<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended DECEMBER 31, 1999, or
-----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________ to ____________
Commission file number 0-4366
------
REGAN HOLDING CORP.
-------------------
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 68-0211359
---------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2090 MARINA AVENUE PETALUMA, CALIFORNIA 94954
--------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(707) 778-8638
--------------
(Registrant's Telephone Number, Including Area Code)
Securities registered under
Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the common equity was sold, or the average bid and asked
prices of such common equity, as of a date specified within the 60 days prior to
the date of filing.
$24,780,201
There is currently no trading market for the registrant's stock.
Accordingly, the foregoing is as of March 15, 2000 and is based on the price
at which the registrant has repurchased its stock during the 60 days prior
to the date of filing.
Index to Exhibits on Page 40
Page 1
<PAGE> 2
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the issuer has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 after the distribution of securities under a plan confirmed
by a court.
Yes No
-------- -------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of February 29, 2000, including redeemable common
stock:
COMMON STOCK-SERIES A 25,745,709
COMMON STOCK-SERIES B 589,757
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 23, 2000, is incorporated by reference into Part III
of this document.
Page 2
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Except for historical information contained herein, the matters discussed
in this report contain forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties that could cause actual results to differ materially.
Regan Holding Corp. (the "Company"), is a California Corporation that is
primarily engaged, through its wholly-owned subsidiary Legacy Marketing Group
("LMG"), in the design, marketing and administration of life insurance and
annuity products. Through LMG, 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 (collectively referred to herein as the "Carriers").
American National has over $1.7 billion in capital and surplus and is rated "A+"
by A. M. Best. IL Annuity has $60.0 million in capital and surplus and is rated
"A" by A.M. Best. Transamerica has over $830.0 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 LMG the exclusive right to market certain
annuity and life insurance products issued by the Carriers (the "Policies").
Under the terms of the Marketing Agreements, LMG is responsible for the
recruiting, appointing and training of producers who contract with LMG to sell
the Policies. For these services, the Carriers pay LMG marketing allowances and
commissions based on the volume of premiums from Policies sold. The Carriers are
also responsible for the funding of commissions paid to producers for sales of
Policies. LMG 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 19,400 producers, of whom approximately 5,200 generated business
during 1999. Each of these producers has entered into a producer agreement with
LMG 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 LMG, with or without cause.
LMG's sales network is built on a multi-level structure, pursuant to which
producers may recruit other producers. Recruited producers are referred to as
"downline" producers within the recruiting producer's "downline network."
Recruited producers may also recruit other producers, creating a hierarchy under
the original recruiting producer. The producer contract contains a nine-level
"open book" design in which a producer may advance from one level to the next
based on his or her commission level and the size of his or her downline
network. As a producer advances within the system, the producer receives higher
commissions on sales made by the producer and the producer's downline network.
LMG's multi-level structure 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 LMG. Advancements to higher levels can
occur as often as every three months. Producers at the highest levels are
considered "wholesalers."
LMG provides tools and services that assist wholesalers with recruiting,
training and support responsibilities associated with the producers in their
downline network. In addition, LMG 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. LMG also generates product
information, sales brochures, and recruiting material. In addition, LMG designs
advanced estate planning concepts, pursuant to which clients of producers
benefit from tax and legal advantages through purchase of the Policies.
In addition to Policy marketing and administration, LMG assists the
Carriers in Policy design and development. LMG's marketing and actuarial
departments work with the Carriers to design proprietary annuity and life
insurance products to be marketed by LMG. Most products marketed by LMG include
certain guarantees for the benefit of policyholders, known as LMG's Cornerstone
Guarantees, which are designed to be unique in the insurance marketplace. LMG's
Cornerstone Guarantees generally include: (i) a contractually guaranteed maximum
administrative fee; (ii) multiple crediting rate options; and (iii) life
insurance products providing a
Page 3
<PAGE> 4
guarantee that changes in the cost of insurance will result solely from changes
in the Policies' future experience factors.
LMG has also entered into Administrative Agreements (the "Administrative
Agreements") with each of the Carriers pursuant to which LMG 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 LMG is
paid from accounts maintained by the Carriers. For providing such services, LMG
is paid on a per transaction basis with the amount of the fee depending on the
type of policy and type of service. Historically, all administrative services
with respect to Policies were performed at the Company's headquarters in
Petaluma, California. However, during 1998, LMG began performing administrative
services with respect to certain annuity Policies at facilities located in Rome,
Georgia.
Until the third quarter of 1998, American National and IL Annuity were the
only insurance companies for which LMG marketed and administered insurance
products. During the third quarter of 1998, LMG began marketing and
administering insurance products for Transamerica. Approximately 36.2% and 57.0%
of the Company's total consolidated revenue during 1997 resulted from agreements
with American National and IL Annuity, respectively. Approximately 12.7%, 79.9%,
and 1.7% of the Company's total consolidated revenue resulted from agreements
with American National, IL Annuity, and Transamerica during 1998, respectively,
and 10.5%, 73.5%, and 11.3% during 1999, respectively.
Neither the Marketing Agreements nor the Administrative Agreements prevent
LMG from entering into similar arrangements with other insurance companies.
However, the Marketing Agreements prevent LMG from marketing products with other
carriers 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 Agreements. In addition, under the terms of the Marketing
Agreements with American National and IL Annuity, LMG is obligated to give
American National and IL Annuity the opportunity to participate in the marketing
of any new products developed by LMG.
The Marketing and Administrative Agreements with American National and IL
Annuity expire on April 30, 2000, 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 LMG 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 Administrative Agreements. Management expects that new
agreements will be signed during the second quarter of 2000. The Marketing and
Administrative Agreements with Transamerica do not have fixed terms but may be
terminated by either party upon twelve months notice without cause, and may be
terminated by either party immediately for cause.
In February of 2000, LMG entered into an Agency Agreement with Bankers
United Life Assurance Company ("Bankers") pursuant to which LMG is authorized to
solicit, through its network of independent insurance producers, sales of
long-term care products offered by Bankers. For this solicitation, LMG will
receive commissions based on the volume of premiums sold. The Agency Agreement
may be terminated by either party with 15 days notice without cause, and may be
terminated by either party immediately for cause. LMG is currently working to
become licensed in several states to sell long-term care products. Accordingly,
no sales of long-term care products have occurred to date.
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 non-exclusive rights to solicit
sales of 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.
During 1999, approximately 3.4% of the Company's consolidated revenues were
generated by LFS.
Through its wholly-owned subsidiary, LifeSurance Corporation, the Company
conducts estate planning seminars which provide continuing education credits for
producers at various locations throughout the United
Page 4
<PAGE> 5
States. Producers pay fees to attend the seminars and may also purchase
educational materials which can be used as tools in promoting life insurance and
annuity policies and estate planning concepts. The seminars and educational
materials are marketed under the business name Wealth Transfer Educational
Systems.
Legacy Advisory Services, Inc. ("LAS") is a wholly-owned subsidiary of
the Company, incorporated in the State of California for the purpose of
operating as an "investment advisor," as defined by and regulated pursuant to
the Investment Advisors Act of 1940. LAS is registered with the Securities and
Exchange Commission (the "SEC") and began limited operations during 1999.
Legacy Reinsurance Company ("LegacyRe")is a wholly-owned subsidiary of
the Company, incorporated in the State of Arizona. The Company is in the
process of obtaining approval from the Arizona Department of Insurance for
LegacyRe to engage in the reinsurance business. Accordingly, LegacyRe has
conducted no business to date. Upon receipt of approval from the Arizona
Department of Insurance, LegacyRe may enter into one or more reinsurance
agreements with insurance carriers to reinsure life insurance and annuity
products.
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 products. Some of these competitors have substantially
greater assets, financial resources and market acceptance than LMG. In
addition, the recent enactment of the Gramm-Leach-Bliley Act which reduced
previously existing Federal restrictions on combinations of banks, insurance
companies, and insurance agents, may increase the number and strength of
potential competitors. The Company's distribution system relies on independent
insurance producers to effectively market its products competitively.
Maintaining relationships with producers requires introducing new products to
the market in an efficient and timely manner, offering competitive commission
schedules, and providing superior marketing training and support.
Regulatory Environment
LMG, or a licensed individual acting on behalf of LMG (in the states that
do not permit the licensing of corporations), is licensed or is currently
seeking licensure as an insurance agent and/or third party administrator in all
states that require such licensure. As a result of being licensed as an
insurance agency, LMG's operations are subject to regulation, including its
sales practices, fiduciary responsibilities and familiarity with pertinent
statutes and regulations. As a result of being licensed as a third party
administrator, LMG is subject to regulation regarding maintenance of records,
settlement and payment of claims, underwriting services or standards, disclosure
of the administrator's capacity, payment of fees or charges and other fiduciary
duties.
