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, 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 October 31, 1998 was:
Common Stock-Series A 26,289,896
Common Stock-Series B 600,398
Page 1 of 11
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1998 1997
(Unaudited) (Audited)
ASSETS:
Cash and cash equivalents $ 8,083,986 $ 5,194,332
Investments 14,906,933 7,692,279
Accounts receivable 1,899,782 1,239,306
Prepaid expenses 598,404 572,932
Marketing supplies inventory 399,928 228,853
Deferred income taxes-current 896,053 488,437
----------------- -----------------
Total current assets 26,785,086 15,416,139
----------------- -----------------
Net fixed assets 3,239,091 2,610,324
Deferred income taxes-non current 756,049 783,477
Other assets 402,776 471,001
----------------- -----------------
Total non-current assets 4,397,916 3,864,802
----------------- -----------------
TOTAL ASSETS $ 31,183,002 $ 19,280,941
================= =================
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable $ 386,853 $ 344,071
Income taxes payable 850,934 389,561
Accrued sales convention costs 2,181,979 1,226,169
Other accrued liabilities 4,600,937 1,379,685
----------------- -----------------
Total current liabilities 8,020,703 3,339,486
----------------- -----------------
Loan payable 132,285 132,285
Deferred incentive compensation 381,886 149,609
----------------- -----------------
Total non-current liabilities 514,171 281,894
----------------- -----------------
TOTAL LIABILITIES 8,534,874 3,621,380
----------------- -----------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE COMMON STOCK 11,462,963 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, 20,548,224 and 20,614,014 shares issued
and outstanding at September 30, 1998 and
December 31, 1997, respectively 3,266,874 3,382,914
Paid-in capital from redemption and retirement
of common stock 840,750 611,559
Paid-in capital from non-employee stock options 18,750 --
Retained earnings (accumulated deficit) 7,109,759 (182,433)
Net unrealized gains (losses) on investments (50,968) 4,870
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 11,185,165 3,816,910
----------------- -----------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & SHAREHOLDERS' EQUITY $ 31,183,002 $ 19,280,941
================= =================
See accompanying notes to consolidated financial statements.
Page 2 of 11
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
INCOME:
Marketing allowances $ 7,619,535 $ 3,231,598 $ 19,299,171 $ 8,492,401
Commission income 3,586,450 1,448,541 9,180,142 3,732,659
Administrative fees 1,798,173 950,330 4,872,523 2,515,183
Investment income 332,228 164,185 833,332 476,768
Other income 37,567 54,695 194,805 191,693
------------ ------------ ------------ ------------
TOTAL INCOME 13,373,953 5,849,349 34,379,973 15,408,704
------------ ------------ ------------ ------------
EXPENSES:
Salaries and related benefits 4,777,738 2,673,329 12,501,208 7,688,238
Sales promotion and support 2,015,193 642,647 3,982,620 1,743,553
Litigation settlement (Note 3) -- -- 1,104,404 --
Professional fees 332,168 159,196 906,570 517,188
Occupancy 334,254 272,472 805,744 642,184
Depreciation and amortization 295,422 199,456 724,422 459,219
Stationery and supplies 232,491 109,422 560,691 269,048
Courier and postage 202,118 166,651 515,246 369,695
Travel and entertainment 204,122 83,812 447,504 196,771
Equipment 176,769 93,459 432,154 267,113
Insurance 38,850 42,636 123,491 129,097
Other expenses 33,119 10,040 133,199 123,686
------------ ------------ ------------ ------------
TOTAL EXPENSES 8,642,244 4,453,120 22,237,253 12,405,792
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 4,731,709 1,396,229 12,142,720 3,002,912
PROVISION FOR INCOME TAXES 1,864,576 565,623 4,850,528 1,235,402
------------ ------------ ------------ ------------
NET INCOME $ 2,867,133 $ 830,606 $ 7,292,192 $ 1,767,510
============ ============ ============ ============
EARNINGS PER SHARE:
Weighted average shares
outstanding - basic 26,600,241 26,865,131 26,703,920 26,937,299
Basic earnings per share $ .11 $ .03 $ .27 $ .07
============ ============ ============ ===========
Weighted average shares
outstanding - diluted 27,263,913 26,865,131 27,090,580 26,937,299
Diluted earnings per share $ .11 $ .03 $ .27 $ .07
============ ============ ============ ===========
See accompanying notes to consolidated financial statements.
