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UNITED STATES
FORM 10-Q
[X]
For the Quarterly Period Ended March 31, 2000
OR
[ ]
For the Transition Period from to
Commission File No. 0-4366
REGAN HOLDING CORP.
California (State or Other Jurisdiction of Incorporation or Organization) |
68-0211359 (I.R.S. Employer Identification Number) |
2090 Marina Avenue,
(707) 778-8638
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 registrants common stock, as of April 30, 2000:
Common Stock-Series A 25,684,156
Common Stock-Series B 589,734
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
March 31, | December 31, | |||||||||
2000 | 1999 | |||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
Cash and cash equivalents | $ | 5,779,373 | $ | 1,094,759 | ||||||
Investments | 12,128,696 | 20,861,973 | ||||||||
Accounts receivable | 1,994,216 | 2,625,867 | ||||||||
Prepaid expenses | 977,824 | 516,759 | ||||||||
Income taxes receivable | 2,199,945 | 2,893,701 | ||||||||
Deferred income taxes-current | 710,261 | 895,841 | ||||||||
Marketing supplies inventory | 795,359 | 706,418 | ||||||||
Total current assets | 24,585,674 | 29,595,318 | ||||||||
Net fixed assets | 13,105,734 | 12,168,135 | ||||||||
Deferred income taxes-non current | 2,840,625 | 2,030,993 | ||||||||
Prepaid software licensing fees | 897,416 | 779,375 | ||||||||
Other assets | 1,493,582 | 2,018,575 | ||||||||
Total non-current assets | 18,337,357 | 16,997,078 | ||||||||
Total Assets | $ | 42,923,031 | $ | 46,592,396 | ||||||
LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS EQUITY | ||||||||||
Liabilities | ||||||||||
Accounts payable | $ | 475,113 | $ | 435,999 | ||||||
Accrued sales convention costs | 1,783,035 | 2,248,913 | ||||||||
Accrued liabilities | 4,521,553 | 4,764,637 | ||||||||
Margin loan payable | | 3,088,918 | ||||||||
Other current liabilities | 159,999 | 107,384 | ||||||||
Total current liabilities | 6,939,700 | 10,645,851 | ||||||||
Loans payable | 2,251,911 | 2,256,418 | ||||||||
Incentive compensation payable | 126,785 | 469,720 | ||||||||
Deferred compensation payable | 1,924,376 | 1,364,713 | ||||||||
Other liabilities | 204,105 | 167,641 | ||||||||
Total non-current liabilities | 4,507,177 | 4,258,492 | ||||||||
Total Liabilities | 11,446,877 | 14,904,343 | ||||||||
Commitments and Contingencies | | |||||||||
Redeemable Common Stock, Series A and B | 11,459,884 | 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: 20,872,292 and 20,863,520 shares at March 31, 2000 and December 31, 1999, respectively | 3,669,651 | 3,659,367 | ||||||||
Paid-in capital from retirement of common stock | 936,104 | 927,640 | ||||||||
Paid-in capital from producer stock options | 4,276,000 | 2,892,000 | ||||||||
Retained earnings | 11,687,022 | 13,217,865 | ||||||||
Accumulated other comprehensive income-net | (552,507 | ) | (572,104 | ) | ||||||
Total Shareholders Equity | 20,016,270 | 20,124,768 | ||||||||
Total Liabilities, Redeemable Common Stock and Shareholders Equity | $ | 42,923,031 | $ | 46,592,396 | ||||||
See accompanying notes to condensed consolidated financial statements
1
REGAN HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended | ||||||||||
March 31, | ||||||||||
2000 | 1999 | |||||||||
(Unaudited) | ||||||||||
Income: | ||||||||||
Marketing allowances | $ | 4,173,759 | $ | 7,876,090 | ||||||
Commission income | 3,550,863 | 4,040,988 | ||||||||
Administrative fees | 2,222,885 | 2,288,243 | ||||||||
Seminar income | 62,131 | 130,789 | ||||||||
Other income | 141,124 | 53,313 | ||||||||
Total income | 10,150,762 | 14,389,423 | ||||||||
Expenses: | ||||||||||
