-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PsMd/K8PlfWhrTJr2pdbfMg8BiI6DN22XB6RKvQT7uAZwxNgtWdIxkXW1gnwmwQ1 cuWY9+ZWA2WJOOVH3m2Zvg== 0000950109-99-002979.txt : 19990817 0000950109-99-002979.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950109-99-002979 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGAN HOLDING CORP CENTRAL INDEX KEY: 0000870069 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 680211359 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19704 FILM NUMBER: 99693920 BUSINESS ADDRESS: STREET 1: 1179 N MCDOWELL BLVD CITY: PETALUMA STATE: CA ZIP: 94954 BUSINESS PHONE: 7077788638 MAIL ADDRESS: STREET 1: 1179 N MCDOWELL BLVD CITY: PETALUMA STATE: CA ZIP: 94954 10-Q 1 FORM 10-Q UNITED STATES 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, 1999, 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.) 2090 Marina Avenue, Petaluma, California 94954 ---------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code)
(707) 778-8638 -------------- (Registrant's Telephone Number, Including Area Code) Proceedings During The Preceding Five Years: 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 ___ --- Applicable Only To Corporate Issuers: Indicate the number of shares outstanding of the registrant's common stock, as of July 31, 1999: Common Stock-Series A 25,767,260 Common Stock-Series B 598,416 Page 1 of 20 PART I FINANCIAL INFORMATION Item 1. Financial Statements REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Balance Sheets
June 30, 1999 December 31, 1998 ----------------- ----------------- ASSETS Cash and cash equivalents $ 5,100,195 $ 5,916,731 Investments 20,500,087 16,987,628 Accounts receivable 2,483,262 1,704,265 Prepaid expenses 1,448,286 768,913 Income taxes receivable -- 884,089 Deferred income taxes-current 651,903 359,421 Marketing supplies inventory 617,099 385,616 ----------------- ----------------- Total Current Assets 30,800,832 27,006,663 ----------------- ----------------- Net fixed assets 7,989,777 2,982,267 Deferred income taxes-non current 2,094,498 904,974 Prepaid software licensing fees 687,656 -- Other assets 426,037 392,109 ----------------- ----------------- Total Non-Current Assets 11,197,968 4,279,350 ----------------- ----------------- TOTAL ASSETS $ 41,998,800 $ 31,286,013 ================= ================= LIABILITIES, REDEEMABLE COMMON STOCK, AND SHAREHOLDERS' EQUITY LIABILITIES Accounts payable $ 304,628 $ 418,821 Accrued sales convention costs 1,599,919 894,713 Accrued liabilities 3,802,807 4,388,401 Software licensing fees payable 600,000 -- Income taxes payable 599,409 -- ----------------- ----------------- Total Current Liabilities 6,906,763 5,701,935 ----------------- ----------------- Loans payable 2,263,383 132,285 Incentive compensation payable 476,450 530,523 Deferred compensation payable 526,890 -- ----------------- ----------------- Total Non-Current Liabilities 3,266,723 662,808 ----------------- ----------------- TOTAL LIABILITIES 10,173,486 6,364,743 ----------------- ----------------- Commitments and contingencies -- -- REDEEMABLE COMMON STOCK, Series A and B 10,899,863 11,225,431 ----------------- ----------------- SHAREHOLDERS' EQUITY Preferred stock, no par value: Authorized: 100,000,000 shares No shares issued or outstanding -- -- Series A common stock, no par value: Authorized: 45,000,000 shares Issued and outstanding: 20,805,034 and 20,530,224 shares at June 30, 1999 and December 31, 1998, respectively 3,599,625 3,248,874 Paid-in capital from retirement of common stock 870,858 888,109 Paid-in capital from producer stock options 2,047,000 25,000 Retained earnings 14,703,540 9,587,775 Accumulated other comprehensive income-net (295,572) (53,919) ----------------- ----------------- TOTAL SHAREHOLDERS' EQUITY 20,925,451 13,695,839 ----------------- ----------------- TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY $ 41,998,800 $ 31,286,013 ================= =================
See accompanying notes to consolidated financial statements Page 2 of 20 REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Income Statements (Unaudited)
For the Three Months Ended For the Six Months Ended June 30, June 30, -------------------------- ------------------------ 1999 1998 1999 1998 ------------ ------------ ----------- ----------- INCOME: Marketing allowances $ 8,200,700 $ 7,299,358 $16,076,790 $11,679,636 Commission income 4,758,236 3,453,208 8,799,224 5,593,692 Administrative fees 2,344,173 1,725,134 4,632,416 3,074,350 Investment income 353,804 286,061 552,462 501,104 Other income 103,218 98,000 287,320 157,238 ------------ ------------ ----------- ----------- TOTAL INCOME 15,760,131 12,861,761 30,348,212 21,006,020 ------------ ------------ ----------- ----------- EXPENSES: Salaries and related benefits 5,893,568 4,236,744 11,450,881 7,723,470 Sales promotion and support 1,799,408 940,070 3,816,241 1,954,927 Producer stock options 1,941,000 6,250 2,022,000 12,500 Professional fees 442,819 293,493 828,792 574,402 Litigation settlement -- 1,104,401 -- 1,104,401 Depreciation and amortization 246,909 224,133 809,177 429,000 Occupancy 386,185 232,870 768,143 471,490 Courier and postage 280,506 150,372 525,334 313,128 Equipment 260,358 146,712 439,392 255,385 Stationery and supplies 176,260 203,410 