||||
| Net income (loss) | $ | 7,994,109 | $ | 20,621 | $ | (2,898,965 | ) | $ | 5,115,765 | ||||||||
| Total Assets: | |||||||||||||||||
| June 30, 2000 | $ | 21,936,202 | $ | 1,526,149 | $ | 19,048,505 | $ | 42,510,856 | |||||||||
| December 31, 1999 | $ | 27,652,585 | $ | 1,300,153 | $ | 17,639,658 | $ | 46,592,396 | |||||||||
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“Other” segments above include Regan Holding Corp. (stand-alone) and its remaining subsidiaries, Legacy Advisory Services, Inc., Legacy Reinsurance Company, LifeSurance Company, and Imagent Online, LLC. Such entities’ operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.
Analysis of Regan Holding Corp. Consolidated
Results of Operations — The Company experienced consolidated net losses of approximately $926,000 during the second quarter of 2000, compared to consolidated net income of approximately $2.3 million during the second quarter of 1999. For the six months ended June 30, 2000, the Company experienced net losses of approximately $2.5 million, compared with net income of $5.1 million for the same period in 1999. These losses are due primarily to a decrease in LMG revenue and to non-cash expenses related to non-employee stock options, both of which are discussed below.
Liquidity and Capital Resources — Cash and short-term investment grade securities represented 35.4% of the Company’s total consolidated assets at June 30, 2000, compared with 47.1% at December 31, 1999.
The Company’s principal needs for cash are: (i) funding operating expenses; (ii) purchases of computer hardware and software, leasehold improvements, and acquisitions of furniture and fixtures to accommodate new employees and support growth in operations; (iii) funding continued product development and potential strategic acquisitions; and (iv) as a reserve to cover possible redemptions of certain of the Company’s common stock, which is redeemable at the option of shareholders under various agreements with the Company.
Generally, the Company’s cash needs are met through cash provided from operating activities, which totaled approximately $7.2 million during the six months ended June 30, 1999. However, operating activities generated negative cash flows of approximately $581,000 during the six months ended June 30, 2000. The decrease in cash flows from operating activities is attributable primarily to decreases in LMG income. Until such income increases, as discussed below, operating activities may continue to generate negative cash flows. Cash and investments on hand are expected to be sufficient to cover any operating needs during this period. The Company’s future cash flows available to fund operations will depend primarily on the level of sales of annuity and life insurance products by LMG and upon the Company’s ability to control expenses.
In the second quarter of 2000, redeemable common stock redemption requests received by the Company were not material in amount, either individually or in the aggregate, and the Company believes that its liquid assets are sufficient to meet anticipated requests for redemption. At June 30, 2000 and December 31, 1999, the total redemption value of all redeemable common stock outstanding was approximately $11.4 million and $11.6 million, respectively.
At December 31, 1999, the Company’s investment portfolio included a $12.0 million equity investment in the Indianapolis Life Group of Companies (the “Indianapolis Group”), an affiliate of an insurance carrier with which LMG contracts. In the first quarter of 2000, the Indianapolis Group repurchased the equity securities from the Company for approximately $12.5 million, pursuant to the terms of the investment agreement under which the securities were purchased.
During the latter two quarters of 1999 and the first quarter of 2000, the Company obtained approximately $4.1 million in margin loan advances from its investment broker. The margin loan was repaid in full during the first quarter of 2000, using proceeds from the repurchase of the Indianapolis Group equity securities, as discussed above.
During May 2000, the Company entered into an agreement to fund a financial services internet start-up company. Pursuant to this agreement, the Company purchased a 33% ownership interest in the internet company for $402,500 during May 2000. The Company also loaned $600,000 during June 2000 and $500,000 during August 2000 to the internet company as a note receivable. Repayments under the note will commence in June 2001.
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In July 2000, the Company paid $200,000 as a first installment toward the purchase of an ownership interest in a Tennessee corporation engaged in the business of values-based investment screening. The Company is obligated to pay approximately $700,000 as an additional equity investment during the third and fourth quarters of 2000.