Salaries and related benefits | 6,251,009 | 5,557,313 | ||||||||
Sales promotion and support | 1,364,727 | 2,097,833 | ||||||||
Producer stock options | 1,384,000 | | ||||||||
Professional fees | 1,046,770 | 385,973 | ||||||||
Occupancy | 758,648 | 381,958 | ||||||||
Depreciation and amortization | 597,683 | 562,268 | ||||||||
Stationery and supplies | 209,335 | 178,021 | ||||||||
Courier and postage | 207,291 | 244,828 | ||||||||
Travel and entertainment | 150,022 | 93,448 | ||||||||
Equipment | 362,442 | 179,034 | ||||||||
Insurance | 148,294 | 88,117 | ||||||||
Other | 206,255 | 53,014 | ||||||||
Total expenses | 12,686,476 | 9,821,807 | ||||||||
Operating Income (Loss) | (2,535,714 | ) | 4,567,616 | |||||||
Other Income (Loss) | ||||||||||
Investment incomenet | 253,300 | 198,658 | ||||||||
Loss on disposals of fixed assets | (186,898 | ) | | |||||||
Total other income (loss) | 66,402 | 198,658 | ||||||||
Income (Loss) Before Income Taxes | (2,469,312 | ) | 4,766,274 | |||||||
Provision for (Benefit From) Income Taxes | (943,241 | ) | 1,972,526 | |||||||
Net Income (Loss) | $ | (1,526,071 | ) | $ | 2,793,748 | |||||
Earnings Per Share: | ||||||||||
Weighted average shares outstanding-basic | 26,345,353 | 26,395,692 | ||||||||
Basic earnings per share | $ | (0.06 | ) | $ | 0.11 | |||||
Weighted average shares outstanding-diluted | 28,638,718 | 27,413,090 | ||||||||
Diluted earnings per share | $ | (0.05 | ) | $ | .10 | |||||
See accompanying notes to condensed consolidated financial statements.
2
REGAN HOLDING CORP. AND SUBSIDIARIES
Paid-in Capital | ||||||||||||||||||
from | Paid-in Capital | |||||||||||||||||
Series A Common Stock | Retirement of | from | ||||||||||||||||
Common | Producer | |||||||||||||||||
Shares | Amount | Stock | Options | |||||||||||||||
Balance December 31, 1999 | 20,863,520 | $ | 3,659,367 | $ | 927,640 | $ | 2,892,000 | |||||||||||
Comprehensive Income: | ||||||||||||||||||
Net loss for the three months ended March 31, 2000 | ||||||||||||||||||
Net unrealized gains on investments | ||||||||||||||||||
Less: Gains included in net loss | ||||||||||||||||||
Deferred tax on net unrealized gains | ||||||||||||||||||
Total comprehensive income | ||||||||||||||||||
Redemption and retirement of common stock | (7,028 | ) | (7,028 | ) | 8,464 | |||||||||||||
Exercise of stock options | 15,800 | 17,312 | ||||||||||||||||
Producer stock option expense | 1,384,000 | |||||||||||||||||
Balance March 31, 2000 (Unaudited) | 20,872,292 | $ | 3,669,651 | $ | 936,104 | $ | 4,276,000 | |||||||||||
[Additional columns below]
[Continued from above table, first column(s) repeated]
Accumulated | ||||||||||||||
Other | ||||||||||||||
Retained | Comprehensive | |||||||||||||
Earnings | Income | Total | ||||||||||||
Balance December 31, 1999 | $ | 13,217,865 | $ | (572,104 | ) | $ | 20,124,768 | |||||||
Comprehensive Income: | ||||||||||||||
Net loss for the three months ended March 31, 2000 | (1,526,071 | ) | (1,526,071 | ) | ||||||||||
Net unrealized gains on investments | 41,319 | 41,319 | ||||||||||||
Less: Gains included in net loss | (8,746 | ) | (8,746 | ) | ||||||||||
Deferred tax on net unrealized gains | (12,976 | ) | (12,976 | ) | ||||||||||
Total comprehensive income | (1,506,474 | ) | ||||||||||||
Redemption and retirement of common stock | (4,772 | ) | (3,336 | ) | ||||||||||
Exercise of stock options | 17,312 | |||||||||||||
Producer stock option expense | 1,384,000 | |||||||||||||
Balance March 31, 2000 (Unaudited) | $ | 11,687,022 | $ | (552,507 | ) | $ | 20,016,270 | |||||||
See accompanying notes to condensed consolidated financial statements.