354,281 328,200 Travel and entertainment 157,383 158,580 250,831 243,382 Insurance 121,367 45,084 209,484 84,641 Miscellaneous 71,973 62,376 124,987 100,083 ------------ ------------ ----------- ----------- TOTAL EXPENSES 11,777,736 7,804,495 21,599,543 13,595,009 ------------ ------------ ----------- ----------- INCOME FROM OPERATIONS 3,982,395 5,057,266 8,748,669 7,411,011 PROVISION FOR INCOME TAXES 1,660,378 2,038,123 3,632,904 2,985,952 ------------ ------------ ----------- ----------- NET INCOME $ 2,322,017 $ 3,019,143 $ 5,115,765 $ 4,425,059 ============ ============ =========== =========== EARNINGS PER SHARE: Weighted average shares outstanding- basic 26,437,347 26,592,383 26,418,217 26,643,344 Basic earnings per share $ .09 $ .11 $ .19 $ .17 ============ ============ =========== =========== Weighted average shares outstanding- diluted 27,314,729 26,592,383 27,280,434 26,643,344 Diluted earnings per share $ .09 $ .11 $ .19 $ .17 ============ ============ =========== ===========
See accompanying notes to consolidated financial statements. Page 3 of 20 REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity (Unaudited)
Paid-in Paid-in Capital Capital Accumulated Series A Common Stock from from Other --------------------- Retirement of Producer Retained Comprehensive Shares Amount Common Stock Options Earnings Income Total ------ ------ ------------ ------- -------- ------ ----- Balance January 1, 1999 20,530,224 $3,248,874 $ 888,109 $ 25,000 $ 9,587,775 $ (53,919) $ 13,695,839 Comprehensive Income: Net income for the six months ended June 30, 1999 5,115,765 5,115,765 Net unrealized gains on investments (400,685) (400,685) Deferred tax on net unrealized gains 159,032 159,032 ------------ Total Comprehensive Income 4,874,112 ------------ Redemption and retirement of common stock (26,454) (26,454) (17,251) (43,705) Stock awarded to producers 291,264 369,905 369,905 Exercise of stock Options 10,000 7,300 7,300 Producer stock option expense 2,022,000 2,022,000 ---------- ---------- ----------- ----------- ----------- --------- ------------ Balance June 30, 1999 20,805,034 $3,599,625 $ 870,858 $ 2,047,000 $14,703,540 $(295,572) $ 20,925,451 ========== ========== =========== =========== =========== ========= ============
See accompanying notes to consolidated financial statements. Page 4 of 20 REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, ------------------------------ 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,115,765 $ 4,425,059 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization of fixed assets 773,543 394,424 Amortization of intangible assets 35,634 34,578 Common stock awarded to producers 369,905 -- Producer stock option expense 2,022,000 12,500 Amortization/accretion of investments (17,866) (28,075) Realized gains on sales of investments 87,652 -- Changes in assets and liabilities Net change in accounts receivable (778,997) (1,237,002) Net change in prepaid expenses (679,373) (26,612) Net change in income taxes receivable and payable 1,483,498 313,162 Net change in deferred tax assets (1,322,974) 196,453 Net change in marketing supplies inventory (231,483) (47,177) Net change in prepaid and deferred software licensing fees (87,656) -- Net change in accounts payable (114,193) (78,440) Net change in accrued sales convention costs 705,206 (53,263) Net change in accrued liabilities (585,594) 2,570,300 Net change in other assets and liabilities 403,255 69,287 ------------ ------------ Net cash provided by operating activities 7,178,322 6,545,194 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments (12,955,988) (5,873,148) Proceeds from sales and maturities of investments 8,973,058 1,416,606 Purchases of fixed assets (5,781,053) (679,001) ------------ ------------ Net cash used in investing activities (9,763,983) (5,135,543) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable 2,132,500 - Payments toward note payable (1,402) - Redemption and retirement of common stock (369,273) (192,935) Proceeds from stock option exercises 7,300 - ------------ ------------ Net cash provided by (used in) financing activities 1,769,125 (192,935) ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (816,536) 1,216,716 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,916,731 5,194,332 ------------ ------------ Cash and cash equivalents, end of period $ 5,100,195 $ 6,411,048 ============ ============
See accompanying notes to consolidated financial statements. Page 5 of 20 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. (the "Company") and its wholly-owned subsidiaries, Legacy Marketing Group ("LMG"), Legacy Financial Services, Inc., Legacy Advisory Services, Inc., Legacy Reinsurance Company, 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, 1998, 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, 1999 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, 1998 for additional disclosure. 