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 June 30, 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 July 31, 1997 was: Common Stock-Series A 26,269,588 Common Stock-Series B 609,574 PART I FINANCIAL INFORMATION Item 1. Financial Statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Balance Sheets June 30, December 31, 1997 1996 (Unaudited) (Audited) ASSETS: Cash and cash equivalents $ 5,715,030 $ 2,202,596 Investments 4,320,689 7,947,207 Accounts receivable 714,885 511,710 Prepaid expenses 453,694 361,950 Marketing supplies inventory 229,214 251,979 Income taxes receivable -- 179,746 -- ------- Total current assets 11,433,512 11,455,188 ---------- ---------- Net fixed assets 2,297,298 1,741,388 Organization costs-net 23,783 23,820 Deferred tax assets 1,412,178 1,600,150 Other assets 442,067 604,356 ------- ------- TOTAL ASSETS $15,608,838 $15,424,902 =========== =========== LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS' EQUITY: LIABILITIES: Accounts payable $ 105,912 $ 170,738 Income taxes payable 96,488 -- Accrued liabilities 1,616,129 2,032,387 --------- --------- Total current liabilities 1,818,529 2,203,125 --------- --------- Loan payable 132,285 132,285 Deferred incentive compensation 76,086 184,456 ------ ------- Total non-current liabilities 208,371 316,741 ------- ------- TOTAL LIABILITIES 2,026,900 2,519,866 --------- --------- COMMITMENTS AND CONTINGENCIES (Note 2) -- -- REDEEMABLE COMMON STOCK (Note 3) 12,185,720 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 June 30, 1997 and December 31, 1996, respectively 3,396,693 3,532,071 Paid-in capital from redemption and retirement of common stock 418,193 310,110 Accumulated deficit (2,395,983) (3,332,887) Net unrealized gains (losses) on investments (22,685) 52,741 -------- ------ TOTAL SHAREHOLDERS' EQUITY 1,396,218 562,035 --------- ------- TOTAL LIABILITIES, REDEEMABLE COMMON STOCK & SHAREHOLDERS' EQUITY $15,608,838 $15,424,902 =========== =========== See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Income Statements (Unaudited) For the Three Months Ended For the Six Months Ended June 30, June 30, -------- -------- 1997 1996 1997 1996 ---- ---- ---- ---- INCOME: Marketing allowances $ 3,018,124 $ 3,045,374 $ 5,260,803 $ 5,556,717 Commission income 1,237,775 1,241,816 2,284,118 2,343,543 Administrative fees 904,766 764,814 1,590,156 1,622,599 Investment income 119,962 182,782 312,583 317,208 Other income 44,040 2,713 111,695 24,816 ------ ----- ------- ------ TOTAL INCOME 5,324,667 5,237,499 9,559,355 9,864,883 --------- --------- --------- --------- EXPENSES: Salaries and related benefits 2,473,535 2,021,008 5,014,909 3,968,528 Sales promotion and support 677,224 936,113 1,100,906 1,385,573 Occupancy 201,983 129,923 369,712 278,075 Professional fees 149,175 55,122 357,992 281,940 Depreciation and amortization 146,007 117,712 288,734 226,331 Courier and postage 86,520 87,400 203,044 169,329 Equipment 86,983 72,692 159,626 141,237 Stationery and supplies 78,859 69,691 173,654 155,594 Travel and entertainment 75,807 89,186 112,959 106,503 Insurance expense 52,095 45,589 86,461 86,621 Other miscellaneous expenses 47,158 15,705 84,675 38,465 ------ ------ ------ ------ TOTAL EXPENSES 4,075,346 3,640,141 7,952,672 6,838,196 --------- --------- --------- --------- INCOME FROM OPERATIONS 1,249,321 1,597,358 1,606,683 3,026,687 PROVISION FOR INCOME TAXES 515,090 650,747 669,779 1,230,400 ------- ------- ------- --------- NET INCOME $ 734,231 $ 946,611 $ 936,904 $ 1,796,287 ======+====== ============== ============ ============== EARNINGS PER SHARE: Weighted average shares outstanding 26,848,054 27,610,431 26,672,941 27,613,502 Earnings per share from operations $ .05 $ .06 $ .06 $ .11 Provision for income taxes .02 .02 .02 .04 --- --- --- --- Earnings per share $ .03 $ .04 $ .04 $ . 07 ============= ============= ============= ============== See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity (Unaudited) Paid-in Capital Retirement Series A Common Stock Retirement 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 six months ended June 30, 1997 936,904 936,904 Redemption and retirement of common stock (172,777) (135,378) 108,083 (27,295) Unrealized losses on investments (125,999) (125,999) Deferred taxes on unrealized losses 50,573 50,573 ---------- ---------- -------- ----------- ----------- ---------- Balance June 30, 1997 20,628,014 $3,396,693 $418,193 $(2,395,983) $ (22,685) $1,396,218 ========== ========== ======== =========== =========== ========== See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 936,904 $ 1,796,287 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of fixed assets 285,663 224,400 Amortization of organization costs 3,071 1,931 Amortization/accretion of investments (8,192) (17,687) Realized loss (gain) on sales of