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, 1998, 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
May 13, 1998, was:
Common Stock-Series A 26,015,841
Common Stock-Series B 600,398
Page 1 of 12
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
1998 1997
(unaudited)
ASSETS:
Cash and cash equivalents $ 2,787,275 $ 5,194,332
Investments 11,857,124 7,692,279
Accounts receivable 1,411,089 1,239,306
Prepaid expenses 520,770 572,932
Marketing supplies inventory 196,910 228,853
Deferred income taxes-current 624,512 488,437
------- -------
Total Current Assets 17,397,680 15,416,139
---------- ----------
Net fixed assets 2,644,586 2,610,324
Deferred income taxes-non current 546,431 783,477
Other assets 513,650 471,001
------- -------
Total Non Current Assets 3,704,667 3,864,802
--------- ---------
TOTAL ASSETS $21,102,347 $19,280,941
=========== ===========
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 293,206 $ 344,071
Accrued liabilities 2,914,903 2,605,854
Income taxes payable 589,064 389,561
------- -------
Total Current Liabilities 3,797,173 3,339,486
--------- ---------
Loan payable 132,285 132,285
Deferred incentive compensation 118,141 149,609
------- -------
Total Non Current Liabilities 250,426 281,894
------- -------
TOTAL LIABILITIES 4,047,599 3,621,380
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 2) -- --
REDEEMABLE COMMON STOCK (Note 3) 11,784,431 11,842,651
---------- ----------
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, 20,605,974
and 20,614,014 shares issued and outstanding
at March 31, 1998, and
December 31, 1997, respectively 3,374,874 3,382,914
Paid-in capital from redemption and retirement
of common stock 641,181 611,559
Paid-in capital from non-employee stock options 6,300 --
Retained earnings (accumulated deficit) 1,223,483 (182,433)
Net unrealized gains on investments 24,479 4,870
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 5,270,317 3,816,910
--------- ---------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & SHAREHOLDERS' EQUITY $21,102,347 $19,280,941
=========== ===========
See accompanying notes to consolidated financial statements.
Page 2 of 12
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
For the Three Months Ended
March 31,
1998 1997
INCOME:
Marketing allowances $ 4,380,278 $ 2,242,679
Commission income 2,140,484 1,046,343
Administrative fees 1,349,216 685,390
Investment income 215,043 192,621
Seminar income 40,883 58,113
Other income 18,355 9,542
------ -----
TOTAL INCOME 8,144,259 4,234,688
---------
EXPENSES:
Salaries and related benefits 3,486,726 2,541,374
Sales promotion and support 1,021,107 423,682
Professional fees 280,909 208,817
Occupancy 238,620 167,729
Depreciation and amortization 204,867 157,212
Courier and postage 162,756 116,524
Equipment 108,673 86,671
Stationery and supplies 124,790 80,767
Travel and entertainment 84,802 37,152
Insurance 39,557 34,366
Other miscellaneous expenses 37,707 23,032
------ ------
TOTAL EXPENSES 5,790,514 3,877,326
---------
INCOME FROM OPERATIONS 2,353,745 357,362
PROVISION FOR INCOME TAXES 947,829 154,689
------- -------
NET INCOME $1,405,916 $202,673
========== ========
EARNINGS PER SHARE:
Weighted average shares
outstanding--basic and diluted 26,694,872 27,012,519
Basic earnings per share $.05 $.01
Diluted earnings per share $.05 $.01
See accompanying notes to consolidated financial statements.
Page 3 of 12
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Paid-in
Capital
Paid-in from Retained
Capital from Non-Employee Earnings/
Series A Common Stock Retirement of Stock (Accumulated Unrealized
Shares Amount Common Stock Options Deficit) Gains Total
------ ------------ ------------ ------------ ---------- -----
Balance
January 1, 1998 20,614,014 $3,382,914 $611,559 $ -- $(182,433) $4,870 $3,816,910
Net income for the
three months ended
March 31, 1998 1,405,916 1,405,916
Redemption and
retirement of
common stock (8,040) (8,040) 29,622 21,582
Non-employee stock
options granted 6,300 6,300
Net unrealized gains on
investments 32,594 32,594
Deferred tax on net
unrealized gains (12,985) (12,985)
---------- ---------- -------- ------ ---------- --------
Balance
March 31, 1998 20,605,974 $3,374,874 $641,181 $6,300 $1,223,483 $24,479 $5,270,317
========== ========== ======== ====== ========== ======== ==========
See accompanying notes to consolidated financial statements.