2. Building Purchase and Loan On May 7, 1999, the Company purchased for $4.3 million the building in Petaluma, California, in which the Company's headquarters were formerly located. In conjunction with the building acquisition, the Company paid $2.2 million of the purchase price in cash and entered into a loan payable for the remaining $2.1 million. The loan has a ten year term and is payable in monthly installments plus one balloon payment of approximately $1.8 million, due on May 10, 2009. The loan bears interest at 0.5% per annum above the Prime Rate, as published in the West Coast Edition of the Wall Street Journal. The loan is fully guaranteed by each of the Company's subsidiaries. In addition, the loan agreement contains certain covenants with which the Company must comply, including restrictions on indebtedness or investments outside the ordinary course of business and restrictions on dividends or other changes in the Company's capital structure. One of the covenants requires management to obtain lender approval prior to repurchasing non-redeemable common stock. On August 12, 1999 the Lender waived this requirement for repurchases through July 31, 1999. One of the covenants requires management non-redeemable common stock. On August 12, 1999 the under waive this requirement for repurchases through July 31, 1999. Pursuant to the loan agreement, the Company was required to place approximately $650,000 in reserve to cover loan payments in the event of default and to provide for certain repair costs. Aggregate principal payments for the five years subsequent to June 30, 1999 are as follows:
Year Principal ---- ---------- Six Months ended December 31, 1999 $ 12,763 Year ended December 31, 2000 $ 27,166 Year ended December 31, 2001 $ 29,509 Year ended December 31, 2002 $ 32,053 Year ended December 31, 2003 $ 34,817 Thereafter $1,994,114
3. Deferred Compensation Payable During 1999, $432,380 in commissions were deferred by Producers under the Regan Holding Corp. Producer Commission Deferral Plan and $83,528 in compensation was deferred by key employees under the Regan Holding Corp. Key Employee Deferred Compensation Plan. Such amounts have been recorded as a liability in the accompanying financial statements, plus accumulated Company matching contributions and earnings of $5,398 and $5,584 respectively. 4. Software Licensing Fees In March, 1999, LMG entered into a license agreement with The Leverage Group, Inc. (the "Agreement"), pursuant to which LMG has the non-exclusive right to use certain computer software programs in administering policies on behalf of the carriers with whom the Company contracts. For this right, LMG incurred an initial licensing fee of $800,000, with whom the company contracts of which $200,000 was paid in April, 1999 and two installments of $300,000 each become payable in September, 1999 and March, 2000. In addition, LMG agreed to pay monthly licensing charges of $8,333 per month, increasing each year to $22,667 per month during the eighth year, plus cost of living adjustments each year. The term of the Agreement extends through March 2007, but may be terminated by LMG with six months written notice after March 2004. The $800,000 initial licensing fee has been recorded as Prepaid Software Licensing Fees, net of the current portion of $101,875 and net of Page 6 of 20 amortization. The unpaid portion of the initial licensing fee payable, equal to $600,000, has been recorded as Software Licensing Fees Payable. The monthly licensing fees are being expensed as incurred. 5. 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, 1999, 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 Shares Amount Shares Amount Shares Amount ----------- ------------- ----------- --------------- ----------- -------------- Balance January 1, 1999 5,171,447 $ 9,428,047 599,128 $ 1,797,384 5,770,575 $ 11,225,431 Redemption and retirement of common stock (195,840) (323,432) (712) (2,136) (196,552) (325,568) ----------- ------------- ----------- --------------- ----------- -------------- Balance June 30, 1999 4,975,607 $ 9,104,615 598,416 $ 1,795,248 5,574,023 $ 10,899,863 =========== ============= =========== =============== =========== ==============
6. Stock Option Expense During the second quarter of 1999, the Company recorded $2,022,000 of expense related to stock options that were granted to independent insurance producers in 1998 and 1999. This charge was a result of the Company's decision to waive the options' vesting provisions, thereby converting the options from "variable" options to "fixed" options pursuant to guidance prescribed in Statement of Financial Accounting Standards No. 123, as interpreted by Emerging Issues Task Force Issue 96-18. This charge reflects a re-measurement of the options based upon management's best estimate of the fair value of the options at the date the vesting provisions were waived. The fair value of the options was estimated using the Black-Sholes option-pricing model with the following assumptions: risk free interest rates ranging from 4.82 to 5.27; expected volatility ranging from 24.26 to 25.0; and expected lives ranging from 5 to 1 years. A dividend yield assumption was not applicable, as the Company's stock is not publicly traded nor does the Company pay dividends. 7. 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 adoption of SOP 98-1 did not have a material impact on the consolidated results of operations or consolidated financial position of the Company during the six months ended June 30, 1999. 8. Amendments to Marketing and Processing Agreements In August, 1999, LMG and American National amended the terms of the Marketing Agreement and the Insurance Processing Agreement to extend the terms to October 1, 1999. LMG and American National are in the process of negotiating a five year extension. 9. Reclassifications Certain amounts in the 1998 financial statements have been reclassified to conform with 1999 classifications. Such reclassifications had no impact on net income or retained earnings. 10. Segment information Page 7 of 20 The table below presents information about the Company's operating segments:
