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
September 30, 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)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ----------
The number of shares outstanding of the registrant's common stock, as of
October 31, 1996 was:
Common Stock-Series A 26,916,103
Common Stock-Series B 610,688
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1996 1995
ASSETS: (Unaudited) (Audited)
Cash and cash equivalents $ 407,366 $ 1,496,631
Investments at market value 9,076,428 5,067,426
Accounts receivable 691,577 1,507,128
Prepaid expenses 297,643 106,539
Marketing supplies inventory 222,924 178,714
Income taxes receivable 187,073 5,687
------------- ------------
Total Current Assets 10,883,011 8,362,125
------------- ------------
Net fixed assets 1,659,484 1,687,025
Organization costs-net 16,410 19,306
Deferred tax assets 1,788,072 2,097,660
Other assets 544,684 138,685
------------- ------------
TOTAL ASSETS $ 14,891,661 $ 12,304,801
============= ============
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY (DEFICIT):
LIABILITIES:
Accounts payable $ 123,120 $ 77,569
Accrued liabilities 1,850,525 1,293,110
Notes payable-current portion -- 87,688
------------- ------------
Total Current Liabilities 1,973,645 1,458,367
------------- ------------
Loan payable 132,285 132,285
Deferred incentive compensation 170,543 172,272
------------- ------------
Total Non Current Liabilities 302,828 304,557
------------- ------------
TOTAL LIABILITIES 2,276,473 1,762,924
------------- ------------
COMMITMENTS --
REDEEMABLE COMMON STOCK (Note 2) 12,593,390 12,682,750
------------- ------------
SHAREHOLDERS' EQUITY (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:
26,960,794 and 27,005,885
September 30, 1996 and December 31, 1995,
respectively 3,802,071 3,802,071
Series B common stock, no par value:
Authorized: 615,242 shares
Issued and outstanding: 610,688 shares --
Paid-in capital from acquisition and
retirement of common stock 63,605 --
Accumulated deficit (3,766,182) (6,047,382)
Unrealized gains (losses) on investments-net
of taxes (77,696) 104,438
------------- ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 21,798 (2,140,873)
------------- ------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & SHAREHOLDERS' EQUITY (DEFICIT) $ 14,891,661 $ 12,304,801
============= ============
See accompanying notes to consolidated financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
INCOME:
Marketing allowances $ 2,262,869 $ 1,840,125 $ 7,819,586 $ 6,761,321
Commission income 965,994 963,516 3,309,537 2,931,647
Administrative fees 684,811 719,741 2,289,044 2,255,970
Investment income 189,719 95,788 506,927 241,320
Other income 4,627 17,712 47,809 56,180
------------- -------------- ------------ --------------
TOTAL INCOME 4,108,020 3,636,882 13,972,903 12,246,438
------------- -------------- ------------ --------------
EXPENSES:
Salaries and related benefits 2,126,998 1,638,086 6,095,526 4,379,510
Sales promotion and support 329,627 417,012 1,715,200 1,068,575
Professional fees 211,495 114,794 493,435 313,483
Occupancy expense 140,740 151,045 418,815 412,504
Depreciation and amortization 122,163 100,558 348,494 263,374
Courier and postage 97,428 66,044 266,757 185,607
Equipment expense 77,054 75,983 218,291 187,662
Stationery and supplies 61,173 71,371 216,767 146,333
Travel and entertainment 68,147 34,971 174,650 125,829
Insurance 41,021 26,537 127,642 62,701
Other miscellaneous expenses 17,290 25,528 55,755 41,583
------------- -------------- ------------ --------------
TOTAL EXPENSES 3,293,136 2,721,929 10,131,332 7,187,161
------------- -------------- ------------ --------------
INCOME FROM OPERATIONS 814,884 914,953 3,841,571 5,059,277
PROVISION FOR INCOME TAXES 329,971 47,688 1,560,371 1,447,218
------------- -------------- ------------ --------------
NET INCOME $ 484,913 $ 867,265 $ 2,281,200 $ 3,612,059
============= =============== ============ ==============
EARNINGS PER SHARE:
Weighted average shares
outstanding 27,584,620 27,616,573 27,603,756 27,548,873
Earnings per share from
operations $ .03 $ .03 $ .14 $ .18
Provision for income taxes .01 -- .06 .05
------------- -------------- ------------ --------------
Earnings per share $ .02 $ .03 $ .08 $ .13
============= ============== ============ ==============
The accompanying notes are an integral part of these financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Statement of Shareholders' Equity (Deficit)
(Unaudited)
Paid-in Capital
from Retirement
Series A Common Stock of Accumulated Unrealized
Shares Amount Common Stock Deficit Gains/(Losses) Total
Balance
January 1, 1996 21,070,791 $3,802,071 $ -- $(6,047,382) $ 104,438 $(2,140,873)
Net income for the
nine months ended
September 30, 1996 2,281,200 2,281,200
Mandatory redemption
and retirement of
common stock
63,605 63,605
Unrealized losses on
investments (311,500) (311,500)
Deferred taxes on
unrealized losses 129,366 129,366