investments 28,994 (2,526) Changes in assets and liabilities Net change in accounts receivable (203,175) 972,889 Net change in marketing supplies inventory 22,765 24,091 Net change in prepaid expenses (91,744) (149,449) Net change in income taxes receivable and payable 276,234 69,389 Net change in deferred tax assets 238,545 334,412 Net change in accounts payable (64,826) (555) Net change in accrued liabilities (416,258) 256,861 Net change in other assets and liabilities 53,919 (251,977) ------ -------- Net cash provided by operating activities 1,061,900 3,258,066 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (20,880,107) (10,008,309) Proceeds from sales and maturities of investments 24,359,825 6,571,304 Purchases of fixed assets (841,574) (267,682) Purchase of organization costs (3,034) -- ------ -- Net cash provided by (used in) investing activities 2,635,110 (3,704,687) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions and retirement of common stock (184,576) (12,810) Repayment of note payable -- (87,688) -- ------- Net cash used in financing activities (184,576) (100,498) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,512,434 (547,119) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,202,596 1,496,631 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,715,030 $ 949,512 ============== ============== 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 ("LMG"), 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 six months ended June 30, 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. Commitments and 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 Insurance Company (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 Insurance Company 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 itself 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 second quarter of 1997, 45,282 shares of redeemable Series A common stock were redeemed and retired for $35,317. During the first quarter of 1997, 39,698 shares of redeemable Series A common stock were redeemed and retired for $27,789 and 752 shares of redeemable Series B common stock were redeemed and retired for $526. The excess of original proceeds over the redemption value has been reflected as additional paid-in capital in the accompanying financial statements. Such amounts totaled $47,819 during the second quarter of 1997 and $45,830 during the first quarter of 1997. At June 30, 1997, the number of remaining shares of redeemable Series A and Series B common stock totaled 5,684,106 and 609,574, respectively. 4. Comprehensive Income In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company does not believe that SFAS No. 130 will have a material impact on its financial statements. 5. Segment Reporting In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operation decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company does not believe SFAS No. 131 will have a material impact on its financial statements. 6. Concentration of Risk At June 30, 1997, $4.0 million included in cash and cash equivalents was invested in commercial paper issued by one brokerage firm. The remainder of the Company's cash and investments was diversified at June 30, 1997. 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 June 30, 1997, the Company recorded net income of $734,000, or $.03 per share, compared with $947,000, or $.04 per share, during the quarter ended June 30, 1996. During the six months ended June 30, 1997, the Company recorded net income of $937,000, or $.04 per share, compared with $1,796,000, or $.07 per share, during the six months ended June 30, 1996. As discussed below, the decreases between periods are attributable primarily to increases in expenses. Income--Total income increased to $5,325,000 during the quarter ended June 30, 1997, from $5,237,000 during the corresponding quarter in 1996. This increase is due primarily to increases in administrative fees. Total income decreased to $9,559,000 during the six months ended June 30, 1997, from $9,865,000 during the six months ended June 30, 1996. This decrease resulted primarily from decreases in the volume of premium placed in force. 