As filed with the Securities and Exchange Commission on November 12, 1998.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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REGAN HOLDING CORP.
(Exact name of Registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
6411
(Primary Standard
Industrial Classification Code Number)
68-0211359
(I.R.S. Employer
Identification No.)
1179 N. McDowell Blvd.
Petaluma, CA 94954
(707) 778-8638
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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R. Preston Pitts
President and Chief Operating Officer
Regan Holding Corp.
1179 N. McDowell Blvd.
Petaluma, CA 94954
(707) 778-8638
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Thomas L. Fairfield, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Avenue, NW
Washington, DC 20009-5728
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Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following the box. X
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Title of Each Class of Maximum Aggregate Amount of
Securities to Be Registered Offering Price (1) Registration Fee
<S> <C> <C>
Class A Common Stock, no par value $11,232,066 $3,313
===================================== =========================== ====================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED [ ] , 1998
15,000,000 Shares
Regan Holding Corp.
Class A Common Stock
(no par value)
Regan Holding Corp. (the "Company") is hereby offering shares of its Class A
Comon Stock, no par value (the "Shares") to be issued (i) upon the exercise of
stock options granted under the Company's Producer Stock Award And Option Plan
(the "Producer Plan") to certain producers ("Producers") who market annuity,
life insurance, and other investment products on behalf of the Company and its
subsidiaries, (ii) pursuant to grants of Shares under the Producer Plan, and
(iii) upon the exercise of stock options granted under the Company's 1998 Stock
Option Plan to certain employees and directors of the Company (the "Employee
Plan" and collectively with the Producer Plan, the "Plans"). The Company is a
California corporation with its principal executive offices located at 1179 N.
McDowell Boulevard, Petaluma, CA 94954.
The Shares are being offered only to (i) Producers pursuant to grants of Shares
under the Producer Plan and valid exercises of options to purchase Shares
granted under the Producer Plan, and (ii) employees and directors of the Company
pursuant to valid exercises of options to purchase Shares granted under the
Employee Plan. An aggregate of 15,000,000 Shares may be issued upon grants of
Shares under the Producer Plan and exercise of options under the Plans, subject
to adjustments described in the Plans and this Prospectus.
No underwriting discounts or commissions will be paid in connection with the
offering of the Shares. The Shares are not listed by any national securities
exchange or the Nasdaq Stock Market.
------------------
For a discussion of certain factors that should be considered in connection with
an investment in the Class A Common Stock, see "Risk Factors" on page [ ]
------------------
Neither The Securities And Exchange Commission Nor Any State Securities
Commission Has Approved Or Disapproved Of These Securities Or Passed Upon
The Accuracy Or Adequacy Of This Prospectus. Any
Representation To The Contrary Is A Criminal Offense.
The date of this Prospectus is [ ] , 1998.
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given, such information or representation must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer in
such jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................2
RISK FACTORS.................................................................4
USE OF PROCEEDS..............................................................6
DETERMINATION OF OFFERING PRICE..............................................6
DESCRIPTION OF THE PLANS.....................................................6
BUSINESS OF THE COMPANY.....................................................10
SELECTED CONSOLIDATED FINANCIAL DATA........................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................16
MANAGEMENT..................................................................20
EXECUTIVE COMPENSATION......................................................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............23
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................23
DESCRIPTION OF CAPITAL STOCK................................................23
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...........................................24
PLAN OF DISTRIBUTION........................................................24
LEGAL MATTERS...............................................................25
EXPERTS.....................................................................25
FINANCIAL STATEMENTS.......................................................F-1
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements
appearing elsewhere in this Prospectus.
The Company
Regan Holding Corp. (the "Company") is engaged in the design, marketing and
administration of life insurance, annuity and other investment products (the
"Products") on behalf of three unaffiliated insurance carriers. The Company,
through its wholly-owned subsidiary Legacy Marketing Group ("Legacy"), has
entered into marketing agreements with these carriers pursuant to which the
Company is responsible for the recruiting, training, managing and supervising of
producers in the sale of the Products. The Company, through Legacy, has also
entered into insurance processing agreements with these carriers pursuant to
which the Company provides clerical, administrative and accounting services with
respect to the Products. Such services include billing, collecting and remitting
cash on insurance policies. Legacy currently markets policies written in the
District of Columbia and in each state of the United States, except Alabama and
New York, through a network consisting of approximately 14,000 independent
insurance producers ("Producers") who market the Products on behalf of Legacy on
a non-exclusive basis. The Company also offers variable annuity and life
insurance products, mutual funds and debt and equity securities through its
wholly-owned broker-dealer subsidiary, Legacy Financial Services, Inc. ("LFS").
The Company was incorporated under the laws of the State of California in
1990. The Company's executive offices are located at 1179 N. McDowell Blvd.,
Petaluma, CA 94954 and its telephone number is (707) 778-8638.
The Offering
Shares Being Offered............... 15,000,000 shares of the Company's Common
Stock-Series A, no par value ("Shares").
Offering Price...................... The offering price of the Shares will be as
determined by the committees which
administer the Plans (as defined below).
Terms of Offering................... Shares will be issued (i) upon the exercise
of stock options granted pursaunt to the
Company's Producer Stock Award and Option
Plan (the "Producer Plan"), (ii) upon
grants of Shares pursuant to the terms of
the Producer Plan, and (iii) upon the
exercise of stock options granted pursuant
to the Company's 1998 Stock Option Plan
(the "Employee Plan" and collectively with
the Producer Plan, the "Plans").
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<PAGE>
Capital Structure................... As of June 30, 1998 there were 25,915,375
shares of the Company's Common Stock-Series
A ("Series A Stock") and 600,398 shares of
the Company's Common Stock-Series B
("Series B Stock" and collectively with the
Series A Stock, the "Common Stock") issued
and outstanding.
Voting Rights....................... Each share of Series A Stock and Series B
Stock is entitled to one vote on all
matters submitted to a vote of
shareholders. Holders of shares of Series A
Stock and Series B Stock vote together as a
single class on all matters submitted to a
vote of the shareholders of the Company
except with respect to those matters which
affect the holders of one series in a
different manner than the other series.
Use of Proceeds..................... The proceeds of this offering will be added
to the general funds of the Company and
used for general corporate purposes.
Dividend Policy..................... To date, the Company has not paid any
dividends on its Common Stock. The Company
does not anticipate paying dividends on any
of its outstanding common stock in the
foreseeable future.
Risk Factors........................ Potential purchasers of Shares should
carefully consider the factors set forth
herein under "Risk Factors" commencing on
page 4, as well as other information
contained in this Prospectus.
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<PAGE>
RISK FACTORS
Investment in the Company is subject to significant risks. Prospective
investors should carefully consider, together with the information contained
elsewhere in this Prospectus, the following:
Regulation. Legacy is licensed as an insurance agency and/or a third party
administrator in several of the United States and, accordingly, is subject to
regulation by the various states' Departments of Insurance. Increased national
attention has forced the National Association of Insurance Commissioners and
state insurance departments to re-examine existing laws and regulations
affecting insurance companies, especially those involving insurance company
solvency, marketing practices, and investment policies. While the Company itself
is not an insurance company, any legislative or regulatory changes relating to
insurance company solvency, marketing practices, and investment policies could
have an adverse impact on the business of the Company. In addition, LFS, the
wholly owned broker-dealer subsidiary of the Company, is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC") and under
various state broker-dealer registration laws and is a member of the National
Association of Securities Dealers ("NASD"). Due to the extensive regulation to
which the Company is subject, the Company may be restricted in its activities
and the Company's management may be required to devote substantial efforts to
regulatory compliance issues. Violations of federal or state laws or regulations
or rules of industry self-regulatory organizations ("SROs"), such as the NASD,
could subject the Company, its subsidiaries and/or its employees to disciplinary
proceedings or civil or criminal liability, including revocation of licenses,
censures, fines or temporary suspension or permanent bar from the conduct of
their business. Any such proceedings or liability could have a material adverse
effect upon the Company's business, financial condition, results of operations
and business prospects.
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by states in which the Company conducts its
business or by the SEC, other governmental regulatory authorities or SROs. The
Company may also be adversely affected by changes in the interpretation or
enforcement of existing laws and rules by these governmental authorities and
SROs.
Litigation. Companies in the life insurance industry have been subject to
substantial claims involving sales practices, alleged agent misconduct, failure
to properly supervise agents, and other matters in connection with sale of
insurance and other investment products. Increasingly these lawsuits have
resulted in the award of substantial judgments that are disproportionate to the
actual damages, including material amounts of punitive damages. In some states
juries have substantial discretion in awarding punitive damages which creates
the potential for unpredictable material adverse judgments in any given punitive
damages suit. Legacy recently settled a claim alleging misrepresentation and
price discrimination in connection with the sale of certain annuity products.
Except for this claim, neither the Company nor any subsidiary is or has been a
defendant in any class-action lawsuit alleging improper sales practices. No
assurance can be given that such class-action lawsuits or other litigation will
not be brought against the Company in the future, or if any such lawsuits or
other litigation are brought against the Company, that such proceedings would
not materially and adversely affect the Company's business, financial condition
or results of operations.
Reliance on Legacy. The Company's growth is, and for the foreseeable future
will continue to be, completely dependent on Legacy's ability to design, market
and administer life insurance and annuity products through Legacy. Management
believes that the ability of Legacy to successfully perform these services could
be affected by many factors, including the following: (i) the ability of Legacy
to recruit, train, and motivate successful Producers; (ii) the degree of market
acceptance of the Products; (iii) the relationship between Legacy and the
insurance companies with which Legacy currently places, or may in the future
place, business; (iv) the failure of Legacy to comply with federal, state and
other regulatory requirements applicable to the sale of insurance and investment
products; and (v)competition from other financial services companies in the sale
of insurance and investment products.
Dependence On Carriers. Legacy has entered into marketing agreements and
administrative services agreements with American National Insurance Company
("American National"), IL Annuity and Insurance Company ("IL Annuity"), and
Transamerica Life Insurance and Annuity Company ("Transamerica"), each of which
is an unaffiliated insurance carrier. During 1997 and the first six months of
1998, Legacy's revenues were derived from the agreements with American National
and IL Annuity. For the six months ended June 30, 1998, approximately 14.0% and
79.0% of the Company's total revenue resulted from agreements with American
National and IL Annuity, respectively. During the third quarter of 1998, Legacy
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<PAGE>
began earning revenues from its agreements with Transamerica. The agreements
with American National and IL Annuity expire on January 1, 1999 and December 31,
2005, respectively, but may be renewed by mutual agreement for successive one
year terms. The agreements with Transamerica do not have a fixed term but may be
terminated by either party upon twelve months notice. The termination of
Legacy's relationship with any of these insurance companies, or the termination
or material revision by any of these insurance companies of the products offered
through Legacy would require the Company to seek relationships with other
insurance companies to replace the lost revenue or products. There can be no
assurance that the Company would be able to reach agreements with any other
insurance companies on favorable terms or at all. The failure to replace such
business quickly could have a material adverse effect on the operating results
and prospects of the Company.
Competition. The business of marketing and administering insurance and
investment products is highly competitive. The success of the Company will
depend to a significant extent on the ability of the Company's subsidiaries to
compete with other marketing organizations and financial service companies that
market and administer insurance and investment products, including banks,
securities brokerage firms, investment advisors and other financial
intermediaries marketing insurance products, annuities, mutual funds, and other
retirement oriented investments. Some of these competitors have substantially
greater assets, financial resources and market acceptance than the Company.
The Company's growth will depend largely on the efforts of Producers who
are independent contractors of Legacy. Producers can voluntarily terminate their
contracts with Legacy at any time. Future growth in the Company's business will
depend largely upon either an increase in the productivity of existing Producers
or growth in the number of productive Producers. Due to competition among
insurance companies and insurance marketing organizations for successful
producers, there can be no assurance that Legacy will be able to retain some or
all of its top Producers.
Significant Control by Lynda Regan. Lynda Regan, the Chairman of the Board
and Chief Executive Officer of the Company, owns approximately 43.8% of the
outstanding shares of Series A Stock. Through her stock ownership, role on the
Board of Directors and management position, Ms. Regan will continue to have
significant influence over the affairs of the Company after the Shares being
offered hereby are sold. Ms. Regan will be able to effectively elect all of the
members of the Company's Board of Directors, and to approve or disapprove any
action requiring shareholder approval, including adopting of amendments to the
Company's Articles of Incorporation and approving or disapproving mergers or
sales of all or substantially all of the assets of the Company. Ms Regan's stock
ownership will make it virtually impossible for any third party to gain control
of the Company through the purchase of Common Stock.
No Public Market for Common Stock. There is currently no active public
market for the shares of Common Stock. The Company intends to conduct an initial
public offering or otherwise create a public market for the Common Stock.
However, there can be no assurance that an active trading market for the shares
of Common Stock will develop or be sustained or that the market price of the
shares of Common Stock will not decline below the price paid for Shares
purchased pursuant to this offering. Unless and until a market for the shares of
Common Stock develops, owners of Shares may not be able to quickly liquidate
their investment. This lack of an active market may significantly limit the
ability to sell, and adversely affect the price of, the Shares.
