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, 1997, 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 April 30, 1997 was: Common Stock-Series A 26,351,194 Common Stock-Series B 609,574 PART I FINANCIAL INFORMATION Item 1. Financial Statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Balance Sheets March 31, December 31, 1997 1996 (Unaudited) (Audited) ASSETS: Cash and cash equivalents $ 1,472,610 $ 2,202,596 Investments 7,501,257 7,947,207 Accounts receivable 615,343 511,710 Prepaid expenses 536,070 361,950 Marketing supplies inventory 213,169 251,979 Income taxes receivable 103,315 179,746 ------------ ------------ Total Current Assets 10,441,764 11,455,188 Net fixed assets 1,914,831 1,741,388 Organization costs-net 25,318 23,820 Deferred tax assets 1,579,476 1,600,150 Other assets 484,378 604,356 ------------ ------------ TOTAL ASSETS $ 14,445,767 $ 15,424,902 ============ ============ LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS' EQUITY: LIABILITIES: Accounts payable $ 215,967 $ 170,738 Accrued liabilities 1,151,333 2,032,387 ------------ ------------ Total Current Liabilities 1,367,300 2,203,125 ------------ ------------ Loan payable 132,285 132,285 Deferred incentive compensation 73,612 184,456 ------------ ------------ Total Non Current Liabilities 205,897 316,741 ------------ ------------ TOTAL LIABILITIES 1,573,197 2,519,866 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 2) -- -- REDEEMABLE COMMON STOCK (Note 3) 12,268,860 12,343,001 ------------ ------------ SHAREHOLDERS' EQUITY: Preferred stock, no par value, 100,000,000 shares authorized, no shares issued or outstanding -- -- Series A common stock, no par value, 45,000,000 shares authorized, 20,628,014 and 20,800,791 shares issued and outstanding at March 31, 1997 and December 31, 1996, respectively 3,396,693 3,532,071 Paid-in capital from acquisition and retirement of common stock 370,374 310,110 Accumulated deficit (3,130,214) (3,332,887) Net unrealized gains (losses) on investments (33,143) 52,741 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 603,710 562,035 ------------ ------------ TOTAL LIABILITIES, REDEEMABLE COMMON STOCK & SHAREHOLDERS' EQUITY $ 14,445,767 $ 15,424,902 ============ ============ See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Income Statements (Unaudited) For the Three Months Ended March 31, ----------------------------- 1997 1996 ---- ---- INCOME: Marketing allowances $ 2,242,679 $ 2,511,343 Commission income 1,046,343 1,101,727 Administrative fees 685,390 857,785 Investment income 192,621 134,426 Other income 67,655 22,103 ----------- ----------- TOTAL INCOME 4,234,688 4,627,384 ----------- ----------- EXPENSES: Salaries and related benefits 2,541,374 1,947,520 Sales promotion and support 423,682 449,460 Professional fees 208,817 226,818 Occupancy 167,729 148,152 Depreciation and amortization 142,727 108,619 Courier and postage 116,524 81,929 Equipment 86,671 68,545 Stationery and supplies 80,767 85,903 Travel and entertainment 37,152 17,317 Insurance 34,366 41,032 Other miscellaneous expenses 37,517 22,760 ----------- ----------- TOTAL EXPENSES 3,877,326 3,198,055 ----------- ----------- INCOME FROM OPERATIONS 357,362 1,429,329 PROVISION FOR INCOME TAXES 154,689 579,653 ----------- ----------- NET INCOME $ 202,673 $ 849,676 =========== =========== EARNINGS PER SHARE: Weighted average shares outstanding 27,012,519 27,616,573 Earnings per share from operations $ .01 $ .05 Provision for income taxes -- .02 ----------- ----------- Earnings per share $ .01 $ .03 ----------- ----------- See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity (Unaudited) Paid-in Capital from Retirement Series A Common Stock of Accumulated Unrealized Shares Amount Common Stock Deficit Gains/(Losses) Total ------ ------ ------------ ----------- -------------- ----- Balance January 1, 1997 20,800,791 $3,532,071 $310,110 $(3,332,887) $ 52,741 $562,035 Net income for the three months ended March 31, 1997 202,673 202,673 Redemption and retirement of common stock (172,777) (135,378) 60,264 (75,114) Unrealized losses on investments (143,467) (143,467) Deferred taxes on unrealized losses 57,583 57,583 ---------- ---------- -------- ----------- -------- -------- Balance March 31, 1997 20,628,014 $3,396,693 $370,374 $(3,130,214) $(33,143) $603,710 ========== ========== ======== =========== ========= ======== See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, -------------------------- 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 202,673 $ 849,676 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization of fixed assets 141,191 107,655 Amortization of