---------- ---------- --------- ----------- ---------- -----------
Balance
September 30, 1996 21,070,791 $3,802,071 $ 63,605 $(3,766,182) $ (77,696) $ 21,798
========== ========== ========= =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,281,200 $ 3,612,059
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 345,598 257,027
Amortization of organization costs 2,896 6,347
Amortization/accretion of investments (26,756) (23,483)
Realized gain on sale of investment (2,526) --
Net change in accounts receivable 815,551 (688,688)
Net change in prepaid expenses (191,104) (129,355)
Net change in marketing supplies inventory (44,210) (70,213)
Net change in income taxes payable/receivable (181,386) (298,499)
Net change in deferred tax assets 438,954 349,771
Net change in accounts payable 45,551 3,074
Net change in accrued liabilities 557,415 509,924
Net change in other assets and liabilities (407,728) 13,792
------------ -----------
Net cash provided by operating activities 3,633,455 3,541,756
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (13,561,338) (4,974,178)
Proceeds from sales and maturities
of investments 9,270,118 2,036,548
Purchase of fixed assets (318,057) (653,296)
Payments for organization costs -- (14,989)
------------ -----------
Net cash used in investing activities (4,609,277) (3,605,915)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 1,067
Payments on notes payable (87,688) (215,385)
Acquisition of common stock (25,755) --
------------ -----------
Net cash used in financing activities (113,443) (214,318)
------------ -----------
Decrease in cash and cash equivalents (1,089,265) (278,477)
Cash and cash equivalents, beginning of period 1,496,631 651,189
------------ -----------
Cash and cash equivalents, end of period $ 407,366 $ 372,712
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 12,659 $ 7,937
Income taxes paid $ 1,302,802 $ 1,403,300
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 nine months ended
September 30, 1996 are not necessarily indicative of the results to be
expected for the entire year. Users of these financial statements are
encouraged to refer to the Annual Report on Form 10-K for the year ended
December 31, 1995 for additional disclosure.
2. Lease Commitments
On September 26, 1996, the Company entered into a new lease agreement
which encompased the 28,000 square feet it currently occupies, plus an
additional 15,300 square feet. Annual rent will be approximately $291,000,
compared to $201,000 before the new lease was signed. The new lease
commenced on November 1, 1996 and expires on October 31, 2006. Pursuant to
the new lease, the Company will lease the remaining 10,460 square feet
available in the same building beginning August 1, 1998, at which time the
annual rent will increase to approximately $371,000.
3. Redeemable Common Stock
The Company is obligated to repurchase certain of its shares of common
stock, pursuant to various agreements under which the stock was issued.
During the nine months ended September 30, 1996, 45,091 shares of
redeemable Series A Common Stock were redeemed for approximately $26,000.
The redeemed shares were effectively retired. The excess of original
proceeds over the redemption value has been reflected as additional paid-in
capital in the accompanying financial statements. At September 30, 1996,
the number of remaining shares of redeemable Series A and Series B Common
Stock totaled 5,890,003 and 610,688, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Summary--During the quarter ended September 30, 1996, the Company recorded net
income of $485,000, or $.02 per share, compared with $867,000, or $.03 per
share, during the quarter ended September 30, 1995. During the nine months ended
September 30, 1996, the Company had net income of $2,281,000, or $.08 per share,
compared with $3,612,000, or $.13 per share, during the nine months ended
September 30, 1995. The decreases between periods are attributable primarily to
increases in operating expenses and income taxes, as discussed below.
Income--Sales by the Company's distribution network, for the insurance companies
with which the Company contracts, resulted in premium placed inforce of
approximately $139,766,000 during the quarter ended September 30, 1996, compared
with $151,549,000 during quarter ended September 30, 1995, representing a 7.8%
decrease. This decrease is attributed largely to the renewal rates of one of
the insurance companies which, when compared to market interest rates, make
existing products less appealing in comparison to alternative financial
products. However, income from insurance sales activities increased, in spite
of a decrease in premium placed inforce, due to a change in the mix of products
sold to products which yield higher marketing allowances and commissions. As a
result, marketing allowances and commission income, combined, increased 15.2%,
to $3,229,000 during the third quarter of 1996, compared with $2,804,000 during
the comparable period in 1995.