Obligation to Repurchase Stock. The Company is obligated, under various
agreements, to redeem approximately 5,359,651 shares of Series A Stock and all
of the shares of Series B Stock outstanding, at the option of the holders, at a
price per share based on the fair market value of such stock. The redemption of
all of these shares at one time or over a short period of time could have a
material adverse effect on the Company.
Taxation. Under the Internal Revenue Code of 1986, as amended (the "Code"),
income tax payable by policyholders on investment earnings is deferred during
the accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the products marketed by the Company
a competitive advantage over other non- insurance products. Congress is
currently reviewing certain proposals contained in President Clinton's Fiscal
Year 1999 Budget which, if enacted, would adversely impact the tax treatment of
variable annuity and certain other life insurance products. Although sales of
these products do not currently represent a significant portion of the Company's
income, if the Code is revised to reduce the tax-deferred status of life
insurance and annuity products, or to increase the tax-deferred status
5
<PAGE>
of competing products, the business of the Company could be adversely impacted.
The Company cannot predict what future initiatives the President or Congress may
propose which may affect the Company.
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 accommodate only a two
digit date position which represents the year (e.g., '95 is stored on 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. 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, the Company has not
completed implementation of its 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. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000.")
USE OF PROCEEDS
The purpose of the Plans is not to provide proceeds for a particular
purpose but to provide incentives for Producers, members of the Company's Board
of Directors ("Directors") and employees of the Company to generally promote the
success of the Company's business. The net proceeds that become available to the
Company upon the sale of the Shares pursuant to the exercise of Options under
the Plans will be added to the general funds and are expected to be used for
general corporate purposes.
DETERMINATION OF OFFERING PRICE
The option exercise prices for the Shares issuable pursuant to Options
granted or to be granted under the Plans will be established by the committees
which administer the Plans (see "Description of the Plans--Administration") in
accordance with the terms of the Plans.
DESCRIPTION OF THE PLANS
The Board of Directors of the Company (the "Board") has adopted the
Producer Plan and the Employee Plan. The purpose of the Producer Plan is to
provide an incentive to Producers and registered representatives of LFS who
market Products on behalf of the Company, by aligning the interest of such
individuals with those of the shareholders of the Company. The purpose of the
Employee Plan is to provide an incentive to Directors of the Company and
employees of its subsidiaries, to increase their interest in the welfare of the
Company, and to aid in attracting and retaining employees and Directors of
outstanding ability.
Participation/Types of Awards
The Employee Plan provides for grants of options to purchase Shares to
Directors and employees of the Company and certain of its subsidiaries. Under
the Employee Plan, employees and employee-Directors of the Company and of
certain of its subsidiaries may be granted incentive stock options ("ISOs") as
well as non-qualified stock options ("Non-Qualified Options"). Non-employee
Directors of the Company and of certain of its subsidiaries,
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<PAGE>
may only be granted Non-Qualified Options under the Employee Plan. (ISOs and
Non-Qualified Options collectively referred to herein as "Options.")
The Producer Plan provides for grants of Non-Qualified Options and awards
of Shares ("Awards") to Producers. ISOs may not be granted under the Producer
Plan.
Administration Each of the Plans is administered by one or more committees
(each a "Committee" and collectively the "Committees"). The Committee that
administers the Producer Plan consists of Lynda L. Regan, R. Preston Pitts, and
David A. Skup, each an officer of the Company. The Committee that administers
the Employee Plan consists of Lynda L. Regan, R. Preston Pitts, David A. Skup,
Gregory C. Egger, and H. Lynn Stafford, who collectively constitute all of the
officers of the Company. In addition, a special committee consisting of Steve C.
Anderson and Ute Scott Smith, each a non-employee Director of the Company and
each of whom is a "disinterested person" under Rule 16b-3 of the Securities
Exchange Act of 1934 (the "Exchange Act"), administers the Employee Plan for the
purposes of Rule 16b-3 with respect to employees and Directors who are subject
to Section 16 of the Exchange Act. Subject to the provisions of each of the
Plans, the Committees have authority to (i) determine eligibility of Producers,
employees and Directors to participate in the respective Plans, (ii) grant
Options and Awards under the Plans, (iii) determine whether the Options granted
under the Employee Plan will be Non-Qualified Options or ISOs, (iv) interpret
the Plans, (v) prescribe, amend, and rescind rules and regulations relating to
each of the Plans, (vi) determine the terms and provisions of written agreements
evidencing the granting of Options under either of the Plans ("Option
Agreement") or the granting of Awards under the Producer Plan, and (vi) make all
other determinations necessary or advisable for the administration of the Plans.
Any controversy or claim arising out of or related to one of the Plans shall be
determined unilaterally by and at the sole discretion of the respective
Committee. Any determination, decision or action of a Committee in connection
with the construction, interpretation, administration, implementation or
maintenance of the respective Plan shall be final, conclusive and binding upon
all persons to whom an Option or Award is granted (each a "Grantee") and all
persons claiming under or through any Grantee.
Term and Termination Each of the Plans became effective on January 1, 1998.
The Board may, at any time, alter, amend, suspend, discontinue, or terminate
either of the Plans, provided that no such action shall adversely affect the
right of any holder of an Option or Award previously granted under either of the
Plans, and provided that certain amendments to the Employee Plan are subject to
the approval of the shareholders of the Company.
Shares Subject to the Plan The total number of Shares underlying Options to
be granted during the term of the Employee Plan may not exceed 5.5 million in
the aggregate, provided that approval of the shareholders of the Company is
required with respect to 4 million of such Shares, and the total number of
Shares underlying Awards and Options to be granted during the term of the
Producer Plan may not exceed 9.5 million in the aggregate. In the event of any
change in capitalization affecting the Shares, including without limitation, a
stock dividend or other distribution, stock split, reverse stock split,
recapitalization, consolidation, subdivision, split-up, spin-off, split-off,
combination or exchange of shares or other form of reorganization or
recapitalization, or any other change affecting the Shares, the Board shall
authorize and make such proportionate adjustments to the Options, if any, as the
Board deems appropriate to reflect such change.
Payment of Exercise Price The purchase price for Shares subject to an
Option is payable upon exercise of an Option in cash or by check, bank draft or
postal or express money order, or, in the discretion of the respective
Committee, in shares of Common Stock.
Termination of Producer/Employment/Director Status Under the terms of the
Producer Plan, in the event that a Grantee's status as a Producer is terminated
for any reason, all options held by the Grantee which have not vested as of the
date of such termination shall expire immediately, provided, that the
termination of a Grantee's status as a
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Producer shall not affect the Grantee's rights with respect to the exercise of
any options which have vested as of the date of such termination.
Under the terms of the Employee Plan, if a Grantee's employment with the
Company or status as a Director of the Company is terminated as a result of
retirement at or after age 62, or by reason of disability (as defined in the
Plan) or death, all Options held by the Grantee on the date of such termination
shall immediately vest and become fully exercisable provided that such Options
are exercised by the earlier of 3 months after the date of termination, or the
date the Option would otherwise expire, and any such Options which are not
exercised during the 3-month period immediately following the date of
termination shall be forfeited. If a Grantee's employment with the Company or
status as a Director of the Company is terminated for cause (as defined in the
Employee Plan) or by the Grantee other than as a result of retirement at or
after age 62, or by reason of disability or death, all unexercised Options held
by the Grantee on the date of such termination shall be forfeited. If a
Grantee's employment with the Company or the status as a Director of the Company
is terminated for any reason other than as set forth in the prior two sentences,
only those Options which were vested and fully exercisable at the time of such
termination may be exercised provided that such Options are exercised by the
earlier of 3 months after the date of termination, or the date the Option would
otherwise expire, and any such Options which are not exercised during the
3-month period immediately following the date of termination shall be forfeited.
Any of the foregoing provisions may be altered by the Committee provided that
such altered terms are reflected in the applicable Option Agreement.
Grant Information The Employee Plan limits the number of Shares that may be
subject to ISOs granted to any individual which ISOs become exercisable for the
first time during a particular calendar year. If the fair market value of Shares
subject to one or more ISOs which become exercisable for the first time during a
particular calender year, combined with the fair market value of shares under
ISOs granted to such individual under other plans of the Company or of it
subsidiaries, determined at the time of grant, exceeds $100,000, the Shares in
excess of such amount will be treated as having been granted pursuant to
Non-Qualified Options.
Federal Income Tax Aspects of the Plans
Optionholders
Grant There are no federal income tax consequences to the
holder of an Option solely by reason of the grant of an ISO or a Non-Qualified
Option under either of the Plans, provided that, in the case of a Non-Qualified
Option, the Option does not have a readily ascertainable fair market value at
the date of grant.
Exercise The exercise of an ISO is not a taxable event for
regular federal income tax purposes. However, such exercise may give rise to an
alternative minimum tax liability.
Upon the exercise of a Non-Qualified Option, the holder of the
Option will generally recognize ordinary income in an amount equal to the excess
of the fair market value of the Shares at the time of exercise over the amount
paid as the exercise price. The ordinary income recognized in connection with
the exercise by a holder of a Non-Qualified Option will be subject to both wage
and employment tax withholding.
The holder's tax basis in the Shares acquired pursuant to the
exercise of an Option will be the amount paid upon exercise plus, in the case of
a Non-Qualified Option, the amount of ordinary income recognized by the
optionholder upon exercise.
Qualifying Disposition If an optionholder disposes of Shares
acquired upon exercise of an ISO in a taxable transaction, and such disposition
occurs more than two years from the date on which the Option is granted and more
than one year after the date on which the Shares are transferred to the
optionholder, the optionholder will
8
<PAGE>
recognize long-term capital gain or loss equal to the difference between the
amount realized upon such disposition and the optionholder's adjusted basis in
such Shares (generally the option exercise price.)
Disqualifying Disposition If an optionholder disposes of
Shares acquired upon exercise of an ISO (other than in certain tax-free
transactions) within two years from the date on which the ISO is granted or
within one year after the transfer of the Shares to the optionholder, then at
the time of disposition the optionholder will generally recognize ordinary
income equal to the lesser of (a) the excess of such Shares' fair market value
on the date of exercise over the exercise price paid by the optionholder or (b)
the optionholder's actual gain (i.e., the excess, if any, of the amount realized
on the disposition over the exercise price paid by the optionholder). If the
amount realized on a taxable disposition of the Shares obtained pursuant to the
exercise of an ISO exceeds the fair market value of such Shares on the date of
the exercise, then the optionholder will recognize a capital gain in the amount
of such excess. If the optionholder incurs a loss on such a disposition (i.e.,
if the amount realized is less than the exercise price paid by the
optionholder), then the loss will be a capital loss. The capital gain or loss
will be long-term or short term depending on whether the Shares were held for
more than one year from the date such Shares were transferred to the
optionholder.
Other Disposition If an optionholder disposes of Shares
acquired upon exercise of a Non-Qualified Option in a taxable transaction, the
optionholder will recognize capital gain or loss in an amount equal to the
difference between the optionholder's basis (as discussed above) in the Shares
sold and the amount realized upon disposition. Any such capital gain or loss
(and any capital gain or loss recognized on a disqualifying disposition of
Shares acquired upon exercise of ISOs as discussed above) will be long-term or
short-term depending on whether the Shares were held for more than one year from
the date such Shares were transferred to the optionholder.
Alternative Minimum Tax The exercise of ISOs (but not
Non-Qualified Options) will generally result in an upward adjustment to the
optionholder's alternative minimum taxable income ("AMTI") in the year of
exercise by an amount equal to the excess, if any, of the fair market value of
the Shares on the date of exercise over the exercise price. The basis of the
Shares acquired, for alternative minimum tax purposes, will equal the exercise
price increased by the prior upward adjustment of the taxpayer's AMTI due to the
exercise of the ISO. This will result in a corresponding downward adjustment to
the optionholder's AMTI in the year the Shares are disposed.
Award Recipients
Grant Upon the grant of an Award, the recipient of the Award
will generally recognize ordinary income in an amount equal to the fair market
value of the Shares received pursuant to the Award. The recipient's tax basis in
the Shares acquired pursuant to the Award will be equal to the amount of
ordinary income recognized by the recipient upon the grant.
Disposition If the recipient of an Award disposes of Shares
acquired pursuant to such Award in a taxable transaction, the recipient of the
Award will recognize capital gain or loss in an amount equal to the difference
between the recipient's basis (as discussed above) in the Shares sold and the
amount realized upon disposition. Any such capital gain or loss (and any capital
gain or loss recognized on a disqualifying disposition of Shares acquired upon
exercise of ISOs as discussed above) will be long-term or short-term depending
on whether the Shares were held for more than one year from the date such Shares
were awarded.
Consequences to the Company
There are no federal income tax consequences to the Company by
reason of the grant of ISOs or Non- Qualified Options or the exercise of ISOs
(other than disqualifying dispositions).
9
<PAGE>
At the time the optionholder recognizes ordinary income from
the exercise of a Non-Qualified Option, or an Award recipient recognizes
ordinary income upon the receipt of Shares pursuant to an Award, the Company
will be entitled to a federal income tax deduction in the amount of the ordinary
income so recognized (as described above), provided that the Company satisfies
its withholding obligations described below. To the extent the optionholder
recognizes ordinary income by reason of a disqualifying disposition of the
shares of Common Stock acquired upon exercise of ISOs, the Company will be
entitled to a corresponding deduction in the year in which the disqualifying
disposition occurs.
