As filed with the Securities and Exchange Commission on December 29, 1998.
Registration No. 333-67219
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
REGAN HOLDING CORP.
(Exact name of Registrant as specified in its charter)
California 6411 68-0211359
(State or other (Primary Standard) (I.R.S. Employer
jurisdiction of Industrial Classification Code Number Identification No.)
incorporation or
organization)
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)
------------------
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)
------------------
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>
Title of Each Class of Securities to Be Proposed Maximum Aggregate Amount of
Registered Offering Price (1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options to Purchase Class A Common Stock,
no par value $ 0 $ 0
- ----------------------------------------------------------------------------------------------------------------
Class A Common Stock, no par value $ 11,232,066.00 $ 3,313.00
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(h).
------------------
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.
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<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 29, 1998
Stock Options to be issued under
Regan Holding Corp. Producer Stock Award and Option Plan
on Regan Holding Corp. 1998 Stock Option Plan and
15,000,000 Shares
Regan Holding Corp.
Class A Common Stock
(no par value)
Regan Holding Corp. (the "Company") is hereby offering (i) stock options to be
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) stock options to be 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"), (iii) shares of its Class A
Common Stock, no par value (the "Shares") to be issued upon exercise of stock
options (the "Options") granted pursuant to the Producer Plan or the Employee
Plan; and (iv) Shares to be issued pursuant to stock awards granted under the
Producer Plan or the Employee Plan. The Company is a California corporation with
its principal executive offices located at 1179 N. McDowell Boulevard, Petaluma,
CA 94954.
The Options are being offered only to (i) Producers pursuant to grants under the
Producer Plan, and (ii) employees and directors of the Company pursuant to
grants under the Employee Plan. Up to an aggregate of 15,000,000 Shares may be
issued under the Plans, subject to adjustment described in the Plans and this
Prospectus.
The Shares are being offered only to (i) Producers pursuant to grants of Shares
under the Producer Plan and valid exercises of Options granted under the
Producer Plan, and (ii) employees and directors of the Company pursuant to valid
exercises of Options granted under the Employee Plan.
No underwriting discounts or commissions will be paid in connection with the
offering of the Option on the Shares. Neither the Options nor the Shares are
listed on 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 Options or the Shares, see "Risk Factors" on page 4.
------------------
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 December 29, 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
Securities Being Offered............... Options to purchase 15,000,000 Shares
("Options")
15,000,000 shares of the Company's
Common Stock-Series A, no par
value ("Shares").
Offering Price......................... The offering price of the Options and
the Shares will be as determined by the
committees which administer the Plans
(as defined below).
2
<PAGE>
Terms of Offering...................... Options will be issued upon their grant
pursuant to the Plans for no tangible
consideration. Shares will be issued
(i) upon the exercise of Options granted
pursuant 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
Options granted pursuant to the
Company's 1998 Stock Option Plan (the
"Employee Plan" and collectively with
the Producer Plan, the "Plans").
Capital Structure...................... As of September 30, 1998 there were
25,854,615 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.
3
<PAGE>
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 grantees of Options or
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.
4
<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.
5
<PAGE>
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 nine months of
1998, Legacy's revenues were derived from the agreements with American National
and IL Annuity. For the nine months ended September 30, 1998, approximately
13.1% and 81.2% of the Company's total revenue resulted from agreements with
American National and IL Annuity, respectively. During the third quarter of
1998, Legacy 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 Legacy.
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.
6
<PAGE>
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 5,306,391 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 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.
7
<PAGE>
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. Options granted under the plans will be
granted for no monetary consideration.
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
8
<PAGE>
well as non-qualified stock options ("Non-Qualified Options"). Non-employee
Directors of the Company and of certain of its subsidiaries, 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 9.5 million in
the aggregate, provided that approval of the shareholders of the Company is
required with respect to 8 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 5.5 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
9
<PAGE>
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 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
10
<PAGE>
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 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).
11
<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
12
<PAGE>
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.
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 preformed 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
13
<PAGE>
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 nine months ended September 30, 1998, approximately 13.1% and 81.2% of
the Company's total revenue resulted from agreements with American National and
IL Annuity, respectively.
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, in the case of American National and IL Annuity, or the same, in
the case of Transamerica, 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 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.
14
<PAGE>
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.
15
<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 September 30, 1998, the Company had approximately 354 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.")
16
<PAGE>
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 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.
17
<PAGE>
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 nine month periods ended September 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
Months Ended
Year Ended Year Ended Year Ended Year Ended December 31, 1993
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994 (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 3,150,454 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>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
Selected Income Statement Data:
Total Income $ 34,379,973 $ 15,408,704
Net Income Before Extraordinary Item 7,292,192 1,767,510
Earnings Per Share - basic .27 .07
Earnings per share - diluted .27 .07
Selected Balance Sheet Data
Total Assets $ 31,183,002
Total Non Current Liabilities 514,171
Total Liabilities 8,534,874
Redeemable Common Stock 11,462,963
Shareholders' Equity 11,185,165
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).
18
<PAGE>
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.
19
<PAGE>
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.
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.
Nine Month Period Ended September 30, 1998 Compared to Nine Month Period
---------------------------------------------------------------------------
Ended September 30, 1997
- ------------------------
Summary--The Company's net income for the nine months ended September 30,
1998 increased approximately $5.5 million, or 312.6%, compared with the
corresponding period in 1997. This increase is attributable primarily to
increases in sales volume, as discussed below.
Income--For the nine months ended September 30, 1998, total income
increased $19.0 million, or 123.1%, over the corresponding nine month period in
1997. This increase resulted primarily from increases in sales volume, as
discussed below.
Marketing allowances and commission income, combined, increased
approximately $16.3 million, or 133.0%, for the nine month period ended
September 30, 1998, compared with the nine month period ended September 30,
1997. This increase is due primarily to increases in volume of sales by the
Company's distribution network on behalf of the Carriers. Premium placed in
force for the Carriers totaled approximately $1.2 billion during the nine months
ended September 30, 1998, compared to $526.0 million during the same period in
1997, representing an increase of 131.1%. Also contributing to the increase in
income during the first nine months of 1998 was a shift in sales mix to sales of
products which yield higher marketing allowances and commission income.
For the nine months ended September 30, 1998 administrative fees increased
approximately $2.4 million, or 93.7%, 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 nine months ended September 30, 1998, approximately 13.1% and 81.2%
1% of the Company's total revenue resulted from agreements with American
National and IL Annuity, respectively.
Expenses--Total expenses increased approximately $9.8 million, or 79.2%,
during the nine months ended September 30, 1998, compared to the corresponding
nine months of 1997. This increase is attributable primarily to increases in
compensation, sales promotion and support, supplies, and travel and
entertainment expenses and to accrual for settlement of a legal matter as
discussed below.
20
<PAGE>
Salaries and related employee benefits increased approximately $4.8
million, or 62.6%, in the first nine months of 1998, compared to the same period
in 1997. This increase resulted primarily from increases in the average number
of full-time equivalent employees, which rose to 278 during the nine months
ended September 30, 1998, compared with 179 during the nine months ended
September 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 nine months of 1998 due to the addition of personnel at
higher pay levels and to scheduled pay increases for existing employees.