Legacy Legacy Marketing Financial Reconciling Group Services, Inc. Other Items Total ----------- -------------- ----------- ------------ ----------- Net income (loss) for the three months ended June 30: 1999 $ 3,799,007 $ (49,335) $ 2,178,016 $ (3,605,671) $ 2,322,017 1998 $ 3,127,663 $ (47,229) $ 3,019,697 $ (3,080,988) $ 3,019,143 Net income (loss) for the six months ended June 30: 1999 $ 7,337,209 $(135,299) $ 4,828,131 $ (6,914,276) $ 5,115,765 1998 $ 4,671,447 $(134,412) $ 4,424,501 $ (4,536,477) $ 4,425,059 Total assets at June 30: 1999 $43,888,220 $ 971,060 $30,782,638 $(33,643,118) $41,998,800 1998 $30,087,878 $ 816,741 $27,110,236 $(26,728,842) $31,286,013
"Other" items above include Regan Holding Corp. (stand-alone) and its remaining subsidiaries, LifeSurance Corporation, Legacy Advisory Services, Inc., and Legacy Reinsurance Company. Such entities operations do not currently factor significantly into management decision making and, accordingly, were not separated for purpose of this disclosure. "Reconciling Items" consist solely of eliminations of inter-company amounts such as investment in, and income from, subsidiaries. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Except for historical information contained herein, certain of the matters discussed in this Form 10-Q are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These "forward-looking statements" involve certain risks and uncertainties. All forecasts and projections in this report are "forward-looking statements," and are based on management's current expectations of the Company's near-term results, based on current information available. Actual results could differ materially. Results of Operations - --------------------- Summary--The Company's net income for the quarter ended June 30, 1999 decreased approximately $1.5 million, or 48.2%, from the corresponding quarter in 1998 and decreased approximately $67,000, or 1.5%, during the six months ended June 30, 1999, compared with the corresponding period in 1998. These decreases are due primarily to adjustments to stock options expense, net of 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 three 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. Administrative fees are a function not only of product sales, but also administration of policies inforce and Producer appointments. Total income increased $2.9 million, or 22.5%, during the three months ended June 30, 1999, compared to the three months ended June 30, 1998. For the six months ended June 30, 1999, total income increased $9.3 million, or 44.5%, over the corresponding six month period in 1998. Marketing allowances and commission income, combined, increased approximately $2.2 million, or 20.5%, in the second quarter of 1999, compared to the second quarter of 1998. Such allowances and commissions increased approximately $7.6 million, or 44.0%, for the six months ended June 30, 1999 compared with the six Page 8 of 20 months ended June 30, 1998. These increases are due primarily to increases in the volume of sales by the Company's distribution network on behalf of the Carriers. Premium placed inforce for the Carriers totaled approximately $529.9 million and $1.0 billion during the three months and six months ended June 30, 1999, respectively, compared to $452.5 million and $730.8 million during the same periods in 1998, representing increases of 17.1% and 40.5%. Also contributing to increases in income during the first six months of 1999 was a shift in sales mix to sales of products which yield higher marketing allowances and commission income. Although premium placed inforce, and the resulting Company's revenues, increased between periods, preliminary marketing statistics indicate that third quarter premium and revenue will increase less than in prior quarters or may even decrease. This trend is attributed to higher interest rates negatively affecting bond values which, in turn, lowers the annuity policies' crediting rates. Management believes that this downward trend is temporary; however, no assurance can be given. Approximately 22.8% of the Company's revenue during the three months ended June 30, 1999 and 36.6% during the six months ended June 30, 1999 was generated by LMG through sales of the VisionMark Annuity on behalf of IL Annuity. The current reinsurance carrier, Transamerica, has informed LMG that it will not reinsure this product beyond September 30, 1999. Management is currently working to replace the VisionMark product with the VisionMark II, which will be reinsured by Reinsurance Group of America, and which has been approved for sale in several states. However, approximately 15.3% of the Company's revenue during the three months ended June 30, 1999 and 15.4% during the six