In May 1998, the Company entered into a Shareholder’s Agreement with Lynda Regan, Chief Executive Officer of the Company and Chairman of the Company’s Board of Directors, and certain other individuals. Under the terms of this agreement, in the event of the death of Ms. Regan, the Company is obligated to repurchase from Ms. Regan’s estate all of the shares of the Company’s common stock that were owned by Ms. Regan at the time of her death or that were transferred by her to one or more trusts prior to her death. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares. The Company has purchased a life insurance policy with a face amount of $14.0 million for the purpose of funding this obligation in the event of Ms. Regan’s death. Any excess of the obligation over the insurance proceeds is expected to be funded with cash and investments and, if necessary, through external financing.
Management intends to continue to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. As a result, management anticipates that cash and investments will continue to represent a high percentage of total assets. Management believes that existing cash and investment balances, together with cash flows from operations, will provide sufficient funding for the foreseeable future. However, in the event that a shortfall were to occur, management believes that adequate financing could be obtained to meet the Company’s cash flow needs.
Analysis of Legacy Marketing Group
Results of Operations — During the second quarter of 2000, LMG’s net income totaled approximately $327,000 which represented an approximate $3,802,000 decrease from the second quarter of 1999. For the six months ended June 30, 2000, LMG earned net income of approximately $331,000, representing a $7.7 million decrease from the same period in 1999. These decreases are due primarily to decreases in income and to increases in expenses, as discussed below.
Income — LMG’s major sources of income are marketing allowances, commission income and administrative fees from sales and administration of fixed annuity and life insurance products on behalf of the insurance carriers with which the Company contracts (the “Carriers”). Levels of marketing allowances and commission income are directly related to the sales volume of such products. Administrative fees are a function not only of product sales, but also of administration of policies inforce and processing of producer appointments and terminations. Total LMG income decreased approximately $5.3 million, or 35.3%, in the second quarter of 2000, compared to the second quarter of 1999 and decreased approximately $10.1 million, or 34.7%, during the six months ended June 30, 2000, compared to the six months ended June 30, 1999. These decreases are attributable primarily to decreases in premium placed inforce for the Carriers, as discussed below.
LMG marketing allowances and commission income, combined, decreased approximately $5.2 million, or 41%, during the second quarter of 2000 compared to the second quarter of 1999, due primarily to a decrease in fixed annuity premium placed inforce for the Carriers of approximately $263.8 million, or 50.4%. Such income decreased approximately $9.8 million, or 40.4%, during the six months ended June 30, 2000 compared to the same period in 1999, due to a decrease in premium of $496.0 million, or 48.9%. These decreases are attributable primarily to market conditions which resulted in the poor performance of bond investments underlying the annuities’ crediting rates and to lower than anticipated market acceptance of the VisionMark II™ annuity, which was introduced in 1999. The decrease in premium placed inforce was partially offset by a shift to sales of fixed annuity and life insurance products which yield higher commissions.
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Currently, the Company markets and administers fixed annuity and life insurance products on behalf of three Carriers. During the three months ended June 30, 2000, 12.8%, 30.9%, and 46.8%, of the Company’s total consolidated income resulted from LMG agreements with American National Insurance Company (“American National”), IL Annuity and Insurance Company (“IL Annuity”), and Transamerica Life Insurance and Annuity Company (“Transamerica”), respectively, compared to 10.5%, 73.8%, and 9.8% during the same period in 1999. For the six months ended June 30, 2000, 12.9%, 33.9%, and 43.9% of the Company’s total consolidated income resulted from agreements with American National, IL Annuity and Transamerica, respectively, compared to 8.5%, 76.8% and 9.4% for the same period in 1999. This shift from IL Annuity to Transamerica is attributable primarily to more favorable acceptance of Transamerica’s products in the marketplace and is expected to continue for the foreseeable future.