The Company will be required to report to the Internal Revenue
Service any ordinary income recognized by any optionholder by reason of the
exercise of a Non-Qualified Option or a disqualifying disposition of an ISO or
by the recipient of an Award. The Company will be required to withhold income
and employment taxes (and pay the employer's share of employment taxes) with
respect to ordinary income recognized by the optionholder upon the exercise of
Non-Qualified Options or a disqualifying disposition of an ISO or by the
recipient of an Award.
THE FOREGOING IS A GENERAL DISCUSSION OF CERTAIN POTENTIAL MATERIAL U.S. FEDERAL
INCOME TAX ASPECTS OF THE RECEIPT OF AN AWARD OR THE RECEIPT AND EXERCISE OF
OPTIONS UNDER THE PLANS AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND
CIRCUMSTANCES OR TAX STATUS OR ATTRIBUTES OF EACH GRANTEE. AS A RESULT, THE
INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT APPLY TO
EACH GRANTEE. ACCORDINGLY, EACH GRANTEE SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE RECEIPT OF AN AWARD OR
THE RECEIPT AND EXERCISE OF OPTIONS UNDER THE PLANS, INCLUDING, BUT NOT LIMITED
TO, THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND
THE POSSIBLE EFFECTS OF CHANGES IN SUCH LAWS.
BUSINESS OF THE COMPANY
Operations
The Company is primarily engaged, through its wholly-owned subsidiary
Legacy, in the design, marketing and administration of life insurance and
annuity products. Through Legacy, the Company has entered into marketing
agreements (the "Marketing Agreements") with American National Insurance Company
("American National"), IL Annuity and Insurance Company ("IL Annuity"), and
Transamerica Life Insurance and Annuity Company ("Transamerica"), each of which
is an unaffiliated company and which are collectively referred to herein as the
"Carriers." American National has over $1.4 billion in capital and surplus and
is rated "A++" by A.M. Best. IL Annuity has over $13 million in capital and
surplus and is rated "A" by A.M. Best. Transamerica has over $560 million in
capital and surplus and is rated "A+" by A.M. Best. The Company currently
markets Policies written in the District of Columbia and in each state of the
United States, except Alabama and New York.
The Marketing Agreements grant Legacy the exclusive right to market certain
annuity and life insurance products issued by the Carriers (the "Policies").
Under the terms of the Marketing Agreements, Legacy is responsible for the
recruiting, training, managing and supervising of producers who have contracted
with Legacy to sell the Policies. For these services, the Carriers pay Legacy
marketing allowances and commissions based on the volume of Policies sold. The
Carriers are also responsible for the payment to Producers of commissions on the
sale of Policies. Legacy may, in its discretion, elect to pay commissions to
Producers in addition to those paid by the Carriers.
The Company currently markets the Policies through a network consisting of
approximately 14,000 Producers, of whom approximately 4,000 have generated
business during 1998. Each of these Producers have entered into a producer
agreement with Legacy pursuant to which the services of the Producer are
provided on a non-exclusive basis. These agreements may be terminated
immediately by either the Producer or Legacy, with or without cause.
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Legacy's sales network is built on a multi-level structure pursuant to
which Producers may sponsor other Producers. Sponsored Producers are referred to
as "downline" Producers within the sponsoring Producer's "downline network."
Sponsored Producers may also sponsor other Producers, creating a hierarchy under
the original sponsoring Producer. The Producer contract contains a nine-level
"open book" design pursuant to which a Producer may advance from one level to
the next based on commission level and the size of the Producer's downline
network. As a Producer advances to higher levels within the system, the Producer
receives a higher commission on sales made by the Producer and the Producer's
downline network. This creates a financial incentive for Producers to build a
hierarchy, or downline network, of Producers, thereby contributing to their own
financial growth and to the growth of the Company. Advancements to higher levels
can occur as often as every three months. Producers at the highest levels are
considered "Wholesalers."
Legacy provides tools and services that assist Wholesalers with recruiting,
training and support responsibilities associated with the Producers in their
hierarchy. In addition, Legacy assists Producers with programs designed to
increase their sales and better serve their clients. Recruiting and training
programs include visual presentations, product videos and seminars, advertising
material guidelines and sales flip charts. Legacy also produces product
information, sales brochures, pre-approved advertisements and recruiting
material.
Legacy has also entered into insurance processing agreements (the
"Processing Agreements") with each of the Carriers pursuant to which Legacy
provides clerical, administrative and accounting services with respect to the
Policies. Such services include billing, collecting and remitting cash on the
Policies. However, all cash receipts are deposited into accounts maintained by
the Carriers and all cash remitted by the Carriers to either policyholders or
Legacy is paid from accounts maintained by the Carriers. For providing such
services, Legacy is paid on a per transaction basis with the amount of the fee
depending on the type of policy and type of service. Historically, all
administrative services with respect to Policies were performed at the Company's
headquarters in Petaluma, California. However, during 1998, Legacy began
performing administrative services with respect to certain Policies at
facilities located in Rome, Georgia.
In addition to Policy marketing and administration, Legacy also assists the
Carriers in Policy design and development. Legacy's marketing and actuarial
departments work with the Carriers to design proprietary annuity and life
insurance products to be marketed by Legacy. All products marketed by Legacy
include certain guarantees for the benefit of policyholders, known as Legacy's
Cornerstone Guarantees, which are designed to be unique in the insurance
marketplace. Legacy's Cornerstone Guarantees generally include: (i) a
contractually guaranteed maximum administrative fee; (ii) multiple cash value
strategies; and (iii) life insurance products providing a guarantee that the
cost of insurance will be no greater than the yearly renewable term rates
provided by the reinsurers of the Policies, with changes in the cost of
insurance resulting solely from changes in the Policies' future experience
factors.
During 1997, American National and IL Annuity were the only insurance
companies for which Legacy marketed and administered insurance products.
Approximately 36.2% and 57.0% of the Company's total revenue during 1997
resulted from agreements with American National and IL Annuity, respectively.
For the six months ended June 30, 1998, approximately 14.0% and 80.7% of the
Company's total revenue resulted from agreements with American National and IL
Annuity, respectively. During the third quarter of 1998, Legacy began marketing
products for Transamerica.
Neither the Marketing Agreements nor the Processing Agreements prevent
Legacy from entering into similar arrangements with other insurance companies.
However, the Marketing Agreements prevent Legacy from marketing products which
are similar to those being offered under the respective Marketing Agreement. In
addition, under the terms of the Marketing Agreements with American National and
IL Annuity, Legacy is obligated to give American National and IL Annuity the
opportunity to participate in the marketing of any new products developed by
Legacy.
The Marketing and Processing Agreements with American National and IL
Annuity expire on January 1, 1999, and December 31, 2005, respectively but may
be renewed by mutual agreement for successive one year terms. These Agreements
may be terminated by either party upon 180 days notice without cause, and may be
terminated by either party immediately for cause. In addition, the Marketing
Agreements with American National and with IL Annuity will terminate
automatically at the end of any calendar quarter upon failure of Legacy to meet
certain quarterly minimum production requirements for two successive calendar
quarters. The Marketing and Processing Agreements with Transamerica do not have
a fixed term but
11
<PAGE>
may be terminated by either party upon twelve months notice without cause, and
may be terminated by either party immediately for cause.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial
Services, Inc. ("LFS"), the Company engages in the offering and sale of variable
annuity and life insurance products, mutual funds and debt and equity securities
on a fully disclosed basis. LFS has entered into agreements (the "Agreements")
with various entities pursuant to which LFS has a non-exclusive right to solicit
sales of these investment products offered by such entities through its network
of independent representatives and to provide certain marketing and
administrative services in order to facilitate sales of such products. Under the
Agreements, the Company is compensated based upon pre-determined percentages of
production. The Agreements may be terminated by any party upon 30 days written
notice. Sales of products pursuant to the Agreements began during the first
quarter of 1996.
Competitive Business Conditions
The life insurance and annuity business is highly competitive. The Company
faces competition from various companies and organizations, including banks,
securities brokerage firms, investment advisors and other financial
intermediaries marketing insurance products, annuities, mutual funds, and other
retirement oriented investments. Some of these competitors have substantially
greater assets, financial resources and market acceptance. The Company's
distribution system relies on independent insurance Producers to be able to
effectively market its products competitively. Maintaining relationships with
Producers requires getting new products to the market in an efficient and timely
manner, offering competitive commission schedules, and providing superior
marketing training and support.
Regulatory Environment
Legacy is licensed as an insurance agency and/or a third party
administrator in several of the United States and, accordingly, is subject to
regulation by the various states' Departments of Insurance. As a result of being
licensed as an insurance agency, Legacy is subject to regulations regarding
residency requirements, record maintenance, qualifications of its agents and
employees, and payments of commissions. As a result of being licensed as a third
party administrator, Legacy is subject to regulation regarding receipt of
payments from insureds, record maintenance, approval of advertising, premium
collection and payment of claims, compensation, and disclosure of charges and
fees and delivery of materials to insureds.
Increased national attention has forced the National Association of
Insurance Commissioners and state insurance departments to re-examine existing
laws and regulations affecting insurance companies, especially those involving
insurance company solvency, marketing practices, and investment policies. The
Company has responded to the increased scrutiny over the marketing of insurance
products by instituting strict advertising guidelines, generating consistent
marketing materials and testimonies addressing appropriate marketing practices,
and including this topic in its bi-annual Wholesaler meetings. While the Company
itself is not an insurance company, changes in the regulatory environment which
affect the insurance companies with which it contracts can impact its
operations.
LFS is registered as a broker-dealer with, and is subject to regulation by,
the SEC and is a member of the NASD. LFS is also registered as a fully disclosed
broker-dealer in several states. As a result of federal and state broker-dealer
registration and SRO memberships, LFS is subject to overlapping schemes of
regulation which cover many aspects of its securities business. Such regulations
cover matters including capital requirements, record keeping and reporting
requirements, supervisory and organizational procedures intended to assure
compliance with securities laws and to prevent the improper trading on material
nonpublic information, employee-related matters, including qualification and
licensing of supervisory and sales personnel, and rules of the SROs designed to
promote high standards of commercial honor and just and equitable principles of
trade. A particular focus of the applicable regulations concerns the
relationship between broker-dealers and their customers. As a result, many
aspects of the broker-dealer customer relationship are subject to regulation,
including in some instances "suitability" determinations as to certain customer
transactions, limitations in the amounts that may be charged to customers, and
disclosures to customers. LFS is in full compliance with all applicable capital
and other regulatory requirements.
12
<PAGE>
Compliance with many of the regulations applicable to the Company involves
a number of risks, particularly because applicable regulations in a number of
areas may be subject to varying interpretation. Regulators make periodic
examinations and review annual, monthly and other reports on the Company's
operations and financial condition. In the event of a violation of or
non-compliance with any applicable law or regulation, governmental regulators
and SROs may institute administrative or judicial proceedings that may result in
censure, fine, civil penalties (including treble damages in the case of insider
trading violations), criminal penalties, the issuance of cease-and-desist
orders, the deregistration or suspension of the non-compliant broker-dealer, the
suspension or disqualification of the broker-dealer's officers or employees, and
other adverse consequences. Such violations or non-compliance could also subject
the Company, and/or its employees to civil actions by private persons. Any
governmental, SRO or private proceeding alleging violation of or non-compliance
with laws or regulations could have a material adverse effect upon the Company's
business, financial condition, results of operations and business prospects.
Employees
As of June 30, 1998, the Company had approximately 294 full-time equivalent
employees. None of the employees of the Company is covered by a collective
bargaining agreement, and the Company believes that its employee relations are
satisfactory.
Property
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 on March 11, 1999. The Company has entered into a
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, subject to
extension, at the option of the Company, for two additional terms of five years
each. The Company also currently leases approximately 30,500 square feet of
office space in Rome, Georgia. This lease expires in December, 2002, unless the
Company exercises its option to extend the lease for a period of three years.
Management believes that existing and planned office space is and will continue
to be adequate for the Company's operations for the foreseeable future.
Legal Proceedings
As a professional services firm engaged in marketing and servicing life
insurance and annuity products, the Company encounters litigation in the normal
course of business. Management is not aware of any material exposure to the
Company resulting from such litigation. Legacy recently settled a lawsuit
brought in the State of Alabama. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations.")
Available Information
The Company has filed with the SEC a Registration Statement on Form S-1
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") pursuant to the provisions of the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations
promulgated thereunder, for the registration of the Shares offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
portions of which have been omitted as permitted by the rules and regulations of
the SEC. For further information with respect to the Company and the Shares
offered hereby, reference is made to the Registration Statement, including
exhibits thereto and financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any contract or
other document are not necessarily complete. With respect to each such contract
or other document filed with the SEC as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed by the Company with the SEC may
13
<PAGE>
be inspected at the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the regional
offices of the SEC located at Seven World Trade Center, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials may be obtained from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
at prescribed rates. In addition, the SEC maintains a Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC.