Sales promotion and support expense increased approximately $2.2 million,
or 128.4%, for the nine months ended September 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 the Company.
Professional fees increased approximately $389,000, or 75.3%, for the nine
month period ended September 30, 1998 as compared with the corresponding period
in 1997. These increases are primarily the result of consulting fees related to
various information systems projects and increased legal fees associated with
the settlement of the litigation described in the footnotes to Financial
Statements.
Stationery and supplies expense increased approximately $292,000, or
108.4%, for the nine months ended September 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 $251,000, or 127.4%,
for the nine months ended September 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 $1.1 million
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 (73.7% as of September 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, support to growth in
operations, funding continued product development and potential strategic
acquisitions, and as a
21
<PAGE>
reserve to cover possible redemptions 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 $11.7 million for the year ended December 31,
1997 and the nine months ended September 30, 1998, respectively. The Company
used approximately $1.3 million and $8.6 million of net cash for investment
activities for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively, and approximately $348,000 and $267,000 of
cash for redemptions and retirement of Common Stock for the year ended December
31, 1997 and the nine months ended September 30, 1998, respectively. In 1997,
and in the first nine 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 September 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 $225,000 in the first nine 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.
MANAGEMENT
Directors and Executive Officers
Directors
- ---------
The following are the Directors of the Company:
22
<PAGE>
Name Principal Occupation Director Since
- ---- -------------------- --------------
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.
23
<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 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) $ ----
Chief Executive Officer 16,825 (5)
1996 408,894 52,290 4,750 (2) ----
16,824 (5)
1995 408,067 181,534 4,620 (2) ----
11,216 (5)
R. Preston Pitts, 1997 $ 300,000 $ 149,916 $ 4,750 (2) $ ----
President and Chief 1996 300,000 72,290 4,750 (2) ----
Operating Officer 1995 300,000 81,534 4,620 (2) ----
Gregory C Egger, (4) 1997 $ 77,885 $ 52,046 $ ---- $ ----
Chief Marketing Officer
David A. Skup, (4) 1997 $ 60,577 $ 20,661 $ ---- $ ----
Chief Financial Officer
H. Lynn Stafford, 1997 $ 139,231 $ 73,416 $ 4,750 (2) $ ----
Information Systems Officer 1996 130,059 31,790 4,750 (2) ----
1995 50,000 32,368 ---- ----
Ute Scott-Smith, (6) 1997 $ 66,754 $ ---- $ 4,750 (2) $ ----
Senior Vice President 1996 177,318 47,290 4,750 (2) ----
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.
(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.
24
<PAGE>
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.
25
<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 October 31, 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 43.9%
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 49.0%
</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 25,852,102 shares were outstanding as of October 31, 1998, and
Series B Stock of which 615,242 are authorized and 600,398 shares were
outstanding as of October 31, 1998. 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.
26
<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 September 30, 1998, 5,306,391
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. As
of October 31, 1998 the Company's Series A Stock was held by approximately 1,500
shareholders of record. As of October 31, 1998 the Series B Stock was 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.
27
<PAGE>
PLAN OF DISTRIBUTION
The Options and Shares being offered hereby may be granted or sold pursuant
to the Plans either (i) by employees of the Company, or its subsidiaries, who
have other duties in connection with the business of the Company or its
subsidiaries or (ii) through its wholly-owned broker-dealer subsidiary Legacy
Financial Services, Inc. ("LFS"). Neither such employees nor LFS will receive a
commission or other compensation in connection with the offer and sale of the
Options or the Shares being offered hereby.
LEGAL MATTERS
The validity of the Options and 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 consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the consolidated statements of income, shareholders' equity, and cash
flows 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.
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants...........................................F-2
Consolidated Balance Sheets as of December 31,
1997 and 1996......................................................F-3
Consolidated Income Statements For the Years Ended
December 31, 1997, 1996, and 1995..................................F-4
Consolidated Statements of Shareholders' Equity.............................F-5
Consolidated Statements of Cash Flows For the Years
Ended December 31, 1997, 1996, and 1995............................F-6
Notes to Consolidated Financial Statements..................................F-7
Consolidated Balance Sheets as of September 30, 1998 (unaudited)...........F-17
Consolidated Income Statements For the Nine Months Ended
September 30, 1998 and 1997 (unaudited)..........................F-18
Consolidated Statements of Shareholders' Equity (unaudited)................F-19
Consolidated Statements of Cash Flows For the Nine Months Ended
September 30, 1998 and 1997 (unaudited)..........................F-20
Notes to Consolidated Financial Statements (unaudited).....................F-21
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>
<CAPTION>
December 31, 1997 December 31, 1996
<S> <C> <C>
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 --- ---
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
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
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 ----- -----
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
=========== =========== ===========
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 $ --- $(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 --- --- --- --- (85,307) (85,307)
----------- ----------- ------------ ------------- ----------- -------------
Balance
December 31, 1995 21,070,791 3,802,071 --- (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
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
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
F-7
<PAGE>
and equity securities (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:
Maturity in years:
<TABLE>
<CAPTION>
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 -- 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 -- -- 503,496 503,496
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:
Accumulated
Depreciation/ Net
Cost Amortization Book Value
---- ------------ ----------
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
============ ============ ==============
F-10
<PAGE>
4. Accrued Liabilities
Accrued liabilities at December 31 consisted of the following:
1997 1996
---- ----
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
============= =============
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
F-12
<PAGE>
current ongoing operations, 615,242 shares of Series 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 ----- ----- (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:
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
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
=========== ============ ==============
F-14
<PAGE>
The Company's deferred tax assets at December 31 consist of the following:
1977 1996
---- ----
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
============== ==============
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:
For the Year Ended December 31,
1997 1996 1995
---- ---- ----
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
============ ============ ============
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>
September 30, 1998
------------------
<S> <C>
ASSETS:
Cash and cash equivalents $ 8,083,986
Investments 14,906,933
Accounts receivable 1,899,782
Prepaid expenses 598,404
Marketing supplies inventory 399,928
Deferred income taxes-current 896,053
------------------
Total Current Assets 26,785,086
------------------
Net fixed assets 3,239,091
Deferred income taxes-non current 756,049
Other assets 402,776
------------------
Total Non-Current Assets 4,397,916
------------------
TOTAL ASSETS $ 31,183,002