months ended June 30, 1999 was generated by sales of the VisionMark in Texas and Washington where the VisionMark II is not yet approved for sale. Management believes that the VisionMark II will be approved in Texas and Washington before September 30, 1999 or that reinsurance of the VisionMark will be extended until state approval is obtained. However, if neither of these events occur, the Company's revenue could be adversely affected beginning the fourth quarter of 1999. Administrative fees increased approximately $619,000, or 35.9%, in the second quarter of 1999, compared to the same period in 1998. For the six months ended June 30, 1999, administrative fees increased approximately $1.6 million, or 50.7%, over the corresponding period in 1998. These increases are due primarily to increases in the number of policies sold and administered during the period. During the three months ended June 30, 1999, 10.5%, 73.8% and 9.8% of the Company's total revenue resulted from agreements with American National, IL Annuity, and Transamerica respectively, compared to 14.0% and 80.7% from American National and IL Annuity, respectively, during the three months ended June 30, 1998. During the six months ended June 30, 1999, 8.5%, 76.8%, and 9.4% of the Company's total revenue resulted from agreements with American National, IL Annuity, and Transamerica, respectively, compared with 14.3% and 78.9% from American National and IL Annuity, respectively, during the six months ended June 30, 1998. Sales and administration of Transamerica products did not begin until the third quarter of 1998. Expenses--Total expenses increased approximately $4.0 million, or 50.9%, during the three months ended June 30, 1999 compared to the three months ended June 30, 1998 and $8.0 million, or 58.9%, during the six months ended June 30, 1999 compared to the corresponding six months of 1998. These increases are attributable primarily to increases in compensation, sales promotion and support and stock option expenses, as discussed below. As a service organization, the Company's primary expenses are salaries and related employee benefits, which increased approximately $1.7 million, or 39.1%, during the three months ended June 30, 1999 compared to the same period in 1998, and approximately $3.7 million, or 48.3%, in the first six months of 1999 compared to the same period in 1998. This increase resulted primarily from an increase in the average number of full-time equivalent employees, which rose to 418 during the quarter ended June 30, 1999, compared with 294 during the quarter ended June 30, 1998. This increase in employment was necessary to accommodate increases in sales volume, as discussed above. Such increases in employment were primarily in operations at lower pay levels. Therefore, salaries and employee benefits did not increase as significantly as the increase in the number of employees. Page 9 of 20 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. 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 $859,000, or 91.4%, for the quarter ended June 30, 1999 compared with the quarter ended June 30, 1998, and approximately $1.9 million, or 95.2%, in the first six months of 1999, compared to the same period in 1998. These increases are due primarily to awards of the Company's common stock and additional commissions to wholesalers who recruited and developed Producers who reached certain sales milestones. During the second quarter of 1999, the Company recorded $2,022,000 of stock option expense related to stock options that were granted to independent insurance Producers in 1998 and 1999. This charge was a result of the Company's decision to waive the options' vesting provisions, thereby converting the options from "variable" options to "fixed" options pursuant to guidance prescribed in Statement of Financial Accounting Standards No. 123, as interpreted by Emerging Issues Task Force Issue (EITF) 96-18. Professional fees increased approximately $149,000, or 50.9%, during the three months ended June 30, 1999 compared with the corresponding period in 1998, and approximately $254,000, or 44.3%, for the six months ended June 30, 1999 compared with the corresponding period in 1998. These increases are primarily the result of consulting fees related to various information systems projects. 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. No such settlement occurred during 1999. Occupancy expense increased approximately $153,000, or 65.8%, during the second quarter of 1999 compared to the second quarter of 1998, and $297,000, or 62.9%, for the six month period ended June 30, 1999, due primarily to maintenance costs related to additional leased space in Petaluma, California and Rome, Georgia. Liquidity and Capital Resources - ------------------------------- Included in investments at March 31, 1999 is $12.0 million representing an equity investment in Indianapolis Life Group of Companies ("Indianapolis Group"), an affiliate of IL Annuity. Management expects that this investment will be returned to LMG during late 1999 pursuant to the terms of the Investment and Funding Agreement between LMG, Indianapolis Group and other parties. If, however, certain events which trigger the return of the investment by year end do not occur, these