Increased national attention has resulted in examination by the National
Association of Insurance Commissioners and state insurance departments of
existing laws and regulations affecting insurance companies, especially those
laws and regulations involving insurance company solvency, fair and ethical
marketing practices, and investment policies. The Company has responded to this
increased scrutiny 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.
Although 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 the National Association of Securities Dealers, Inc. (the "NASD").
As a result of federal and state broker-dealer registration and self regulatory
organization ("SRO") memberships, LFS is subject to regulation which covers many
aspects of its securities business. Such regulation covers matters including
capital requirements, record-keeping and reporting requirements, supervisory and
organizational procedures intended to ensure compliance with securities laws and
to prevent the improper trading on material non-public 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 "suitability" determinations
as to customer transactions, limitations in the amounts that may be charged to
customers, and correspondence with customers. LFS is currently in compliance
with all applicable capital and other regulatory requirements.
Page 5
<PAGE> 6
Compliance with many of the regulations applicable to the Company or its
subsidiaries involves a number of risks, particularly because regulations in a
number of areas may be subject to varying interpretation. Regulators make
periodic examinations and review annual, monthly and other periodic 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, SROs , and other regulators 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 a
non-compliant broker-dealer, the suspension of disqualification of a
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 and regulations applicable
to the Company or its subsidiaries could have a material adverse effect upon the
Company's business, financial condition, results of operations and business
prospects.
As of March 15, 2000, the Company had approximately 507 full-time
equivalent employees. None of the employees of the Company are covered by a
collective bargaining agreement, and the Company believes that its employee
relations are satisfactory.
Information about the Company, including copies of the Company's Forms 10-K
and 10-Q may be reviewed at offices 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.
ITEM 2. PROPERTY
The Company currently leases approximately 72,000 square feet of office
space in Petaluma, California, at which the Company's headquarters are located.
This lease expires in April 2009, subject to extension at the option of the
Company for two additional terms of five years each.
In March 1999, the Company purchased a building in Petaluma, California,
which previously housed the Company's headquarters for $4.3 million. The
building consists of approximately 53,700 total square feet of useable office
and warehouse space. Approximately 13,700 square feet of the newly purchased
building is currently used for LFS operations and training facilities for the
Company's employees. The remaining approximate 40,000 square feet is leased to
unrelated parties. The Company also leases approximately 5,700 square feet of
warehouse space in Petaluma, California.
In addition, the Company leases 18,200 square feet of office space in Des
Moines, Iowa, expiring in October 2004, and leases 30,500 square feet of office
space in Rome, Georgia, expiring in December 2001.
Management believes that existing and planned office and warehouse space is
and will continue to be adequate for the Company's operations for the
foreseeable future.
ITEM 3. 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 currently existing as a result of such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth
calendar quarter of 1999.
Page 6
<PAGE> 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
As of March 15, 2000, the Company's Series A common stock was held by
approximately 1,500 shareholders of record and the Company's Series B common
stock was held by approximately 9,800 shareholders of record. There is no
established trading market for the Company's stock.
The Board of Directors of the Company may, at its sole discretion, declare
and pay dividends on common stock, subject to capital and solvency restrictions
under California law. To date, the Company has not paid any dividends on its
common stock. The Company's ability to pay dividends is dependent on the ability
of the Company's wholly-owned subsidiaries to pay dividends or make other
distributions to its parent company. In addition, the Company's ability to pay
dividends is restricted under the terms of a loan agreement (see Management's
Discussion and Analysis of results of operations and Financial Condition --
Analysis of Regan Holding Corp. Consolidated.) As of December 31, 1999, the
Company does not anticipate paying dividends on any of its outstanding common
stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
-------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data:
Total Revenue $ 50,030,617 $ 45,935,164 $ 21,883,482 $ 17,508,601 $ 16,800,554
Net Income 4,467,834 9,770,208 3,150,454 2,714,495 4,858,620
Earnings Per Share-Basic .17 .37 .12 .10 .18
Earnings Per Share-Diluted .16 .36 .12 .10 .18
Selected Balance Sheet Data:
Total Assets $ 46,592,396 $ 31,286,013 $ 19,280,941 $ 15,424,902 $ 12,304,801
Total Non-current Liabilities 4,258,492 662,808 281,894 316,741 304,557
Total Liabilities 14,904,343 6,364,743 3,621,380 2,519,866 1,762,924
Redeemable Common Stock 11,563,285 11,225,431 11,842,651 12,343,001 12,682,750
Shareholders' Equity (Deficit) 20,124,768 13,695,839 3,816,910 562,035 (2,140,873)
Cash Dividends Declared -- -- -- -- --
Selected Operating Data:
Total Premium
Placed Inforce (1) $1.62 billion $1.65 billion $777.3 million $626.8 million $620.0 million
Total No. of Policies
Placed Inforce (1) 28,000 31,900 15,060 11,144 12,167
</TABLE>
(1) Inforce premium and policies are actually statistics of the Carriers but
represent factors which directly affect the Company's revenue.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for historical information contained herein, certain of the matters
discussed in this Form 10-K are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. These "forward-looking
statements" involve certain risks and uncertainties. All forecasts and
projections in this report are "forward-looking statements" and are based on
management's current expectations of the Company's near term results, based on
current information available. Actual results could differ materially.
Page 7
<PAGE> 8
The table below presents information about the Company's operating segments
for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Legacy Legacy
Marketing Financial
Group Services, Inc. Other Total
----- -------------- ----- -----
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
Total revenue $ 48,117,700 $ 1,694,680 $ 218,237 $ 50,030,617
Total expenses 34,291,486 1,485,463 7,926,249 43,703,198
------------ ------------- --------------- --------------
Operating income (loss) 13,826,214 209,217 (7,708,012) 6,327,419
Other income 1,202,854 3,155 22,670 1,228,679
------------ ------------- --------------- --------------
Income (loss) before tax 15,029,068 212,372 (7,685,342) 7,556,098
Tax provision (benefit) 5,413,341 (55,514) (2,269,563) 3,088,264
------------ ------------- --------------- --------------
Net income (loss) $ 9,615,727 $ 267,886 $ (5,415,779) $ 4,467,834
============ ============= =============== ==============
Year Ended December 31, 1998
Total revenue $ 45,113,652 $ 821,512 $ -- $ 45,935,164
Total expenses 27,649,023 861,486 2,449,557 30,960,066
------------ ------------- --------------- --------------
Operating income (loss) 17,464,629 (39,974) (2,449,557) 14,975,098
Other income (loss) 1,220,313 1,439 (720) 1,221,032
------------ ------------- --------------- --------------
Income (loss) before tax 18,684,942 (38,535) (2,450,277) 16,196,130
Tax provision (benefit) 6,880,139 (128,953) (325,264) 6,425,922
------------ ------------- --------------- --------------
Net income (loss) $ 11,804,803 $ 90,418 $ (2,125,013) $ 9,770,208
============ ============= =============== ==============
Year Ended December 31, 1997
Total revenue $ 21,571,588 $ 311,894 $ -- $ 21,883,482
Total expenses 15,011,972 653,926 1,569,699 17,235,597
------------ ------------- --------------- --------------
Operating income (loss) 6,559,616 (342,032) (1,569,699) 4,647,885
Other income (loss) 715,168 -- (17,575) 697,593
------------ ------------- --------------- --------------
Income (loss) before tax 7,274,784 (342,032) (1,587,274) 5,345,478
Tax provision (benefit) 2,420,753 (230,335) 4,606 2,195,024
------------ -------------- --------------- --------------
Net income (loss) $ 4,854,031 $ (111,697) $ (1,591,880) $ 3,150,454
============ ============= ================ ==============
Total assets
December 31, 1999 $ 27,652,585 $ 1,300,153 $ 17,639,658 $ 46,592,396
============ ============= =============== ==============
December 31, 1998 $ 21,777,580 $ 823,714 $ 8,684,719 $ 31,286,013
============ ============= =============== ==============
</TABLE>
The "Other" segment above includes Regan Holding Corp. (stand-alone) and its
remaining subsidiaries, LifeSurance Corporation, Legacy Advisory Services,
nc., and Legacy Reinsurance Company. Such entities' operations do not
currently factor significantly into management decision making and,
accordingly, were not separated for purposes of this disclosure.
ANALYSIS OF REGAN HOLDING CORP. CONSOLIDATED
Results of Operations--The Company's consolidated net income decreased
approximately $5.3 million in 1999, compared to 1998, due primarily to increases
in LMG expenses, as discussed below. Consolidated net income increased
approximately $6.6 million in 1998, compared to 1997, and is primarily
attributable to increases in LMG revenue, as discussed below.