==================
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 386,853
Income taxes payable 850,934
Accrued sales convention costs 2,181,979
Other accrued liabilities 4,600,937
------------------
Total Current Liabilities 8,020,703
------------------
Loan payable 132,285
Deferred incentive compensation 381,886
------------------
Total Non-Current Liabilities 514,171
------------------
TOTAL LIABILITIES 8,534,874
------------------
REDEEMABLE COMMON STOCK (Note 2) 11,462,963
------------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 100,000,000 shares
authorized, no shares issued or outstanding --
Series A common stock, no par value, 45,000,000 shares
authorized, 20,548,224 shares issued and outstanding
at September 30, 1998 3,266,874
Paid-in capital from redemption and retirement of common stock 840,750
Paid-in capital from non-employee stock options 18,750
Retained earnings 7,109,759
Net unrealized losses on investments (50,968)
------------------
TOTAL SHAREHOLDERS' EQUITY 11,185,165
------------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & SHAREHOLDERS' EQUITY $ 31,183,002
==================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Income Statements (Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
INCOME:
Marketing allowances $19,299,171 $ 8,492,401
Commission income 9,180,142 3,732,659
Administrative fees 4,872,523 2,515,183
Investment income 833,332 476,768
Other income 194.805 191,693
----------- -----------
Total Income 34,379,973 15,408,704
----------- -----------
EXPENSES:
Salaries and related benefits 12,501,208 7,688,238
Sales promotion and support 3,982,620 1,743,553
Occupancy 805,744 642,184
Professional fees 906,570 517,188
Litigation settlement (Note 3) 1,104,404 --
Depreciation and amortization 724,422 459,219
Courier and postage 515,246 369,695
Equipment 432,154 267,113
Stationery and supplies 560,691 269,048
Travel and entertainment 447,504 196,771
Insurance 123,491 129,097
Other miscellaneous expenses 133,199 123,686
----------- -----------
Total Expenses 22,237,253 12,405,792
----------- -----------
INCOME FROM OPERATIONS 12,142,720 3,002,912
PROVISION FOR INCOME TAXES 4,850,528 1,235,402
----------- -----------
NET INCOME $ 7,292,192 $ 1,767,510
=========== ===========
EARNINGS PER SHARE:
Weighted average shares outstanding - basic 26,703,920 26,937,299
Basic earnings per share $ 0.27 $ 0.07
=========== ===========
Weighted average shares outstanding - diluted 27,090,580 26,937,299
Diluted earnings per share $ 0.27 $ 0.07
=========== ===========
</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> <C>
Balance
January 1, 1998 20,614,014 $3,382,914 $ 611,559 $ -- $ (182,433) $ 4,870 $ 3,816,910
Net Income for the
nine months ended
September 30, 1998 7,292,192 7,292,192
Redemption and
retirement of
common stock (65,790) (116,040) 229,191 113,151
Non-employee stock
option expense 18,750 18,750
Net unrealized losses
on investments (93,844) (93,844)
Deferred tax on net
unrealized losses 38,006 38,006
----------- ---------- --------- -------- ----------- ---------- ------------
Balance
September 30, 1998 20,548,224 $3,266,874 $ 840,750 $ 18,750 $ 7,109,759 $ (50,968) $ 11,185,165
=========== ========== ========= ======== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-19
<PAGE>
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 7,292,192 $ 1,767,510
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization of fixed assets 671,665 454,190
Amortization of intangible assets 52,757 5,029
Amortization/accretion of investments (46,765) (24,547)
Non-employee stock option expense 18,750 --
Realized loss (gain) on sales of investments (14,463) 28,686
Net change in accounts receivable (660,476) (510,966)
Net change in prepaid expenses (25,472) (201,504)
Net change in marketing supplies inventory (171,075) 40,259
Net change in deferred tax assets (342,182) 152,239
Net change in accounts payable 42,782 (5,899)
Net change in income taxes payable 461,373 527,820
Net change in accrued sales convention costs 955,810 (91,087)
Net change in other accrued liabilities 3,221,252 (54,597)
Net change in other assets and liabilities 265,551 135,013
------------ ------------
Net cash provided by operating activities 11,721,699 2,222,146
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (10,049,466) (11,060,306)
Proceeds from sales and maturities of investments 2,802,196 9,739,821
Purchases of fixed assets (1,300,432) (1,215,750)
Purchase of organization costs (17,806) (10,640)
------------ ------------
Net cash (used in) provided by investing activities (8,565,508) (2,546,875)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptiones and retirement of common stock (266,537) (271,091)
------------ ------------
Net cash used in financing activities (266.537) (271,091)
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,889,654 (595,820)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,194,332 2,202,596
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,083,986 $ 1,606,776
============ ============
</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 nine months ended September 30, 1998, are not necessarily
indicative of the results to be expected for the entire year. Users of
these financial statements are encouraged to refer to the Annual Report on
Form 10-K for the year ended December 31, 1997, for additional disclosure.
2. Redeemable Common Stock
The Company is obligated to repurchase certain of its shares of common
stock pursuant to various agreements under which the stock was issued.
During the nine months ended September 30, 1998, redeemable common stock
was redeemed and retired as follows:
<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 (200,935) (378,299) (463) (1,389) (201,398) (379,688)
---------- ------------ -------- ------------ ---------- -----------
Balance
September 30, 1998 5,306,391 $ 9,661,769 600,398 $ 1,801,194 5,906,789 $11,462,963
========== ============ ======== =========== ========== ===========
</TABLE>
3. Litigation Settlement
In December 1996, LMG and American National Insurance Company ("American
National") were named in a lawsuit filed in the Circuit Court of Jefferson
County, Alabama, alleging misrepresentation and price discrimination in
connection with the sale of certain annuity products issued by American
National and marketed by LMG. American National and LMG have denied the
allegations contained in the complaint as well as any wrongdoing with
respect to the sale and issuance of annuities. However, on June 17, 1998,
in order to avoid protracted litigation, American National and LMG entered
into a settlement agreement with the plaintiffs and other class members.
LMG's portion of the settlement, net of recovery under its errors and
omissions insurance policy, was recorded as an expense during the second
quarter of 1998.
4. Lease Commitment
The Company currently leases approximately 43,000 square feet of office
space in Petaluma, California, at which the Company's headquarters are
located. The lease for this space was terminated on September 11, 1998, and
F-21
<PAGE>
the Company intends to vacate such space in March, 1999. On October 27,
1998, the Company entered into a new lease for approximately 72,000 square
feet of office space in Petaluma, California, into which the Company
intends to move its headquarters upon vacating the space it currently
leases. This lease expires in April, 2009, and includes an option to extend
the term for two five-year periods. Pursuant to the lease, the Company will
pay monthly rent of $71,612, plus a pro-rate share of property taxes and
operating expenses based on leased square footage.
5. Amendments to Marketing and Processing Agreements
In December 1998, LMG and American National amended the terms of the
Marketing Agreement and Insurance Processing Agreement to extend the
initial terms thereof to March 31, 1999. LMG and American National are in
the process of negotiating a five year extension.
6. Related Party Transactions
In May of 1998, the Company entered into a Shareholder's Agreement with
Lynda Regan, Chief Executive Officer of the Company and Chairman of the
Company's Board of Directors, and certain other individuals. Under the
terms of this agreement, in the event of the death of Ms. Regan, the
Company shall repurchase from Ms. Regan's estate all shares of Common Stock
that were owned by Ms. Regan at the time of her death or were transferred
by her to one or more trusts prior to her death. The purchase price to be
paid by the Company shall be equal to 125% of the fair market value of the
shares.
7. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period resulting from transactions
and other events and circumstances from non-owner sources. The Company's
comprehensive income for the nine month period ended September 30, 1998 and
1997, includes unrealized losses, net of deferred tax, of $55,838 and
$34,016, respectively.