The Company is currently subject to the informational requirements of the
Exchange Act. So long as the Company is subject to the periodic reporting
requirements of the Exchange Act, it will continue to furnish the reports and
other information required thereby to the Commission. The Company intends to
furnish the holders of the Shares with annual reports containing, among other
information, audited consolidated financial statements reported upon by an
independent public accounting firm. The Company also intends to furnish such
other reports as it may determine or as may be required by law.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected summary consolidated financial data for the Company
for the years ended December 31, 1997, 1996, 1995, and 1994 and the five month
period ended December 31, 1993 have been derived from financial statements
audited by PricewaterhouseCoopers, LLP, independent certified public
accountants, whose report with respect to their audits of the financial
statements as of December 31, 1997 and 1996, and for the three years ended
December 31, 1997, is included elsewhere in this Prospectus. The data presented
for the six month periods ended June 30, 1998 and 1997 are derived from
unaudited financial statements presented elsewhere in the this Prospectus and,
in the opinion of management, fairly reflect the consolidated results of
operations and the consolidated financial condition of the Company for such
periods. The summary consolidated financial data set forth below should be read
in conjunction with the consolidated financial statements of the Company and
notes thereto and the other financial information, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere herein. The results of operations for interims period are not
necessarily indicative of results that may be expected for a full year or any
other interim period.
<TABLE>
<CAPTION>
Five
Year Ended Year Ended Year Ended Year Ended Months Ended
December December December December December 31,
31, 1997 31, 1996 31, 1995 31, 1994 1993 (2)
--------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Total Income $ 22,581,07 $ 18,237,528 $ 17,153,947 $ 7,683,791 $ 1,627,210
Net Income Before Extraordinary Item 3,150,545 2,714,495 4,858,620 5,085,866 473,187
Earnings Per Share .12 .10 .18 .21 .02
Selected Balance Sheet Data:
Total Assets 19,280,941 $ 15,424,902 $ 12,304,801 $ 6,860,778 $ 2,128,057
Total Non Current Liabilities 281,894 316,741 304,557 130,146 1,136,321
Total Liabilities 3,621,380 2,519,866 1,762,924 1,287,425 2,199,685
Redeemable Common Stock 11,842,651 12,343,001 12,682,750 12,696,412 12,696,412
Shareholders' Equity (Deficit) 3,816,910 562,035 (2,140,873) (7,123,059) (12,768,040)
Cash Dividends declared - - - - -
Selected Operating Data:
Total Premium Placed Inforce(1) $777,300,000 $626,800,000 $620,000,000 $339,000,000 $30,000,000
Total No. of Policies Placed Inforce(1) 15,060 11,144 12,167 6,118 313
</TABLE>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
---------------- ---------------
Selected Income Statement Data:
Total Income $21,006,020 $9,559,355
Net Income Before Extraordinary Item 4,425,059 936,904
Earnings Per Share .17 .04
Selected Balance Sheet Data
Total Assets $26,422,381
Total Non Current Liabilities 387,061
Total Liabilities 6,531,569
Redeemable Common Stock 11,565,951
Shareholders' Equity 8,324,861
Cash Dividends Declared -
(1) Inforce premium and policies are actually statistics of the Carriers but
represent factors which directly affect the Company's revenue.
(2) Operating statements are for the five months ended December 31, 1993. See
discussion at "Financial Statements and Supplementary Data," Notes to the
Consolidated Financial Statements, Note 1(a).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 and
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Summary--The Company's net income increased approximately $436,000, or
16.1%, in 1997 compared to 1996. This increase is attributable primarily to
increases in income resulting from increases in premium placed inforce for the
Carriers. From 1995 to 1996, however, net income decreased approximately $2.1
million, or 44.1%, due primarily to increases in expenses to accommodate actual
and anticipated increases in sales, as discussed below.
Income--The Company's major sources of income are marketing allowances,
commission income and administrative fees from sales and administration of
annuity and life insurance products on behalf of the Carriers. Levels of
marketing allowances and commission income are directly related to 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 approximately $4.3 million, or 23.8%, in 1997 compared to
1996, and increased approximately $1.1 million, or 6.3%, in 1996 compared to
1995. These increases are attributable primarily to increases in sales volume,
as discussed below.
Marketing allowances and commission income, combined, increased
approximately $3.7 million, or, 25.7%, in 1997 from 1996 and increased
approximately $633,000, or 4.6%, in 1996 from 1995. These increases are due
primarily to increases in the volume of sales by the Company's distribution
network for the Carriers. Premium placed inforce for the Carriers totaled
approximately $777.3 million, $626.8 million, and $620.0 million in 1997, 1996,
and 1995, respectively. This represented a 24.0% increase from 1996 to 1997 and
a 1.2% increase from 1995 to 1996. Also contributing to the increases in income
were shifts in both 1997 and 1996 to sales of products which yield higher
marketing allowances and commission income.
Administrative fees increased approximately $468,000, or 14.9%, in 1997
compared to 1996, and increased approximately $104,000, or 3.4%, in 1996
compared to 1995. 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.
In 1997, the Company marketed and administered insurance products for only
two Carriers, American National and IL Annuity. In 1997, approximately 36.2% and
57.0% of the Company's total revenue resulted from agreements with American
National and IL Annuity, respectively, compared to approximately 87.5% and 5.9%,
respectively, in 1996. This shift in income from American National to IL Annuity
is attributable primarily to favorable market acceptance of IL Annuity's
products. On May 29, 1998, the Company entered into marketing and administrative
agreements with Transamerica.
Savings and investment income primarily represents earnings from
investments in marketable securities. Such earnings decreased approximately
$31,000, or 4.3%, in 1997 from 1996, and increased approximately $376,000, or
106.3%, in 1996 from 1995. These fluctuations are attributed primarily to
changes in the amount of assets invested.
Seminar income consists of attendance fees and sales of educational
materials related to educational seminars held by the Company. The seminars are
designed to stimulate sales of life insurance products through the training of
Producers in current estate planning concepts and were first sponsored by the
Company in 1997.
Expenses--Total expenses increased approximately $3.6 million, or 25.9%, in
1997 compared to 1996 and increased approximately $3.3 million, or 31.7%, in
1996 compared to 1995. These increases are attributable primarily to increases
in compensation, sales promotion and support, and occupancy expenses, as
discussed below.
As a service organization, the Company's primary expenses are salaries and
related employee benefits. These expenses increased approximately $2.3 million,
or 27.4%, in 1997 from 1996, and increased approximately $2.0 million, or 31.3%,
in 1996 from 1995. These increases resulted from increases in the average number
of full-time equivalent employees, which rose to 184 in 1997, from 151 in 1996
and 108 in 1995. These increases in employment are largely attributable to
preparation for and accommodation of increases in sales of insurance products.
Salaries and benefits also increased in 1997 and 1996 due to the addition of
personnel at higher pay levels and due to scheduled pay increases for existing
employees.
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<PAGE>
Sales promotion and support expense consists primarily of costs related to
the Company's annual national sales conventions and to various sales 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 $333,000, or
14.9%, in 1997 from 1996, due primarily to increased Producer support costs
associated with higher sales volume, as discussed above, and increased
approximately $869,000, or 63.8%, in 1996 from 1995, due primarily to higher
costs associated with the Company's 1996 annual sales convention.
Occupancy expense increased approximately $244,000, or 37.9%, in 1997 from
1996, and increased approximately $88,000, or 15.8%, in 1996 from 1995. These
increases are due primarily to increases in facilities rent expense resulting
from the Company's leasing additional office space in November, 1996, and to
overall increases in telephone and other utilities expenses which correspond
with increases in sales volume and employment, as discussed above.
Depreciation and amortization expense increased approximately $171,000, or
36.5%, in 1997 from 1996 and increased approximately $99,000, or 26.6%, in 1996
from 1995. These increases are due primarily to acquisitions of fixed assets in
1997 and 1996. Such acquisitions were necessary to improve newly leased office
space and to accommodate increases in employment, as discussed above.
Six Month Period Ended June 30, 1998 Compared to Six Month Period Ended
June 30, 1997
Summary--The Company's net income for the six months ended June 30, 1998
increased approximately $3.5 million, or 372.3%, compared with the corresponding
period in 1997. This increase is attributable primarily to increases in revenue,
as discussed below.
Income--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 $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 $730.8 million in the six months ended June 30, 1998,
compared to approximately $322.5 million during the same period in 1997,
representing an increase of 126.6%. Also contributing to increases in income in
the first six months of 1998 were shifts to sales of products which yield higher
marketing allowances and commission income.
Administrative fees increased approximately $1.5 million, or 96.5%, for the
six months ended June 30, 1998, over the corresponding period in 1997. This
increase is due primarily to increases in the number of policies sold and
administered and to a shift in policies administered to those which generate
higher administrative fees.
For the six months ended June 30, 1998, approximately 14.0% and 79.0% of
the Company's total revenue resulted from agreements with American National and
IL Annuity, respectively
Expenses--Total expenses increased approximately $5.6 million, or 70.9%, in
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.
Salaries and related employee benefits increased 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 in the first six months of 1998 due to the addition of personnel
at higher pay levels and to scheduled pay increases for existing employees.
17
<PAGE>
Sales promotion and support expense increased approximately $867,000, 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 by Legacy.
Professional fees increased approximately $216,000, or 60.5%, for the six
month period ended June 30, 1998 as compared with the corresponding period in
1997. This increase is primarily the result of increased legal fees associated
with the settlement of the litigation discussed below.
In December of 1996, Legacy and 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 Legacy. In
order to avoid protracted future litigation, Legacy, together with American
National, entered into an agreement to settle such lawsuit. The Company's total
net cost of the settlement, approximately $1.1 million, has been recorded as an
expense in the second quarter of 1998. Management believed that such amounts
could not be estimated as of December 31, 1997 or June 30, 1998, and
accordingly, no amounts were accrued on the Company's financial statements as of
such dates.
Stationery and supplies expense increased approximately $155,000, or 89.0%,
for the six months ended June 30, 1998, as compared with the corresponding
period in 1997. This increase is 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 and approximately $130,000, or 115.5%,
for the six months ended June 30, 1998, as compared with the corresponding
period in 1997. This increase is 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.
Recent Developments
As a result of the Company vacating its current office space in Petaluma
California (see "Business of Company Property"), management anticipates that
increased depreciation expenses of approximately $700,000 attributable to
abandoned leasehold improvements will be recognized ratably during the fourth
quarter of 1998 and the first quarter of 1999. In conjunction with the leasing
of additional office space that the Company will began to occupy 1999,
management anticipates that capital expenditures of approximately $430,000 will
be made in 1999 for furniture and fixtures.
Sales of Transamerica annuity products commenced in the third quarter of
1998.
Liquidity and Capital Resources
The Company's ability to mobilize its assets remained strong at December
31, 1997, with cash and short-term investment grade debt securities representing
66.8% of the Company's total assets (70.3% as of June 30, 1998). The Company's
principal needs for cash are for operating expenses, the purchase of computer
hardware and software, leasehold improvements, acquisitions of furniture and
fixtures to accommodate new employees, to support growth in operations, to fund
continued product development and potential strategic acquisitions, and as a
reserve to cover possible redemptions
18
<PAGE>
of certain of the Company's common stock, which is redeemable at the option of
shareholders under various agreements with the Company. The Company generally
utilizes cash from operations to fund its needs for cash. The Company generated
cash from operating activities of approximately $4.6 million and $6.5 million
for the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. The Company used approximately $1.3 million and $5.1 million of
net cash for investment activities for the year ended December 31, 1997 and the
six months ended June 30, 1998, respectively, and approximately $348,000 and
$193,000 of cash for redemptions and retirement of Common Stock for the year
ended December 31, 1997 and the six months ended June 30, 1998, respectively. In
1997, and in the first six months of 1998, redemption requests received by the
Company were not material in amount, either individually or in the aggregate,
and the Company believes that its liquid assets are sufficient to meet
anticipated requests for redemption. In the unlikely event that all redeemable
shares were presented for redemption, the Company believes that such demands
could be met by reserves on hand. At December 31, 1997 and June 30, 1998, the
redemption value of redeemable common stock was approximately $5.9 million and
$8.0 million, respectively (see " Financial Statements and Supplementary Data,"
Notes to Consolidated Financial Statements, Note 9).The Company's future cash
flows available to fund operations will depend primarily on the level of sales
of annuity and life insurance products and upon the Company's ability to control
operating expenses in relation to demand placed upon the organization from
increased sales.
In order to fund LFS during the start-up phase, the Company has committed
to make sufficient contributions to support LFS's operations and to ensure LFS's
compliance with financial regulatory requirements through December, 1998. Such
contributions totaled $330,000 in 1997 and $100,000 in the first six months of
1998.
Management intends to continue to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. As a result, management anticipates that cash and investments will
continue to represent a high percentage of total assets. Management believes
that existing cash and investment balances, together with cash flows from
operations, will provide sufficient funding for the foreseeable future.
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 on 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 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 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.
19
<PAGE>
MANAGEMENT
Directors and Executive Officers
Directors
The following are the Directors of the Company:
<TABLE>
<CAPTION>
Name Principal Occupation Director Since
<S> <C> <C>
Lynda L. Regan Ms. Regan, born in 1948, has served as Chairman 1990
and Chief Executive Officer of the Company since
1992. She was Senior Vice President and
Treasurer from 1990 to 1992.