Liquidity and Capital Resources--The Company's ability to mobilize its
assets remained strong at December 31, 1999 and 1998, with cash and short-term
investment grade securities representing 47.1% and 73.2% of the Company's total
consolidated assets, respectively. At December 31, 1999, the Company's
investment portfolio included a $12 million investment in Indianapolis Life
Group of Companies ("Indianapolis Group"), an affiliate of IL Annuity, which
represents 25.8% of the Company's total assets. In the first quarter of 2000,
the Indianapolis Group repurchased the equity securities from the Company for
approximately $12.5 million, pursuant to the terms of the investment agreement
under which the securities were purchased.
Page 8
<PAGE> 9
The Company's principal needs for cash are for: (i) funding operating
expenses; (ii) purchases of computer hardware and software, leasehold
improvements, and acquisitions of furniture and fixtures to accommodate new
employees and support growth in operations; (iii) funding continued product
development and potential strategic acquisitions; and (iv) utilization as a
reserve to cover possible redemptions of certain shares of the Company's common
stock, which is redeemable at the option of the shareholders under various
agreements with the Company. In 1999, 1998, and 1997, redemption requests
received by the Company were not material in amount, neither individually nor in
the aggregate, and the Company believes that its liquid assets are sufficient to
meet anticipated requests for redemption. At December 31, 1999 and 1998, the
total redemption value of all redeemable common stock outstanding was
approximately $11.5 million and $9.6 million, respectively.
Generally, the Company's cash needs are met through cash provided from
operating activities, which totaled approximately $6.7 million during the year
ended December 31, 1999 and $12.1 million in the preceding year. During the last
quarter of 1999 and the first quarter of 2000, however, operating activities
generated negative cash flows due primarily to decreases in LMG revenue (see
discussion below). Such negative cash flows may continue through early 2000.
Cash and investments on hand are expected to be sufficient to cover any
shortfalls during this period. The Company's future cash flows available to
fund operations will depend primarily on the level of sales of annuity and life
insurance products by LMG and upon the Company's ability to control expenses.
During the second half of 1999, the Company obtained $3.5 million in margin
loan advances from its investment broker. The margin loan was repaid in full
during the first quarter of 2000, using proceeds from the repurchase of equity
securities by the Indianapolis Group, as discussed above.
In May 1999, the Company purchased for $4.3 million the building in
Petaluma, California, which previously housed the Company's headquarters. In
conjunction with the building acquisition, the Company paid $2.2 million of the
purchase price in cash and entered into a loan payable for the remaining $2.1
million. The loan has a ten-year term and is payable in monthly installments
plus one balloon payment of approximately $1.8 million, due on May 10, 2009. In
addition, the loan agreement contains certain covenants with which the Company
must comply, including restrictions on indebtedness or investments outside the
ordinary course of business and restrictions on dividends or other changes in
the Company's capital structure. One of the covenants requires management to
obtain lender approval prior to repurchasing non-redeemable common stock. The
Lender has waived this covenant through June 30, 2000, provided that such
voluntary repurchases do not exceed $125,000 per quarter. Management expects to
obtain an extension of this waiver throughout the term of the loan. Pursuant to
the loan agreement, the Company was also required to place approximately
$560,000 in reserve to cover loan payments in the event of default and to
provide for certain repair costs.
Pursuant to 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, in the event of the death of Ms. Regan, the Company
shall repurchase from Ms. Regan's estate all of the shares of the Company's
common stock that were owned by Ms. Regan at the time of her death, or that 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. The Company has purchased a life insurance policy with a face amount of
$14.0 million for the purpose of funding this obligation in the event of Ms.
Regan's death. Any excess of the obligation over the insurance proceeds are
expected to be funded with cash and investments and, if necessary, through
external financing.
In order to fund LFS during the start-up phase, the Company has committed
to make sufficient contributions to support LFS' operations to ensure LFS'
compliance with financial requirements through December, 2000. Such
contributions totaled $247,000 in 1999 and $475,000 in 1998. LFS operating
results reached break-even on a monthly basis during the second half of 1999. As
a result, future contributions are expected to decrease from prior levels.
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. However,
in the event that a shortfall were to occur, management believes that adequate
financing could be obtained to meet the Company's cash flow needs.
Page 9
<PAGE> 10
Year 2000--For the past several years, the Company has taken corrective
measures to ensure that, on January 1, 2000, its computer systems and equipment
that uses embedded computer chips would be able to distinguish between the years
"1900" and "2000." The Company also undertook corrective measures to avoid any
business disruptions as a result of the millennium's first leap year on February
29, 2000. Due to these efforts, since December 31, 1999, the Company has not
experienced any material system errors or failures as a result of Year 2000
issues. The Company will continue to monitor its computer systems and
infrastructure, as well as the Year 2000 efforts of third parties with which the
Company does business. Although the Company does not anticipate that any future
Year 2000 issues will result in a material impact on the Company, there can be
no assurance that this will be the case.
ANALYSIS OF LEGACY MARKETING GROUP
Results of Operations--LMG's net income decreased approximately $2.1
million in 1999 from 1998 due primarily to increases in expenses, as discussed
below. In 1998, however, LMG's net income increased approximately $6.9 million
from 1997 to 1998 due primarily to increases in revenue, which is also
discussed below.
Revenue--LMG'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 sales volume of such products.
Administrative fees are a function not only of product sales, but also of
administration of policies inforce and producer appointments. Total LMG income
increased approximately $3.0 million, or 6.7%, in 1999 compared to 1998, and
increased approximately $23.5 million, or 109.1% in 1998, compared to 1997. The
increases are attributable primarily to changes in product mix and fluctuations
in premium placed inforce for the Carriers, as discussed below.
LMG marketing allowances and commission revenue, combined, increased
approximately $1.1 million, or 3.0%, during 1999 compared to 1998 due to the
continued shift in product mix to products which yielded higher marketing
allowances and commission income, such as life insurance products. The
increase in life insurance premium placed inforce, reached $10.9 million in
1999, up 60.6% from $6.8 million in 1998. This increase was offset by the
effect of a decrease in overall premium placed inforce for the Carriers of
approximately $37.0 million, or 2.3%, due primarily to reduced sales of fixed
annuities during the second half of the year. This decrease is attributable
primarily to the poor performance of bond investments underlying the
annuities' crediting rates and to lower than anticipated market acceptance of
the VisionMark II(TM) annuity, which was introduced in 1999 to replace the
original VisionMark(TM). LMG marketing allowances and commission revenue,
combined, increased approximately $20.4 million, or 115.1%, in 1998 compared
to 1997 due primarily to increases in the volume of sales by LMG's distribution
network for the Carriers. Premium placed inforce for the Carriers totaled
$1.6 billion in 1998, an increase of 112.6% from 1997. Also contributing to
the increase from 1997 to 1998 was the shift in product mix to products
which yielded higher marketing allowances and commission income.
Administrative fees increased approximately $2.0 million, or 29.6%, from
1998 to 1999, and increased approximately $3.1 million, or 84.9%, in 1998
compared to 1997, due primarily to increases in the number of policies sold and
administered during the respective periods and to a continued shift in policies
administered to those which generate higher administrative fees.
In 1999, the Company marketed and administered insurance products for three
Carriers, American National, IL Annuity, and Transamerica. However, the Company
did not market or administer products for Transamerica until the third quarter
of 1998. In 1999, approximately 10.5%, 73.5%, and 11.3% of the Company's total
consolidated revenue resulted from LMG's agreements with American National, IL
Annuity, and Transamerica, respectively, compared to approximately 12.7%, 79.9%,
and 1.7% in 1998, respectively, and approximately 36.2% and 57.0% with American
National and IL Annuity, respectively, in 1997. In addition, during the fourth
quarter of 1999, 20.6% of the Company's total consolidated revenue resulted from
LMG's Transamerica agreements. These shifts in sales mix from American National
to IL Annuity in 1998 from 1997 and the shift from IL Annuity to Transamerica
from 1998 to 1999 are attributable to favorable acceptance of the respective
Carrier's products in the marketplace.
LMG is currently in discussions with two other insurance carriers to
provide marketing and administrative services, similar to those performed for
the Carriers. If those discussions result in LMG entering Agreements to provide
services, LMG's revenue could increase beginning as early as third quarter
2000. However, there can be no assurances that such agreements will be entered
into or regarding the terms of such agreements, if entered into.
Page 10
<PAGE> 11
Although the Company markets and administers several annuity and life
insurance products on behalf of the Carriers, LMG's revenues are derived
primarily from sales and administration of annuity products. During 1999, 1998,
and 1997, 56.2%, 70.6%, and 52.4% of the Company's total consolidated revenues
resulted from LMG sales of the VisionMark(TM) annuity, respectively. However,
during the fourth quarter of 1999, 17.8% of the Company's total revenues
resulted from sales of the SelectMark(TM) annuity, offered through Transamerica.