3
REGAN HOLDING CORP. AND SUBSIDIARIES
For the Three Months Ended | |||||||||||
March 31, | |||||||||||
2000 | 1999 | ||||||||||
(Unaudited) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (1,526,071 | ) | $ | 2,793,748 | ||||||
Adjustments to reconcile net income (loss) to cash provided by operating activities: | |||||||||||
Depreciation and amortization of fixed assets | 583,199 | 544,512 | |||||||||
Loss on disposal of fixed assets | (186,898 | ) | | ||||||||
Amortization of intangible assets | 14,484 | 17,757 | |||||||||
Common stock awarded to producers | | 369,905 | |||||||||
Producer stock option grants | 1,384,000 | 81,000 | |||||||||
Amortization/accretion of investments | (625 | ) | (21,576 | ) | |||||||
Realized gains on sales of investments | 8,746 | 87,652 | |||||||||
Changes in assets and liabilities | |||||||||||
Net change in accounts receivable | 631,651 | (391,949 | ) | ||||||||
Net change in prepaid expenses | (461,065 | ) | (477,264 | ) | |||||||
Net change in income taxes receivable | 693,756 | 2,045,239 | |||||||||
Net change in deferred income taxes | (637,026 | ) | (72,714 | ) | |||||||
Net change in marketing supplies inventory | (88,941 | ) | (142,304 | ) | |||||||
Net change in software licensing fees | (118,041 | ) | | ||||||||
Net change in accounts payable | 39,114 | (54,577 | ) | ||||||||
Net change in accrued sales convention costs | (465,878 | ) | 154,261 | ||||||||
Net change in accrued liabilities | (243,084 | ) | (964,605 | ) | |||||||
Net change in other assets and liabilities | 473,196 | (103,866 | ) | ||||||||
Net cash provided by operating activities | 100,517 | 3,865,219 | |||||||||
Cash flows from investing activities: | |||||||||||
Purchases of investments | (5,730,021 | ) | (12,032,709 | ) | |||||||
Proceeds from sales of investments | 14,487,749 | 8,588,066 | |||||||||
Purchases of fixed assets | (1,333,901 | ) | (450,626 | ) | |||||||
Net cash provided by (used in) in investing activities | 7,423,827 | (3,895,269 | ) | ||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from margin loan | 1,000,000 | | |||||||||
Payments toward margin loan | (4,124,515 | ) | | ||||||||
Payments toward loan payable | (4,507 | ) | | ||||||||
Return of building loan reserve | 378,717 | | |||||||||
Payments for redemption and retirement of common stock | (106,737 | ) | (3,703 | ) | |||||||
Proceeds from stock option exercises | 17,312 | | |||||||||
Net cash used in financing activities | (2,839,730 | ) | (3,703 | ) | |||||||
Increase (decrease) in cash and cash equivalents | 4,684,614 | (33,753 | ) | ||||||||
Cash and cash equivalents, beginning of period | 1,094,759 | 5,916,731 | |||||||||
Cash and cash equivalents, end of period | $ | 5,779,373 | $ | 5,882,978 | |||||||
See accompanying notes to condensed consolidated financial statements.