Although LMG markets and administers several fixed annuity and life insurance products on behalf of the Carriers, LMG’s income is derived primarily from sales and administration of two fixed annuity products. During the second quarters of 2000 and 1999, 10.4% and 22.5%, respectively, of the Company’s total consolidated income resulted from sales of the IL Annuity VisionMark IISM annuity and 43.1% and 5.5%, respectively, of the Company’s consolidated income resulted from sales of the Transamerica SelectMarkSM 10 Special Edition annuity. For the first six months of 2000, 14.2% and 41.5% of the Company’s total income was due to sales of the VisionMark IISM and SelectMarkSM 10 Special Edition, respectively, compared to 40.4% and 9.8% for the same period in 1999.
This shift from sales of the VisionMarkSM II to sales of SelectMarkSM 10 Special Edition are attributable primarily to market acceptance of the SelectMark SM and are expected to continue for the foreseeable future.
The Company is currently implementing several initiatives to increase LMG income, including several marketing programs planned for 2000, which are designed to strengthen relationships with existing producers and attract new producers. In addition, LMG released several new products and product enhancements at a sales convention in July 2000, which are expected to diversify LMG’s product portfolio, enhance market share, and increase income. The Company is also in negotiations with certain insurance carriers to provide marketing and administrative services, similar to those performed for the Carriers. However, there can be no assurances that such events will occur or, if they occur, will result in increases in LMG income.
Expenses — Total LMG expenses increased approximately $1.l million, or 12.6%, during the three months ended June 30, 2000, compared to the three months ended June 30, 1999, and increased $2.9 million, or 17.3%, for the six months ended June 30, 2000, compared to the six months ended June 30, 1999. These increases are due primarily to increases in compensation, occupancy, professional fees, and depreciation, and were partially offset by decreases in sales promotion and support expense, as discussed below.
As a service organization, LMG’s primary expenses are salaries and related employee benefits. These expenses increased approximately $269,000, or 4.9%, in the second quarter of 2000, compared to the second quarter of 1999. For the six months ended June 30, 2000 salaries and related benefits increased $734,000, or 6.8%, compared to the same period in 1999. Such increases resulted primarily from regular annual pay increases and from increases in the number of employees, which are largely attributable to preparation for increases in sales. However, the rate of increase in salary expense is lower than the rate of increase in the number of employees due to the fact that newly added personnel were primarily at lower salary levels. During the third quarter of 2000, however, the Company hired several employees at higher salary levels. Such increases in personnel are considered necessary in order to support anticipated increases in LMG income, as discussed above. Accordingly, salary and benefits expense is expected to increase in future periods.
Occupancy expenses consist primarily of office building and equipment leasing costs. These expenses increased approximately $331,000, or 130.9%, in the second quarter of 2000, compared to the second quarter of 1999. During the six months ended June 30, 2000, occupancy expense increased $760,000, or 158.6%, compared to the same period in 1999. These increases are due primarily to the leasing of new
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Sales promotion and support expense is comprised primarily of costs related to LMG’s annual national sales conventions, product marketing materials designed and printed for distribution to Producers, and incentives paid to Producers to stimulate sales. These expenses decreased approximately $374,000, or 23.7%, during the second quarter of 2000, compared to the second quarter of 1999 and decreased approximately $571,000, or 18.6%, during the six months ended June 30, 2000, compared to the six months ended June 30, 1999. These decreases are attributable primarily to fewer marketing materials distributed in 2000 as a result of timing of product releases and to lower premium-based incentives paid to Producers as a result of lower premium placed inforce, as discussed above.
Professional fees increased approximately $654,000, or 204.2%, in the second quarter of 2000 compared to the second quarter of 1999. For the six months ended June 30, 2000 professional fees increased $1.3 million, or 218%, compared to the six months ended June 30, 1999. Such increases are due primarily to consulting fees related to various information systems projects.