This shift from the VisionMark(TM) annuity and the VisionMark II(TM) annuity, to
the SelectMark(TM) annuity is attributable primarily to market acceptance of the
SelectMark(TM) product and is expected to continue for the foreseeable future.
Expenses--Total LMG expenses increased approximately $6.6 million, or
24.0%, during 1999 compared to 1998, and increased approximately $12.6 million,
or 83.9%, during 1998 compared to 1997. These increases are due primarily to
increases in compensation, sales promotion and support, and professional fees,
as discussed below.
As a service organization, LMG's primary expenses are salaries and related
employee benefits. These expenses increased approximately $3.9 million, or
23.6%, in 1999 from 1998, and increased $6.6 million, or 65.6%, in 1998 from
1997. These increases resulted primarily from increases in the average number
of full-time equivalent employees, which are largely attributable to preparation
for, and accommodation of, increases in sales of insurance products,
particularly in the latter half of 1998 and the first half of 1999. Salaries and
benefits also increased due to increases in bonuses in 1998, which are tied to
net income, to the addition of personnel at higher pay levels in both 1999 and
1998, and to normal pay increases for existing employees. During 2000, LMG
management plans to hire several employees at higher pay levels, some of whom
are expected to be elected as officers of LMG. Accordingly, salaries and
benefits expense is expected to increase during 2000.
Sales promotion and support expense consists primarily of costs related to
LMG's annual national sales conventions and to various sales and training
events. Also included in sales and promotion 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 LMG's cost structure, as
attendance at the national sales conventions increases, as the number of
producers marketing products for the Company increases and as new products are
introduced. This expense increased approximately $1.2 million, or 22.2%, in 1999
from 1998 and increased approximately $2.9 million, or 120.3%, in 1998 from
1997. These increases are due primarily to increased incentives paid to
producers to stimulate sales and increased printing costs related to the
introduction of new products and enhancements to existing products.
Occupancy expenses consist primarily of office building and equipment
leasing costs. These expenses increased approximately $1.1 million, or 164.9%,
in 1999 from 1998, and increased approximately $217,000, or 51.5%, in 1998 from
1997 due primarily to the leasing of new office space during 1999 and 1998 and
to overall increases in telephone, utilities, and other related expenses which
correspond with increases in sales and employment, as discussed above.
Professional fees decreased approximately $749,000, or 33.3%, in 1999 from
1998 and increased approximately $1.8 million, or 400.8%, in 1998 from 1997, due
primarily to expenses associated with a $1.1 million settlement of litigation in
1998. Excluding the cost of this settlement, professional fees increased by
approximately $355,000 in 1999 from 1998 and increased approximately $695,000 in
1998 from 1997 due primarily to increased consulting fees related to various
information systems projects.
Depreciation and amortization expense increased approximately $237,000, or
235.4%, in 1999 from 1998 and increased approximately $97,000, or 2,434.5%, in
1998 from 1997 due primarily to acquisitions of fixed assets. Such acquisitions
were necessary primarily to improve newly leased office space and to accommodate
increases in employment, as discussed above.
Courier and postage, stationery and supplies, equipment, and
miscellaneous expenses increased in 1999 from 1998 and in 1998 from 1997 due
primarily to overall increases in the volume of business, increases in
employment, and newly leased office space, all of which are discussed above.
ANALYSIS OF LEGACY FINANCIAL SERVICES, INC.
Results of Operations--LFS net income increased approximately $177,470, or
196.3%, in 1999 from 1998, and net income of approximately $90,000 in 1998
represented an approximate $202,000 shift from net losses of approximately
$112,000 in 1997. These fluctuations are due primarily to increases in revenue,
offset by increases
Page 11
<PAGE> 12
in expenses, as discussed below. During the second half of 1999, LFS results
of operations shifted from net losses to net income on a monthly basis.
Revenue--LFS' major source of revenue is commission overrides, which
are generated through sales of life and annuity products, mutual funds, and
certain equity securities. Levels of commission income are directly related to
the volume of sales of such products. Total LFS revenue increased approximately
$873,000, or 106.3%, in 1999 from 1998, and increased approximately $510,000, or
163.4%, in 1998 from 1997. These increases are attributable to increases in the
volume of sales by LFS' distribution network of registered representatives in
1999 and 1998, respectively. Also contributing to increases in commission income
were shifts to sales by representative networks from which LFS receives a higher
net commission.
Expenses - Total LFS expenses increased approximately $624,000, or
72.4%, in 1999 from 1998 and increased approximately $208,000, or 31.7%, in 1998
from 1997 due primarily to increases in salaries and related benefits. As a
service organization, LFS operating expenses consist primarily of salaries and
related employee benefits. These expenses increased approximately $315,000, or
47.5%, in 1999 from 1998, and increased approximately $228,000, or 52.4%, in
1998 from 1997, due primarily to increases in the average number of employees to
accommodate increases in sales volume, to the addition of personnel at higher
pay levels, and to regular annual pay increases.
ANALYSIS OF OTHER SEGMENTS
Results of Operations - Other segments consist of Regan Holding Corp
(stand-alone), LifeSurance Corporation, Legacy Advisory Services, Inc. and
Legacy Reinsurance Company. Combined net losses from these entities increased
approximately $3.3 million, or 154.8%, in 1999 from 1998 and increased
approximately $533,000, or 33.5%, in 1998 from 1997 due primarily to increases
in expenses.
Combined expenses for these entities increased approximately $5.5
million, or 223.6%, in 1999 from 1998 and increased approximately $880,000, or
56.1%, in 1998 from 1997.
The increase in 1999 expenses is attributable primarily to: (i) $2.9
million in stock option expense recorded during 1999 by Regan Holding Corp.
related to approximately 4.9 million stock options that were granted to LMG
producers during 1999 and 1998; (ii) awards of the Company's common stock to
producers, which resulted in recognition of approximately $420,000 in related
expense; (iii) $1.6 million in expenses relating to the producer estate planning
seminars conducted under the name of WTES, which were reported in LMG expenses
in 1998 and 1997 and which are now reported as expenses of LifeSurance
Corporation; and (iv) increases in legal and consulting fees related to various
parent company strategic planning projects. During the first quarter of 2000,
approximately 2.1 million additional producer stock options were granted. As a
result, related stock option expense is expected to be recorded in the first
quarter of 2000. This latter grant is expected to be the final "broad-scale"
grant to producers. However, future grants to the highest performing producers
are still expected to occur which will result in additional expense in future
years.
The increase in 1998 expenses is due primarily to increases in
depreciation and equipment expense attributable to overall increases in
subsidiary sales volume and employment, as discussed above.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), all of the Company's short-term investments are treated as
available-for-sale.
Investments in fixed income instruments carry a degree of market
risk. Market risk represents the potential for loss due to adverse changes in
the fair market value of financial investments. The market risks faced by the
Company relate primarily to its investment portfolio, which exposes the Company
to risks related to interest rates and, to a lesser extent, credit quality and
equity prices.
Interest rate risk is the price sensitivity of a fixed income
security to changes in interest rates. The following table provides information
about the Company's fixed income investments, which are sensitive to changes in
interest rates. Listed below are cash flows from principal amounts and related
weighted average
Page 12
<PAGE> 13
interest rates by expected maturity dates for fixed income investments held at
December 31, 1999 and 1998. Actual cash flows could differ from expected
amounts.
Page 13
<PAGE> 14
<TABLE>
<CAPTION>
Total
--------------------------
Estimated
Amortized Market
2000 2001 2002 2003 Thereafter Cost Value
---- ---- ---- ---- ---------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1999
Fixed maturities $12,000,000 $ -- $ -- $ 499,251 $ 4,852,143 $17,351,394 $17,093,404
Average interest rate 5.18% -- -- 5.23% 6.53%
December 31, 1998
Fixed maturities $ -- $ 501,654 $ 1,004,337 $ 996,676 $ 7,911,303 $10,413,970 $10,449,800
Average interest rate -- 6.67% 6.81% 3.30% 4.04%
Mortgage-backed securities -- -- -- -- $ 1,524,500 $ 1,524,500 $ 1,523,415
Average interest rate -- -- -- -- 5.67%
</TABLE>
The Company invests in marketable securities which are predominately
investment grade. As a result, management believes that the Company has minimal
exposure to credit risk.
