SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1996, or ________________ [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ____________ Commission file number 0-4366 ______ Regan Holding Corp. ___________________ (Exact Name of Registrant as Specified in Its Charter) California 68-0211359 __________ __________ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1179 N. McDowell Blvd., Petaluma, California 94954 ____________________________________________ _____ (Address of Principal Executive Offices) (Zip Code) (707) 778-8638 ______________ (Registrant's Telephone Number, Including Area Code) _______________________________________________________________ (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the registrant's common stock, as of March 31, 1996 was: Common Stock-Series A 27,005,885 Common Stock-Series B 610,688 PART I - FINANCIAL INFORMATION Item 1. Financial Statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Balance Sheets March 31, December 31, 1996 1995 ASSETS: (Unaudited) (Audited) ___________ _________ Cash and cash equivalents $ 878,785 $ 1,496,631 Investments at market value 6,965,458 5,067,426 Accounts receivable 579,584 1,507,128 Income taxes receivable - 5,687 Prepaid expenses 306,010 106,539 Marketing supplies inventory 136,329 178,714 ___________ ___________ Total Current Assets 8,866,166 8,362,125 ___________ ___________ Net fixed assets 1,644,805 1,687,025 Organization costs-net of amortization 18,341 19,306 Deferred tax assets 1,939,899 2,097,660 Other assets 291,203 138,685 ___________ ___________ TOTAL ASSETS $12,760,414 $12,304,801 ___________ ___________ LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS' DEFICIT: LIABILITIES: Accounts payable $ 60,561 $ 77,569 Income taxes payable 351,236 - Fractional shares payable 44,879 44,879 Accrued liabilities 700,061 1,248,231 Note payable-current portion 12,303 87,688 ___________ ___________ Total Current Liabilities 1,169,040 1,458,367 ___________ ___________ Loan payable 132,285 132,285 Deferred incentive compensation 119,694 172,272 ___________ ___________ Total Non-Current Liabilities 251,979 304,557 ___________ ___________ TOTAL LIABILITIES 1,421,019 1,762,924 ___________ ___________ CONTINGENCIES (Note 3) - - REDEEMABLE COMMON STOCK 12,682,750 12,682,750 ___________ ___________ SHAREHOLDERS' DEFICIT: 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: 27,005,885 shares 3,802,071 3,802,071 Series B common stock, no par value: Authorized: 615,242 shares Issued and outstanding: 610,688 shares - - Accumulated deficit (5,197,706) (6,047,382) Unrealized gains on investments (net of taxes) 52,280 104,438 ___________ ___________ TOTAL SHAREHOLDERS' DEFICIT (1,343,355) (2,140,873) ___________ ___________ TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' DEFICIT $12,760,414 $12,304,801 ___________ ___________ The accompanying notes are an integral part of these financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Income Statements (Unaudited) For the Three For the Three Months Ended Months Ended March 31, 1996 March 31, 1995 ______________ ______________ REVENUE: Marketing allowances $ 2,511,343 $ 2,573,692 Commission income 1,101,727 875,736 Administrative fees 857,785 761,738 Investment income 134,426 57,079 Other income 22,103 16,434 ______________ _____________ Total Revenue 4,627,384 4,284,679 ______________ _____________ EXPENSES: Salaries and related benefits 1,947,520 1,317,157 Depreciation and amortization 108,619 74,133 Equipment expense 68,545 33,361 Occupancy expense 148,152 129,072 Travel and entertainment 17,317 25,870 Stationery and supplies 85,903 23,382 Courier and postage 81,929 59,574 Other miscellaneous expenses 59,586 21,242 ______________ _____________ Subtotal- General & Administrative 2,517,571 1,683,791 ______________ _____________ Advertising and sales promotion 425,707 216,368 Other producer related expenses 23,753 28,958 ______________ _____________ Subtotal -Producer Related 449,460 245,326 ______________ _____________ Professional fees 226,818 126,183 Interest expense 4,206 4,057 ______________ _____________ Total Expenses 3,198,055 2,059,357 ______________ _____________ Income before income taxes 1,429,329 2,225,322 Provision for income taxes 579,653 1,000,000 ______________ _____________ NET INCOME $ 849,676 $ 1,225,322 ______________ _____________ Weighted average shares outstanding 27,616,573 27,509,908 Earnings per share $ 0.03 $ 0.04 ______________ _____________ The accompanying notes are an integral part of these financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Statement of Shareholders' Deficit (Unaudited) Unrealized Series A Common Stock Accumulated Gains Shares Amount Deficit (Losses) Total ______ ______ _______ __________ _____ Balance December 31, 1995 27,005,885 $3,802,071 $(6,047,382) $104,438 $(2,140,873) Net income for the three months ended March 31, 1996 849,676 849,676 Unrealized losses on investments (87,129) (87,129) Deferred taxes on unrealized losses 34,971 34,971 __________ __________ ___________ ________ ___________ Balance March 31, 1996 27,005,885 $3,802,071 $(5,197,706) $ 52,280 $(1,343,355) __________ __________ ___________ ________ ___________ The accompanying notes are an integral part of these financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the Three For the Three Months Ended Months Ended March 31, 1996 March 31, 1995 ______________ ______________ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 849,676 $ 1,225,322 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 107,655 70,184 Amortization of organization costs 964 3,949 Accretion/amortization of investments (6,192) (13,785) Net change in accounts receivable 927,544 (247,102) Net change in prepaid expenses (199,471) (85,113) Net