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, 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 July 24, 1998 was: Common Stock-Series A 25,906,857 Common Stock-Series B 600,398 PART I FINANCIAL INFORMATION Item 1. Financial Statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Balance Sheets June 30, December 31, 1998 1997 (Unaudited) (Audited) ASSETS: Cash and cash equivalents $ 6,411,048 $ 5,194,332 Investments 12,154,671 7,692,279 Accounts receivable 2,476,308 1,239,306 Prepaid expenses 599,544 572,932 Marketing supplies inventory 276,030 228,853 Deferred income taxes-current 467,219 488,437 ----------------- ----------------- Total Current Assets 22,384,820 15,416,139 ----------------- ----------------- Net fixed assets 2,894,901 2,610,324 Deferred income taxes-non current 617,094 783,477 Other assets 525,566 471,001 ----------------- ----------------- Total Non-Current Assets 4,037,561 3,864,802 ----------------- ----------------- TOTAL ASSETS $ 26,422,381 $ 19,280,941 ================= ================= LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS' EQUITY: LIABILITIES: Accounts payable $ 265,631 $ 344,071 Accrued liabilities 5,176,154 2,605,854 Income taxes payable 702,723 389,561 ----------------- ----------------- Total Current Liabilities 6,144,508 3,339,486 ----------------- ----------------- Loan payable 132,285 132,285 Deferred incentive compensation 254,776 149,609 ----------------- ----------------- Total Non-Current Liabilities 387,061 281,894 ----------------- ----------------- TOTAL LIABILITIES 6,531,569 3,621,380 ----------------- ----------------- REDEEMABLE COMMON STOCK (Note 2) 11,565,951 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, 20,555,724 and 20,614,014 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 3,274,373 3,382,914 Paid-in capital from redemption and retirement of common stock 803,865 611,559 Paid-in capital from non-employee stock options 12,500 -- Retained earnings (accumulated deficit) 4,242,626 (182,433) Net unrealized gains (losses) on investments (8,503) 4,870 ----------------- ----------------- TOTAL SHAREHOLDERS' EQUITY 8,324,861 3,816,910 ----------------- ----------------- TOTAL LIABILITIES, REDEEMABLE COMMON STOCK & SHAREHOLDERS' EQUITY $ 26,422,381 $ 19,280,941 ================= ================= 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, ------------------------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- INCOME: Marketing allowances $ 7,299,358 $ 3,018,124 $ 11,679,636 $ 5,260,803 Commission income 3,453,208 1,237,775 5,593,692 2,284,118 Administrative fees 1,725,134 904,766 3,074,350 1,590,156 Investment income 286,061 119,962 501,104 312,583 Other income 98,000 44,040 157,238 111,695 ------------- -------------- ------------ -------------- TOTAL INCOME 12,861,761 5,324,667 21,006,020 9,559,355 ------------- -------------- ------------ -------------- EXPENSES: Salaries and related benefits 4,236,744 2,473,535 7,723,470 5,014,909 Sales promotion and support 946,320 677,224 1,967,427 1,100,906 Occupancy 232,870 201,983 471,490 369,712 Professional fees 293,493 149,175 574,402 357,992 Litigation settlement (Note 3) 1,104,401 -- 1,104,401 -- Depreciation and amortization 224,133 146,007 429,000 288,734 Courier and postage 150,372 86,520 313,128 203,044 Equipment 146,712 86,983 255,385 159,626 Stationery and supplies 203,410 78,859 328,200 173,654 Travel and entertainment 158,580 75,807 243,382 112,959 Insurance expense 45,084 52,095 84,641 86,461 Other miscellaneous expenses 62,376 47,158 100,083 84,675 ------------- -------------- ------------ -------------- TOTAL EXPENSES 7,804,495 4,075,346 13,595,009 7,952,672 ------------- -------------- ------------ -------------- INCOME FROM OPERATIONS 5,057,266 1,249,321 7,411,011 1,606,683 PROVISION FOR INCOME TAXES 2,038,123 515,090 2,985,952 669,779 ------------- -------------- ------------ -------------- NET INCOME $ 3,019,143 $ 734,231 $ 4,425,059 $ 936,904 ============= ============ =============== ============ EARNINGS PER SHARE: Weighted average shares outstanding- basic and diluted 26,592,383 26,848,054 26,643,344 26,672,941 Basic earnings per share $ .11 $ .03 $ .17 $ .04 ============= ============= ============= ============= Diluted earnings per share $ .11 $ .03 $ .17 $ . 04 ============= ============= ============= ============== See accompanying notes to consolidated financial statements. REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity (Unaudited) Paid-in Capital Paid-in Capital from Retained from Retirement Non-Employee Earnings/ Unrealized Series A Common Stock of Stock (Accumulated Gains Shares Amount Common Stock Options Deficit) (Losses) Total Balance January 1, 1998 20,614,014 $ 3,382,914 $ 611,559 $ -- $ (182,433) $ 4,870 $ 3,816,910 Net income for the six months ended June 30, 1998 4,425,059 4,425,059 Redemption and retirement of common stock (58,290) (108,541) 192,306 83,765 Non-employee stock option expense 12,500 12,500 Net unrealized losses on investments (22,225) (22,225) Deferred tax on net unrealized losses 8,852 8,852 ----------- ----------- ------------ ---------- ----------- ---------- ------------ Balance June 30, 1998 20,555,724 $ 3,274,373 $ 803,865 $ 12,500 $ 4,242,626 $ (8,503) $ 8,324,861 =========== =========== ============ ========== =========== ========== ============ 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, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,425,059 $ 936,904 Adjustments to reconcile net income to cash (used in) provided by operating activities: Depreciation and amortization of fixed assets 394,424 285,663 Amortization of intangible assets 34,578 32,042 Producer stock option expense 12,500 -- Amortization/accretion of investments (28,075) (8,192) Realized loss on sales of