Equity price risk is the potential loss arising from changes in the value
of equity securities. In general, equity securities have more year-to-year price
variability than intermediate term high grade bonds. However, returns over
longer time frames have been consistently higher. The Company's equity
securities consist primarily of preferred stocks, which provide consistent
income. As a result of unfavorable market conditions related to preferred
securities, the fair value of the Company's equity securities is below original
cost at December 31, 1999 and 1998. The original cost and fair values of the
Company's marketable equity securities are shown below:
<TABLE>
<CAPTION>
Original Cost Fair Value
------------- ----------
<S> <C> <C>
December 31, 1999 $3,125,708 $2,403,857
December 31, 1998 $5,139,732 $5,014,411
</TABLE>
All of the above risks are monitored on an ongoing basis. A
combination of in-house review and consultation with external experts is used to
analyze individual securities, as well as the entire portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page 14
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Regan Holding Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Regan Holding Corp.
and its subsidiaries (the "Company") at December 31, 1999 and 1998, and results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed Note 1, the Company changed its method of accounting for the cost
of computer software developed or obtained for internal use in 1999.
Our audits were conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information on pages 34 and 35 is presented for purposes of additional analysis
of the consolidated financial statements, rather than to present the financial
position, and results of operations of the individual companies. Accordingly,
we do not express an opinion on the financial position, and results of
operations of the individual companies. However, the consolidating information
on pages 34 and 35 has been subjected to the auditing procedures applied in the
audits of the consolidated financial statements and, in our opinion, is fairly
stated in all material respects in relation to the consolidated financial
statements taken as a whole.
PricewaterhouseCoopers LLP
San Francisco, California
March 23, 2000
Page 15
<PAGE> 16
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,094,759 $ 5,916,731
Investments 20,861,973 16,987,628
Accounts receivable 2,625,867 1,704,265
Prepaid expenses 516,759 768,913
Income taxes receivable 2,893,701 884,089
Deferred income taxes-current 895,841 359,421
Marketing supplies inventory 706,418 385,616
--------------- ---------------
Total current assets 29,595,318 27,006,663
--------------- ---------------
Net fixed assets 12,168,135 2,982,267
Deferred income taxes-non current 2,030,993 904,974
Software licensing fees 779,375 --
Other assets 2,018,575 392,109
--------------- ---------------
Total non-current assets 16,997,078 4,279,350
--------------- ---------------
TOTAL ASSETS $ 46,592,396 $ 31,286,013
=============== ===============
LIABILITIES, REDEEMABLE COMMON STOCK,
AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 435,999 $ 418,821
Accrued sales convention costs 2,248,913 894,713
Accrued liabilities 4,227,137 4,388,401
Margin loan payable 3,088,918 --
Software licensing fees payable 537,500 --
Other current liabilities 107,384 --
--------------- ---------------
Total current liabilities 10,645,851 5,701,935
--------------- ---------------
Loan payable 2,256,418 132,285
Incentive compensation payable 469,720 530,523
Deferred compensation payable 1,364,713 --
Other liabilities 167,641 --
--------------- ----------------
Total non-current liabilities 4,258,492 662,808
--------------- ----------------
TOTAL LIABILITIES 14,904,343 6,364,743
--------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 10) -- --
REDEEMABLE COMMON STOCK, Series A and B 11,563,285 11,225,431
--------------- ----------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 100,000,000 shares; no shares issued
or outstanding -- --
Series A common stock, no par value:
Authorized: 45,000,000 shares; issued and
outstanding: 20,863,520 and 20,530,224 shares
at December 31, 1999 and 1998, respectively 3,659,367 3,248,874
Paid-in capital from retirement of common stock 927,640 888,109
Paid-in capital from producer stock options 2,892,000 25,000
Retained earnings 13,217,865 9,587,775
Accumulated other comprehensive income-net (572,104) (53,919)
--------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 20,124,768 13,695,839
--------------- -----------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK AND SHAREHOLDERS' EQUITY $ 46,592,396 $ 31,286,013
=============== =================
</TABLE>
See accompanying notes to consolidated financial statements
Page 16
<PAGE> 17
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997
---- ---- ----
REVENUE
<S> <C> <C> <C>
Marketing allowances $ 25,477,344 $ 26,229,937 $ 12,386,755
Commissions 15,395,259 12,651,358 5,609,078
Administrative fees 8,637,245 6,664,224 3,603,708
Seminar fees 381,319 263,785 220,406
Other 139,450 125,860 63,535
---------------------- ---------------------- ----------------------
Total revenue 50,030,617 45,935,164 21,883,482
---------------------- ---------------------- ----------------------
EXPENSES
Salaries and related benefits 22,216,897 17,371,780 10,512,259
Sales promotion and support 7,734,997 5,520,798 2,565,200
Producer stock options 2,867,000 -- --
Professional fees 2,373,084 2,617,377 712,129
Occupancy 2,193,632 1,149,787 887,608
Depreciation and amortization 1,754,865 1,323,052 698,556
Equipment 1,019,075 586,164 369,706
Courier and postage 1,008,502 702,612 480,175
Stationery and supplies 954,358 753,397 399,140
Travel and entertainment 707,776 594,224 329,611
Insurance 399,929 169,524 165,028
Miscellaneous 473,083 171,351 116,185
---------------------- ---------------------- ----------------------
Total expenses 43,703,198 30,960,066 17,235,597
---------------------- ---------------------- ----------------------
OPERATING INCOME 6,327,419 14,975,098 4,647,885
OTHER INCOME
Investment income--net 1,228,679 1,221,032 697,593
---------------------- ---------------------- ----------------------
INCOME BEFORE INCOME TAXES 7,556,098 16,196,130 5,345,478
PROVISION FOR INCOME TAXES 3,088,264 6,425,922 2,195,024
---------------------- ---------------------- ----------------------
NET INCOME $ 4,467,834 $ 9,770,208 $ 3,150,454
====================== ====================== ======================
EARNINGS PER SHARE
Weighted average shares outstanding--basic 26,393,679 26,543,535 26,895,594
====================== ====================== ======================
Basic earnings per share $ .17 $ .37 $ .12
====================== ====================== ======================
Weighted average shares outstanding--diluted 27,760,140 27,187,436 26,895,594
====================== ====================== ======================
Diluted earnings per share $ .16 $ .36 $ .12
====================== ====================== ======================
</TABLE>
See accompanying notes to consolidated financial statements
Page 17
<PAGE> 18
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Paid-in
Paid-in Capital Retained Accumulated
Capital from from Earnings Other
Series A Common Stock Retirement of Producer (Accumulated Comprehensive
Shares Amount Common Stock Options Deficit) Income Total
------ ------ ------------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1997 20,800,791 $3,532,071 $310,110 $ -- $(3,332,887) $ 52,741 $ 562,035
Comprehensive income:
Net income 3,150,454 3,150,454
Net unrealized losses
on investments (93,509) (93,509)
Less:
Losses included in net
income 13,499 13,499
Deferred taxes on net
unrealized losses 32,139 32,139
-----------
Total comprehensive
income 3,102,583
Retirement upon
redemption (186,777) (149,157) 301,449 152,292
----------- ---------- -------- ---------- ----------- --------- -----------
Balance
December 31, 1997 20,614,014 3,382,914 611,559 -- (182,433) 4,870 3,816,910
Comprehensive income:
Net income 9,770,208 9,770,208
Net unrealized losses
on investments (153,304) (153,304)
Less:
Losses included in
net income 54,633 54,633
Deferred taxes on net
unrealized losses 39,882 39,882
-----------
Total comprehensive
income 9,711,419
Retirement upon
redemption (83,790) (134,040) 276,550 142,510
Producer stock option
expense 25,000 25,000
----------- ---------- -------- ---------- ----------- --------- -----------
Balance
December 31, 1998 20,530,224 3,248,874 888,109 25,000 9,587,775 (53,919) 13,695,839
Comprehensive income:
Net income 4,467,834 4,467,834
Net unrealized losses
on investments (800,296) (800,296)
Less:
Gains included in
net income (60,007) (60,007)
Deferred taxes on net
unrealized losses 342,118 342,118
-----------
Total comprehensive
income 3,949,649
Retirement upon
redemption (69,788) (81,456) 39,531 (50,488) (92,413)
Accretion of redeemable
common stock to
redemption value (787,256) (787,256)
Issuance of
common stock 403,084 491,949 491,949
Producer stock option
expense 2,867,000 2,867,000
----------- ---------- -------- ---------- ----------- --------- -----------
Balance
December 31, 1999 20,863,520 $3,659,367 $927,640 $2,892,000 $13,217,865 $(572,104) $20,124,768
=========== ========== ======== ========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 18
<PAGE> 19
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,467,834 $ 9,770,208 $ 3,150,454
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of fixed assets 1,665,482 1,252,116 632,781
Amortization of intangible assets 89,383 70,936 65,775
Common stock awarded to producers 419,905 -- --
Producer stock option expense 2,867,000 25,000 --
Amortization/accretion of investments (9,802) (73,118) (68,761)
Realized gains (losses) on sales of investments 60,007 (54,633) (13,499)
Realized loss on sale of fixed assets -- -- 19,603
Changes in operating assets and liabilities:
Accounts receivable (921,602) (464,959) (727,596)
Prepaid expenses 252,154 (195,981) (210,982)
Income taxes receivable
and payable (2,009,612) (1,273,650) 569,307
Deferred tax assets (1,320,321) 47,401 360,375
Marketing supplies inventory (320,802) (156,763) 23,126
Software licensing fees (241,875) -- --
Accounts payable 17,178 74,750 173,333
Accrued sales convention costs 1,354,200 (331,456) 400,613
Accrued liabilities (161,264) 3,008,716 172,854
Other operating assets and liabilities 469,959 406,676 50,959
--------------- ------------- -------------
Net cash provided by operating activities 6,677,824 12,105,243 4,598,342
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (13,461,328) (15,396,140) (20,404,456)
Proceeds from sales and maturities of investments 8,676,474 6,129,871 20,667,228
Purchases of fixed assets (10,851,351) (1,624,059) (1,521,320)
Payments for organization costs -- (17,806) --
--------------- ------------- -------------
Net cash used in investing activities (15,636,205) (10,908,134) (1,258,548)
--------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan payable 2,132,500 -- --
Payments toward loan payable (8,368) -- --
Proceeds from margin loan 3,500,000 -- --
Payments toward margin loan payable (455,221) -- --
Payment for building loan reserve (562,730)
Payments for redemption of common stock (541,816) (474,710) (348,058)
Proceeds from stock option exercises 72,044 -- --
--------------- ------------- -------------
Net provided by (used in) in financing activities 4,136,409 (474,710) (348,058)
--------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (4,821,972) 722,399 2,991,736
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 5,916,731 5,194,332 2,202,596
--------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,094,759 $ 5,916,731 $ 5,194,332
=============== ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Taxes Paid $ 5,835,000 $ 7,201,000 $ 1,265,025
Interest Paid $ 172,836 $ 19,873 $ 18,695
</TABLE>
See accompanying notes to consolidated financial statements
Page 19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGAN HOLDING CORP. AND SUBSIDIARIES
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.