Depreciation and amortization expense increased approximately $201,000, or 919%, in the second quarter of 2000, compared to the same period in 1999. For the six months ended June 30, 2000, depreciation and amortization expense increased $370,000, or 812.6%. These increases are due primarily to acquisitions of fixed assets, which were necessary to improve newly leased office space and to accommodate increases in employment, as discussed above, and to a decrease in the estimated useful lives of certain computer hardware and software from five years to three years.
Analysis of Legacy Financial Services, Inc.
Results of Operations — LFS’ net income increased approximately $127,000, or 430%, in the second quarter of 2000, compared to the second quarter of 1999. During the six months ended June 30, 2000, net income increased approximately $355,000, or 1,723%, for the same period in 1999. These increases are due primarily to increases in revenue, offset by increases in expenses, as discussed below.
Income — LFS’ major source of income is commission overrides, which are generated through sales of variable life insurance and variable annuity products, mutual funds, and certain equity securities. Levels of commission income are directly related to the volume of sales of such products. Total LFS income increased approximately $255,000, or 61.3%, during the three months ended June 30, 2000, compared to the same period in 1999. For the six months ending June 30, 2000, total income increased by approximately $723,000, or 109.7%, compared to the same period in 1999. Such increases are due primarily to overall increases in sales volume. Also contributing to increases in commission income were shifts to sales by independent broker networks from which LFS receives a higher net commission.
Expenses — Total LFS expenses increased approximately $84,000, or 20.0%, during the second quarter of 2000 compared to the second quarter of 1999. For the six months ended June 30, 2000, expenses increased approximately $206,000, or 28.2%, compared to the six months ended June 30, 1999. Expenses increased due primarily to increases in salaries and benefits of approximately $104,000, or 44.0%, during the second quarter of 2000, compared to the corresponding quarter in 1999. During the first six months of 2000, salaries and related benefits increased by $235,000, or 53.4%, over the same period in 1999. These increases are attributable primarily to increases in the number of employees, to the addition of personnel at higher pay levels, and to regular annual pay increases.
Analysis of Other Segments
Results of Operations — Other segments consist of Regan Holding Corp. (stand-alone), LifeSurance Corporation, Legacy Advisory Services, Inc., Legacy Reinsurance Company, and Imagent Online, LLC. Combined net losses from these entities decreased approximately $427,000, or 23.3%, during the second quarter of 2000, compared to the second quarter of 1999, due primarily to decreases in expenses, as discussed below.
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Combined expenses for other segments decreased approximately $684,000, or 24.6%, during the first quarter of 2000, compared to the first quarter of 1999. This decrease is due primarily to a decrease of approximately $1.4 million in Regan Holding Corp. stock option expense recorded during the second quarter of 2000, compared to the second quarter of 1999. During the second quarter of 1999, Regan Holding Corp. recorded approximately $1.6 million in stock option expense related to non-employee stock options which were granted during 1998 and 1999 and which were modified during the second quarter of 1999. During the second quarter of 2000, stock option expense of approximately $168,000 was recorded related to stock options granted during the quarter. Partially offsetting the decrease in stock option expense between three month periods were increases in professional fees, attributable to consulting fees for various strategic and marketing projects, and increases in depreciation expense, attributable to purchases of fixed assets and a decrease in the estimated useful lives of certain computer software and hardware from five years to three years.
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PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
| Exhibit 10.1 | Amendment Fourteen to the Marketing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated July, 2000. | |
| Exhibit 10.2 | Amendment Thirteen to the Insurance Processing Agreement by and between Legacy Marketing Group and American National Insurance Company, July, 2000. | |
| Exhibit 11.1 | Computation of Earnings Per Share-Basic | |
| Exhibit 11.2 | Computation of Earnings Per Share-Diluted | |
| Exhibit 27 | Financial Data Schedule |
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| REGAN HOLDING CORP. |
| Date: August 14, 2000 |
Signature: /s/ R. PRESTON PITTS R. Preston Pitts, President & Chief Operations Officer |
|
| Date: August 14, 2000 |
Signature: /s/ G. STEVEN TAYLOR G. Steven Taylor, Chief Financial Officer |
|
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