8. Recent Accounting Pronouncements--Internal Use Software Cost
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred
for computer software developed or obtained for internal use. The Company
has not yet determined the impact, if any, of adopting SOP 98-1, which will
be effective for the Company's year ending December 31, 1999.
9. Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform with 1998 classifications.
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.. $ 3,313.00
Legal fees and expenses.............................. $ 90,000.00*
Accounting fees and expenses ........................ $ 20,000.00*
Printing, engraving and postage expenses............. $ 20,000.00*
Miscellaneous........................................ $ 20,000.00*
Total................................................ $153,313.00*
*Estimated
- -------------------
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) 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
10(p) 1998 Stock Option Plan, as amended
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 form 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.
***** Incorporated herein by reference form the Company's
quarterly report on Form 10-Q for the three months ended
September 30, 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.
II-2
<PAGE>
(iv) Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1997, 1996 and 1995.
(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 December 29, 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 December 29, 1998
- ---------------------------------------------------------
Lynda L. Regan, Chairman of the Board, (Date)
and Chief Executive Officer
/s/ R. Preston Pitts December 29, 1998
- ---------------------------------------------------------
R. Preston Pitts, President and Chief (Date)
Operating Officer, and Director
/s/ Steven C. Anderson December 29, 1998
- ---------------------------------------------------------
Steven C. Anderson, Director (Date)
/s/ Ute Scott-Smith December 29, 1998
- ---------------------------------------------------------
Ute Scott-Smith, Director (Date)
/s/ David A. Skup December 29, 1998
- ---------------------------------------------------------
David A. Skup, Chief Financial (Date)
Officer
II-4
REGAN HOLDING CORP.
PRODUCER STOCK AWARD AND OPTION PLAN
(As Amended and Restated Effective November 1, 1998)
I. ESTABLISHMENT OF PLAN; DEFINITIONS
1. Purpose. The purpose of the Regan Holding Corp. Producer Stock
-------
Award and Option Plan is to provide an incentive to individuals marketing
annuity, life insurance, and other investment products on behalf of Regan
Holding Corp. and its subsidiaries, by aligning the interests of such
individuals with those of the shareholders of Regan Holding Corp.
2. Definitions. Unless the context clearly indicates otherwise, the
-----------
following terms shall have the meanings set forth below:
a. "Board" shall mean the Board of Directors of the Corporation.
b. "Committee" shall mean a committee designated by the Board which
committee shall administer the Plan as set forth in Section 4 of this
Article I of the Plan.
c. "Corporation" shall mean Regan Holding Corp., a California
corporation.
d. "Fair Market Value" shall mean on any date, (i) if the Stock is not
listed on a national securities exchange or quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"),
the fair market value of Stock on that date as determined by the Board, or
(ii) if the Stock is listed on a national securities exchange or is quoted
on the Nasdaq, the closing price reported on the composite tape for issues
listed on such exchange on such date, or the closing price or the average
of the closing dealer "bid" and "asked" prices of the Stock on the date of
grant as quoted as Nasdaq, or if no trades shall have been reported for
such date, on the next preceding date on which there were trades reported;
provided, however, that if no quotations shall have been made within the 10
-------- -------
business days preceding such date, the Fair Market Value shall be
determined by the Board as provided in clause (i) above.
e. "Grantee" shall mean a Producer who has been granted a Stock Award
or a Stock Option under the Plan.
f. "Person" shall mean an individual, a corporation, a limited
liability company, or a partnership.
g. "Plan" shall mean the Regan Holding Corp. Producer Stock Award and
Option Plan as set forth herein and as amended from time to time.
h. "Producer" shall mean a Person who has entered into an agreement
with the Corporation, or one of its subsidiaries, pursuant to which such
person agrees to market annuity, life insurance, and other investment
products on behalf of the Corporation, or one of its subsidiaries.
i. "Stock" shall mean authorized but unissued shares of the Series A
Common Stock of the Corporation, no par value, or reacquired shares of the
Corporation's Series A Common Stock.
<PAGE>
j. "Stock Awards" shall mean shares of Stock granted to a Grantee
pursuant to the Plan.
k. "Stock Option" shall mean an option granted pursuant to the Plan to
purchase shares of Stock.
l. "Stock Option Agreement" shall mean the written instrument
evidencing the grant of one or more Stock Options under the Plan and which
shall contain the terms and conditions applicable to such grant.
3. Shares of Stock Subject to the Plan. There are hereby reserved for
-----------------------------------
issuance under the Plan 9.5 million shares of Stock. Subject to the provisions
of Section 1 of Article IV, the Stock which may be issued pursuant to Stock
Awards and Stock Options authorized to be granted under the Plan and the Stock
which is subject to outstanding but unexercised Stock Options under the Plan
shall not exceed 5.5 million shares of Stock in the aggregate. If a Stock Option
shall expire and terminate for any reason, in whole or in part, without being
exercised, the number of shares of Stock as to which such expired or terminated
Stock Option shall not have been exercised may again become available for the
grant of Stock Options.
4. Administration of the Plan. The Plan shall be administered by the
---------------------------
Committee which shall consist of 3 or more officers of the Corporation
designated by the Board. Subject to the express provisions of the Plan, the
Committee shall have authority to determine the eligibility of Producers to
participate in the Plan, to grant Stock Awards and Stock Options under the Plan,
to interpret the Plan, to prescribe, amend, and rescind rules and regulations
relating to the Plan, to determine the terms and provisions of Stock Awards and
Stock Option Agreements and to make all other determinations necessary or
advisable for the administration of the Plan. Any controversy or claim arising
out of or related to the Plan shall be determined unilaterally by and at the
sole discretion of the Committee. Any determination, decision or action of the
Committee in connection with the construction, interpretation, administration,
implementation or maintenance of the Plan shall be final, conclusive and binding
upon all Grantees and all person(s) claiming under or through any Grantees.
5. Amendment or Termination. The Board may, at any time, alter, amend,
------------------------
suspend, discontinue, or terminate the Plan; provided, however, that no such
action shall adversely affect the right of any Grantee under any Stock Award or
Stock Option previously granted thereto hereunder.
6. Effective Date of Plan. The Plan became effective on January 1,
-----------------------
1998; this Amendment and restatement of the Plan shall become effective November
1, 1998, subject to the approval of the Board.
II. STOCK OPTION PROVISIONS
1. Granting of Stock Options.
-------------------------
a. The Committee shall determine and shall designate from time to time
those Producers who are to be granted Stock Options and shall specify the
number of shares of Stock subject to each Stock Option.
b. When granting a Stock Option, the Committee shall determine the
purchase price of the Stock subject to the Stock Option.
-2-
<PAGE>
c. The Committee, in its sole discretion, shall determine whether any
particular Stock Option shall become exercisable in one or more
installments, shall specify the installment dates, and shall determine the
total period during which the Stock Option shall be exercisable.
d. In addition to the powers set forth in this Section 1, the
Committee shall have the exclusive responsibility and authority to set all
terms and conditions applicable to Stock Options granted under the Plan.