Steve C. Anderson Mr. Anderson, born in 1948, has been a partner in 1990
Hoalst Anderson, an independent insurance
agency, since 1983. He is a member of the
National Association of Life Underwriters and
CLU Society.
R. Preston Pitts Mr. Pitts, born in 1951, has served as President 1995
and Secretary of the Company since February
1997, and as Chief Operating Officer of the
Company since April, 1998, and he served as
Chief Financial Officer of the Company from 1994
to July 1997. Prior to joining the Company, he
owned Pitts Company, a CPA firm specializing in
services for insurance companies, served as
financial officer for United Family Life Insurance
Company and American Security Insurance Group,
both Fortis-owned companies, and was Audit
Manager for Ernst & Young.
Ute Scott-Smith Ms. Scott-Smith, born in 1960, served as Senior 1997
Vice-President of the Company from 1990 to April
of 1997.
</TABLE>
20
<PAGE>
Executive Officers
In addition to the Directors who serve as executive officers of the Company
and who are identified above, the following individuals serve as executive
officers of the Company:
H. Lynn Stafford served as Vice President of Operations of the Company from
1995 to July, 1997, and as Information Systems Officer since August, 1997. Prior
to that time, he served as Chief Operations Officer for Lincoln Liberty Life
Insurance Company and First Delaware Life Insurance Company.
Gregory C. Egger has served as Chief Marketing Officer of the Company since
August, 1997. Prior to that time, Mr. Egger was Executive Vice President for
American Security Group.
David A. Skup has served as Chief Financial Officer of the Company since
July, 1997. Previously, Mr. Skup was Vice President in charge of Internal Audit
for Independent Insurance Group, Inc. and was Senior Audit Manager for Deloitte,
Haskins & Sells.
EXECUTIVE COMPENSATION
Executive Compensation
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------
Annual Annual All Other
Name and Position Year Salary Bonus (1) Other Compensation
- ----------------- ---- ------ --------- ----- ------------
<S> <C> <C> <C> <C> <C>
Lynda L. Regan, 1997 $407,712 $167,916 $ 4,750 (2) $ <179>
Chief Executive Officer 16,825 (5)
1996 408,894 52,290 4,750 (2) <179>
16,824 (5)
1995 408,067 181,534 4,620 (2) <179>
11,216 (5)
R. Preston Pitts, 1997 $300,000 $149,916 $ 4,750 (2) $ <179>
President and Chief 1996 300,000 72,290 4,750 (2) <179>
Operating Officer 1995 300,000 81,534 4,620 (2) <179>
Gregory C. Egger, (4) 1997 $ 77,885 $ 52,046 $ <179> $ <179>
Chief Marketing Officer
David A. Skup, (4) 1997 $ 60,577 $ 20,661 $ <179> $ <179>
Chief Financial Officer
H. Lynn Stafford, 1997 $139,231 $ 73,416 $ 4,750 (2) $ <179>
Information Systems Officer 1996 130,059 31,790 4,750 (2) <179>
1995 50,000 32,368 <179> <179>
Ute Scott-Smith, (6) 1997 $ 66,754 $ <179> $ 4,750 (2) $ <179>
Senior Vice President 1996 177,318 47,290 4,750 (2) <179>
1995 175,000 56,534 4,620 (2) 80,313 (3)
</TABLE>
(1) Includes bonuses in the year in which they were earned.
(2) The Company matches contributions made to its 401(k) plan at a rate of $.50
for every $1.00 deferred, up to 6% of total annual salary.
(3) Compensation related to the payment of personal income taxes due to the
exercise of stock options in 1991.
(4) Mr. Skup and Mr. Egger were elected officers of the Company in July, 1997,
and August, 1997, respectively.
21
<PAGE>
(5) The Company pays interest on debt related to a split dollar life insurance
policy under which Ms. Regan is the beneficiary.
(6) Ms. Scott-Smith resigned effective April 4, 1997, and became a Director in
August, 1997.
Director Compensation
The Company compensates outside Directors for attending Board and
committee meetings at $2,000 per meeting. Currently, Steve C. Anderson and Ute
Scott-Smith are the only outside Directors of the Company. The other Directors
are otherwise employed by the Company and are not compensated for serving as
Directors or attending Board or committee meetings.
22
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. The compensation of
executive officers is determined by the Board of Directors. Lynda Regan, who is
Chief Executive Officer of the Company, is also Chairman of the Board of
Directors and R. Preston Pitts, who is President and Chief Operating Officer, is
also a Director. None of the executive officers of the Company serve as a
Director or member of the compensation committee of an entity, any of whose
executive officers serves as a Director of the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares and the percentage of the
shares of the Company's Series A Stock beneficially owned by each of the
Directors and executive officers of the Company as of June 30, 1998. No Director
or officer owns any shares of Series B Stock.
<TABLE>
<CAPTION>
Name Position Total Percent
<S> <C> <C> <C>
Lynda L. Regan Chairman of the Board &
Chief Executive Officer 11,358,222 43.8%
R. Preston Pitts Director, President & Chief
Operating Officer 800,000 3.0%
Ute Scott-Smith Director 441,739 1.7%
Steve C. Anderson Director 69,714 *
---------- -----
Directors and
officers as a group 12,669,675 48.9%
========== =====
</TABLE>
*Indicates that the percentage of the outstanding shares beneficially owned
is less than one percent (1%).
The Company knows of no person who is the beneficial owner of more than
five percent of any class of the Company's outstanding Common Stock other than
Lynda L. Regan, Chairman and Chief Executive Officer of the Company, whose
ownership is listed above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid Ashley A. Penney, a Director until August, 1997, $133,113
for services provided as a human resource consultant during 1997.
In May of 1998, the Company entered into a Shareholder's Agreement with
Lynda Regan 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.
DESCRIPTION OF CAPITAL STOCK
The Company's total authorized capital stock consists of 100,000,000 shares
of Common Stock, which is divided into one or more series, and 100,000,000
shares of preferred stock ("Preferred Stock"). There are currently two series of
Common Stock authorized, Series A Stock of which 45,000,000 shares are
authorized and 25,906,857 shares are outstanding, and Series B Stock of which
600,398 are authorized and 600,618 shares are outstanding. All of the
outstanding shares of Series A Stock and Series B Stock are fully paid and
non-assessable. Shareholders do not have pre-emptive rights to purchase
additional shares of Common Stock. There are no shares of Preferred Stock
currently outstanding.
23
<PAGE>
Each share of Series A Stock and Series B Stock is entitled to one vote at
shareholders' meetings. Holders of shares of Series A Stock and Series B Stock
vote as one class with holders of each other series of Common Stock upon any
matter submitted to a vote of shareholders of the Company, except with respect
to those matters which would adversely affect the holders of one series of
Common Stock in a different manner than other series of Common Stock. A majority
of shares of Common Stock eligible to vote at a meeting constitutes a quorum for
voting purposes. Pursuant to Section 708 of the California Corporations Code, in
the election of Directors, each shareholder may cumulate his or her votes and
give any one candidate a number of votes to which the shareholder's shares are
entitled, or may distribute such votes among as many candidates as the
shareholder may determine. However, no shareholder will be entitled to cumulate
votes unless such candidates names have been placed in nomination prior to the
voting and at least one shareholder has given notice at the meeting prior to the
voting of intent to cumulate votes.
Holders of Series A Stock and Series B Stock are entitled to receive
distributions out of any funds legally available therefor, payable pro rata
based on the total aggregate number of shares of such series held to the total
number of shares of Common Stock then outstanding. No distribution may be made
to the holders of any series of Common Stock unless such distribution is also
made, on a pro rata basis, to the holders of each other series of Common Stock
then outstanding.
The Board may, without further action by the shareholders, issue shares of
Preferred Stock in such series and amounts and under such terms and conditions
as the Board shall decide. The Board may also, without further action by the
shareholders, issue additional series of Common Stock in such amounts and under
such terms and conditions as the Board shall decide The Board has no current
intention to issue any series of Preferred Stock or any additional series of
Common Stock.
Prior to December 31, 1992, the Company issued 5,935,094 shares of Series A
Stock (the "Redeemable Series A Stock") at prices ranging from $1.00 to $2.25
per share. The Redeemable Series A Stock was issued in accordance with the terms
of the 701 Asset Accumulator Program (the "701 Plan") between the Company, its
Producers and employees, and the Confidential Private Placement Memorandum and
Subscription Agreement (the "Subscription Agreement") between the Company and
certain accredited investors. Under the terms of the 701 Plan and the
Subscription Agreement, the Redeemable Series A Stock may be redeemed at the
option of the holder after being held for two consecutive years, at a redemption
price based on current market value, subject to the Company's ability to make
such purchases under applicable corporate law. In connection with a merger in
1991 between the Company and LifeSurance Corporation, a wholly-owned insurance
subsidiary of the Company with no current ongoing operations, 615,242 shares of
B Stock (the "Redeemable Series B Stock") were authorized and issued in exchange
for all of the outstanding stock of LifeSurance Corporation. Pursuant to the
Agreement and Plan of Merger, the Redeemable Series B Stock is subject to
redemption at the option of the holder in quantities of up to 10% per year, at a
redemption price based on current market value, provided that the redemption is
in accordance with applicable corporate law. As of June 30, 1998, 5,359,651
shares of Redeemable Series A Stock and 600,398 shares of Redeemable Series B
Stock remained outstanding.
The transfer agent and registrar for the shares of Common Stock is Harris
Trust Company of California.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's stock. The
Company's Series A Stock is held by approximately 1,500 shareholders of record.
The Series B Stock is held by approximately 9,800 shareholders of record.
The Board may, at its sole discretion, declare and pay dividends on common
stock, subject to capital and solvency restrictions under California law. The
Company's ability to pay dividends is dependent on the ability of its
subsidiaries to pay dividends or make other distributions to the Company. To
date, the Company has not paid any dividends on its Common Stock, and the
Company does not anticipate paying any dividends on its outstanding Common Stock
in the foreseeable future.
24
<PAGE>
PLAN OF DISTRIBUTION
The Shares being offered hereby will be sold pursuant to the exercise of
options granted under the Plans by employees of the Company, or its
subsidiaries, who have other duties in connection with the business of the
Company or its subsidiaries. Such employees receive no commissions or other
compensation in connection with the sale of the Shares being offered hereby.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by LeBoeuf, Lamb, Greene & MacRae, L.L.P., Washington, D.C., a limited
liability partnership including professional corporations.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers, LLP, independent public accountants, given on the
authority of said firm as experts in auditing and accounting.
25
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants............................................
Consolidated Balance Sheets as of December 31,
1997 and 1996.......................................................
Consolidated Income Statements For the Years Ended
December 31, 1997, 1996, and 1995...................................
Consolidated Statements of Shareholders' Equity..............................
Consolidated Statements of Cash Flows For the Years
Ended December 31, 1997, 1996, and 1995.............................
Notes to Consolidated Financial Statements...................................
Consolidated Balance Sheets as of June 30, 1998 (unaudited).................
Consolidated Income Statements For the Six Months Ended
June 30, 1998 and 1997 (unaudited).................................
Consolidated Statements of Shareholders' Equity (unaudited)..................
Consolidated Statements of Cash Flows For the Six Months Ended
June 30, 1998 and 1997 (unaudited).................................
Notes to Consolidated Financial Statements (unaudited).......................
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Regan Holding Corp.