During the nine months ended September 30, 1996, premium placed inforce through
the Company's distribution network totaled $486,859,000, compared with
approximately $471,741,000 during the nine months ended September 30, 1995,
which represented a 3.2% increase. Income from insurance sales activity also
increased as a result of a change in the sales mix to products which yield
higher marketing allowances and commissions. Accordingly, income from insurance
sales activity increased 14.8%, to $11,129,000 during the nine months ended
September 30, 1996, from $9,693,000 during the nine months ended September 30,
1995.
Investment income represents earnings from investments in marketable securities.
Such earnings increased 98.1% to $190,000 during the quarter ended September 30,
1996, from $96,000 during the quarter ended September 30, 1995. Likewise,
investment income increased 110.1% to $507,000 during the nine months ended
September 30, 1996, from $241,000 during the comparable period in 1995. These
increases resulted primarily from increases in the amount of assets invested.
Expenses--Expenses totaled $3,293,000 during the quarter ended September 30,
1996, compared with $2,722,000 during the quarter ended September 30, 1995.
During the nine months ended September 30, 1996, expenses totaled $10,131,000
compared with $7,187,000 during the nine months ended September 30, 1995. These
increases are largely attributable to planned increases in the number of Company
employees and expansion of the Company's infrastructure to prepare for projected
increases in sales of annuity, life insurance and variable products.
As a service organization, the Company's predominant expense is salaries and
related employee benefits. Salaries and related benefits increased 29.8% to
$2,127,000 during the quarter ended September 30, 1996, from $1,638,000 during
the comparable period in 1995. During the nine months ended September 30, 1996,
salaries and benefits increased 39.2% to $6,096,000 from $4,380,000 during the
nine months ended September 30, 1995. These increases were due primarily to
increases in the average number of full-time equivalent employees to 158 during
the quarter ended September 30, 1996, from 122 during the comparable period in
1995, and to 148 during the nine months ended September 30, 1996, from 102
during the comparable period in 1995. Such increases resulted from efforts to
expand operating capacity to accommodate anticipated increases in sales.
Sales promotion and support 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 network. This expense totaled
$330,000 during the third quarter of 1996, compared with $417,000 during the
third quarter of 1995. During the nine months ended September 30, 1996, this
expense totaled $1,715,000, compared with $1,069,000 during the comparable
period in 1995. The increase between comparable nine month periods is
attributable primarily to accrual during 1996 for the cost of the annual
national sales convention to be held in May of 1997. The decrease between
comparable three month periods, however, is due to a reduction in the sales
convention accrual for producers who are no longer on track to qualify for
convention attendance.
Professional fees, which include legal fees, outside accounting fees and
consulting fees, increased to $211,000 during the quarter ended September 30,
1996, from $115,000 during the quarter ended September 30, 1995. During the nine
months ended September 30, 1996, fees increased to $493,000, from $313,000
during the nine months ended September 30, 1995. These increases are due largely
to consulting fees related to a company-wide project to improve the
effectiveness and efficiency of the Company's operating processes as well as as
higher actuarial fees and other miscellaneous consulting projects.
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. In addition, the Company has
recorded federal and state alternative minimum tax ("AMT") credit carryforward
benefits. Included in deferred tax assets at September 30, 1996 are state NOL
carryforwards of $2,432,000 and federal and state AMT credit carryforwards of
$1,144,000 and $303,000, respectively. The NOL carrryforwards expire December
31, 1997. The AMT credit carryforwards have no expiration date. 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 $330,000 and $48,000 for the three months
ended September 30, 1996 and 1995, respectively, and $1,560,000 and $1,447,000
for the nine months ended September 30, 1996 and 1995, respectively. The
Company's effective tax rate was 40.6% and 28.6% during the nine months ended
September 30, 1996 and 1995, respectively, and 40.5% and 5.2% during the three
months ended September 30, 1996 and 1995, respectively. The effective rates
during the three months and the nine months ended September 30, 1995 were lower
than in comparable periods during 1996 due to recognition of federal and state
AMT credit carryforwards and to reversal during the third quarter of 1995 of
valuation allowances against state NOL carryforwards.
Financial Condition
During the nine months ended September 30, 1996, the Company continued to
generate positive cash flows from operations, which resulted in a 44.5% net
increase in cash and investments to $9,484,000 at September 30, 1996, from
$6,564,000 at December 31, 1995.
Total liabilities increased to $2,276,000 at September 30, 1996, from $1,763,000
at December 31, 1995, due primarily to accrual of costs related to the 1997
national sales convention during the producers' qualification period.
Liquidity and Capital Resources
The Company's business is not capital intensive. Cash flows from operations
totaled $3,633,000 during the nine months ended September 30, 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 $2,920,000, or 44.5%, during the nine month
period ended September 30, 1996. Such amounts represented 63.7% of the Company's
total assets at September 30, 1996.