2. Exercise of Stock Options. The purchase price of Stock subject to a
Stock Option shall be payable on exercise of the Option in cash or by check,
bank draft or postal or express money order.
3. Termination of Producer Status. In the event that a Grantee's
status as a Producer is terminated for any reason, all Stock 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 Producer
shall not effect the Grantee's rights with respect to the exercise of any Stock
Options which have vested as of the date of the termination of the Grantee's
status as a Producer.
III. STOCK AWARD PROVISIONS
The Committee shall determine and shall designate from time to time
those Producers who are to be granted Stock Awards and shall specify the number
of shares of Stock subject to each Stock Award and the terms and conditions, if
any, applicable thereto.
IV. GENERAL PROVISIONS
1. Recapitalization Adjustments.
----------------------------
a. In the event of any change in capitalization affecting the Stock,
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 Stock, the Board shall authorize and make such
proportionate adjustments, if any, as the Board deems appropriate to
reflect such change, including, without limitation, with respect to the
aggregate number of shares of Stock for which Stock Awards or Stock Options
may be granted under the Plan, the number of shares of Stock covered by
each outstanding Stock Option, the purchase price per share of Stock in
respect of outstanding Stock Options, and such adjustments with respect to
the Stock Awards as the Board deems appropriate.
b. Any provision hereof to the contrary notwithstanding, in the event
the Corporation is a party to a merger or other reorganization, outstanding
Stock Options shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Stock Options by the surviving corporation or its
parent, for their continuation by the Corporation (if the Corporation is a
surviving corporation) for accelerated vesting and accelerated expiration
or for settlement in cash.
2. General.
-------
a. Each Stock Option shall be evidenced by a Stock Option Agreement.
-3-
<PAGE>
b. The granting of a Stock Award or a Stock Option in any year shall
not give the Grantee any right to similar grants in future years or any
right to be retained as a Producer, and all Producers shall remain subject
to discharge or removal to the same extent as if the Plan were not in
effect.
c. No Grantee, and no beneficiary or other person claiming under or
through him or her, shall have any right, title or interest by reason of
any Stock Option to any particular assets of the Corporation, or any shares
of Stock allocated or reserved for the purposes of the Plan or subject to
any Stock Option except as set forth herein. The Corporation shall not be
required to establish any fund or make any other segregation of assets to
assure the exercise of any Stock Option.
d. No Stock Option or right under the Plan shall or may be sold,
exchanged, assigned, pledged, encumbered, or otherwise hypothecated or
disposed of except by will or the laws of descent and distribution, and a
Stock Option shall be exercisable during the Grantee's lifetime only by the
Grantee or his conservator, provided that Committee shall have the right to
grant exceptions to the foregoing restrictions on terms and conditions to
be determined by the Committee.
e. Notwithstanding any other provision of the Plan or agreements made
pursuant thereto, the Corporation's obligation to issue or deliver any
certificate or certificates for shares of Stock under a Stock Award or a
Stock Option, and the transferability of Stock acquired upon a Stock Award
or by exercise of a Stock Option, shall be subject to all of the following
conditions:
(1) Any registration or other qualification of such shares under
any state or federal law or regulation, or the maintaining in effect
of any such registration or other qualification which the Board shall,
in its absolute discretion upon the advice of counsel, deem necessary
or advisable;
(2) The obtaining of any other consent, approval, or permit from
any state or federal governmental agency which the Board shall, in its
absolute discretion upon the advice of counsel, determine to be
necessary or advisable; and
(3) Each stock certificate issued pursuant to a Stock Award or a
Stock Option shall bear such legends which the Corporation shall
determine, in its absolute discretion, are necessary or advisable, or
which in the opinion of counsel to the Corporation are required under
applicable federal or state securities laws.
f. All payments to Grantees or to their legal representatives shall be
subject to any applicable tax, community property, or other statutes or
regulations of the United States or of any state having jurisdiction
thereof. The Grantee may be required to pay to the Corporation the amount
of any withholding taxes which the Committee, in its sole discretion, deems
necessary to be withheld in order to comply with any applicable statutes or
regulations with respect to a Stock Award or a Stock Option or its
exercise. In the event that such payment is not made when due, the
Corporation shall have the right to deduct, to the extent permitted by law,
from any payment or settlement of any kind otherwise due to such person all
or part of the amount required to be withheld. If the Committee, in its
sole discretion, permits shares of Stock to be used to satisfy any such tax
withholding, such Stock shall be valued based upon the Fair Market Value of
such Stock as of the date the tax withholding is required to be made, such
date to be determined by the Committee. The Corporation shall not be
required to issue Stock until such obligations are satisfied.
-4-
<PAGE>
g. A Grantee entitled to Stock as a result of the exercise of an
Option or a grant of a Stock Award shall not be deemed for any purpose to be, or
have rights as, a shareholder of the Corporation by virtue of such exercise,
except to the extent a stock certificate is issued therefor and then only from
the date such certificate is issued. No adjustments shall be made for dividends
or distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as otherwise provided herein. The
Corporation shall issue any stock certificates required to be issued in
connection with the exercise of a Stock Option with reasonable promptness after
such exercise.
h. The Plan and the grant of Stock Awards under the Plan and the grant
or exercise of Stock Options granted under the Plan shall be subject to, and
shall in all respects comply with, applicable California law.
-5-
REGAN HOLDING CORP.
1998 STOCK OPTION PLAN
(As Amended and Restated Effective November 1, 1998)
I. ESTABLISHMENT OF PLAN; DEFINITIONS
1. Purpose. The purpose of the Regan Holding Corp. 1998 Stock Option
-------
Plan is to provide an incentive to Employees and Directors of Regan Holding
Corp. and its Affiliates who are in a position to contribute materially to the
long-term success of the Corporation and/or its Affiliates, to increase their
interest in the welfare of the Corporation and its Affiliates and to aid in
attracting and retaining Employees and Directors of outstanding ability.
2. Definitions. Unless the context clearly indicates otherwise, the
-----------
following terms shall have the meanings set forth below:
a. "Affiliate" shall mean any parent or subsidiary of the
Corporation which meets the requirements of Section 425 of the Code.
b. "Board" shall mean the Board of Directors of the Corporation.
c. "Cause" shall mean repeated failure to properly perform
assigned duties, gross negligence, insubordination, commission of a
felony or any act injurious to the Corporation or an Affiliate
involving dishonesty or breach of any duty of confidentiality or
loyalty.