We have audited the accompanying consolidated balance sheets of Regan Holding
Corp. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Regan Holding
Corp. and Subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
March 18, 1998
F-2
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
December 31, 1997 December 31, 1996
ASSETS
Cash and cash equivalents $ 5,194,332 $ 2,202,596
Investments 7,692,279 7,947,207
Accounts receivable 1,239,306 511,710
Prepaid expenses 572,932 361,950
Deferred income taxes-current 488,437 --
Marketing supplies inventory 228,853 251,979
Income taxes receivable -- 179,746
----------------- -----------------
Total Current Assets 15,416,139 11,455,188
----------------- -----------------
Net fixed assets 2,610,324 1,741,388
Deferred income taxes-non current 783,477 1,600,150
Other assets 471,001 628,176
----------------- -----------------
Total Non Current Assets 3,864,802 3,969,714
----------------- -----------------
TOTAL ASSETS $ 19,280,941 $ 15,424,902
================= =================
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 344,071 $ 170,738
Accrued liabilities 2,605,854 2,032,387
Income taxes payable 389,561 --
----------------- -----------------
Total Current Liabilities 3,339,486 2,203,125
----------------- -----------------
Loan payable 132,285 132,285
Deferred incentive compensation 149,609 184,456
----------------- -----------------
Total Non Current Liabilities 281,894 316,741
----------------- -----------------
TOTAL LIABILITIES 3,621,380 2,519,866
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 8) -- --
REDEEMABLE COMMON STOCK, Series A and B (Note 9) 11,842,651 12,343,001
----------------- -----------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 100,000,000 shares
No shares issued or outstanding <179> <179>
Series A common stock, no par value:
Authorized: 45,000,000 shares
Issued and outstanding: 20,614,014 and 20,800,791
shares at December 31, 1997 and 1996, respectively 3,382,914 3,532,071
Paid-in capital from retirement of common stock 611,559 310,110
Accumulated deficit (182,433) (3,332,887)
Net unrealized gains on investments 4,870 52,741
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 3,816,910 562,035
----------------- -----------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY $ 19,280,941 $ 15,424,902
================= =================
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Marketing allowances $ 12,386,755 $ 10,039,278 $ 9,767,414
Commission income 5,609,078 4,281,032 3,920,318
Administrative fees 3,603,708 3,136,123 3,032,538
Savings and investment income 697,593 728,927 353,393
Seminar income 220,406 <179> <179>
Other income 63,535 52,168 80,284
------------ -------------- -------------
Total Income 22,581,075 18,237,528 17,153,947
------------ -------------- -------------
EXPENSES
Salaries and related benefits 10,512,259 8,253,564 6,287,339
Sales promotion and support 2,565,200 2,231,978 1,362,689
Occupancy 887,608 643,726 555,679
Professional fees 712,129 652,219 766,025
Depreciation and amortization 640,614 469,255 370,651
Courier and postage 480,175 373,158 255,149
Stationery and supplies 399,140 292,695 195,541
Equipment 369,706 287,448 261,691
Travel and entertainment 329,611 239,400 196,868
Insurance 165,028 167,154 89,729
Miscellaneous 174,127 74,273 50,758
------------ -------------- -------------
Total Expenses 17,235,597 13,684,870 10,392,119
------------ -------------- -------------
INCOME FROM OPERATIONS 5,345,478 4,552,658 6,761,828
PROVISION FOR INCOME TAXES 2,195,024 1,838,163 1,903,208
------------ -------------- -------------
NET INCOME $ 3,150,454 $ 2,714,495 $ 4,858,620
============ ============== =============
EARNINGS PER SHARE
Weighted average shares outstanding 26,895,594 27,540,209 27,563,679
Basic earnings per share $ .12 $ .10 $ .18
============ ============== =============
Diluted earnings per share $ .12 $ .10 $ .18
============ ============== =============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
Paid-in Net
Capital from Unrealized
Series A Common Stock Retirement of Accumulated Gains/
Shares Amount Common Stock Deficit (Losses) Total
<S> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1995 20,964,126 $ 3,801,004 $ <179> $(10,906,002) $ (18,061) $ (7,123,059)
Issuance of stock 106,665 1,067 1,067
Net income for the
twelve months ended
December 31, 1995
4,858,620 4,858,620
Net unrealized gains on
investments 207,806 207,806
Deferred taxes on net
unrealized gains <179> <179> <179> <179> (85,307) (85,307)
------------ ------------ ------------ ------------- ------------ ------------
Balance
December 31, 1995 21,070,791 3,802,071 <179> (6,047,382) 104,438 (2,140,873)
Redemptions and
retirement of
common stock (270,000) (270,000) 310,110 40,110
Net income for the
twelve months ended
December 31, 1996 2,714,495 2,714,495
Net unrealized losses on
investments (93,603) (93,603)
Deferred taxes on net
unrealized losses 41,906 41,906
------------ ------------ ------------ ------------- ------------ ------------
Balance
December 31, 1996 20,800,791 3,532,071 310,110 (3,332,887) 52,741 562,035
Redemptions and
retirement of
common stock (186,777) (149,157) 301,449 152,292
Net income for the
twelve months ended
December 31, 1997 3,150,454 3,150,454
Net unrealized losses on
investments (80,010) (80,010)
Deferred taxes on net
unrealized losses 32,139 32,139
------------ ------------ ------------ ------------- ------------ ------------
Balance
December 31, 1997 20,614,014 $ 3,382,914 $ 611,559 $ (182,433) $ 4,870 $ 3,816,910
============ ============ ============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,150,454 $ 2,714,495 $ 4,858,620
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization of
fixed assets 632,781 465,394 354,854
Accretion/amortization of investments (68,761) (39,372) (33,903)
Net realized gain on sales of investments (13,499) (2,525) --
Realized loss on sale of fixed assets 19,603 -- --
Net change in accounts receivable (727,596) 995,418 (1,262,202)
Net change in prepaid expenses (210,982) (255,411) 15,594
Net change in marketing supplies inventory 23,126 (73,265) (104,036)
Net change in income taxes receivable and payable 569,307 (174,059) (109,792)
Net change in deferred income taxes 360,375 539,413 508,103
Net change in accounts payable 173,333 48,290 54,994
Net change in accrued liabilities 573,467 784,156 528,849
Net change in other assets and liabilities 116,734 (458,000) 228,286
----------- ----------- -----------
Net cash provided by operating activities 4,598,342 4,544,534 5,039,367
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (20,404,456) (19,087,646) (6,589,085)
Proceeds from sale and maturities of investments 20,667,228 16,156,162 3,497,115
Purchases of fixed assets (1,521,320) (519,758) (823,022)
----------- ----------- ----------
Net cash used in investing activities (1,258,548) (3,451,242) (3,914,992)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and retirement of common stock (348,058) (299,639) --
Payments on note payable -- (87,688) (280,000)
Proceeds from issuance of common stock -- -- 1,067
Net cash used in financing activities (348,058) (387,327) (278,933)
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,991,736 705,965 845,442
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,202,596 1,496,631 651,189
----------- ----------- -----------
END OF PERIOD $ 5,194,332 $ 2,202,596 $ 1,496,631
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 18,695 $ 18,883 $ 12,042
income taxes paid $ 1,265,025 $ 1,472,806 $ 1,450,300
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
a. Organization
Regan Holding Corp. (the "Company") was incorporated in the
State of California on February 21, 1990, for the primary
purpose of owning and operating an insurance company. The
Company conducted business through its primary subsidiary, Old
Colony Life Insurance Company ("Old Colony"), until May 21,
1992. The Company conducted no operations and prepared no
financial statements through August 1, 1993.
The Company, through its wholly-owned subsidiary Legacy
Marketing Group ("LMG"), has entered into marketing agreements
(the "Marketing Agreements") with American National Insurance
Company ("American National") and IL Annuity and Insurance
Company ("IL Annuity"), collectively referred to herein as the
"Carriers." American National is an unaffiliated company with
over $1.5 billion in capital and surplus and is rated "A++" by
A.M. Best. IL Annuity is also an unaffiliated company, with
over $13 million in capital and surplus and is rated "A" by
A.M. Best. The Marketing Agreements grant the Company the
exclusive right to market certain annuity and life insurance
products issued by the Carriers (the "Policies"). Under the
terms of the Marketing Agreements, the Company is responsible
for the recruiting, training, managing and supervising of
Producers in the sale of the Policies. For these services, the
Carriers pay the Company marketing allowances and commissions
based on the volume of Policies sold.
The Company has also entered into insurance processing
agreements (the "Processing Agreements") with the Carriers
pursuant to which the Company provides clerical,
administrative and accounting services with respect to the
Policies. Such services include billing, collecting and
remitting cash on the Policies. However, all cash receipts are
deposited into accounts maintained by the Carriers upon
receipt by the Company and all cash remitted is paid from
accounts maintained by the Carriers. For providing such
services, the Company is paid on a per transaction basis with
the amount of the fee depending on the type of policy.
Effective March 1, 1996, the Marketing and Processing
Agreements with American National were amended to reduce
certain commissions and administrative fees earned by the
Company. In addition, during April 1996, certain investment
strategy features of the annuity policies offered by American
National were eliminated.
The Marketing and Processing Agreements with American National
and IL Annuity expire June 1, 1998, and December 31, 2005,
respectively, but may be renewed by mutual agreement for
successive one year terms. The Agreements may be terminated by
either party upon 180 days notice without cause, and may be
terminated by either party immediately for cause. In addition,
the Marketing Agreements will terminate automatically at the
end of any calendar quarter upon failure of the Company to
meet certain quarterly minimum production requirements for two
successive calendar quarters. The Company is currently
negotiating with American National to renew the Marketing and
Processing Agreements. Management expects that new agreements
will be signed during the second quarter of 1998.
In May, 1995, the Company formed Legacy Financial Services,
Inc. ("LFS"), a wholly-owned broker-dealer subsidiary. LFS has
been approved by the National Association of Securities
Dealers and the Securities and Exchange Commission to engage
in the offering and sale of variable annuity and life
insurance products, mutual funds and debt and equity
securities
F-7
<PAGE>
(collectively, the "Products") on a fully disclosed basis. LFS
has entered into agreements (the "Agreements") with various
entities licensed to sell the Products. The Agreements grant
LFS the non-exclusive right to solicit sales of the Products
through its network of independent representatives and to
provide certain marketing and administrative services in order
to facilitate sales of the Products. Under the Agreements, the
Company is compensated based upon pre-determined percentages
of production. The Agreements may be terminated by any party
upon 30 days written notice. Sales of the Products pursuant to
the Agreements began during the first quarter of 1996. LFS is
in full compliance with all applicable capital and other
regulatory requirements.
b. Basis of Presentation
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, Legacy
Financial Services, Inc., and LifeSurance Corporation, a
non-operating subsidiary. All significant intercompany
accounts and transactions
have been eliminated.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
c. Revenue Recognition
Through June 30, 1995, in accordance with the terms of the
Marketing Agreement with American National, marketing
allowances and commissions were accrued when policies were
submitted for acceptance. Effective July 1, 1995, both the
Marketing Agreement with American National and the related
recording of revenue were modified to provide for recognition
of marketing allowances and commissions only after policies
become inforce, which is consistent with the method of
recognition of revenue generated under the Marketing Agreement
with IL Annuity. Administrative fees are recognized on a per
transaction basis as services are performed.
d. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks
and short-term investments with an original maturity of 90
days or less. The carrying amount of cash and cash equivalents
approximates market value.
e. Investments
Investments include mortgage-backed securities, corporate
bonds and equity securities, and obligations backed by U.S.
government agencies. The Company's investments are classified
as available-for-sale and are carried at market value. Market
values are determined using published quotes as of the close
of business. Unrealized gains and losses, net of the related
tax effect, are excluded from earnings and are reported as a
separate component of shareholders' equity until realized.
Premiums and discounts are amortized or accreted over the life
of the related investment as an adjustment to yield using the
effective interest method. Interest income is recognized when
earned. Realized gains and losses on sales of investments are
included in earnings and are derived using the specific
identification method for determining the cost of investments
sold.
F-8
<PAGE>
f. Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed on the
straight-line method over the estimated useful life of each
type of asset. The Company uses an estimated useful life for
computers and furniture and equipment of 5 years. Leasehold
improvements are amortized over the term of the lease or the
estimated useful life, whichever is shorter. Upon retirement
or disposition of fixed assets, any gain or loss is included
in income.
g. Sales Promotion and Support Costs
Sales promotion and support costs are expensed as incurred,
except for sales brochures and other marketing materials,
which are inventoried at cost.
h. Income Taxes
The Company and its subsidiaries file consolidated tax returns
for federal purposes. For financial reporting purposes, the
income tax effects of transactions are recognized in the year
in which they enter into the determination of recorded income,
regardless of when they are recognized for income tax
purposes. Accordingly, the provisions for income taxes in the
consolidated statements of income include charges or credits
for deferred income taxes relating to temporary differences
between the tax basis of assets and liabilities and their
reported amounts in the financial statements.
i. Earnings Per Share
Basic and diluted earnings per share are presented in
accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." Earnings per share is
based on the weighted average number of common shares
outstanding, including shares of redeemable common stock.
j. Reclassifications
Certain 1996 and 1995 balances have been reclassified to
conform with the 1997 presentation. Such reclassifications had
no effect on net income or shareholders' equity.
k. 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 form
transactions and other events and circumstances from non-owner
sources. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company does not believe that
SFAS No. 130 will have a material impact on the Company's
financial statements.
l. Segment Reporting
In June, 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS
No. 131 requires publicly-held companies to report financial
and other information about key revenue-producing segments of
the entity for which such information is available and is
utilized by the chief operation decision maker. Specific
information to be reported for individual segments includes
profit or loss, certain revenue and expense items and total
assets. A reconciliation of segment financial information to
amounts reported in the financial statements would be
provided. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. The Company does not believe that
SFAS No. 131 will have a material impact on the Company's
financial statements.
F-9
<PAGE>
2. Investments
Investment portfolios at the dates indicated consisted of the
following:
<TABLE>
<CAPTION>
Maturity in years:
1 Year 1 to 5 Longer Than
or Less Years 10 Years Other Total
------- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C>
December 31, 1997
Government agency
securities $ 3,588,363 $ 500,762 $ -- $ -- $ 4,089,125
Mortgage-backed
securities -- -- -- 2,336,717 2,336,717
Equity securities -- -- -- 1,252,750 1,252,750
----------- ----------- ---------- ----------- -----------
Amortized cost 3,588,363 500,762 -- 3,589,467 7,678,592
Gross unrealized gains 14,042 8,103 <179> 31,745 53,890
Gross unrealized losses -- -- -- (40,203) (40,203)
----------- ----------- ---------- ----------- -----------
Market value $ 3,602,405 $ 508,865 $ -- $ 3,581,009 $ 7,692,279
=========== =========== ========== =========== ===========
December 31, 1996
Government agency
securities $ -- $ 1,093,183 $1,909,275 $ -- $ 3,002,458
U.S. Treasury notes 552,213 -- -- -- 552,213
Corporate bonds -- -- 03,496 503,496
Mortgage-backed
securities -- -- -- 3,053,187 3,053,187
Equity securities -- -- -- 747,750 747,750
----------- ----------- ---------- ----------- -----------
Amortized cost 552,213 1,093,183 2,412,771 3,800,937 7,859,104
Gross unrealized gains 26,338 43,318 65,611 14,971 150,238
Gross unrealized losses -- -- (10,214) (51,921) (62,135)
----------- ----------- ---------- ----------- -----------
Market value $ 578,551 $ 1,136,501 $2,468,168 $ 3,763,987 $ 7,947,207
=========== =========== ========== =========== ===========
</TABLE>
Included in operating results for the years ended December 31, 1997,
1996 and 1995 are $494,033, $501,753, and $319,490 of interest income
earned on investments, respectively.