4
REGAN HOLDING CORP. AND SUBSIDIARIES
1. Financial Information
The accompanying 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, 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 Companys consolidated financial position and results of operations. 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 three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the entire year. Users of these 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 is being depreciated. Had this change in estimate not occurred, the Company would have recorded $443,307 in depreciation expense during the three months ended March 31, 2000.
2. Margin Loan Payable
During the first quarter of 2000, the Company borrowed an additional $1,000,000 under a margin loan agreement with the Companys investment broker. As of March 31, 2000 the margin loan was paid in full.
3. Loan Payable
In 1999, the Company entered into a loan payable for the purchase of a building. The loan agreement contains certain covenants with which the Company must comply, including restrictions on repurchasing non-redeemable common stock. The lender has waived this covenant through June 30, 2000, provided that such voluntary repurchases do not exceed $125,000 per quarter. Pursuant to the loan agreement, the Company was also required to place approximately $560,000 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 released $378,717 of such reserves for general use by the Company.
4. Deferred Compensation Payable
During the first quarter of 2000, $421,984 in commissions were deferred by producers under the Regan Holding Corp. Producer Commission Deferral Plan and $32,468 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 consolidated financial statements, plus Company matching contributions of $27,579 and first quarter gains of $77,632.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 three months ended March 31, 2000, redeemable common stock was redeemed and retired as follows:
Series B | ||||||||||||||||||||||||
Series A Redeemable | 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 | (51,925 | ) | (103,332 | ) | (23 | ) | (69 | ) | (51,948 | ) | (103,401 | ) | ||||||||||||
Balance March 31, 2000 | 4,869,690 | $ | 9,690,682 | 589,734 | $ | 1,769,202 | 5,459,424 | $ | 11,459,884 | |||||||||||||||
6. Stock Option Expense
During the first quarter of 2000, the Company recorded $1,384,000 of expense related to stock options that were granted to independent insurance producers. This charge reflects a measurement of the options based upon managements 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 rate of 6.59%, expected volatility of 28.3%, and expected lives of 6 years. A dividend yield assumption was not applicable, as the Companys stock is not publicly traded nor does the Company pay dividends.
7. Loss on Disposals of Fixed Assets
The Company recorded pre-tax non-operating losses of $186,898 during the first quarter of 2000 related to idle assets and other equipment replaced as a result of capital improvements.
8. Amendments to Marketing and Insurance Processing Agreements
In April 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 July 31, 2000. LMG and American National are in the process of negotiating a five year extension for both agreements.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Segment Information
The table below presents information about the Companys operating segments:
Legacy | Legacy | ||||||||||||||||
Marketing | Financial | ||||||||||||||||
Group | Services, Inc. | Other | Total | ||||||||||||||
Three months ended March 31, 2000: | |||||||||||||||||
Total revenue | $ | 9,269,033 | $ | 709,404 | $ | 172,325 | $ | 10,150,762 | |||||||||
Total expenses | 9,719,257 | 430,544 | 2,536,675 | 12,686,476 | |||||||||||||
Operating income (loss) | (450,224 | ) | 278,860 | (2,364,350 | ) | (2,535,714 | ) | ||||||||||
Other income (loss) | 244,509 | 3,695 | (181,802 | ) | 66,402 | ||||||||||||
Income (loss) before tax | (205,715 | ) | 282,555 | (2,546,152 | ) | (2,469,312 | ) | ||||||||||
Tax provision (benefit) | (210,177 | ) | 62,535 | (795,599 | ) | (943,241 | ) | ||||||||||
Net income (loss) | $ | 4,462 | $ | 220,020 | $ | (1,750,553 | ) | $ | (1,526,071 | ) | |||||||
Three months ended March 31, 1999: | |||||||||||||||||
Total revenue | $ | 14,067,996 | $ | 242,219 | $ | 79,208 | $ | 14,389,423 | |||||||||
Total expenses | 7,940,659 | 308,855 | 1,572,293 | 9,821,807 | |||||||||||||
Operating income (loss) | 6,127,337 | (66,636 | ) | (1,493,085 | ) | 4,567,616 | |||||||||||
Other income | 198,359 | 299 | | 198,658 | |||||||||||||
Income (loss) before tax | 6,325,696 | (66,337 | ) | (1,493,085 | ) | 4,766,274 | |||||||||||
Tax provision (benefit) | 2,459,949 | (57,539 | ) | (429,884 | ) | 1,972,526 | |||||||||||
Net income (loss) | $ | 3,865,747 | $ | (8,798 | ) | $ | (1,063,201 | ) | $ | 2,793,748 | |||||||
Total Assets: | |||||||||||||||||
March 31, 2000 | $ | 23,664,248 | $ | 1,497,394 | $ | 17,761,389 | $ | 42,923,031 | |||||||||
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 and LifeSurance Company. Such entities operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.