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"), IL
Annuity and Insurance Company ("IL Annuity") and
Transamerica Life Insurance and Annuity Company
("Transamerica"), collectively referred to herein as the
"Carriers." American National is an unaffiliated company
with over $1.7 billion in capital and surplus and is
rated "A+" by A.M. Best. IL Annuity is an unaffiliated
company, with $60.0 million in capital and surplus and
is rated "A" by A.M. Best. Transamerica is also an
unaffiliated company, with over $830.0 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, appointing, and training
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
administrative agreements (the "Administrative
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 and
type of service.
The Marketing and Administrative Agreements with
American National and IL Annuity expire April 30, 2000,
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 Administrative Agreements.
The Marketing and Administrative 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. The Marketing and
Administrative Agreements with American National were
amended during 1999 to extend the terms. In addition,
the Administrative Agreements with American National
and Transamerica were amended during 1999 with respect
to various policy administration matters.
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 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-
Page20
<PAGE> 21
determined percentages of production. The Agreements may
be terminated by any party upon 30 days written notice.
Through LifeSurance Corporation, a wholly-owned
subsidiary, the Company conducts estate planning
seminars which provide continuing education credits for
producers at various locations throughout the United
States. Producers pay attendance fees to attend the
seminars and may also purchase educational materials
which can be used as tools in promoting life insurance
and annuity policies and estate planning concepts. The
seminars and educational materials are marketed under
the business name Wealth Transfer Educational Systems.
Legacy Advisory Services, Inc. ("LAS") is a wholly-owned
subsidiary of the Company, incorporated in the state of
California for the purpose of operating as an
"investment advisor," as defined by and regulated
pursuant to the Investment Advisors Act of 1940. LAS is
registered with the Securities and Exchange Commission
(the "SEC") and has conducted limited operations to
date.
Legacy Reinsurance Company ("LegacyRe") is a
wholly-owned subsidiary of the Company, incorporated
in the State of Arizona. The Company is in the process
of obtaining approval from the Arizona Department of
Insurance for LegacyRe to engage in the reinsurance
business. Accordingly, LegacyRe has conducted no
business to date. Upon receipt of approval from the
Arizona Department of Insurance, LegacyRe may enter into
one or more reinsurance agreements to reinsure annuity
and life products.
b. Basis of Presentation
The accompanying consolidated financial statements are
prepared in conformity with accounting principles
generally accepted in the United States and include the
accounts of Regan Holding Corp. and its wholly-owned
subsidiaries, Legacy Marketing Group, Legacy Financial
Services, Inc., LifeSurance Corporation, Legacy Advisory
Services, Inc., and Legacy Reinsurance Company. All
significant intercompany accounts and transactions have
been eliminated.
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States 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
Marketing allowances and commissions are recognized when
policies become inforce. 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 short-term investments
included in cash and cash equivalents are carried at
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, within
"accumulated other comprehensive income," until
realized.
Page 21
<PAGE> 22
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
in the period sold and are derived using the specific
identification method for determining the cost of
investments sold.
f. Fixed Assets
Fixed assets are stated at cost, less accumulated
depreciation and amortization. In addition, the Company
capitalizes at cost certain consulting fees, salaries
and benefits related to the development of software for
internal use. Upon retirement or disposition of fixed
assets, any gain or loss is included in net income.
Effective January 1, 1999, the Company adopted the AICPA
Statement of Position 98-1 (SOP 98-1), Accounting for
the Cost of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 provides guidance on accounting
for the costs of the computer software developed or
obtained for internal use. In accordance with SOP 98-1,
the Company capitalized $1,288,886 of internal and
external costs, incurred subsequent to December 31,
1998, which were directly associated with the
development of internal-use software. Upon project
completion, these costs are amortized over the
estimated useful life of the software on a straight-line
basis. Previously, these costs were expensed as
incurred. Prior costs have not been restated.
Depreciation is computed using the straight-line method
over the estimated useful life of each type of asset, as
follows:
<TABLE>
<S> <C>
Computer hardware and purchased software 3 years
Internal use software development costs 5 years
Leasehold improvements 2-10 years
Furniture and equipment 5 years
Building 20 years
</TABLE>
g. Redeemable Common Stock
Shares of Series A and B Redeemable Common Stock are
redeemable at a rate per share based upon current fair
market value. The contractual agreements under which the
Redeemable Common Stock was issued 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 company, 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 $1.99 per share as of
December 31, 1999, based on management's estimate of
fair market value. Management's estimate is derived from
a valuation performed at the end of each period
presented. Redeemable Common Stock is recorded at the
greater of the issuance value or the redemption value,
with the periodic differences recorded as redeemable
common stock accretion. The Company recorded redeemable
common stock accretion of $787,256 for the year ended
December 31, 1999. The issuance value exceeded the
redemption value at December 31, 1998. Accordingly, no
accretion was recorded during the year ended December
31, 1998.
h. 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.
i. Income Taxes
The Company and its subsidiaries file consolidated
income 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
Page 22
<PAGE> 23
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 consolidated financial
statements.
j. 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.
k. Reclassifications
Certain 1998 and 1997 balances have been reclassified to
conform with the 1999 presentation. Such
reclassifications had no effect on net income or
shareholders' equity.
2. INVESTMENTS
Investment portfolios at the dates indicated consisted of the
following:
<TABLE>
<CAPTION>
Maturity in years:
1 Year 1 to 5 Longer Than
or Less Years 10 Years Other
------- ----- -------- -----
<S> <C> <C> <C> <C>
December 31, 1999
Government agency
securities $ -- $ 4,056,128 $ 769,532 $ --
Investment in IL Annuity 12,000,000 -- -- --
Corporate bonds -- -- 525,733 --
Mutual Funds -- -- -- 1,335,756
Equity securities -- -- -- 3,125,708
------------------ ------------------ ------------------ ------------------
Amortized cost 12,000,000 4,056,128 1,295,265 4,461,464
Gross unrealized gains -- -- -- 241,957
Gross unrealized losses -- (170,545) (87,443) (934,853)
------------------- ------------------- ------------------- -------------------
Market value $ 12,000,000 $ 3,885,583 $ 1,207,822 $ 3,768,568
================== ================== ================== ==================
Total
-----
December 31, 1999
Government agency
securities $ 4,825,660
Investment in IL Annuity 12,000,000
Corporate bonds 525,733
Mutual Funds 1,335,756
Equity securities 3,125,708
------------------
Amortized cost 21,812,857
Gross unrealized gains 241,957
Gross unrealized losses (1,192,841)
-------------------
Market value $ 20,861,973
==================
December 31, 1998
Government agency
securities $ 2,256,704 $ 4,841,327 $ 1,788,614 $ --
Corporate bonds 1,001,018 -- 526,307 --
Mortgage-backed securities -- -- -- 1,524,500
Equity securities -- -- -- 5,139,732
------------------ ------------------ ------------------ ------------------
Amortized cost 3,257,722 4,841,327 2,314,921 6,664,232
Gross unrealized gains 14,132 20,059 27,369 139,217
Gross unrealized losses (22,556) -- (3,164) (265,631)
------------------- ------------------ ------------------ ------------------
Market value $ 3,249,298 $ 4,861,386 $ 2,339,126 $ 6,537,818
================== ================== ================== ==================
December 31, 1998
Government agency
securities $ 8,886,645
Corporate bonds 1,527,325
Mortgage-backed securities 1,524,500
Equity securities 5,139,732
------------------
Amortized cost 17,078,202
Gross unrealized gains 200,777
Gross unrealized losses (291,351)
------------------
Market value $ 16,987,628
==================
</TABLE>
Included in operating results for the years ended December 31, 1999,
1998, and 1997, are $917,505, $824,164, and $494,033 of interest
income earned on investments, respectively.