change in marketing supplies inventory 42,385 (16,729) Net change in deferred income taxes 192,732 788,319 Net change in accounts payable (17,008) (10,448) Net change in income taxes receivable and payable 356,923 128,681 Net change in accrued liabilities (548,170) (184,313) Net change in other assets and liabilities (205,095) - _________ _________ Net cash provided by operating activities 1,501,943 1,658,965 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (4,972,364) (2,004,832) Proceeds from sales and maturities of investments 2,993,395 506,000 Purchases of fixed assets (65,435) (160,821) ___________ ___________ Net cash used in investing activities (2,044,404) (1,659,653) ___________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on note payable (75,385) (75,385) ___________ ___________ Net cash used in financing activities (75,385) (75,385) ___________ ___________ DECREASE IN CASH AND CASH EQUIVALENTS (617,846) (76,073) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,496,631 651,189 ___________ ___________ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 878,785 $ 575,116 ___________ ___________ Interest paid $ 4,206 $ 4,057 Income taxes paid $ 381,600 $ 196,300 The accompanying notes are an integral part of these financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Financial Information The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principles and include the accounts of Regan Holding Corp., and its wholly-owned subsidiaries, Legacy Marketing Group, Legacy Financial Services, Inc., and LifeSurance Corporation. All intercompany transactions have been eliminated. The statements are unaudited but reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company's financial position and results of operations. The results for the three months ended March 31, 1996 and 1995 are not necessarily indicative of the results to be expected for the entire year. 2. Modifications to Agreements Effective March 1, 1996, Marketing and Processing Agreements between the Company and American National Insurance Company ("American National") were amended to reduce certain administrative fees earned by the Company. These reductions in rates are expected to result in lower revenues to the Company. The amount of the decrease will depend on the volume of policies sold and administered. In addition, during April 1996, certain investment strategy features of the annuity policies offered by American National were eliminated. Such changes could impact the volume of the Company's sales of annuity policies. 3. Contingencies During 1991 and 1992, the Company sold 5,698,452 shares of Series A Common Stock pursuant to the terms of the 701 Asset Accumulator Program. Current management is investigating whether some of these sales were made without compliance with the applicable securities laws of one or more states. In the event that this is the case, the Company may be required to rescind some of these sales. The costs of rescission, if any, cannot be estimated at this time. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Summary -- The Company recorded net income of $850,000, or $.03 per share, during the three months ended March 31, 1996, compared with $1,225,000, or $.04 per share, during the three months ended March 31, 1995. This decrease is attributable primarily to increases in operating expenses, as discussed below. Revenue -- The Company's primary sources of revenue are marketing allowances, commission overrides, and administrative fees. Marketing allowances and commission overrides are directly related to sales of annuities and life insurance products. Administrative fees are a function not only of product sales but also of agent appointments and insurance policies inforce each month. Sales by the Company's distribution system resulted in policy premium placed inforce for American National Insurance Company ("American National") of approximately $158,000,000 during the three months ended March 31, 1996, compared to approximately $145,000,000 during the three months ended March 31, 1995, representing a 9% increase. Although premium placed inforce increased, marketing allowance revenues decreased by 2% during the first quarter of 1996, compared to the three months ended March 31, 1995, due primarily to a change in the timing of revenue recognition pursuant to contractual arrangements. In accordance with the terms of the Marketing Agreement with American National, the Company recognized first quarter 1995 marketing allowance revenue at the time of submission of policy applications. Effective July 1, 1995, the Marketing Agreement was amended to provide for recognition of marketing allowance revenue by the Company after the policies become inforce. First quarter 1995 submitted premium was approximately $183,000,000, compared to premium placed inforce during first quarter 1995 of approximately $145,000,000. This timing difference was compounded by the high volume of premium submitted during the first quarter of 1995, which was the highest in the Company's history. The resulting decrease in marketing allowance revenue was offset by increases during the first quarter of 1996 in sales of life insurance products and other shifts in the Company's sales mix to products which yield higher marketing allowances. Commission revenues increased by approximately 26% during the three months ended March 31, 1996, when compared to the three months ended March 31, 1995. This increase is attributable to the increase in premium placed inforce and to shifts in the Company's product sales mix to products with higher commission rates. Effective March 1, 1996, the Marketing and Processing Agreements between the Company and American National were further amended to reduce certain administrative fees