10. Subsequent Events
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 an equity investment in the internet company for $500,000 during May 2000 and is obligated to provide additional funding of up to $1 million during 2000, depending on the internet company's achievement of agreed-upon development objectives.
11. 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.
Item 2. Managements 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 managements current expectations of the Companys near term results, based on current information available. Actual results could differ materially.
7
The table below presents information about the Companys operating segments:
Legacy | Legacy | ||||||||||||||||
Marketing | Financial | ||||||||||||||||
Group | Services, Inc. | Other | Total | ||||||||||||||
Three months ended March 31, 2000: | |||||||||||||||||
Total revenue | $ | 9,269,033 | $ | 709,404 | $ | 172,325 | $ | 10,150,762 | |||||||||
Total expenses | 9,719,257 | 430,544 | 2,536,675 | 12,686,476 | |||||||||||||
Operating income (loss) | (450,224 | ) | 278,860 | (2,364,350 | ) | (2,535,714 | ) | ||||||||||
Other income (loss) | 244,509 | 3,695 | (181,802 | ) | 66,402 | ||||||||||||
Income (loss) before tax | (205,715 | ) | 282,555 | (2,546,152 | ) | (2,469,312 | ) | ||||||||||
Tax provision (benefit) | (210,177 | ) | 62,535 | (795,599 | ) | (943,241 | ) | ||||||||||
Net income (loss) | $ | 4,462 | $ | 220,020 | $ | (1,750,553 | ) | $ | (1,526,071 | ) | |||||||
Three months ended March 31, 1999: | |||||||||||||||||
Total revenue | $ | 14,067,996 | $ | 242,219 | $ | 79,208 | $ | 14,389,423 | |||||||||
Total expenses | 7,940,659 | 308,855 | 1,572,293 | 9,821,807 | |||||||||||||
Operating income (loss) | 6,127,337 | (66,636 | ) | (1,493,085 | ) | 4,567,616 | |||||||||||
Other income | 198,359 | 299 | | 198,658 | |||||||||||||
Income (loss) before tax | 6,325,696 | (66,337 | ) | (1,493,085 | ) | 4,766,274 | |||||||||||
Tax provision (benefit) | 2,459,949 | (57,539 | ) | (429,884 | ) | 1,972,526 | |||||||||||
Net income (loss) | $ | 3,865,747 | $ | (8,798 | ) | $ | (1,063,201 | ) | $ | 2,793,748 | |||||||
Total Assets: | |||||||||||||||||
March 31, 2000 | $ | 23,664,248 | $ | 1,497,394 | $ | 17,761,389 | $ | 42,923,031 | |||||||||
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 and LifeSurance Company.
Analysis of Regan Holding Corp. Consolidated
Results of OperationsThe Company experienced a consolidated net loss of approximately $1.5 million in the first quarter of 2000, compared to consolidated net income of approximately $2.8 million during the first quarter of 1999, due primarily to a decrease in LMG revenue and a non-cash expense related to non-employee stock options, both of which are discussed below.
Liquidity and Capital ResourcesThe Companys ability to mobilize its assets remained strong at March 31, 2000, with cash and short-term investment grade securities representing 41.7% of the Companys total consolidated assets.