funds could be invested in Indianapolis Group for up to eight years at a yield to equal that earned by the Indianapolis Group on this investment portfolio. On May 7, 1999, the Company and its subsidiaries purchased for $4.3 million the building in Petaluma, California, in which the Company's headquarters were previously located. In conjunction with the building acquisition, the Company paid $2.2 million of the purchase price in cash and entered into a loan payable for the remaining $2.1 million. The loan has a ten year term and is payable in monthly installments plus one balloon payment of approximately $1.8 million, due on May 10, 2009. The loan bears interest at 0.5% per annum above the Prime Rate, as published in the West Coast Edition of the Wall Street Journal. The loan is fully guaranteed by each of the Company's subsidiaries. In addition, the loan agreement contains certain covenants with which the company Page 10 of 20 must comply, including restrictions on indebtedness or investments outside the ordinary cause of business and restrictions on dividends or other changes in the Company's capital structure. Pursuant to the loan agreement, the Company was required to place approximately $650,000 in reserve to cover loan payments in the event of default and to provide for certain repair costs. Management believes that cash and investments on hand, plus cash generated by ongoing operating activities, are adequate to meet the Company's needs for cash, both on a long-term and a short-term basis. Year 2000 - --------- As the year 2000 approaches, a critical business issue has emerged regarding how existing application software 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 fully implemented a plan to insure that the Company will be year 2000 compliant. This plan consisted 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 compliant; (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 four stages of the Company's year 2000 plan have been completed for mission-critical systems. Management is of the opinion that there are no significant barriers to being able to conduct normal business operations during the transition to year 2000 and beyond. The Company is also working closely with significant customers and vendors to ensure that their systems will be fully year 2000 compliant. However, there can be no assurance that potential interruptions due to year 2000 would not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. Page 11 of 20 Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company invests its cash in a variety of financial instruments, including government agency notes, corporate equity securities and fixed rate corporate obligations. These investments are denominated in U. S. dollars. Interest income on the Company's investments is reflected in "Investment Income" in the Company's consolidated financial statements. The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and short- term investments, are treated as available-for-sale under SFAS 115. Investments in fixed rate interest earning instruments carry a degree of interest rate risk. The fair market value of fixed rate securities may be adversely impacted when interest rates rise. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. The Company's investment securities are held for purposes other than trading. The weighted-average interest rate on investment securities at June 30, 1999 was 5.51%. The fair value of securities held at June 30, 1999 was $20,500,087. 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 21, 1999. The results of shareholder votes were as follows:
Broker For Against Abstain Non-Votes --------- -------- ------- --------- (i) Election of four Directors to hold office until the Annual Meeting of Shareholders in 2000 and until their successors are duly elected Lynda L. Regan 18,957,843 9,147 R. Preston Pitts 18,956,719 10,271 Steven C. Anderson 18,957,843 9,147 Ute Scott-Smith 18,956,276 10,714 (ii) Ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the year ended December 31, 1999 18,954,100 3,508 9,382 (iii) Approval of the Regan Holding Corp. 1998 Stock Option Plan 18,670,889 29,425 265,849 827 (iv) Approval of the Regan Holding Corp. Producer Stock Award and Option Plan 18,668,987 25,227 271,949 827
Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees for Directors of the Company. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Index to Exhibits Exhibit 10.1 Amendment Eight to the Marketing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated June, 1999. Exhibit 10.2 Amendment Seven to the Insurance Processing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated June, 1999. Exhibit 10.3 Amendment Nine to the Marketing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated August, 1999. Exhibit 10.4 Amendment Eight to the Insurance Processing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated August, 1999. Exhibit 11.1 Computation of Earnings Per Share-Basic Exhibit 11.2 Computation of Earnings Per Share-Diluted Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K was filed in April, 1999 to report that, on March 31, 1999, Legacy Marketing Group, a wholly-owned subsidiary of the registrant, acquired 15.4 shares of common stock of Indianapolis Life Group