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 $175,834,000 during the quarter ended June 30, 1997, compared with $183,221,000 during the quarter ended June 30, 1996, and $322,466,000 during the six months ended June 30, 1997, compared with $341,627,000 during the six months ended June 30, 1996. These decreases are attributable largely to changes in product strategies and lower than anticipated renewal rates on products of one of the Carriers. Such decreases were offset in part, however, by favorable market acceptance of new products introduced on behalf of the other Carrier. As a result of the decreases in premium, marketing allowances and commission income, combined, decreased slightly to $4,256,000 during the second quarter of 1997, from $4,287,000 during the comparable period in 1996, and to $7,545,000 during the six months ended June 30, 1997, from $7,900,000 during the comparable period in 1996. Administrative fees increased 18%, to $905,000, during the three months ended June 30, 1997, from $765,000 during the three months ended June 30, 1996, and remained consistent at $1,590,000 during the six months ended June 30, 1997, compared with $1,623,000 during the same period in 1996. The increase between quarters is due to an increase in the number of policies administered and to a shift in policies administered to those which generate higher administrative fees. On a year to date basis, the increase in administrative fees resulting from these factors was offset by a decrease in the number of policies issued and 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 decreased to $120,000 during the quarter ended June 30, 1997, from $183,000 during the quarter ended June 30, 1996, and to $313,000 during the six months ended June 30, 1997, from $317,000 during the six months ended June 30, 1996. The decrease between quarters is due primarily to decreases in the amount of assets invested and to losses incurred during the second quarter of 1997 on sales of assets under investment. Expenses--Expenses totaled $4,075,000 during the quarter ended June 30, 1997, compared with $3,640,000 during the quarter ended June 30, 1996, and $7,953,000 during the six months ended June 30, 1997, compared with $6,838,000 during the six months ended June 30, 1996. These increases are largely attributable to increases in salaries and related expenses, which constitute the Company's predominant expense. Salaries and related benefits expense increased 22%, to $2,474,000, during the quarter ended June 30, 1997, from $2,021,000 during the comparable period in 1996. This increase is due to an increase in the average number of full-time equivalent employees to 182 during the quarter ended June 30, 1997, from 147 during the comparable period in 1996. Salaries and related benefits expense increased 26%, to $5,015,000, during the six months ended June 30, 1997, from $3,969,000 during the comparable period in 1996. This increase was also due to an increase in the average number of full time equivalent employees to 177 during the six months ended June 30, 1997, from 140 during the comparable period in 1996. These increases in employment are 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. Sales promotion and support expense decreased, as a percentage of income, to 13% during the three months ended June 30, 1997, from 18% during the same period in 1996, and to 12% during the six months ended June 30, 1997, from 14% during the same period in 1996. These decreases are due primarily to an increase in the second quarter of 1996 in the accrual for the Company's annual national sales incentive meeting. Professional fees increased to $149,000 during the quarter ended June 30, 1997, from $55,000 during the same quarter in 1996, and to $358,000 during the six months ended June 30, 1997, from $282,000 during the same period in 1996, due primarily to consulting costs incurred during the second quarter of 1997 related to information systems development. Occupancy expense increased to $202,000 during the quarter ended June 30, 1997, from $130,000 during the quarter ended June 30, 1996, and to $370,000 during the six months ended June 30, 1997, from $278,000 during the six months ended June 30, 1996. These increases are due primarily to rent and other occupancy expenses related to the leasing of additional office space, which became effective in November, 1996. 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 June 30, 1997, are state NOL tax benefits of $157,000 and federal and state AMT credit carryforwards of $869,000 and $347,000, 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. Liquidity and Capital Resources The Company's business is not capital intensive. Cash and investments, combined, remained consistent at $10.0 million at June 30, 1997, compared with $10.1 million at June 30, 1996. The Company's assets remained liquid, with cash and investments representing 64% of the Company's total assets at June 30, 1997, compared to 65% at December 31, 1996. At June 30, 1997, $4.0 million included in cash and cash equivalents was invested in commercial paper issued by one brokerage firm. The remainder of the Company's cash and investments was diversified at June 30, 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 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGAN HOLDING CORP. Date: August 12, 1997 Signature: /s/ Lynda Regan Lynda Regan, Chief Executive Officer Date: August 12, 1997 Signature: /s/ R. Preston Pitts R. Preston Pitts, President