3. Fixed Assets
A summary of fixed assets at the dates indicated follows:
<TABLE>
<CAPTION>
Accumulated
Depreciation/ Net
Cost Amortization Book Value
<S> <C> <C> <C>
December 31, 1997
Computers $ 2,088,329 $ 981,955 $ 1,106,374
Leasehold improvements 1,227,563 429,797 797,766
Furniture and equipment 974,922 396,260 578,662
Land 127,522 -- 127,522
-------------- ------------- --------------
Totals $ 4,418,336 $ 1,808,012 $ 2,610,324
============== ============= ==============
December 31, 1996
Computers $ 1,614,881 $ 659,111 $ 955,770
Leasehold improvements 689,722 323,813 365,909
Furniture and equipment 671,416 251,707 419,709
-------------- ------------- --------------
Totals $ 2,976,019 $ 1,234,631 $ 1,741,388
============== ============= ==============
</TABLE>
F-10
<PAGE>
4. Accrued Liabilities
Accrued liabilities at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Annual sales convention $ 1,226,169 $ 825,556
Accrued compensation 976,428 843,301
Producer seminar expenses 39,498 151,531
Other 363,759 211,999
------------- -------------
Totals $ 2,605,854 $ 2,032,387
============= =============
</TABLE>
5. Loan Payable
The Company has a loan payable, bearing interest at 9% annually,
representing amounts borrowed in a non-cash transaction to pay premiums
related to a split-dollar life insurance policy. The outstanding
balance of the loan was $132,285 at December 31, 1997 and 1996.
6. Deferred Incentive Compensation
Under the Company's officer incentive bonus plan (the "Plan"), each
officer of the Company is allocated 1.25% of annual net income in a
given year (the "Bonus Year"), before officer incentive bonuses, as an
incentive bonus (the "Bonus"). The payment of the Bonus occurs in equal
amounts over the three years following the Bonus Year. The first
payment is automatically paid immediately following the end of the
Bonus Year. The remaining two payments are paid in February of each of
the second and third years following the Bonus Year and are contingent
upon the Company achieving targeted growth in net income during the
first and second years following the Bonus Year, respectively. The
Bonus payment is forfeited for any year during which the specified
growth is not achieved. At December 31, 1997 and 1996, $149,609 and
$184,456, respectively, are reflected as deferred incentive
compensation in the accompanying balance sheets. Such amounts represent
the deferred portion of the 1997 and 1996 Bonuses, except for the
second year payment of the 1995 Bonus, which was forfeited, because net
income targets were not achieved in 1996.
7. Deferred Compensation Plan
The Company sponsors a qualified defined contribution 401(k) plan (the
"401(k) Plan"), which is available to all employees. The 401(k) Plan
allows employees to defer, on a pretax basis, a portion of their
compensation as contributions to the plan. Employees may elect to
contribute up to 15% of their annual compensation (not to exceed $9,500
annually for 1997 and 1996 and $9,240 for 1995) to the 401(k) Plan. The
Company matches 50% of each employee's contributions, up to a maximum
of 6% of annual compensation. The Company's matching contributions
charged to operating expenses were $181,443, $134,673, and $83,849 for
the years ended December 31, 1997, 1996 and 1995, respectively.
8. Commitments and Contingencies
The Company leases its office premises and certain office equipment
under operating leases. Related rent expense of $335,973, $219,214, and
$198,196 are included in occupancy costs for the years ended December
31, 1997, 1996, and 1995, respectively. Total rentals for and leases of
equipment included in equipment expenses were $146,874, $132,635, and
$107,585 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company currently leases approximately 43,300 square feet of office
space at an annual rent of approximately $292,000 plus required
maintenance, landscaping and related expenses. The current lease
expires in October, 2006, and includes a commitment by the Company to
lease an additional 10,460 square feet beginning August 1, 1998, which
will raise the annual rent by approximately $72,000 per year.
F-11
<PAGE>
The Company's minimum annual lease commitments under all operating
leases are as follows:
1998 $ 481,191
1999 537,536
2000 525,200
2001 432,797
2002 442,030
Thereafter 1,783,529
-------------
Total minimum lease payments $ 4,202,283
=============
In order to fund LFS during the start-up phase, the Company has
committed to make sufficient contributions to support LFS's operations
and to ensure LFS's compliance with financial regulatory requirements
through December 31, 1998. Such contributions totaled $330,000,
$455,000, and $215,000 during 1997, 1996 and 1995, respectively.
As part of the Company's agreements with its insurance producers (the
"Producers"), the Company may, under certain circumstances, be
obligated to purchase the business of the Producers. At December 31,
1997, there were no outstanding commitments relating to the above by
the Company.
As a professional services firm engaged in marketing and servicing life
insurance and annuity products, the Company encounters litigation in
the normal course of business, including the activities relating to its
former business of operating an insurance company. Management is not
aware of any material asserted or unasserted litigation which existed
at December 31, 1997, except as follows:
In December, 1996, LMG and American National (collectively, the
"Co-defendants") were named in a lawsuit filed in the Circuit
Court of Jefferson County, Alabama, alleging misrepresentation and
price discrimination in connection with the sale of certain
annuity products issued by American National and marketed by LMG.
The plaintiffs, policyholders Buddie Watson King and Feyrene Zink,
sought and received conditional class action certification prior
to service of the complaint upon the Co-defendants. In February,
1997, the case was removed to the U. S. Federal District Court in
Birmingham, Alabama, and the conditional class action
certification was vacated by the federal district court.
Thereafter, the federal court remanded the case back to the above
Circuit Court of Jefferson County, Alabama, where the case is
currently pending. The outcome of the lawsuit cannot be determined
nor can the amount of any potential liability with respect to this
matter be estimated. Accordingly, no amounts have been recorded in
the financial statements for any losses which may result from the
lawsuit.
9. Redeemable Common Stock
During the three years ended December 31, 1992, the Company issued
5,935,094 shares of Series A Common Stock (the "Redeemable Series A
Stock"), no par value, at prices ranging from $1.00 to $2.25 per share.
The Redeemable Series A Stock was issued in accordance with the terms
of the 701 Asset Accumulator Program (the "701 Plan") between the
Company, its insurance Producers, and its employees, and the
Confidential Private Placement Memorandum and Subscription Agreement
(the "Subscription Agreement") between the Company and certain
accredited investors. Under the terms of the 701 Plan and the
Subscription Agreement, the Redeemable Series A Stock may be redeemed
at the option of the holder after being held for two consecutive years,
subject to the Company's ability to make such purchases under
applicable corporate law.
In connection with a merger in 1991 between the Company and LifeSurance
Corporation, a wholly-owned insurance subsidiary of the Company with no
current ongoing operations, 615,242 shares of Series
F-12
<PAGE>
B Common Stock (the "Redeemable Series B Stock"), no par value, were
authorized and issued in exchange for all of the outstanding stock of
LifeSurance Corporation. Pursuant to the Agreement and Plan of Merger
(the "Merger Agreement"), the Redeemable Series B Stock is subject to
redemption at the option of the holder in quantities of up to 10% per
year, provided that the redemption is in accordance with applicable
corporate law.
At December 31, 1994, the Company did not have sufficient current
assets, as required under California corporate law, to purchase all of
the Series A Redeemable Common Stock and Series B Redeemable Common
Stock (hereafter collectively referred to as the "Redeemable Common
Stock"). However, during 1995, current assets surpassed current
liabilities by an amount sufficient to allow the Company to meet its
obligations under the 701 Plan, the Subscription Agreement, and the
Merger Agreement.
Redeemable Common Stock has been recorded at the greater of the
issuance value or the redemption value as of December 31, 1997 and
1996. The 701 Plan, the Subscription Agreement, and the Merger
Agreement specify that the Redeemable Common Stock is to be redeemed at
a rate per share based upon current fair market value. These Agreements
specify factors to be considered in determining fair market value,
including the net present value of inforce insurance policy cash flows.
However, since the Company no longer operates an insurance business,
this factor is not applicable. Further, there is no active trading
market for the Company's stock which would establish market value.
Accordingly, the Company's Board of Directors has approved a redemption
value of $.96 per share as of December 31, 1997, based on management's
estimate of fair market value. The total redemption value for Series A
and Series B Redeemable Common Stock was $5,287,033 and $576,827,
respectively, at December 31, 1997 and $4,499,887 and $476,054,
respectively, at December 31, 1996. Carrying value exceeded redemption
value by $5,978,791 at December 31, 1997, and $7,367,060 at December
31, 1996. As the shares are redeemed, the excess of carrying value over
redemption value will be reflected as additional paid-in capital.
Changes to Redeemable Common Stock during the years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Series A Series B Total
Redeemable Common Stock Redeemable Common Stock Redeemable Common Stock
Carrying Carrying Carrying
(Issuance) (Issuance) (Issuance)
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1995 5,935,094 $10,850,686 615,242 $1,845,726 6,550,336 $12,696,412
Adjustment to
fractional share
liability <179> <179> (4,554) (13,662) (4,554) (13,662)
----------- ------------ --------- ----------- ----------- ------------
Balance December
31, 1995 5,935,094 10,850,686 610,688 1,832,064 6,545,782 12,682,750
Redemptions and
retirement of
common stock (166,008) (338,663) (362) (1,086) (166,370) (339,749)
----------- ------------ --------- ----------- ----------- ------------
Balance December
31, 1996 5,769,086 10,512,023 610,326 1,830,978 6,379,412 12,343,001
Redemptions and
retirement of
common stock (261,760) (471,955) (9,465) (28,395) (271,225) (500,350)
----------- ------------ --------- ----------- ----------- ------------
Balance December
31, 1997 5,507,326 $10,040,068 600,861 $1,802,583 6,108,187 $11,842,651
=========== ============ ========= =========== =========== ============
</TABLE>
Shares of Redeemable Common Stock are excluded from total shares issued
and outstanding in the accompanying balance sheets.
F-13
<PAGE>
10. Stock Awards and Stock Options
At December 31, 1996, the Company had outstanding warrants which
granted the holder the right to purchase 140,950 shares of its common
stock at a price of $2.25 per share. The warrants became exercisable on
April 1, 1995, and expired on March 31, 1997.
In August, 1997, the Company's shareholders voted to approve the Regan
Holding Corp. 1998 Stock Option Plan, which authorizes the Company to
grant stock options to employees and directors (the "Employee Option
Plan"). The Employee Option Plan is administered by two committees
which are appointed by the Company's Board of Directors. 1,500,000
shares of the Company's Series A Common Stock were reserved by
shareholders for granting under the Employee Option Plan. On January 1,
1998, (the "Employee Grant Date") 1,476,000 options were granted to
employees pursuant to the Employee Option Plan (the "Employee
Options"). The Employee Options vest evenly over four years following
the Employee Grant Date. Once vested, the Employee Options become
exercisable at the estimated fair market value of $.73 per share. Any
unexercised Employee Options expire ten years after the Employee Grant
Date. The Employee Options qualify as "Incentive Stock Options," as
defined by the Internal Revenue Code. The impact of the Employee
Options on the Company's 1998 Financial Statements will be accounted
for in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and is not expected to be material.
During 1997, the Company's Board of Directors approved the Regan
Holding Corp. Producer Stock Option Plan (the "Producer Option Plan"),
which provides for the granting of stock options to LMG Producers and
LFS registered representatives. 2,700,000 shares of the Company's
Series A Common Stock were reserved for granting under the Producer
Stock Option Plan. On January 1, 1998, (the "Producer Grant Date")
795,400 options were granted pursuant to the Producer Stock Option Plan
(the "Producer Options"). The Producer Options vest evenly over five
years following the Producer Grant Date. Once vested, the Producer
Options become exercisable at the estimated fair market value of $.73
per share. Any unexercised Producer Options expire six years after the
Producer Grant Date. The impact of the Producer Options on the
Company's 1998 financial statements will be accounted for in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," and is not expected to be material.
11. Income Taxes
Deferred tax assets and liabilities are recognized as temporary
differences between amounts reported in the financial statements and
the future tax consequences attributable to those differences that are
expected to be recovered or settled.