organization costs 1,536 964 Amortization/accretion of investments (4,274) (6,192) Realized gain on sale of investment (12,726) -- Net change in accounts receivable (103,633) 927,544 Net change in prepaid expenses (174,120) (199,471) Net change in marketing supplies inventory 38,810 42,385 Net change in income taxes receivable and payable 76,431 356,923 Net change in deferred tax assets 78,257 192,732 Net change in accounts payable 45,229 (17,008) Net change in accrued liabilities (881,054) (548,170) Net change in other assets and liabilities 9,134 (205,095) __________ _________ Net cash (used in) provided by operating activities (582,546) 1,501,943 __________ _________ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (528,811) (4,972,364) Proceeds from sale and maturities of investments 848,295 2,993,395 Purchases of fixed assets (314,635) (65,435) Payments for organization costs (3,034) -- __________ _________ Net cash provided by (used in) investing activities 1,815 (2,044,404) __________ _________ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on note payable -- (75,385) Redemption and retirement of common stock (149,255) -- __________ _________ Net cash used in financing activities (149,255) (75,385) __________ _________ DECREASE IN CASH AND CASH EQUIVALENTS (729,986) (617,846) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,202,596 1,496,631 __________ _________ CASH AND CASH EQUIVALENTS, END OF PERIOD $1,472,610 $ 878,785 __________ _________ See accompanying notes to consolidated 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, 1997 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, 1996 for additional disclosure. 2. Contingencies A report on Form 8-K was filed on January 21, 1997 to inform security holders that in December, 1996, LMG and American National (collectively, the "Co-defendants") were named in a lawsuit filed in the Circuit Court of Jefferson County, Alabama, alleging misrepresentation and price discrimination in connection with the sale of certain annuity products issued by American National and marketed by LMG. The outcome of the lawsuit cannot be determined. However, the Company's management believes that the suit is without merit and intends to defend vigorously. 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 first quarter of 1997, 39,698 shares of redeemable Series A common stock were redeemed for $27,789 and 752 shares of redeemable Series B common stock were redeemed for $526. 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 March 31, 1997, the number of remaining shares of redeemable Series A and Series B common stock totaled 5,729,388 and 609,574, respectively. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Except for historical information contained herein, the matters discussed in this report contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially. Results of Operations Summary--During the quarter ended March 31, 1997, the Company recorded net income of $203,000, or $.01 per share, compared with $850,000, or $.03 per share, during the quarter ended March 31, 1996. The decrease between periods is attributable to the combined effect of decreases in revenue and increases in expenses, as discussed below. Income--Total income decreased to $4,235,000 during the quarter ended March 31, 1997, from $4,627,000 during the corresponding quarter in 1996. This decrease is due primarily to decreases in sales volume. Sales by the Company's distribution network, for the two insurance companies for which the Company markets and administers insurance policies (the "Carriers"), resulted in premium placed inforce of approximately $146,600,000 during the quarter ended March 31, 1997, compared with $158,000,000 during the quarter ended March 31, 1996, representing a 7% decrease. This decrease is attributable largely to changes in product strategies and lower than anticipated renewal rates on products of one of the Carriers. As a result, marketing allowances and commission income, combined, decreased to $3,289,000 during the first quarter of 1997, compared with $3,613,000 during the comparable period in 1996. Administrative fees decreased 20% to $685,000 during the three months ended March 31, 1997, from $858,000 during the three months ended March 31, 1996. This decrease is due to a decrease in the number of policies issued and to a reduction in certain administrative fees per policy under the Company's processing agreement with one of the Carriers. Investment income represents earnings from investments in marketable securities. Such earnings increased 43% to $193,000 during the quarter ended March 31, 1997, from $134,000 during the