d. "Change of Control" shall mean the happening of any of the
following events:
(i) the Corporation receives a report on Schedule 13D filed
with the Securities and Exchange Commission pursuant to Section
13(d) of the Exchange Act disclosing that any person, group,
corporation or other entity is the beneficial owner, directly or
indirectly, of thirty percent or more of the total combined
voting power of all classes of stock of the Corporation;
(ii) any person (as such term is defined in Section 13(d) of
the Exchange Act), group, corporation or other entity other than
the Corporation or a wholly-owned subsidiary of the Corporation,
purchases shares of any common stock of the Corporation (or
securities convertible into common stock) pursuant to a tender
offer or exchange offer for cash, securities or any other
consideration, provided that after consummation of the offer, the
person, group, corporation or other entity in question is the
beneficial owner (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of thirty percent or more
of the total combined voting power of all classes of stock of the
Corporation (calculated as provided in paragraph (d) of Rule
13d-3 under the Exchange Act in the case of rights to acquire
common stock);
(iii) the shareholders of the Corporation approve (a) any
consolidation or merger of the Corporation in which the
Corporation is not the continuing or surviving corporation or
pursuant to which shares of Stock would be converted into cash,
securities or other property, or (b) any sale, lease, exchange or
other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the
Corporation; or
-1-
<PAGE>
(iv) there shall have been a change in a majority of the
members of the Board of Directors of the Corporation within a 24
month period unless the election or nomination for election by
the Corporation's shareholders of each new Director was approved
by the vote of two-thirds of the Directors then still in office
who were in office at the beginning of the 24 month period.
e. "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
f. "Committee" shall mean a committee designated by the Board which
committee shall administer the Plan as set forth in Section 4 of this
Article I of the Plan.
g. "Corporation" shall mean Regan Holding Corp., a California
corporation.
h. "Director" shall mean any individual who is a member of the Board
and/or a member of the Board of Directors of an Affiliate.
i. "Disability" shall mean the inability of an individual to provide
meaningful service for the Corporation due to a medically determinable
physical or mental impairment, which service is reasonably consistent with
the individual's past service for the Corporation, training and experience.
Such determination of disability shall be made by the Committee.
Notwithstanding the foregoing, if an individual qualifies for Federal
Social Security disability benefits or for payments under a long-term
disability income Plan of the Corporation or the Affiliate which employs
such individual, based upon his physical or mental condition, such
individual shall be deemed to suffer from a Disability hereunder.
j. "Employee" shall mean any employee, including officers, of the
Corporation or any of its Affiliates.
k. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
l. "Fair Market Value" shall mean on any date, (i) if the Stock is not
listed on a national securities exchange or quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq"),
the fair market value of the Stock on that date as determined by the Board,
or (ii) if the Stock is listed on a national securities exchange or is
quoted on Nasdaq, the closing price reported on the composite tape for
issues listed on such exchange on such date, or the closing price or the
average of the closing dealer "bid" and "asked" prices of the Stock on the
date of grant as quoted by Nasdaq, or if no trades shall have been reported
for such date, on the next preceding date on which there were trades
reported; provided, however, that if no quotations shall have been made
within the 10 business days preceding such date, the Fair Market Value
shall be determined by the Board as provided in clause (i) above.
m. "Grantee" shall mean an Employee or Director who has been granted a
Stock Option under the Plan.
n. "Incentive Stock Option" shall mean a Stock Option granted pursuant
to the Incentive Stock Option provisions as set forth in Article II of the
Plan.
-2-
<PAGE>
o. "Non-Qualified Stock Option" shall mean a Stock Option granted
pursuant to the Non-Qualified Stock Option provisions as set forth in
Article III of the Plan.
p. "Option Period" shall mean the term of a Stock Option as fixed by
the Committee.
q. "Plan" shall mean the Regan Holding Corp. 1998 Stock Option Plan as
set forth herein and as amended from time to time.
r. "Stock" shall mean authorized but unissued shares of the Series A
Common Stock of the Corporation, no par value, or reacquired shares of the
Corporation's Series A Common Stock.
s. "Stock Option" shall mean an option, which shall include
Non-Qualified Stock Options and Incentive Stock Options, granted pursuant
to the Plan to purchase shares of Stock.
t. "Stock Option Agreement" shall mean the written instrument
evidencing the grant of one or more Stock Options under the Plan and which
shall contain the terms and conditions applicable to such grant.
u. "Ten Percent Shareholder" shall mean an Employee or Director who at
the time a Stock Option is granted thereto owns stock possessing more than
10% of the total combined voting power of all stock of the Corporation or
of its Affiliates.
3. Shares of Stock Subject to the Plan. There are hereby reserved for
-----------------------------------
issuance under the Plan 5,500,000 shares of Stock. Subject to the provisions of
Section 1 of Article IV, the Stock which may be issued pursuant to Stock Options
authorized to be granted under the Plan and the Stock which is subject to
outstanding but unexercised Stock Options under the Plan shall not exceed
5,500,000 shares of Stock in the aggregate. If a Stock Option shall expire and
terminate for any reason, in whole or in part, without being exercised, the
number of shares of Stock as to which such expired or terminated Stock Option
shall not have been exercised may again become available for the grant of Stock
Options.
There shall be no terms and conditions in a Stock Option which provide
that the exercise of an Incentive Stock Option reduces the number of shares of
Stock for which an outstanding Non-Qualified Stock Option may be exercised; and
there shall be no terms and conditions in a Stock Option which provide that the
exercise of a Non-Qualified Stock Option reduces the number of shares of Stock
for which an outstanding Incentive Stock Option may be exercised.
4. Administration of the Plan. The Plan shall be administered by the
---------------------------
Committee. Subject to the express provisions of the Plan, the Committee shall
have authority to determine the eligibility of Employees and Directors to
participate in the Plan, to grant Stock Options under the Plan and to determine
whether Stock Options granted under the Plan shall be Non-Qualified Stock
Options or Incentive Stock Options, to interpret the Plan, to prescribe, amend,
and rescind rules and regulations relating to the Plan, to determine the terms
and provisions of Stock Option Agreements and to make all other determinations
necessary or advisable for the administration of the Plan. Any controversy or
claim arising out of or related to the Plan shall be determined unilaterally by
and at the sole discretion of the Committee. Any determination, decision or
action of the Committee in connection with the construction, interpretation,
administration, implementation or maintenance of the Plan shall be final,
conclusive and binding upon all Grantees and all person(s) claiming under or
through any Grantees.
-3-
<PAGE>
There shall be 2 Committees under the Plan. Solely with respect to the
participation in the Plan of Employees and Directors who are subject to Section
16 of the Exchange Act or any successor statute ("Section 16"), a special
Committee comprised solely of 2 or more "non-employee directors" (as such term
is defined in Rule 16b-3(d)(1) promulgated by the Securities and Exchange
Commission under the Exchange Act) shall administer the Plan solely for purposes
of the Plan and the Stock Options granted under the Plan to satisfy the
applicable requirements of Rule 16b-3 promulgated by the Securities Exchange
Commission under the Exchange Act ("Rule 16b-3") with respect to such Employees
and Directors. For all other purposes of the Plan, a committee comprised of 3 or
more officers of the Corporation designated by the Board shall serve as the
Committee. Notwithstanding anything contained in this Section 4 to the contrary,
no member of the Committee shall have the authority to render any decision with
respect to his or her participation in or entitlement to benefits under the
Plan.
5. Amendment or Termination. The Board may, at any time, alter, amend,
------------------------
suspend, discontinue, or terminate the Plan; provided, however, that no such
-------- -------
action shall adversely affect the right of any Grantee under any Stock Option
previously granted thereto hereunder.
6. Effective Date of Plan. The Plan became effective on January 1,
-----------------------
1998; this amendment and restatement of the Plan shall become effective on
November 1, 1998, subject to approval of the shareholders of the Corporation.