Page 3 of 11
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
Paid-in
Capital
from
Paid-in Capital Non- Retained
from Retirement 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
nine months ended
September 30, 1998 7,292,192 7,292,192
Redemption and
retirement of
common stock (65,790) (116,040) 229,191 113,151
Non-employee stock
options expense 18,750 18,750
Net unrealized losses
on investments (93,844) (93,844)
Deferred tax on net
unrealized losses 38,006 38,006
----------- ----------- ----------- --------- ----------- --------- -----------
Balance
September 30, 1998 20,548,224 $ 3,266,874 $ 840,750 $ 18,750 $ 7,109,759 $ (50,968) $11,185,165
=========== =========== =========== ========= =========== ========= ===========
See accompanying notes to consolidated financial statements.
Page 4 of 11
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,292,192 $ 1,767,510
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of fixed assets 671,665 454,190
Amortization of intangible assets 52,757 5,029
Amortization/accretion of investments (46,765) (24,547)
Non-employee stock option expense 18,750 --
Realized loss (gain) on sales of investments (14,463) 28,686
Changes in assets and liabilities:
Net change in accounts receivable (660,476) (510,966)
Net change in prepaid expenses (25,472) (201,504)
Net change in marketing supplies inventory (171,075) 40,259
Net change in deferred income taxes (342,182) 152,239
Net change in accounts payable 42,782 (5,899)
Net change in income taxes payable 461,373 527,820
Net change in accrued sales convention costs 955,810 (91,087)
Net change in other accrued liabilities 3,221,252 (54,597)
Net change in other assets and liabilities 265,551 135,013
-------------- --------------
Net cash provided by operating activities 11,721,699 2,222,146
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (10,049,466) (11,060,306)
Proceeds from sales and maturities of investments 2,802,196 9,739,821
Purchases of fixed assets (1,300,432) (1,215,750)
Payments for organization costs (17,806) (10,640)
-------------- --------------
Net cash used in investing activities (8,565,508) (2,546,875)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption and retirement of common stock (266,537) (271,091)
--------------- ---------------
Net cash used in financing activities (266,537) (271,091)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,889,654 (595,820)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,194,332 2,202,596
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,083,986 $ 1,606,776
============== ==============
See accompanying notes to consolidated financial statements.
Page 5 of 11
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., Legacy
Advisory 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 nine months ended
September 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 nine months ended September 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 (200,935) (378,299) (463) (1,389) (201,398) (379,688)
---------- ------------ ---------- ----------- ---------- -----------
Balance
September 30, 1998 5,306,391 $ 9,661,769 600,398 $ 1,801,194 5,906,789 $11,462,963
========== ============ ========== =========== ========== ===========
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, was recorded as an expense during the second quarter
of 1998.
Page 6 of 11
4. Lease Commitment
The Company currently leases approximately 43,000 square feet of office
space in Petaluma, California, at which the Company's headquarters are
located. The lease for this space was terminated on September 11, 1998,
and the Company intends to vacate such space in March, 1999. On October
27, 1998, the Company entered into a new lease for approximately 72,000
square feet of office space in Petaluma, California, into which the
Company intends to move its headquarters upon vacating the space it
currently leases. This lease expires in April, 2009, and includes an
option to extend the term for two five-year periods. Pursuant to the
lease, the Company will pay monthly rent of $71,612, plus a pro-rate
share of property taxes and operating expenses based on leased square
footage.
5. Amendments to Marketing and Processing Agreements
In October, 1998, LMG and American National amended the terms of the
Marketing Agreement and Insurance Processing Agreement to extend the
initial terms thereof to January 1, 1999. LMG and American National are
in the process of negotiating a five year extension.