Page 23
<PAGE> 24
3. FIXED ASSETS
A summary of fixed assets at the dates indicated follows:
<TABLE>
<CAPTION>
Accumulated
Depreciation/
Cost Amortization
---- -------------
<S> <C> <C>
December 31, 1999
-----------------
Computer hardware and purchased
software $ 5,582,936 $ 1,700,896
Internal use software development costs 1,288,886 152,662
Leasehold improvements 1,292,870 74,454
Furniture and equipment 2,446,104 871,886
Building 3,438,332 114,188
Land 1,033,093 --
-------------------- ------------------
Totals $ 15,082,221 $ 2,914,086
==================== ==================
December 31, 1998
-----------------
Computer hardware and software $ 3,406,540 $ 1,499,340
Leasehold improvements 1,290,647 970,030
Furniture and equipment 1,205,587 578,659
Land 127,522 --
-------------------- ------------------
Totals $ 6,030,296 $ 3,048,029
==================== ==================
Net
Book Value
----------
December 31, 1999
-----------------
Computer hardware and purchased
software $ 3,882,040
Internal use software development costs 1,136,224
Leasehold improvements 1,218,416
Furniture and equipment 1,574,218
Building 3,324,144
Land 1,033,093
-------------------
Totals $ 12,168,135
===================
December 31, 1998
-----------------
Computer hardware and software $ 1,907,200
Leasehold improvements 320,617
Furniture and equipment 626,928
Land 127,522
-------------------
Totals $ 2,982,267
===================
</TABLE>
4. SOFTWARE LICENSING FEES
In March 1999, LMG entered into a license agreement with a software
vendor (the "Software Agreement"), pursuant to which LMG has the
non-exclusive right to use certain computer software programs in
administering policies on behalf of the carriers with whom the
Company contracts. For this right, LMG incurred an initial licensing
fee of $800,000 exclusive of taxes, of which the unpaid portion of
$537,500 has been recorded as Software Licensing Fees Payable. This
balance is due in March 2000. In addition, LMG agreed to pay
licensing charges of $8,333 per month, increasing each year to
$22,667 per month during the eighth year, plus cost of living
adjustments each year. The monthly fees are being expensed as
incurred. The term of the Software Agreement extends through March
2007, but may be terminated by LMG with six months written notice
after March 2004. The $800,000 initial licensing fee has been
recorded as Software Licensing Fees, net of amortization, in the
accompanying consolidated balance sheets.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Accrued compensation $ 2,119,485 $ 2,595,760
Commissions payable 929,802 714,926
Investment purchase pending -- 500,000
Miscellaneous expenses 1,177,850 577,715
------------------ ------------------
Totals $ 4,277,137 $ 4,388,401
================== ==================
</TABLE>
6. MARGIN LOAN PAYABLE
During 1999, the Company obtained margin loan advances in the amount
of $3.5 million from its investment broker. The loan bears interest
at 1/2% above the Call Rate, as published in the Wall Street Journal
and is collateralized by the Company's investment portfolio. As of
December 31, 1999, $3,088,918 remained payable under this
arrangement. The margin loan was repaid in full during the first
quarter of 2000.
Page 24
<PAGE> 25
7. LOAN PAYABLE
On May 7, 1999, the Company purchased for $4.3 million the building
in Petaluma, California, which previously housed the Company's
headquarters. In conjunction with the building acquisition, the
Company paid $2.2 million of the purchase price in cash and entered
into a loan payable for the remaining $2.1 million. The loan has a
ten-year term and is payable in monthly installments plus one
balloon payment of approximately $1.8 million, due on May 10, 2009.
The loan bears interest at 0.5% per annum above the Prime Rate, as
published in the West Coast Edition of the Wall Street Journal. The
loan is fully guaranteed by each of the Company's subsidiaries. In
addition, the loan agreement contains certain covenants with which
the Company must comply, including restrictions on indebtedness or
investments outside the ordinary course of business and restrictions
on dividends or other changes in the Company's capital structure.
One of the covenants requires management to obtain lender approval
prior to repurchasing non-redeemable common stock. The Lender has
waived this covenant through June 30, 2000, provided that such
voluntary repurchases do not exceed $125,000 per quarter. Pursuant
to the loan agreement, the Company was also required to place
approximately $560,000 in reserve to cover loan payments in the
event of default and to provide for certain repair costs. Such
reserved amounts are classified as Other Assets in the accompanying
consolidated balance sheet at December 31, 1999.
The Company's future principal payments are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Principal
----------------------- ---------
<S> <C>
2000 $ 27,166
2001 29,509
2002 32,053
2003 34,817
2004 37,820
Thereafter 1,962,768
</TABLE>
8. INCENTIVE COMPENSATION PAYABLE
Under the Company's Officer Incentive Bonus Plan (the "Plan"), each
officer of the Company is allocated from 0.75% to 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 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, 1999 and
1998, $596,506 and $798,062 respectively, are reflected as incentive
compensation payable in the accompanying consolidated balance sheets
of which $469,720 and $488,671, respectively, are classified as
non-current liabilities. Such amounts primarily represent the
deferred portion of the 1999 and 1998 Bonuses.
9. DEFERRED COMPENSATION PAYABLE
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 401(k) Plan. Employees
may elect to contribute up to 15% of their annual compensation (not
to exceed $10,000 annually for 1999 and 1998) 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 $348,132, $272,658,
and $181,443 for the years ended December 31, 1999, 1998, and 1997,
respectively.
The Company also sponsors a non-qualified deferred compensation plan
(the "Key Employee Deferred Compensation Plan"), which is available
to certain employees who, because of Internal Revenue Code
limitations, are prohibited from contributing the maximum percentage
of salary to the 401(k) Plan. Under
Page 25
<PAGE> 26
the Key Employee Deferred Compensation Plan certain employees may
defer, on a pre-tax basis, a percentage of annual compensation,
including bonuses. The Company matches 50% of each employee's
contributions, up to a maximum of 6% of annual compensation, less
amounts already matched under the 401(k) Plan. Deferrals under the
Key Employee Deferred Compensation Plan began in the first quarter
of 1999. Pursuant to the Key Employee Deferred Compensation Plan,
the Company recorded $53,073 in matching expense during the year
ended December 31, 1999. As of December 31, 1999, employee
contributions and Company matching contributions, net of accumulated
losses, totaled $213,045. Such amounts are reflected as a liability
in the accompanying consolidated balance sheet.
The Company also sponsors a non-qualified deferred compensation plan
under which producers may defer, on a pre-tax basis, up to 50% of
annual commissions (the "Producer Commission Deferral Plan").
Producers who earn a minimum of $100,000 in annual commission are
eligible to participate in the Producer Commission Deferral Plan. In
addition, the Company will match producer contributions for those
producers who earn over $250,000 in annual commissions at rates
ranging from 1% to 5% of amounts deferred, depending on the level of
annual commissions earned. Deferrals under the Producer Commission
Deferral Plan began in the second quarter of 1999. During the year
ended December 31, 1999, $55,710 in matching contributions were
charged to operating expenses related to the Producer Commission
Deferral Plan. As of December 31, 1999, producer contributions and
Company matching contributions, net of accumulated losses, totaled
$1,151,668. Such amounts are reflected as a liability in the
accompanying consolidated balance sheet.
Assets held by the Company in the Key Employee Deferred Compensation
Plan and the Producer Commission Deferral Plan are subject to the
general creditors of the Company.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse premises and certain office
equipment under non-cancelable operating leases. Related rent
expense of $875,971, $369,231, and $335,973 are included in
occupancy costs for the years ended December 31, 1999, 1998, and
1997, respectively. Total rentals for and leases of equipment
included in equipment expense were $416,770, $255,078, and
$146,874 for the years ended December 31, 1999, 1998, and 1997,
respectively.