The provisions for federal and state income taxes consist of amounts
currently payable and amounts deferred which, for the periods
indicated, are shown below:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current income taxes:
Federal $ 1,262,317 $ 891,442 $ 778,164
State 572,332 407,305 604,928
--------------- -------------- --------------
Total current 1,834,649 1,298,747 1,383,092
--------------- -------------- --------------
Deferred income taxes:
Federal 405,951 523,365 1,066,893
State (45,576) 16,051 (546,777)
--------------- --------------
Total deferred 360,375 539,416 520,116
--------------- -------------- --------------
Provision for income taxes $ 2,195,024 $ 1,838,163 $ 1,903,208
=============== ============== ==============
</TABLE>
F-14
<PAGE>
The Company's deferred tax assets at December 31 consist of the following:
<TABLE>
<CAPTION>
1977 1996
---- ----
<S> <C> <C>
Alternative minimum tax credit carryforward $ 652,320 $ 1,387,885
Sales incentive trip accrual 488,437 --
State net operating loss carryforward -- 205,891
Fixed asset depreciation (26,834) (39,833)
Other 157,991 46,207
-------------- --------------
Total deferred tax assets $ 1,271,914 $ 1,600,150
============== ==============
</TABLE>
The provisions for income taxes differ from the provisions computed by
applying the statutory federal income tax rate (34%) to income before taxes,
as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income taxes due at
statutory rate (34%) $ 1,817,462 $ 1,547,904 $ 2,299,022
Increases (reductions) in
income taxes resulting from:
State franchise taxes, net
of federal income tax
benefit 375,892 288,628 258,407
Reversal of valuation
allowance -- -- (437,310)
Adjustment to prior year's
provision -- -- (240,695)
Other 1,670 1,631 23,784
Provisions for income taxes $ 2,195,024 $ 1,838,163 $ 1,903,208
</TABLE>
During 1995, the Company recorded federal alternative minimum tax
("AMT") credits of $240,695 as of December 31, 1994, which can be used
to reduce income taxes in subsequent years to the extent of tentative
minimum tax. Federal and state income tax AMT credits of $210,775 and
$441,545, respectively, remained as of December 31, 1997. The credits
have no expiration date.
12. Related Party Transactions
The Company paid Ashley A. Penney, a director until August, 1997,
$133,113, $140,100 and $107,293 for services provided as a human
resource consultant during the years ended December 31, 1997, 1996 and
1995, respectively.
Pursuant to a salary continuation agreement related to the Company's
former Chief Executive Officer, John Regan, payments totaling $87,688
and $280,000 were made to Ms. Regan during the years ended December 31,
1996 and 1995, respectively, as an obligation of the Company to his
estate. No such payments were made during 1997.
13. Concentration of Risk
At December 31, 1997, the Company was contracted with over 12,000
independent insurance Producers to sell insurance products throughout
the country in a majority of the fifty states. Production in no one
state accounted for over 20% of insurance premiums to the Carriers nor
of the corresponding revenue of the Company during 1997.
F-15
<PAGE>
Prior to December, 1995, American National was the only insurance
company with which the Company was contracted to market insurance
products. This arrangement generated approximately 36.2%, 87.5%,and
97.7% of total revenues to the Company during 1997, 1996 and 1995,
respectively. In December 1995, the Company contracted to provide
marketing and administrative services for IL Annuity. This arrangement
generated approximately 57.0% and 5.9% of the Company's revenues during
1997 and 1996, respectively. However, neither the Marketing Agreements
nor the Processing Agreements prevent the Company from entering into
similar arrangements with other insurance companies.
F-16
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
June 30, 1998
--------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 6,411,048
Investments 12,154,671
Accounts receivable 2,476,308
Prepaid expenses 599,544
Marketing supplies inventory 276,030
Deferred income taxes-current 467,219
-------------
Total Current Assets 22,384,820
-------------
Net fixed assets 2,894,901
Deferred income taxes-non current 617,094
Other assets 525,566
-------------
Total Non-Current Assets 4,037,561
-------------
TOTAL ASSETS $ 26,422,381
=============
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 265,631
Accrued liabilities 5,176,154
Income taxes payable 702,723
-------------
Total Current Liabilities 6,144,508
-------------
Loan payable 132,285
Deferred incentive compensation 254,776
-------------
Total Non-Current Liabilities 387,061
-------------
TOTAL LIABILITIES 6,531,569
-------------
REDEEMABLE COMMON STOCK (Note 2) 11,565,951
-------------
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 shares issued and outstanding
at June 30, 1998 3,274,373
Paid-in capital from redemption and retirement of common stock 803,865
Paid-in capital from non-employee stock options 12,500
Retained earnings 4,242,626
Net unrealized losses on investments (8,503)
-------------
TOTAL SHAREHOLDERS' EQUITY 8,324,861
-------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & SHAREHOLDERS' EQUITY $ 26,422,381
=============
</TABLE>
See accompanying notes to consolidated financial statements
F-17
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements (Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1998 1997
<S> <C> <C>
INCOME:
Marketing allowances $ 11,679,636 $ 5,260,803
Commission income 5,593,692 2,284,118
Administrative fees 3,074,350 1,590,156
Investment income 501,104 312,583
Other income 157,238 111,695
--------------- --------------
Total Income 21,006,020 9,559,355
--------------- --------------
EXPENSES:
Salaries and related benefits 7,723,470 5,014,909
Sales promotion and support 1,967,427 1,100,906
Occupancy 471,490 369,712
Professional fees 574,402 357,992
Litigation settlement (Note 3) 1,104,401 --
Depreciation and amortization 429,000 288,734
Courier and postage 313,128 203,044
Equipment 255,385 159,626
Stationery and supplies 328,200 173,654
Travel and entertainment 243,382 112,959
Insurance expense 84,641 86,461
Other miscellaneous expenses 100,083 84,675
--------------- --------------
Total Expenses 13,595,009 7,952,672
--------------- --------------
INCOME FROM OPERATIONS 7,411,011 1,606,683
PROVISION FOR INCOME TAXES 2,985,952 669,779
--------------- --------------
NET INCOME $ 4,425,059 $ 936,904
=============== ==============
EARNINGS PER SHARE:
Weighted average shares outstanding - basic and diluted 26,643,344 26,672,941
Basic earnings per share $ 0.17 $ 0.04
=============== ==============
Diluted earnings per share $ 0.17 $ 0.04
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Paid-in
Paid-in Capital Capital Retained
from Retirement from Non- Earnings/ Unrealized
Series A Common Stock of Employee (Accumulated Gains
Shares Amount Common Stock Stock Options Deficit) (Losses) Total
------ ------ ------------ ------------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
=========== ========== ============ ============= ========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Six Month Ended June 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 4,425,059 $ 936,904
Adjustments to reconcile net income to cash
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
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:
Redemptiones 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
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
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
========== ============ ======== ============ ========== ============
</TABLE>
3. Litigation Statement
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
F-21
<PAGE>
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 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.
6. Reclassifications
Certain amounts in the 1997 financial statements have been reclassified
to conform with 1998 classifications.
F-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses in connection with the issuance and distribution of the
shares of Common Stock being registered, all of which will be paid by the
Company, are as follows:
Securities and Exchange Commission registration fee................... 3,313
Legal fees and expenses............................................... 90,000
Accounting fees and expenses ......................................... 20,000
Printing, engraving and postage expenses.............................. 20,000
Miscellaneous......................................................... 20,000
Total.................................................................153,313
Item 14. Indemnification of Officers and Directors
Article V, Section 8 of the Amended and Restated Bylaws of the Company
provides:
Indemnification of Corporate Agents: The Corporation shall indemnify each
of its agents against expenses, judgments, fines, settlements and other amounts,
actually and reasonably incurred by such person by reason of such person's
having been made or having been threatened to be made a party to a proceeding by
reason of the fact that the person is or was an agent of the Corporation, to the
extent permitted by Section 317 of the California Corporations Code. The
indemnification provided by this Section shall not be deemed exclusive of any
other rights to which those seeking indemnification may be entitled to under any
other bylaw, agreement, vote of shareholders or disinterested directors, or
otherwise, to the extent such additional rights are authorized in the Articles
of Incorporation and by applicable law.
Section 317 of the California Corporations Code provides in pertinent part:
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the corporation to procure a judgment in its favor)
by reason of the fact that the person is or was an agent of the corporation,
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of the corporation or
that the person had reasonable cause to believe that the person's conduct was
unlawful.
(c) A corporation shall have power to indemnify any person who was in or is
a party or is threatened to be made a party to any threatened, pending, or
completed action by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that the person is or was an agent of the
corporation, against expenses actually or reasonably incurred by that person in
connection with the defense or settlement of the action if the person acted in
good faith, in a manner the person believed to be in the best interests of the
corporation and its shareholders.
Item 15. Recent Sales of Unregistered Securities
The Company has not sold any of its securities during the three year period
prior to the date of this Registration Statement. During this period, the
Company has issued Options to certain Producers, Directors and employees. No
consideration was paid by the recipients for such Options and accordingly, the
granting does not constitute a sale.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
3(a) Restated Articles of Incorporation.***
3(b) Amended and Restated Bylaws of the Company.***
4 Certificate of Determination of Preferences of Series C
Common Stock of Regan Holding Corp.*
5 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (1)
10(a) Administrative Services Agreement effective January 1,
1991, as amended, between Allianz Life Insurance Company
of North America and the Company.*
10(b) Marketing Agreement effective June 1, 1993, as
amended, between American National Insurance Company and
the Company.*
10(c) Insurance Processing Agreement effective June 1, 1993,
as amended, between American National Insurance Company
and the Company.*
10(d) Form of Producer Agreement.*
10(e) Lease Agreement dated September 26, 1996, for 1179 North
McDowell Blvd., Petaluma, California 94954.***
10(f) Settlement Agreement dated June 18, 1993, among the
State of Georgia as receiver for and on behalf of Old
Colony Life Insurance Company, other related parties and
the Company.*
10(g) 401(K) Profit Sharing Plan & Trust dated July 1, 1994.*
10(h) Marketing Agreement effective January 1, 1996 between IL
Annuity and Insurance Company and the Company.**
10(i) Insurance Processing Agreement effective January 1, 1996
between IL Annuity and Insurance Company and the
Company.**
10(j) Marketing Agreement effective January 1, 1996 between
Indianapolis Life Insurance Company and the Company.**
10(k) Insurance Processing Agreement effective January 1, 1996
between Indianapolis Life Insurance Company and the
Company.**
10(l) Marketing Agreement between Transamerica Life Insurance
and Annuity Company and the Company, dated June 1,
1998****
10(m) Administrative Services Agreement between Transamerica
Life Insurance and Annuity Company and the Company dated
May 29, 1998, as amended****
10(n) Lease Agreement dated October 27, 1998, for 2090 Marina
Avenue, Petaluma, California
10(o) Producer Stock Award and Stock Option Plan, as
amended (1)
10(p) 1998 Stock Option Plan, as amended (1)
21 Subsidiaries of the Company.**
23(a) Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
23(b) Consent of PricewaterhouseCoopers, LLP.
* Incorporated herein by reference from the Company's annual
report on Form 10-K for the year ended December 31, 1994.
** Incorporated herein by reference from the Company's annual
report on Form 10-K for the year ended December 31, 1995.
*** Incorporated herein by reference from the Company's
quarterly Form 10-Q for the three months ended September
30, 1996.
**** Incorporated herein by reference form the Company's current
report on Form 8-K dated June 1, 1998.
(1) To be provided by amendment
(b) Financial Statement Schedules
1. The following financial statements are included:
(i) Report of Independent Accountants.
(ii) Consolidated Balance Sheets as of December 31, 1997 and
1996.
(iii)Consolidated Income Statements for the years ended
December 31, 1997, 1996 and 1995.
(iv) Consolidated Statements of Shareholders' Equity
(Deficit) for the years ended December 31, 1997, 1996
and 1995.
II-2
<PAGE>
(v) Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.
(vi) Notes to Consolidated Financial Statements.
2. Financial statement schedules are omitted because the
information is not required or has been included in the
financial statements and related notes.
Item 17. Undertakings
The Company hereby undertakes:
(1) To file, during any period in which offers or sales of the
securities being registered are being made, a post-effective amendment
to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "1933 Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to Directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a
Director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such Director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Petaluma, State of
California, on November 12, 1998.
REGAN HOLDING CORP.
(Registrant)
By: /s/ R. Preston Pitts
______________________________________
R. Preston Pitts, President and Chief
Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Lynda L. Regan 11/12/98
- ------------------------------------------------
Lynda L. Regan, Chairman of the Board, (Date)
and Chief Executive Officer
/s/ R. Preston Pitts 11/12/98
- ------------------------------------------------
R. Preston Pitts, President and Chief (Date)
Operating Officer, and Director
/s/ Steven C. Anderson 11/12/98
- ------------------------------------------------
Steven C. Anderson, Director (Date)
/s/ Ute Scott-Smith 11/12/98
- ------------------------------------------------
Ute Scott-Smith, Director (Date)
/s/ David A. Skup 11/12/98
- ------------------------------------------------
David A. Skup, Chief Financial (Date)
Officer
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
________) of our report dated March 18, 1998, on our audits of the financial
statements of Regan Holding Corporation. We also consent to the references to
our firm under the captions "Experts" and "Selected Financial Date."
s/PricewaterhouseCoopers LLP
San Francisco, California
November 11, 1998