PART II OTHER INFORMATION
Item 2. Change of Securities
At an Annual Meeting of the shareholders of the Company held on August 2,
1996 (the "Annual Meeting"), certain amendments to the Company's Amended and
Restated Articles of Incorporation (the "Articles") and the Company's by-laws
(the "By-laws") were adopted which altered the rights of the holders of the
Company's Series A Common Stock and the Company's Series B Common Stock (the
Series A Common Stock and the Series B Common Stock collectively referred to
herein as the "Common Stock"). The Articles were amended to eliminate (i) the
right of the holders of the Series A Common Stock to elect four (4) directors,
and (ii) the right of first refusal of the Company in connection with sales of
shares of Series A Common Stock. The By-laws were amended to eliminate (i) the
right of first refusal of the Company and the Company's shareholders in
connection with the sale of shares of Common Stock, and (ii) the Company's
call right with respect to shares of Common Stock held by certain holders and
the put right of shareholders who have held shares of Common Stock for at least
two years. (See Item 4.)
Item 4. Submission of Matters to a Vote of Security-Holders
The following is a list of matters submitted to a vote of the shareholders
of the Company at the Annual Meeting and the results of such votes:
(i) Amendment of the Articles to eliminate the right of the holders of the
Series A Common Stock to elect four (4) directors.
Broker
For Against Abstain Non-Votes
Series A 20,196,142 854,795 88,335 337
Series B 83,382 11,330 2,812 13,187
---------- ------- ------ ------
20,279,524 866,125 91,147 13,524
========== ======= ====== ======
(ii) Amendment of the Bylaws to reduce the maximum number of directors to
seven (7) and the minimum number of directors to three (3).
Broker
For Against Abstain Non-Votes
Series A 19,759,838 1,301,264 78,507 0
Series B 94,094 14,415 2,202 0
---------- --------- ------ ----
19,853,932 1,315,679 80,709 0
========== ========= ====== ====
(iii) Election of Directors
(a) Steve C. Anderson
Broker
For Withheld Non-Votes
Series A 20,964,237 175,372 0
Series B 105,837 4,874 0
---------- ------- -----
21,070,074 180,246 0
========== ======= =====
(b) Ashley A. Penney
Broker
For Withheld Non-Votes
Series A 20,348,522 791,087 0
Series B 105,837 4,874 0
---------- ------- -----
20,454,359 795,961 0
========== ======= =====
(c) R. Preston Pitts
Broker
For Withheld Non-Votes
Series A 20,934,900 204,709 0
Series B 105,778 4,933 0
---------- ------- -----
21,040,678 209,642 0
========== ======= =====
(d) Lynda L. Regan
Broker
For Withheld Non-Votes
Series A 20,962,137 177,472 0
Series B 105,778 4,933 0
---------- ------- -----
21,067,915 182,405 0
========== ======= =====
(iv) Amendment of (a) the Articles to eliminate the right of first refusal
of the Company in connection with sales of shares of Series A Common Stock, and
(b) the Bylaws to eliminate (i) the right of first refusal of the Company and
the Company's shareholders in connection with sales of shares of Common Stock,
and (ii) the Company's call right with respect to shares of Common Stock held by
certain stockholders and the put right of shareholders who have held shares of
Common Stock for at least two years.
Broker
For Against Abstain Non-Votes
Series A 20,811,438 243,915 83,919 337
Series B 73,595 20,838 3,091 13,187
---------- ------- ------ ------
20,885,033 264,753 87,010 13,524
========== ======= ====== ======
(v) Ratification of the appointment of Coopers & Lybrand, LLP, as the
principal independent accountants for the Company for the five months ended
December 31, 1993 and the years ended December 31, 1994, 1995 and 1996.
Broker
For Against Abstain Non-Votes
Series A 21,051,025 2,527 86,057 0
Series B 107,900 861 1,950 0
---------- ----- ------ -----
21,158,925 3,388 88,007 0
========== ===== ====== =====
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit 3(a) Amended and Restated Articles of Incorporation of Regan
Holding Corp. (as amended at Annual Meeting)
Exhibit 3(b) Bylaws of Regan Holding Corp. (including amendments
adopted by the shareholders at the Annual Meeting and
amendments adopted by the Board of Directors subsequent
to the Annual Meeting)
Exhibit 10(e) Lease Agreement, dated September 26, 1996, for 1179
North McDowell Blvd., Petaluma, California 94954
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30, 1996
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
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: November 8, 1996 Signature: /s/ Lynda Regan
---------------------------- --------------------------------
Lynda Regan
President & CEO
Date: November 8, 1996 Signature: /s/ R. Preston Pitts
---------------------------- --------------------------------
R. Preston Pitts
Chief Financial Officer