quarter ended March 31, 1996. This increase resulted primarily from increases in the amount of assets invested and from changes in the mix of investments to those which yielded a higher return. Expenses--Expenses totaled $3,877,000 during the quarter ended March 31, 1997, compared with $3,198,000 during the quarter ended March 31, 1996. This increase is largely attributable to increases in salaries and related expenses, which constitute the Company's predominant expense. Salaries and related benefits increased 31% to $2,541,000 during the quarter ended March 31, 1997, from $1,948,000 during the comparable period in 1996. This increase was due primarily to an increase in the average number of full-time equivalent employees to 173 during the quarter ended March 31, 1997, from 136 during the comparable period in 1996. Such expenses also increased due to the addition of key personnel at higher pay levels. This increase in employment is largely attributable to preparation for projected increases in sales of annuity, life, and variable products. However, such projected increases in sales may not be realized if new products are not introduced as planned or if market acceptance of such products is not as favorable as anticipated. Provision for Income Taxes--The Company files consolidated returns for federal income tax purposes. In prior years, the Company experienced both federal and state net operating losses ("NOLS") that can be used to offset taxes payable in current and future profitable years. The federal NOL carryforwards were fully utilized as of December 31, 1996. In addition, the Company has recorded federal and state alternative minimum tax ("AMT") credit carryforward benefits. Included in deferred tax assets at March 31, 1997 are state NOL carryforwards of $2,137,502 and federal and state AMT credit carryforwards of $1,035,105 and $323,109, respectively. The state NOL carryforwards expire December 31, 1997. The AMT credit carryforwards have no expiration date. Realization of the state NOL carryforwards is dependent on generating sufficient taxable income prior to the 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 $155,000 and $580,000 for the three months ended March 31, 1997 and 1996, respectively. The Company's effective tax rate was 43% and 41% for the three months ended March 31, 1997 and 1996, respectively. The increase in the Company's effective tax rate was due to a decrease in the future tax benefit of state NOLs as a result of a statutory decrease in the applicable state tax rates. Financial Condition During the quarter under review, the Company's total assets decreased 6% to $14,446,000 at March 31, 1997 from $15,425,000 at December 31, 1996. This was primarily attributable to a 33% reduction in cash and cash equivalents to $1,473,000 at March 31, 1997 from $2,203,000 at December 31, 1996, and a 6% reduction in investments to $7,501,000 from $7,947,000 during the same period. The decrease in cash and cash equivalents and investments were primarily attributable to the payment of liabilities accrued during prior periods with respect to the Company's annual sales convention held in May of 1997. As a result of these payments, the Company's accrued liabilities decreased 43% to $1,151,000 at March 31, 1997 from $2,032,000 at December 31, 1996 and the Company's total liabilities decreased approximately 38% to $1,573,000 from $2,520,000 during this period. Liquidity and Capital Resources The Company's business is not capital intensive. Cash flows used for operations were provided by operating activities and through cash and investments on hand. As a result, cash and investments decreased $1,176,000, or 12%, during the three month period ended March 31, 1997. Cash and investments represented 62% of the Company's total assets at March 31, 1997. PART II OTHER INFORMATION Item 1. Legal Proceedings Item 3 of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 1996 is incorporated herein by this reference. Item 6. Exhibits and Reports on Form 8-K (a) Index to Exhibits Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended March 31, 1997. A report on Form 8-K was filed on January 21, 1997 to disclose the initiation of a legal proceeding in which the Company was named as a codefendant. See Item 1 of this Part II - Legal Proceedings. 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 12, 1997 Signature: /s/ Lynda Regan -------------------------- ------------------------------- Lynda Regan Chief Executive Officer Date: May 12, 1997 Signature: /s/ R. Preston Pitts -------------------------- ------------------------------- R. Preston Pitts President and Chief Financial Officer