of Companies, Inc. for a total purchase price of $12.0 million. Page 12 of 20 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 16, 1999 Signature: /s/ R. Preston Pitts ------------------------- R. Preston Pitts, President & Chief Operating Officer Date: August 16, 1999 Signature: /s/ David A. Skup --------------------------- David A. Skup, Chief Financial Officer Page 13 of 20 EX-10.1 2 AMENDMENT NO. 8 TO MARKETING AGREEMENT Exhibit 10.1 AMENDMENT EIGHT TO MARKETING AGREEMENT This document is Amendment Eight to the Marketing Agreement made and entered into effective June 1, 1993, and amended by Amendment One to Marketing Agreement dated September 16, 1993; Amendment Two to Marketing Agreement dated June 4, 1998; Amendment Three to Marketing Agreement dated September 25, 1998; Amendment Four to Marketing Agreement dated October 19, 1998; and Amendment Five to Marketing Agreement dated December 15, 1998; Amendment Six to Marketing Agreement dated March 25, 1999, and Amendment Seven to Marketing Agreement dated May 10, 1999 (the "Agreement"), by and between American National Insurance Company ("American National") a Texas corporation, and Legacy Marketing Group ("LMG"), a California corporation. In consideration of mutual covenants contained herein, the parties agree as follows: 1. Section 3.1 of the Agreement is hereby deleted in its entirety and the following new Section 3.1 shall be substituted therefore: "3.1 Subject to termination as hereinafter provided, this Agreement shall remain in force and effect until the close of business on August 15, 1999, the term of this Agreement. This Agreement may be renewed by mutual agreement for successive terms of one (1) year unless terminated by either party by prior written notice to the other at least one hundred eighty (180) days prior to the end of the initial term or the renewal term." 2. Except as specifically amended hereby, all terms and provisions of the Marketing Agreement shall remain in full force and effect. LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE COMPANY By: /s/ David A. Skup By: /s/ David A. Behrens ----------------- -------------------- Title: Chief Financial Officer Title: Executive V. P. of ----------------------- Independent Marketing --------------------- Witness: /s/ Galina Coleman Witness: /s/ Debra Knowles ------------------ ----------------- Date: June 24, 1999 Date: June 30, 1999 ------------- ------------- Page 14 0f 20 EX-10.2 3 AMENDMENT NO. 7 TO INSURANCE PROCESSING AGREEMENT Exhibit 10.2 AMENDMENT SEVEN TO INSURANCE PROCESSING AGREEMENT This document is Amendment Seven to the Insurance Processing Agreement made and entered into effective June 1, 1993, and amended by Amendment One to Insurance Processing Agreement dated June 4, 1998; Amendment Two to Insurance Processing Agreement dated September 25, 1998; Amendment Three to Insurance Processing Agreement dated October 19, 1998; Amendment Four to Insurance Processing Agreement dated December 15, 1998, Amendment Five to Insurance Processing Agreement dated March 25, 1999, and Amendment Six to Insurance Processing Agreement dated May 10, 1999 (the "Agreement"), by and between American National Insurance Company ("American National") a Texas corporation, and Legacy Insurance Processing Group ("LMG"), a California corporation. In consideration of mutual covenants contained herein, the parties agree as follows: 1. Section 6.1 of the Agreement is hereby deleted in its entirety and the following new Section 6.1 shall be substituted therefore: "6.1 Subject to termination as hereinafter provided, this Agreement shall remain in force and effect until the close of business on August 15, 1999, the term of this Agreement. This Agreement may be renewed by mutual agreement for additional successive terms of one (1) year unless terminated by either party by prior written notice to the other at least one hundred eighty (180) days prior to the end of the initial term or the renewal term." 2. Except as specifically amended hereby, all terms and provisions of the Insurance Processing Agreement shall remain in full force and effect. LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE COMPANY By: /s/ David A. Skup By: /s/ David A. Behrens ----------------------- ------------------------------- Title: Chief Financial Officer Title: Executive V. P. of Independent ----------------------- Marketing ------------------------------- Witness: /s/ Galina Coleman Witness: /s/Debra Knowles ----------------------- ------------------------------- Date: June 24, 1999 Date: June 30, 1999 ----------------------- ------------------------------- Page 15 of 20 EX-10.3 4 AMENDMENT NO. 9 TO MARKETING AGREEMENT Exhibit 10.3 AMENDMENT NINE TO MARKETING AGREEMENT This document is Amendment Nine to the Marketing Agreement made and entered into effective June 1, 1993, and amended by Amendment One to Marketing Agreement dated September 16, 1993; Amendment Two to Marketing Agreement dated June 4, 1998; Amendment Three to Marketing Agreement dated September 25, 1998; Amendment Four to Marketing Agreement dated October 19, 1998; and Amendment Five to Marketing Agreement dated December 15, 1998; Amendment Six to Marketing Agreement dated March 25, 1999, Amendment Seven to Marketing Agreement dated