earned by the Company. These reductions in rates are expected to result in lower revenues to the Company. The amount of the decrease will depend on the volume of policies sold and administered. In addition, during April 1996, certain investment strategy features of the annuity policies offered by American National were eliminated. Such changes could impact the volume of the Company's sales of annuity policies. Investment income represents earnings from investments in marketable securities. Such earnings increased 136% to $134,000 during the three months ended March 31, 1996, from $57,000 during the three months ended March 31, 1995, due to increases in invested assets. Expenses -- Expenses totaled $3,198,000 during the three months ended March 31, 1996, compared to $2,059,000 during the three months ended March 31, 1995. This increase is largely attributed to planned increases in the Company's employees and infrastructure to prepare for projected increases in sales of life insurance and variable products. As a service organization, the Company's predominant expense is salaries and related employee benefits. The Company hires new employees as necessary to support increases in sales and to provide for anticipated future growth in operations. Total full- time equivalent employees grew 53% to 138 at March 31, 1996 from 90 at March 31, 1995. As a result, total salaries and related employee benefits increased to $1,948,000 for the three months ended March 31, 1996 from $1,317,000 for the three months ended March 31, 1995. Advertising and sales promotion expense consists primarily of the cost of sales promotion meetings and design and printing of sales brochures for use by producers throughout the Company's distribution system. The expense totaled $426,000 during the first quarter of 1996, or 9% of revenues, compared to $216,000 during the first quarter of 1995, or 5% of revenues. This increase, as a percentage of revenue, is attributable primarily to expenses incurred during 1996 associated with the annual national sales convention, which was held in January 1996, and to costs of a new training program designed to familiarize producers' administrative personnel with products marketed by the Company. Professional fees, which include legal fees, outside accounting fees and consulting fees totaled $227,000 during the three months ended March 31, 1996, compared to $126,000 during the three months ended March 31, 1995. This increase is due primarily to various consulting projects in process, including consultants hired to market life insurance products and to coordinate a Company-wide initiative to analyze and improve operating processes. Provision for Income Taxes -- The Company files consolidated returns for federal income tax purposes. The Company experienced both federal and state net operating losses ("NOLs") in prior years that can be used to offset taxes payable in current and future profitable years. Realization of the NOL carryforwards is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realized could, however, be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The provision for income taxes was $580,000 and $1,000,000 for the three months ended March 31, 1996 and 1995, respectively. The Company's effective tax rate was 41% for the three months ended March 31, 1996 and 45% for the three months ended March 31, 1995. Financial Condition During the three months ended March 31, 1996, the Company continued to generate positive cash flows from operations, which resulted in a 20% net increase in cash and investments to $7,844,000 at March 31, 1996 from $6,564,000 at December 31, 1995. In addition to cash generated by first quarter income, collections of accounts receivable from American National during the first quarter of 1996 contributed to positive cash flows during the period. Total liabilities decreased to $1,421,000 at March 31, 1996 from $1,763,000 at December 31, 1995 due primarily to payment of 1995 employee bonuses which had been accrued at December 31, 1995. This decrease was offset by increases in income taxes payable resulting from timing differences between recognition and payment of income taxes. Liquidity and Capital Resources The Company's cash flows from operations totaled $1,502,000 during the three months ended March 31, 1996 and were applied primarily to the purchase of investments in U.S. Treasury securities and other marketable securities backed by U.S. Government agencies. As a result, cash and investments increased $1,280,000, or 20%, during the three month period ended March 31, 1996. Such amounts represented 61% of the Company's total assets at March 31, 1996. Contingent Obligations of the Company During 1991 and 1992, the Company sold 5,698,452 shares of Series A Common Stock pursuant to the terms of the 701 Asset Accumulator Program. Current management is investigating whether some of these sales were made without compliance with the applicable securities laws of one or more states. In the event that this is the case, the Company may be required to rescind some of these sales. The costs of rescission, if any, cannot be estimated at this time. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibit 10 Amendment effective March 1, 1996 to the Marketing and Processing Agreement between the Company and American National Insurance Company.* Exhibit 27 Financial Data Schedule * Certain confidential commercial and financial information has been omitted here but filed under separate cover with the SEC. 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: 5/10/96 Signature: s/Lynda Regan _______________________ Lynda Regan President & Chief Executive Officer Date: 5/10/96 Signature: s/R. Preston Pitts _______________________ R. Preston Pitts Chief Financial Officer