II. INCENTIVE STOCK OPTION PROVISIONS
1. Granting of Incentive Stock Options.
-----------------------------------
a. Solely Employees of the Corporation or its Affiliates shall be
eligible to receive Incentive Stock Options under the Plan.
b. When granting an Incentive Stock Option, the Committee shall
determine the purchase price of the Stock subject thereto, provided, that
the purchase price of each share of Stock subject to an Incentive Stock
Option shall not be less than 100% of the Fair Market Value of a share of
the Stock on the date the Incentive Stock Option is granted; and provided,
--------
further, that the purchase price of each share of Stock subject to an
-------
Incentive Stock Option granted to a Ten Percent Shareholder shall not be
less than 110% of the Fair Market Value of a share of the Stock on the date
the Incentive Stock Option is granted.
c. No Incentive Stock Option shall be exercisable more than 10 years
from the date the Incentive Stock Option was granted; provided, however,
-------- -------
that an Incentive Stock Option granted to a Ten Percent Shareholder shall
not be exercisable more than 5 years from the date the Incentive Stock
Option was granted.
d. The Committee shall determine and shall designate from time to time
those Employees who are to be granted Incentive Stock Options and shall
specify the number of shares of Stock subject to each Incentive Stock
Option.
e. Notwithstanding any other provisions hereof, the aggregate Fair
Market Value (determined at the time the option is granted) of Stock with
respect to which Incentive Stock Options are exercisable for the first time
by an Employee during any calendar year (under all such plans of the
Corporation and its Affiliates) shall not exceed $100,000.
-4-
<PAGE>
f. The Committee, in its sole discretion, shall determine whether any
particular Incentive Stock Option shall become exercisable in one or more
installments, shall specify the installment dates, and, within the
limitations herein provided, shall determine the total period during which
the Incentive Stock Option is exercisable. Further, the Committee may make
such other provisions as may appear generally acceptable or desirable to
the Committee or necessary to qualify its grants under the provisions of
Section 422 of the Code.
g. The Committee may grant at any time new Incentive Stock Options to
an Employee who has previously received Incentive Stock Options or other
options whether such prior Incentive Stock Options or other options are
still outstanding, have previously been exercised in whole or in part or
are canceled in connection with the issuance of new Incentive Stock
Options. The purchase price of the new Incentive Stock Options may be
established by the Committee without regard to the existing Incentive Stock
Options or other options.
2. Exercise of Incentive Stock Options. The purchase price of Stock
-------------------------------------
subject to an Incentive Stock Option shall be payable on exercise of the Option
in cash or by check, bank draft or postal or express money order. The Committee,
in its discretion, may permit a Grantee to make partial or full payment of the
purchase price by the surrender of Stock owned by the Grantee prior to the date
of exercise. Shares of Stock surrendered in payment of the purchase price as
provided above shall be valued at the Fair Market Value thereof on the date of
exercise. Surrender of such stock shall be evidenced by delivery of the
certificate(s) representing such shares in such manner, and endorsed in such
form, or accompanied by stock powers endorsed in such form, as the Committee may
determine.
3. Termination of Employment. Except as provided otherwise in the
---------------------------
applicable Stock Option Agreement (in which case the provisions of the Stock
Option Agreement shall control over the provisions of this Section 3):
a. If a Grantee's employment with the Corporation or an Affiliate is
terminated by reason of death, Disability, or retirement at or after age
62, notwithstanding the otherwise applicable vesting requirements set forth
in the applicable Stock Option Agreement, all Incentive Stock Options held
by the Grantee at the date of the termination of the Grantee's employment
shall immediately vest and become fully exercisable. Such Incentive Stock
Options must be exercised within 3 months after such termination of
employment (but in no event after expiration of the Option Period) or they
shall be forfeited.
b. If a Grantee's employment with the Corporation or an Affiliate is
terminated for Cause or if Grantee shall have voluntarily terminated such
employment other than by retirement at or after age 62, all then
outstanding Incentive Stock Options held by the Grantee shall expire
immediately and such Incentive Stock Options shall not be exercisable after
the date of the termination of Grantee's employment.
c. If a Grantee's employment with the Corporation or an Affiliate is
terminated for any reason other than as set forth in subparagraph (a) or
subparagraph (b) of this Section 3, only those Incentive Stock Options held
by the Grantee which were vested and fully exercisable at the date of the
Grantee's termination shall be exercisable by the Grantee following the
termination of the Grantee's employment; provided, however, that such
Incentive Stock Options must be exercised by the earlier of (i) 3 months
from the date of the Grantee's termination, or (ii) the expiration of the
Option Period, or they shall be forfeited.
-5-
<PAGE>
III. NON-QUALIFIED STOCK OPTION PROVISIONS
1. Granting of Non-Qualified Stock Options.
---------------------------------------
a. Employees and Directors of the Corporation or its Affiliates shall
be eligible to receive Non-Qualified Stock Options under the Plan.
b. The Committee shall determine and shall designate from time to time
those Employees and Directors who are to be granted Non-Qualified Stock
Options and shall specify the number of shares of Stock subject to each
Non-Qualified Stock Option.
c. The Committee may grant at any time new Non-Qualified Stock Options
to an Employee or Director who has previously received Non-Qualified Stock
Options or other options, whether such prior Non-Qualified Stock Options or
other options are still outstanding, have previously been exercised in
whole or in part or are canceled in connection with the issuance of new
Non-Qualified Stock Options.
d. When granting a Non-Qualified Stock Option, the Committee shall
determine the purchase price of the Stock subject thereto.
e. The Committee, in its sole discretion, shall determine whether any
particular Non-Qualified Stock Option shall become exercisable in one or
more installments, specify the installment dates and, within the
limitations herein provided, determine the total period during which the
Non-Qualified Stock Option is exercisable. Further, the Committee may make
such other provisions as may appear generally acceptable or desirable to
the Committee.
2. Exercise of Non-Qualified Stock Options. The purchase price of
------------------------------------------
Stock subject to a Non- Qualified Stock Option shall be payable on exercise of
the Option in cash or by check, bank draft or postal or express money order. The
Committee, in its discretion, may permit a Grantee to make partial or full
payment of the purchase price by the surrender of Stock owned by the Grantee
prior to the date of exercise. Shares of Stock surrendered in payment of the
purchase price as provided above shall be valued at the Fair Market Value
thereof on the date of exercise, surrender of such to be evidenced by delivery
of the certificates(s) representing such shares in such manner, and endorsed in
such form, or accompanied by stock powers endorsed in such form, as the
Committee may determine.