Page 4 of 12
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,405,916 $ 202,673
Adjustments to reconcile net income to cash (used in) provided by
operating activities:
Depreciation and amortization of fixed assets 187,579 141,191
Non-employee stock option expense 6,300 --
Amortization/accretion of investments (17,217) (4,274)
Realized gains on sales of investments -- (12,726)
Net change in accounts receivable (171,783) (103,633)
Net change in prepaid expenses 52,162 (174,120)
Net change in marketing supplies inventory 31,943 38,810
Net change in deferred tax assets 87,986 78,257
Net change in accounts payable (50,865) 45,229
Net change in accrued liabilities 309,049 (881,054)
Net change in income taxes receivable and payable 199,503 76,431
Net change in other assets and liabilities (74,117) 7,636
------- -----
Net cash provided by (used in) operating activities 1,966,456 (585,580)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (5,687,309) (528,811)
Proceeds from sales and maturities of investments 1,572,275 848,295
Purchases of fixed assets (221,841) (314,635)
-------- ---------
Net cash (used in) provided by investing activities (4,336,875) 4,849
---------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption and retirement of common stock (36,638) (149,255)
------- --------
Net cash used in financing activities (36,638) (149,255)
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (2,407,057) (729,986)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,194,332 2,202,596
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,787,275 $1,472,610
========== ==========
See accompanying notes to consolidated financial statements.
Page 5 of 12
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 consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required
by generally accepted accounting principles. The results for the three
months ended March 31, 1998, 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, 1997, for additional disclosure.
2. Contingencies
In December, 1996, LMG and American National Insurance Company 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 at this time. However, the Company's management believes that
the suit is without merit and intends to defend the Company 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 three months ended March 31, 1998, redeemable common stock was
redeemed and retired as follows:
Series A Redeemable Series B Redeemable Total Redeemable
Common Stock Common Stock Common Stock
Carrying Carrying Carrying
(Issuance) (Issuance) (Issuance)
Shares Amount Shares Amount Shares Amount
--------- ----------- -------- ---------- --------- -----------
Balance
December 31, 1997 5,507,326 $10,040,068 600,861 $1,802,583 6,108,187 $11,842,651
Redemption and
retirement of
common stock (35,337) (57,491) (243) (729) (35,580) (58,220)
---------- ----------- -------- ----------- ----------- -----------
Balance
March 31, 1998 5,471,989 $9,982,577 600,618 $1,801,854 6,072,607 $11,784,431
========== =========== ======== =========== ========== ============
4. Reclassification
For comparative purposes, certain prior year amounts have been reclassified
to conform to the current year presentation. Such reclassifications had no
impact on the Company's net income or shareholders' equity.
5. 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 resulting from transactions
and other events and circumstances from non-owner sources. The Company's
comprehensive income for the three month period ended March 31, 1998, and
March 31, 1997, includes unrealized gains, net of deferred tax, of $19,609
and unrealized losses, net of deferred tax, of $85,884, respectively.
6. Internal Use Software Cost
Page 6 of 12
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred
for computer software developed or obtained for internal use. The Company
has not yet determined the impact, if any, of adopting SOP 98-1, which will
be effective for the Company's year ending December 31, 1999.
Page 7 of 12
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 -- The Company's net income for the first quarter increased
approximately $1.2 million, or 593.7%, from the corresponding quarter in 1997.
This increase is attributable primarily to increases in revenue, as discussed
below.
Income -- The Company's major sources of income are marketing allowances,
commission overrides and administrative fees from sales and administration of
annuity and life insurance products on behalf of the two insurance companies for
which the Company markets and administers policies (the "Carriers"). Levels of
marketing allowances and commission overrides are directly related to the volume
of sales of such products. Administration fees are a function not only of
product sales, but also administration of policies inforce and producer
appointments. Total income increased approximately $3.9 million, or 92.3%,
during the three months ended March 31, 1998, compared to the three months ended
March 31, 1997. This increase resulted primarily from increases in sales volume,
as discussed below.
Marketing allowances and commission income, combined, increased
approximately $3.2 million, or 98.3%, in the first quarter of 1998, compared to
the first quarter of 1997. This increase is due primarily to increases in volume
of sales by the Company's distribution network on behalf of the Carriers.