The Companys 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 Companys common stock, which is redeemable at the option of certain shareholders under various agreements with the Company. In the first quarter of 2000, redemption requests received by the Company were not material in amount, neither individually nor in the aggregate, and the Company believes that its liquid assets are sufficient to meet anticipated requests for redemption. At March 31, 2000 and December 31, 1999, the total redemption value of all redeemable common stock outstanding was approximately $11.5 million.
Generally, the Companys cash needs are met through cash provided from operating activities, which totaled approximately $101,000 during the quarter ended March 31, 2000, compared to approximately $3.9 million during the quarter ended March 31, 1999.
8
At December 31, 1999, the Company's investment portfolio included a $12 million equity investment in 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 an equity investment in the internet company for $500,000 during May 2000 and is obligated to provide additional funding of up to $1 million during 2000, depending on the internet company's achievement of agreed-upon development objectives.
In May 1998, the Company entered into a Shareholders Agreement with Lynda Regan, Chief Executive Officer of the Company and Chairman of the Companys Board of Directors, and certain other individuals. Under the terms of this agreement, in the event of the death of Ms. Regan, the Company shall repurchase from Ms. Regans estate all of the shares of the Companys 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. Regans death. Any excess of the obligation over the insurance proceeds are 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 was to occur, management believes that adequate financing could be obtained to meet the Companys cash flow needs.
Analysis of Legacy Marketing Group
Results of OperationsDuring the first quarter of 2000, LMGs net income totaled approximately $4,000, which represented a $3.9 million decrease from the first quarter of 1999. This decrease is due primarily to a decrease in income and to increases in expenses, as discussed below.
IncomeLMGs 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 producer appointments. Total LMG income decreased approximately $4.8 million, or 34.1%, in the first quarter of 2000 compared to the first quarter of 1999. The 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 $4.7 million, or 39.8%, due to a decrease in fixed annuity premium placed inforce of approximately $236.7 million, or 47.7%, during the first quarter of 2000 compared to the first quarter of 1999. This decrease is attributable primarily to current market conditions which have resulted in the poor performance of bond investments underlying the annuities crediting rates and to lower than anticipated market acceptance of the VisionMark IIannuity, which was introduced in 1999 to replace the original version of the VisionMark. The decrease in premium placed inforce was partially offset by a shift to fixed life insurance products which yield higher commissions.
Currently, the Company markets and administers fixed annuity and life insurance products on behalf of three Carriers. During the three months ended March 31, 2000, 13.0%, 37.0%, and 40.8% of the Companys total consolidated income resulted from LMG agreements with American National, IL Annuity and Insurance Company ("IL Annuity"), and Transamerica Life Insurance and Annuity Company ("Transamerica") respectively, compared to 8.9%, 80.4%, and 6.4% during the same period in 1999.
Although the Company markets and administers several fixed annuity and life insurance products on behalf of the Carriers, LMGs income is derived primarily from sales and administration of two fixed annuity products. During the first quarters of 2000 and 1999, 18.2% and 63.0% of the Companys total income resulted
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These shifts from sales of IL Annuity products to sales of Transamerica products are attributable primarily to market acceptance of the SelectMarkSM product and are expected to continue for the foreseeable future.
The Company is currently implementing several intiatives to increase LMG income, including negotiations with insurance carriers to provide marketing and administrative services, similar to those performed for the Carriers. In addition, LMG is expected to release several new products during 2000, which are expected to diversify LMG's product portfolio, enhance market share, and increase income. Several marketing programs are also planned for 2000, which are designed to strengthen relationships with existing producers and to attract new producers. However, there can be no assurances that such events would occur or, were they to occur, would result in increases in LMG income.
ExpensesTotal LMG expenses increased approximately $1.8 million, or 22.4%, during the three months ended March 31, 2000 compared to the three months ended March 31, 1999. This increase is due primarily to increases in compensation, occupancy, professional fees, and depreciation, as discussed below.