6. Related Party Transactions
In May of 1998, the Company entered into a Shareholder's Agreement with
Lynda Regan, Chief Executive Officer of the Company and Chairman of the
Company's Board of Directors, and certain other individuals. Under the
terms of this agreement, in the event of the death of Ms. Regan, the
Company shall repurchase from Ms. Regan's estate all shares of Common
Stock that were owned by Ms. Regan at the time of her death or were
transferred by her to one or more trusts prior to her death. The
purchase price to be paid by the Company shall be equal to 125% of the
fair market value of the shares.
7. 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 nine
month period ended September 30, 1998 and 1997, includes unrealized
losses, net of deferred tax, of $55,838 and $34,016, respectively.
8. Recent Accounting Pronouncements--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.
9. Reclassifications
Certain amounts in the 1997 financial statements have been reclassified
to conform with 1998 classifications.
Page 7 of 11
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 September 30,
1998, increased approximately $2.0 million, or 245.2%, from the corresponding
quarter in 1997, and approximately $5.5 million, or 312.6%, for the nine months
ended September 30, 1998, compared with the corresponding period in 1997. These
increases are attributable primarily to increases in sales volume, 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 three insurance companies
for which the Company markets and administers policies, American National
Insurance Company ("American National"), IL Annuity and Insurance Company ("IL
Annuity") and Transamerica Life Insurance and Annuity Company ("Transamerica")
(collectively, 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 128.6%, during the three months ended
September 30, 1998, compared to the three months ended September 30, 1997. For
the nine months ended September 30, 1998, total income increased $19.0 million,
or 123.1%, over the corresponding nine 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 139.4%, in the third quarter of 1998, compared to
the third quarter of 1997. Such allowances and commissions increased
approximately $16.3 million, or 133.0% for the nine month period ended September
30, 1998, compared with the nine month period ended September 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 $484.7 million and $1.2 billion, respectively
during the three months and nine months ended September 30, 1998, compared to
$203.4 million and $526.0 million during the same periods in 1997, representing
increases of 138.2% and 131.1%, respectively. Also contributing to increases in
income during the first nine months of 1998 was a shift in sales mix to sales of
products which yield higher marketing allowances and commission income.
Administrative fees increased approximately $848,000, or 89.2%, in the
third quarter of 1998, compared to the same period in 1997. For the nine months
ended September 30, 1998, administrative fees increased approximately $2.4
million, or 93.7%, 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 three months ended September 30, 1998, 9.4%, 84.0% and 1.0%
of the Company's total revenue resulted from agreements with American National,
IL Annuity and Transamerica, respectively. During the three months ended
September 30, 1997, 42.2% and 51.0% of the Company's total revenue resulted from
agreements with American National and IL Annuity, respectively. Sales and
administration of Transamerica products began during the third quarter of 1998.
The shift from American National to IL Annuity products is attributed to
favorable market acceptance of IL Annuity's products.
Expenses--Total expenses increased approximately $4.2 million, or
94.1%, during the three months ended September 30, 1998, compared to the three
months ended September 30, 1997, and $9.8 million, or 79.2%, during the nine
months ended September 30, 1998, compared to the corresponding nine months of
1997. These increases are attributable primarily to increases in compensation,
sales promotion and support, stationery and supplies, and travel and
entertainment expenses and to accrual for settlement of a legal matter, as
discussed below.
Page 8 of 11
As a service organization, the Company's primary expenses are salaries
and related employee benefits, which increased approximately $2.1 million, or
78.7%, during the three months ended September 30, 1998, compared to the same
period in 1997, and approximately $4.8 million, or 62.6%, during the nine months
ended September 30, 1998, compared to the same period in 1997. These increases
resulted primarily from increases in the average number of full-time equivalent
employees, which rose to 324 during the quarter ended September 30, 1998,
compared with 192 during the quarter ended September 30, 1997. These increases
in employment were necessary to accommodate increases in sales volume, as
discussed above. Salaries and benefits also increased 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, incentives paid 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 $1.4 million, or 213.6%, for the quarter ended
September 30, 1998, compared with the quarter ended September 30, 1997, and
approximately $2.2 million, or 128.4%, for the nine months ended September 30,
1998, compared with the corresponding period in 1997. These increases are due
primarily to an increase in costs associated with the Company's national sales
conventions and increased anticipated attendance at such conventions, and to
increased incentives paid to Producers by the Company.