Premium placed inforce for the Carriers totaled approximately $278.3 million
during the three months ended March 31, 1998, compared to $146.6 million during
the same period in 1997, representing an 89.8% increase. Also contributing to
increases in income during the first quarter were shifts in 1998 to sales of
products which yield higher marketing allowances and commission income.
Administrative fees increased approximately $644,000, or 96.9%, in the
first quarter of 1998, compared to the same period in 1997. These increases are
due primarily to increases in the number of policies sold and administered
during the respective periods and to a shift in policies administered to those
which generate higher administrative fees.
During the first quarter of 1998, the Company marketed and administered
insurance products for two Carriers, American National Insurance Company
("American National") and IL Annuity and Insurance Company ("IL Annuity").
During the first quarter of 1998, 17.9% and 76.2% of the Company's total revenue
resulted from agreements with American National and IL Annuity, respectively,
compared to 51.6% and 39.2%, respectively, during the first quarter of 1997.
This fluctuation is attributable primarily to favorable market acceptance of IL
Annuity's products.
Expenses--Total expenses increased approximately $1.9 million, or 49.3%,
during the three months ended March 31, 1998, compared to the three months ended
March 31, 1997. This increase is attributable primarily to increases in
compensation, sales promotion and support, and professional fees, as discussed
below.
As a service organization, the Company's primary expenses are salaries and
related employee benefits, which increased approximately $945,000, or 37.2%, in
the first quarter of 1998, compared to the same period in 1997. This increase
resulted primarily from increases in the average number of full-time equivalent
employees, which rose to 218 during the three months ended March 31, 1998, from
173 during the same period in 1997. This increase in employment was necessary to
accommodate increases in sales volume, as discussed above. Salaries and benefits
also increased during the first quarter of 1998 due to the addition of personnel
at higher pay levels and to scheduled pay increases for existing employees.
Sales promotion and support expense consists primarily of costs relating to
the Company's annual national sales conventions and to various sales meetings
and training activities. Also included in sales promotion and support expense is
the cost of designing and printing sales brochures for use by Producers in the
Company's sales distribution network. It is expected that these expenses will
continue to be a major element of the Company's cost structure, as attendance at
the national sales conventions increases, as the number of Producers marketing
products for the Company increases, and as new products are introduced. This
expense increased approximately $597,000, or 141.0%, during the first quarter of
1998 from the first quarter of 1997, due primarily to an increase in the accrual
of costs associated with the Company's national sales conventions and to
increased anticipated attendance at such conventions.
Professional fees increased approximately $72,000, or 34.5%, during the
three months ended March 31, 1998, compared to the three months ended March 31,
1997. This increase is attributable primarily to consulting costs incurred
during the first quarter of 1998 related to ongoing re-programming of the
Company's administrative information systems, including re-programming which is
necessary in preparation for administration of new products.
Page 8 of 12
Occupancy expense increased approximately $71,000, or 42.3%, during the
first quarter of 1998, compared to the first quarter of 1997, due primarily to
an increase in telephone expense, which is attributable to increases in
employment and sales volume, as discussed above.
Depreciation and amortization expense increased approximately $48,000, or
30.3%, during the three months ended March 31, 1998, compared to the three
months ended March 31, 1997, due primarily to acquisitions of fixed assets
between periods. These acquisitions consisted primarily of amounts paid for the
improvement of newly leased office space and purchases of computer equipment to
accommodate increases in employment, both of which are discussed above.
Liquidity and Capital Resources
The Company's ability to mobilize its assets remained strong, with cash and
investments representing 69.4% of the Company's total assets as of March 31,
1998.
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, 1997, is incorporated herein by this reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit 11 Statement re: Computation of Per Share Earnings--Basic and
Diluted
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1998.
Page 9 of 12
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: 3/13/98 Signature: /s/ R. Preston Pitts
-------------- --------------------------------------
R. Preston Pitts,
President & Chief Operating Officer
Date: 3/13/98 Signature: /s/ David A. Skup
-------------- --------------------------------------
David A. Skup,
Chief Financial Officer
Page 10 of 12
Exhibit 11
Statement re: Computation of Per Share Earnings--Basic and Diluted
Three Months Ended
March 31,
1998 1997
Common shares outstanding entire period 26,678,581 26,966,976
Weighted average common shares retired upon redemption 16,291 45,543
----------- -----------
Total weighted average shares outstanding 26,694,872 27,012,519
Net income $ 1,405,916 $ 202,673
----------- -----------
Earnings per share--basic and diluted $ 0.05 $ 0.01
=========== ===========
Page 11 of 12