investments -- 28,994 Changes in assets and liabilities Net change in accounts receivable (1,237,002) (203,175) Net change in marketing supplies inventory (47,177) 22,765 Net change in prepaid expenses (26,612) (91,744) Net change in income taxes payable 313,162 276,234 Net change in deferred tax assets 196,453 238,545 Net change in accounts payable (78,440) (64,826) Net change in accrued liabilities 2,570,300 (416,258) Net change in other assets and liabilities 16,024 24,948 -------------- -------------- Net cash provided by operating activities 6,545,194 1,061,900 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (5,873,148) (20,880,107) Proceeds from sales and maturities of investments 1,416,606 24,359,825 Purchases of fixed assets (679,001) (841,574) Purchase of organization costs -- (3,034) -------------- -------------- Net cash (used in) provided by investing activities (5,135,543) 2,635,110 -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions and retirement of common stock (192,935) (184,576) -------------- -------------- Net cash used in financing activities (192,935) (184,576) -------------- -------------- INCREASE IN CASH AND CASH EQUIVALENTS 1,216,716 3,512,434 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,194,332 2,202,596 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,411,048 $ 5,715,030 ============== ============== 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 consolidated balance sheet data at December 31, 1997, was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the six months ended June 30, 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. 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 six months ended June 30, 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 (147,675) (275,311) (463) (1,389) (148,138) (276,700) ---------- ------------ ---------- ------------ ---------- ------------ Balance June 30, 1998 5,359,651 $ 9,764,757 600,398 $ 1,801,194 5,960,049 $ 11,565,951 ========= =========== ========== ============ ========= ============ 3. Litigation Settlement In December 1996, LMG and American National Insurance Company ("American National") 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. American National and LMG have denied the allegations contained in the complaint as well as any wrongdoing with respect to the sale and issuance of annuities. However, on June 17, 1998, in order to avoid protracted litigation, American National and LMG entered into a settlement agreement with the plaintiffs and other class members. LMG's portion of the settlement, net of recovery under its errors and omissions insurance policy, has been recorded as an expense in the accompanying income statement. 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 resulting from transactions and other events and circumstances from non-owner sources. The Company's comprehensive income for the six month period ended June 30, 1998, and June 30, 1997, includes unrealized losses, net of deferred tax, of $13,373 and $75,426, respectively. 5. Recent Accounting Pronouncement - Internal Use Software Cost 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 on 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. 6. Reclassification Certain amounts in the 1997 financial statements have been reclassified to conform with 1998 classifications. 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 quarter ended June 30, 1998 increased approximately $2.3 million, or 311.2%, from the corresponding quarter in 1997 and approximately $3.5 million, or 372.3%, for the six months ended June 30, 1998, compared with the corresponding period 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, and increase with, 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 $7.5 million, or 141.6%, during the three months ended June 30, 1998, compared to the three months ended June 30, 1997. For the six months ended June 30, 1998, total income increased $11.4 million, or 119.7% over the corresponding six month period in 1997. This increase resulted primarily from increases in sales volume, as discussed below. Marketing allowances and commission income, combined, increased approximately $6.5 million, or 151.3%, in the second quarter of 1998, compared to the second quarter of 1997. Such allowances and commissions increased approximately $9.7 million, or 128.9% for the six month period ended June 30, 1998, compared with the six month period ended June 30, 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 $452.5 million and $730.8 million, respectively during the three months and six months ended June 30, 1998, compared to $175.8 million and $322.5 million during the same periods in 1997, representing increases of 157.4% and 126.6%, respectively. Also contributing to increases in income during the first six months of 1998 were shifts to sales of products which yield higher marketing allowances and commission income. Administrative fees increased approximately $820,000, or 90.6%, in the second quarter of 1998, compared to the same period in 1997. For the six months ended June 30, 1998, administrative fees increased approximately $1.5 million, or 96.5%, over the corresponding 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 second 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 second quarter of 1998, 14.0% and 80.7% of the Company's total revenue resulted from agreements with American National and IL Annuity, respectively. On May 29, 1998, the Company entered into marketing and administrative agreements with a third carrier, Transamerica Life Insurance and Annuity Company ("Transamerica"). Sales of Transamerica annuity products are expected to begin in the third quarter of 1998. Expenses--Total expenses increased approximately $3.7 million, or 91.5%, during the three months