3. Termination of Employment or Director Status. Except as provided
---------------------------------------------
otherwise in the applicable Stock Option Agreement (in which case the provisions
of the Stock Option Agreement shall control over the provisions of this Section
3):
a. If a Grantee's employment with the Corporation or an Affiliate or
status as a Director is terminated by reason of death, Disability, or
retirement at or after age 62 notwithstanding the otherwise applicable
vesting requirements set forth in the applicable Stock Option Agreement,
Non- Qualified Stock Options held by the Grantee at the date of the
termination of the Grantee's employment or status as a Director shall
immediately vest and become fully exercisable. Such Non-Qualified Stock
Options must be exercised within 3 months after such termination of
employment or status as a Director (but in no event after expiration of the
Option Period) or they shall be forfeited.
b. If a Grantee's employment with the Corporation or an Affiliate or
status as a Director is terminated for Cause or if the Grantee shall have
voluntarily terminated such employment or status as a Director other than
by retirement at or after age 62, all then outstanding Non-Qualified Stock
Options held by the Grantee shall expire immediately and such Non-Qualified
Stock Options shall not be exercisable after the date of the termination of
the Grantee's employment or status as a Director.
-6-
<PAGE>
c. If a Grantee's employment with the Corporation or an Affiliate or
status as a Director is terminated for any reason other than as set forth
in subparagraph (a) or subparagraph (b) of this Section 3, only those
Non-Qualified Stock Options held by the Grantee which were vested and fully
exercisable at the date of the Grantee's termination shall be exercisable
by the Grantee following the termination of the Grantee's employment or
status as a Director; provided, however, that such Non- Qualified Stock
Options must be exercised by the earlier of (i) 3 months from the date of
the Grantee's termination, or (ii) the expiration of the Option Period, or
they shall be forfeited.
IV. GENERAL PROVISIONS
1. Recapitalization Adjustments.
----------------------------
a. In the event of any change in capitalization affecting the Stock,
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 Stock, the Board shall authorize and make such
proportionate adjustments, if any, as the Board deems appropriate to
reflect such change, including, without limitation, with respect to the
aggregate number of shares of Stock for which Stock Options in respect
thereof may be granted under the Plan, the number of shares of Stock
covered by each outstanding Stock Option, and the purchase price per share
of Stock in respect of outstanding Stock Options.
b. Any provision hereof to the contrary notwithstanding, in the event
the Corporation is a party to a merger or other reorganization, outstanding
Stock Options shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Stock Options by the surviving corporation or its
parent, for their continuation by the Corporation (if the Corporation is a
surviving corporation) for accelerated vesting and accelerated expiration
or for settlement in cash.
2. General.
-------
a. Each Stock Option shall be evidenced by a Stock Option Agreement.
b. The granting of a Stock Option in any year shall not give the
Grantee any right to similar grants in future years or any right to be
retained as an Employee or Director, and all Employees and Directors shall
remain subject to discharge or removal to the same extent as if the Plan
were not in effect.
c. No Employee or Director, and no beneficiary or other person
claiming under or through him or her, shall have any right, title or
interest by reason of any Stock Option to any particular assets of the
Corporation, or any shares of Stock allocated or reserved for the purposes
of the Plan or subject to any Stock Option except as set forth herein. The
Corporation shall not be required to establish any fund or make any other
segregation of assets to assure the exercise of any Stock Option.
d. No Stock Option or right under the Plan shall or may be sold,
exchanged, assigned, pledged, encumbered, or otherwise hypothecated or
disposed of except by will or the laws of descent and distribution, and a
Stock Option shall be exercisable during the Grantee's lifetime only by the
Grantee or his conservator.
-7-
<PAGE>
e. Notwithstanding any other provision of the Plan or agreements made
pursuant thereto, the Corporation's obligation to issue or deliver any
certificate or certificates for shares of Stock under a Stock Option, and
the transferability of Stock acquired by exercise of a Stock Option, shall
be subject to all of the following conditions:
(1) Any registration or other qualification of such shares under
any state or federal law or regulation, or the maintaining in effect
of any such registration or other qualification which the Board shall,
in its absolute discretion upon the advice of counsel, deem necessary
or advisable;
(2) The obtaining of any other consent, approval, or permit from
any state or federal governmental agency which the Board shall, in its
absolute discretion upon the advice of counsel, determine to be
necessary or advisable; and
(3) Each stock certificate issued pursuant to a Stock Option
shall bear such legends which the Corporation shall determine, in its
absolute discretion, are necessary or advisable, or which in the
opinion of counsel to the Corporation are required under applicable
federal or state securities laws.
f. All payments to Grantees or to their legal representatives shall be
subject to any applicable tax, community property, or other statutes or
regulations of the United States or of any state having jurisdiction
thereof. The Grantee may be required to pay to the Corporation the amount
of any withholding taxes which the Committee, in its sole discretion, deems
necessary to be withheld in order to comply with any applicable statutes or
regulations with respect to a Stock Option or its exercise. In the event
that such payment is not made when due, the Corporation shall have the
right to deduct, to the extent permitted by law, from any payment or
settlement of any kind otherwise due to such person all or part of the
amount required to be withheld. If the Committee, in its sole discretion,
permits shares of Stock to be used to satisfy any such tax withholding,
such Stock shall be valued based upon the Fair Market Value of such Stock
as of the date the tax withholding is required to be made, such date to be
determined by the Committee. The Corporation shall not be required to issue
Stock until such obligations are satisfied.
g. In the case of a grant of a Stock Option to any Employee or
Director of an Affiliate of the Corporation, the Corporation may, if the
Committee so directs, issue or transfer the shares, if any, covered by the
Stock Option to the Affiliate, for such lawful consideration as the
Committee may specify, upon the condition or understanding that the
Affiliate will transfer the shares to the Employee or Director in
accordance with the terms of the Stock Option specified by the Committee
pursuant to the provisions of the Plan.
h. A Grantee entitled to Stock as a result of the exercise of an
Option shall not be deemed for any purpose to be, or have rights as, a
shareholder of the Corporation by virtue of such exercise, except to the
extent a stock certificate is issued therefor and then only from the date
such certificate is issued. No adjustments shall be made for dividends or
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as otherwise provided herein.
The Corporation shall issue any stock certificates required to be issued in
connection with the exercise of a Stock Option with reasonable promptness
after such exercise.
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<PAGE>
i. The Plan and the grant or exercise of Stock Options granted under
the Plan shall be subject to, and shall in all respects comply with,
applicable California law.
j. Should the participation of any Employee or Director in the Plan be
subject to Section 16, it is the express intent of the Corporation that the
Plan and the Stock Options granted under the Plan satisfy and be
interpreted in a manner to achieve the result that the applicable
requirements of Rule 16b-3 shall be satisfied with respect to such
Employees and Directors, with the result that such Employees and Directors
shall be entitled to the benefits of Rule 16b-3 or other applicable
exemptive rules under Section 16. If any provision of the Plan or of any
Stock Option would otherwise frustrate or conflict with the intent of the
Corporation expressed in the immediately preceding sentence, to the extent
possible, such provision shall be interpreted and deemed amended so as to
avoid such conflict, and, to the extent of any remaining irreconcilable
conflict with such intent, the provision shall, solely with respect to
Employees and Directors subject to Section 16, be deemed void.
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PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
333 Market Street
San Francisco CA 94105-2119
Telephone (415) 957-3000
Facsimile (415) 957-3394
(415) 957 3372
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form s-1 (File No.
333-67219) 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 Data."
PricewaterhouseCoopers LLP
San Francisco, California
December 28, 1998