In order to avoid protracted future litigation, the Company's principal
subsidiary, LMG, together with American National, entered into an agreement to
settle a lawsuit filed in Jefferson County, Alabama. LMG's net cost of the
settlement, approximately $1.1 million, was recorded as an expense during the
second quarter of 1998. See footnotes to Part I, Item 1, "Financial Statements."
Professional fees increased $173,000, or 108.7%, for the three months
ended September 30, 1998, and $389,000, or 75.3%, for the nine month period
ended September 30, 1998, compared with the corresponding periods in 1997. These
increases are primarily the result of consulting fees related to various
information systems projects and increased legal fees associated with the
settlement of the litigation described in footnotes to Part I, Item 1,
"Financial Statements."
Stationery and supplies expense increased approximately $123,000, or
112.5%, for the quarter ended September 30, 1998, and approximately $292,000, or
108.4%, for the nine months ended September 30, 1998, 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.
Travel and entertainment increased approximately $120,000, or 143.5%,
for the quarter ended September 30, 1998, compared with the quarter ended
September 30, 1997, and approximately $251,000, or 127.4%, for the nine months
ended September 30, 1998, compared with the corresponding period in 1997. The
increases are due to increased travel by personnel in the Company's marketing
department, to travel related to implementation of the carrier relationship with
Transamerica, as discussed above, and to travel necessary for 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 73.7% of the Company's total assets as of September
30, 1998.
Page 9 of 11
Year 2000
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., '95 is stored in the system and
represents the year 1995). As a result, the year 1999 (i.e. '99) could be the
maximum date value these systems will be able to accurately process. Management
has developed and is in the process of implementing a plan to insure that the
Company will be year 2000 compliant. This plan consists of the following four
stages: (i) conducting an inventory of all hardware, software and support
systems; (ii) assessing whether such hardware, software and support systems are
year 2000 complaint; (iii) correcting or replacing any non-compliant hardware,
software and support systems; and (iv) testing to ensure that all corrections or
replacements made pursuant to the third phase of the plan are functioning
properly. The first two stages of this plan have been completed and management
anticipates that the last two stages will be completed by March 31, 1999. The
Company is also working closely with significant customers and vendors to ensure
that their systems will be fully year 2000 compliant. Based on information
currently available, management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
system improvements to be year 2000 compliant, however, as noted, the Company
has not completed implementation of its compliance plan. To the extent the
Company's systems are not fully year 2000 compliant, there can be no assurance
that potential systems interruptions or the cost necessary to update software
would not have a material adverse effect on the Company's business, financial
condition, results of operations and business prospects.
Page 10 of 11
PART II OTHER INFORMATION
Item 5. Other Information
In October of 1998, LMG and American National amended the terms of the
Marketing Agreement and Insurance Processing Agreement to extend the initial
terms thereof to January 1, 1999. LMG and American National are in the process
of negotiating a five year extension.
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit 10.1 Amendment Three to Insurance Processing Agreement with
American National Insurance Company
Exhibit 10.2 Amendment Four to Marketing Agreement with American
National Insurance Company
Exhibit 10.3 Lease Agreement for 2090 Marine Ave., Petaluma Calif.
Exhibit 10.4 Buy-Sell
Exhibit 11 Computation of Earnings Per Share--Basic and Diluted
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: November 12, 1998 Signature: /s/ R. Preston Pitts
-------------------------------------
R. Preston Pitts,
President & Chief Operating Officer
Date: November 12, 1998 Signature: /s/ David A. Skup
-------------------------------------
David A. Skup,
Chief Financial Officer
Page 11 of 11