May 10, 1999, and Amendment Eight to Marketing Agreement dated June 24, 1999, (the "Agreement"), by and between American National Insurance Company ("American National") a Texas corporation, and Legacy Marketing Group ("LMG"), a California corporation. In consideration of mutual covenants contained herein, the parties agree as follows: 3. Section 3.1 of the Agreement is hereby deleted in its entirety and the following new Section 3.1 shall be substituted therefore: "3.1 Subject to termination as hereinafter provided, this Agreement shall remain in force and effect until the close of business on October 1, 1999, the term of this Agreement. This Agreement may be renewed by mutual agreement for successive terms of one (1) year unless terminated by either party by prior written notice to the other at least one hundred eighty (180) days prior to the end of the initial term or the renewal term." 4. Except as specifically amended hereby, all terms and provisions of the Marketing Agreement shall remain in full force and effect. LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE COMPANY By: /s/ David A. Skup By: /s/ David A. Behrens ----------------- -------------------- Title: Chief Financial Officer Title: Executive V. P. of ----------------------- ------------------ Independent Marketing --------------------- Witness: /s/ Galina Coleman Witness: /s/Nicole Abraham ------------------ ----------------- Date: August 5, 1999 Date: August 11, 1999 -------------- --------------- EX-10.4 5 AMENEMENT NO. 8 TO INSURANCE PROCESING AGREEMENT Exhibit 10.4 AMENDMENT EIGHT TO INSURANCE PROCESSING AGREEMENT This document is Amendment Eight to the Insurance Processing Agreement made and entered into effective June 1, 1993, and amended by Amendment One to Insurance Processing Agreement dated June 4, 1998; Amendment Two to Insurance Processing Agreement dated September 25, 1998; Amendment Three to Insurance Processing Agreement dated October 19, 1998; Amendment Four to Insurance Processing Agreement dated December 15, 1998, Amendment Five to Insurance Processing Agreement dated March 25, 1999, Amendment Six to Insurance Processing Agreement dated May 10, 1999, Amendment Seven to Insurance Processing Agreement dated June 24, 1999, (the "Agreement"), by and between American National Insurance Company ("American National") a Texas corporation, and Legacy Insurance Processing Group ("LMG"), a California corporation. In consideration of mutual covenants contained herein, the parties agree as follows: 3. Section 6.1 of the Agreement is hereby deleted in its entirety and the following new Section 6.1 shall be substituted therefore: "6.1 Subject to termination as hereinafter provided, this Agreement shall remain in force and effect until the close of business on October 1, 1999, the term of this Agreement. This Agreement may be renewed by mutual agreement for additional successive terms of one (1) year unless terminated by either party by prior written notice to the other at least one hundred eighty (180) days prior to the end of the initial term or the renewal term." 4. Except as specifically amended hereby, all terms and provisions of the Insurance Processing Agreement shall remain in full force and effect. LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE COMPANY By: /s/ David A. Skup By: /s/ David A. Behrens ----------------------- ------------------------ Title: Chief Financial Officer Title: Executive Vice President of Independent Marketing ----------------------- ------------------------ Witness: /s/ Galina Coleman Witness: /s/ Debra Knowles ----------------------- ------------------------ Date: June 24, 1999 Date: June 30, 1999 ----------------------- ------------------------ Page 17 of 20 EX-11.1 6 COMPUTATION OF EARNINGS PER SHARE - BASIC Exhibit 11.1 Computation of Earnings Per Share (Unaudited) Basic Earnings Per Share
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average shares outstanding - basic 26,437,347 26,592,383 26,418,217 26,643,344 Net income $ 2,322,017 $ 3,019,143 $ 5,115,765 $ 4,425,059 ----------- ----------- ----------- ----------- Basic net income per share $ 0.09 $ 0.11 $ 0.19 $ 0.17 =========== =========== =========== ===========
Page 18 of 20 EX-11.2 7 COMPUTATION OF EARNINGS PER SHARE - DILUTED Exhibit 11.2 Computation of Earnings Per Share Unaudited Diluted Earnings Per Share
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average shares outstanding - basic 26,437,347 26,592,383 26,418,217 26,643,344 Plus incremental shares from assumed conversions 877,382 -- 862,217 -- ----------- ----------- ----------- ----------- Number of shares for computation of diluted 27,314,729 26,592,383 27,280,434 26,643,344 net income per share Net income $ 2,322,017 $ 3,019,143 $ 5,115,765 $ 4,425,059 ----------- ----------- ----------- ----------- Diluted net income per share $ 0.09 $ 0.11 $ 0.19 $ 0.17 =========== =========== =========== ===========
Page 19 of 20 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 5,100,195 20,500,087 2,483,262 0 617,099 30,800,832 10,520,701 (2,530,924) 41,998,800 6,906,763 0 10,899,863 3,599,625 0 17,325,826 20,925,451 0 30,348,212 21,599,543 8,748,669 3,632,904 0 0 0 0 0 0 0 0 5,115,765 .19 .19
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