As a service organization, LMG's primary expenses are salaries and related employee benefits. These expenses increased approximately $465,000, or 8.8%, during the first quarter of 2000 compared to the first quarter of 1999. Such increases resulted primarily from regular annual wage increases and from increases in the average number of full-time equivalent employees. The increases in personnel during 1999 were largely attributable to preparation for, and accommodation of, increases in sales. However, the rate of increase in salaries expense is lower than the rates of increase in personnel due to the fact that newly added personnel were primarily at lower salary levels. During 2000, however, the Company plans to hire several LMG employees at higher salary levels, some of whom are expected to be elected as officers of LMG. Such increases in personnel are considered necessary in order to support anticipated increases in LMG income, as discussed above. Accordingly, salaries 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 $429,000, or 189.5%, in the first quarter of 2000 compared to the first quarter of 1999 due primarily to the leasing of new office space during the third quarter of 1999 and to overall increases in telephone, utilities, and other related expenses which correspond with increases in employment, as discussed above.
Professional fees increased approximately $632,000, or 234.3%, in the first quarter of 2000 compared to the three months ended March 31, 1999, due primarily to consulting fees related to various information systems projects.
Depreciation and amortization expense increased approximately $169,000, or 714.3%, in the first quarter of 2000 compared to the first quarter of 1999, due primarily to acquisitions of fixed assets, which were necessary to improve newly leased office space and to accommodate increases in employment, and to a change in the estimated useful lives over which certain computer hardware are being depreciated.
Analysis of Legacy Financial Services, Inc.
Results of OperationsLFS net income increased approximately $229,000, or 2,600.9%, in the first quarter of 2000 compared to the first quarter of 1999 due primarily to increases in income, offset by increases in expenses, as discussed below.
IncomeLFS major source of income is commission overrides, which are generated through sales of variable life insurance and 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 revenue increased approximately $467,000, or 192.9%, in the three months ended March 31, 2000 compared to the corresponding period in 1999 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 higher net commissions.
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ExpensesTotal LFS expenses increased approximately $122,000, or 39.4%, in the first quarter of 2000 compared to the first quarter of 1999 due primarily to increases in salaries and benefits. As a service organization, LFS operating expenses consist primarily of salaries and related employee benefits. These expenses increased approximately $131,000, or 64.2%, in the first quarter of 2000, from the corresponding quarter in 1999, due primarily to increases in the average number of employees, to the addition of personnel at higher pay levels, and to regular annual pay increases.
Analysis of Other Segments
Results of OperationsOther segments consist of Regan Holding Corp. (stand-alone), LifeSurance Corporation, Legacy Advisory Services, Inc. and Legacy Reinsurance Company. Combined net losses from these entities increased approximately $687,000, or 64.7%, in the first quarter of 2000 compared to the first quarter of 1999 due primarily to increases in expenses, as discussed below.
Combined expenses for these entities increased approximately $964,000, or 61.3%, in the first quarter of 2000 compared to the first quarter of 1999. This increase is due primarily to an increase of approximately $1.4 million in Regan Holding Corp. stock option expense recorded during the first quarter of 2000 related to stock options granted to LMG producers and LFS registered representatives during the first quarter of 2000. The increase in stock option expense was partially offset by expenses recorded in the first quarter of 1999 which did not occur in the first quarter of 2000, including: (i) a decrease of approximately $451,000 related to awards of Regan Holding Corp. stock to LMG producers during the first quarter of 1999; and, (ii) a decrease of approximately $133,000 in Regan Holding Corp. depreciation expense related to accelerated amortization of leasehold improvements for office space vacated in mid-1999.
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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 Thirteen to the Marketing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated April, 2000. | |||
Exhibit 10.2 | Amendment Twelve to the Insurance Processing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated April, 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 first 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: | May 15, 2000 | Signature: |
/s/ R. PRESTON PITTS --------------------------------------------------- R. Preston Pitts, President & Chief Operating Officer |
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Date: | May 15, 2000 | Signature: |
/s/ DAVID A. SKUP --------------------------------------------------- David A. Skup, Chief Financial Officer |
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