ended June 30, 1998, compared to the three months ended June 30, 1997, and $5.6 million, or 70.9%, during the six months ended June 30, 1998, compared to the corresponding six months of 1997. This increase is attributable primarily to increases in compensation, sales promotion and support, litigation settlement, stationery and supplies, and travel and entertainment, as discussed below. As a service organization, the Company's primary expenses are salaries and related employee benefits, which increased approximately $1.8 million, or 71.3%, in the first quarter of 1998, compared to the same period in 1997, and approximately $2.7 million, or 54.0%, in the first six months of 1998, compared to the same period in 1997. This increase resulted primarily from increases in the number of full-time equivalent employees, which rose to 294 at June 30, 1998, compared with 190 at June 30, 1997. This increase in employment was necessary to accommodate increases in sales volume, as discussed above. Salaries and benefits also increased during the first six months 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, payments made to the Company's higher level Producers for recruitment and development of additional Producers, and costs relating 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 $269,096 or 39.7% for the quarter ended June 30, 1998, as compared with the quarter ended June 30, 1997, and approximately $866,521 or 78.7% for the six months ended June 30, 1998, as compared with the corresponding period in 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, as well as increased commissions paid to Producers. In order to avoid protracted future litigation, the Company's principal subsidiary, LMG, together with American National Insurance Company, entered into an agreement to settle a lawsuit filed in Jefferson County, Alabama. LMG's net cost of the settlement, approximately $1.1 million, has been recorded as an expense during the second quarter of 1998. See Part II, Item 1. "Legal Proceedings" and footnotes to accompanying financial statements. Stationery and supplies expense increased approximately $125,000, or 157.9%, for the quarter ended June 30, 1998, and approximately $154,546, or 89.0%, for the six months ended June 30, 1998, when compared with the corresponding periods in 1997. These increases are primarily the result of additional supplies necessary to support the increased volume of business and increased number of employees as described above. Professional fees increased $144,318, or 96.7% for the three month period ended June 30, 1998 and $216,410, or 60.5% for the six month period ended June 30, 1998 as compared with the corresponding periods in 1997. These increases are primarily the result of increased legal fees associated with the settlement of the litigation described in Part II, Item 1. "Legal Proceedings." Travel and entertainment increased approximately $83,000, or 109.2%, for the quarter ended June 30, 1998, as compared with the quarter ended June 30, 1997, and approximately $130,000, or 115.5%, for the six months ended June 30, 1998, as compared with the corresponding period in 1997. The increases are due to increased travel duties and responsibilities of the Company's marketing department, travel related to the implementation of the carrier relationship with Transamerica as discussed above, and to travel related to set-up and training for an east coast service center which became operational in July 1998. Liquidity and Capital Resources The Company's ability to mobilize its assets remained strong, with cash and investments representing 70.3% of the Company's total assets as of June 30, 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. On June 17, 1998, American National and LMG entered into a settlement agreement with plaintiffs and other class members pursuant to which LMG is released from further liability with respect to such claims. Under the terms of the settlement, LMG agreed to pay approximately $1.1 million, net of reimbursement under its errors and omissions insurance policy. Item 4. Submission of Matters to a Vote of Security-Holders The following matters were submitted to a vote of shareholders of the Company at the Annual Meeting of Shareholders, which was held May 27, 1998. The results of shareholder votes were as follows: Broker For Against Abstain Non-Votes (i)Ratification of the Appointment of Coopers & Lybrand L.L.P., as the principal independent accountants for the Company for the year ended December 31, 1998 20,608,156 2,655 374,480 -- Item 5. Other Information In June of 1998, LMG and American National amended the terms of the Marketing Agreement and Insurance Processing Agreement to extend the initial terms thereof to October 1, 1998. LMG and American National are in the process of negotiating a five year extension of these agreements. Item 6. Exhibits and Reports on Form 8-K (a) Index to Exhibits Exhibit 10(a) Amendment Two to Marketing Agreement with American National Insurance Company Exhibit 10(b) Amendment One to Insurance Processing Agreement with American National Insurance Company Exhibit 11 Statement re: Computation of Per Share Earnings--Basic and Diluted Exhibit 27 Financial Data Schedule (b) On June 11, 1998, the Company filed a form 8-K to report that, on June 1, 1998, LMG entered into an Administrative Services Agreement and a Marketing Agreement with Transamerica Life Insurance and Annuity Company. 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: July 30, 1998 Signature: /s/ R. Preston Pitts ----------------- ------------------------------------ R. Preston Pitts, President & Chief Operating Officer Date: July 30, 1998 Signature: /s/ David A. Skup ----------------- ------------------------------------ David A. Skup, Chief Financial Officer