In October 1998, the Company entered into a new lease for
approximately 72,000 square feet of office space in Petaluma,
California, into which the Company moved its headquarters in July
1999. This lease expires in July 2009, and includes an option to
extend the term for two five-year periods. Pursuant to the lease,
the Company pays monthly base rent of $71,612, plus a pro-rata share
of property taxes and operating expenses based on leased square
footage. The base rent increases to $75,193 per month in July 2000
and then increases by 6% every twenty four months thereafter.
Effective March 2000, the Company also entered into a lease for
approximately 5,700 square feet of warehouse space in Petaluma,
California, at a rate of $4,500 per month. expiring in February
2006.
The Company also leases 18,200 square feet of office space in Des
Moines, Iowa, at a monthly rate of $14,292, increasing to $26,179
per month in April 2000, and expiring in October 2004. In addition,
the Company leases 30,500 square feet of office space in Rome,
Georgia, at a rate of $11,438 per month, expiring December 2001.
The Company's future minimum annual lease commitments under all
operating leases are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
2000 $ 1,905,151
2001 2,030,169
2002 1,864,285
2003 1,529,923
2004 1,373,880
Thereafter 5,108,888
------------------------
Total minimum lease payments $ 13,812,296
========================
</TABLE>
Page 26
<PAGE> 27
In May 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. The Company
has purchased a life insurance policy with a face amount of $14.0
million for the purpose of funding this obligation in the event of
Ms. Regan's death.
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. In December 1996, LMG and American National were named in a
lawsuit filed in the Circuit Court of Jefferson County, Alabama,
alleging misrepresentation and price discrimination in connection
with the sale of certain annuity products issued by American
National and marketed by 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
7, 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
approximately $1.1 million, which was recorded as an expense in
1998. Management is not aware of any material asserted or unasserted
litigation which existed at December 31, 1999.
As part of the Company's agreements with certain of its insurance
producers (the "Producers"), the Company may, under certain
circumstances, be obligated to purchase the business of the
Producers. At December 31, 1999, there were no outstanding
commitments by the Company relating to such obligations.
11. REDEEMABLE COMMON STOCK
The following table summarizes transactions affecting redeemable
common stock during the years ended December 31, 1999, 1998, and
1997:
<TABLE>
<CAPTION>
Series A Series B
Redeemable Common Stock Redeemable Common Stock
----------------------- -----------------------
Carrying Carrying
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance
January 1, 1997 5,769,086 $ 10,512,023 610,326 $1,830,978
Redemptions and
retirement of
common stock (261,760) (471,955) (9,465) (28,395)
---------------- ----------------- ---------------- -----------------
Balance
December 31, 1997 5,507,326 10,040,068 600,861 1,802,583
Redemptions and
retirement of
common stock (335,879) (612,021) (1,733) (5,199)
---------------- ----------------- ---------------- -----------------
Balance
December 31, 1998 5,171,447 9,428,047 599,128 1,797,384
Redemptions and
retirement of
common stock (249,832) (421,289) (9,371) (28,113)
Accretion to
redemption value -- 787,256 -- --
---------------- ----------------- ---------------- -----------------
Balance
December 31, 1999 4,921,615 $ 9,794,014 589,757 $ 1,769,271
================ ================= ================ =================
Total
Redeemable Common Stock
------------------------
Carrying
Shares Amount
------ ------
<C> <C>
Balance
January 1, 1997 6,379,412 $12,343,001
Redemptions and
retirement of
common stock (271,225) (500,350)
---------------- ----------------
Balance
December 31, 1997 6,108,187 11,842,651
Redemptions and
retirement of
common stock (337,612) (617,220)
---------------- ----------------
Balance
December 31, 1998 5,770,575 11,225,431
Redemptions and
retirement of
common stock (259,203) (449,402)
Accretion to
redemption value -- 787,256
---------------- ----------------
Balance
December 31, 1999 5,511,372 $ 11,563,285
================= ================
</TABLE>
Shares of Redeemable Common Stock are excluded from total shares
issued and outstanding in the accompanying consolidated balance sheets.
Page 27
<PAGE> 28
12. STOCK OPTIONS AND STOCK AWARDS
The Company currently sponsors two stock-based compensation plans,
which are described below. Options were first granted under both
plans during 1998. Under both plans, the exercise price of each
option equals the estimated fair market value of the underlying
common stock on the date of grant, as estimated by management (see
Note 1) and as discounted for lack of marketability, except for
incentive stock options granted to 10% shareholders where the
exercise price equals 110% of the estimated fair market value.
Both plans are administered by committees, which are appointed by
the Company's Board of Directors.
Producer Option Plan--Under the Regan Holding Corp. Producer Stock
Option and Award plan (the "Producer Option Plan"), the Company may
grant to LMG producers and LFS registered representatives
non-qualified stock options (the "Producer Options") to purchase the
Company's common stock. 9,500,000 shares have been reserved for
grant under the Producer Option Plan. The Producer Options granted
through June 1999 vested ratably over the five years following
grant. During the second quarter of 1999, however, the Company
waived the Producer Options' vesting provisions, thereby converting
the Producer Options from "variable" to "fixed" options pursuant to
guidance proscribed in Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, as interpreted by
Emerging Issues Task Force Issue 96-18 Accounting for Equity
Instruments That Are Issued to Other Than Employees For Acquiring
or in Conjunction With Selling Goods and Services. As a result,
the Company recorded $2,867,000 of expense during 1999
representing management's estimate of the fair value of the
Producer Options at the date that the vesting provisions were
waived. The fair value of the options was estimated using the
Black-Scholes option-pricing model with the following assumptions:
risk-free interest rates ranging from 5.3% to 6.0%, expected
volatility ranging from 27.7% to 39.5%, and expected lives ranging
from one to five years. A dividend yield assumption was not
applicable, as the Company's stock is not publicly traded nor does
the Company pay dividends. All Producer Options granted after June
1999 were immediately vested upon grant. Producer Options
generally expire in six years.
Under the Producer Option Plan, the Company may also award shares of
its common stock to Producers. During 1998, no awards were made.
During 1999, 330,634 shares of Series A common stock were awarded to
producers, when the estimated fair market value of the shares was
$1.27 per share. As a result, the Company recorded marketing and
sales promotion expense of $419,905 during the year ended December
31, 1999.
Employee Option Plan--Under the Regan Holding Corp. 1998 Stock
Option Plan (the "Employee Option Plan"), the Company may grant to
employees and directors incentive stock options and non-qualified
options to purchase the Company's common stock (collectively
referred to herein as "Employee Options"). 5,500,000 shares have
been reserved for grant under the Employee Option Plan. The
Employee Options generally vest over four or five years and expire
in ten years, except for incentive stock options granted to 10%
shareholders, which expire in five years. The Company applies
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations in accounting
for the Employee Option Plan. Accordingly, no compensation
expense has been recognized for options granted under the Employee
Option Plan. Had the Company elected to recognize compensation
expense in accordance with SFAS No. 123, the Company's net income
and earnings per share for the year ended December 31, 1999 would
have been reduced for options granted under the Employee Option
Plan to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
Earnings
Net per Share-
Income Basic
------ ----------
<S> <C> <C>
December 31, 1999
As reported $ 4,467,834 $ 0.17
Pro-Forma $ 3,991,616 $ 0.15
December 31, 1998
As reported $ 9,770,208 $ 0.37
Pro-Forma $ 9,727,809 $ 0.37
Earnings
per Share-
Diluted
----------
December 31, 1999
As reported $ 0.16
Pro-Forma $ 0.14
December 31, 1998
As reported $ 0.36
Pro-Forma $ 0.36
</TABLE>
For purposes of estimating the fair value of the Employee Options
for the pro-forma amounts listed above, the Company applied the
minimum value method, as proscribed in SFAS No. 123, with risk-free
rate interest rate assumptions ranging from 4.7% to 6.3% and
expected life assumptions ranging from five to
Page 28
<PAGE> 29
seven years. Volatility and dividend yield assumptions were not
applicable, as the Company's stock is not publicly traded nor does
the Company pay dividends.
The following table summarizes transactions under both plans:
<TABLE>
<CAPTION>
Employee Option Plan Producer Option Plan
--------------------- --------------------
Weighted-average Weighted-average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at
January 1, 1998 -- $ -- -- $ --
Granted 1,513,000 $ 0.74 992,000 $ 0.76
Forfeited (23,000) $ 0.73 (6,500) $ 0.73
-------------- ------------
Outstanding at
December 31, 1998 1,490,000 $ 0.74 985,500 $ 0.76
Granted 1,552,200 $ 1.29 4,921,250 $ 1.27
Exercised (8,350) $ 0.79 (64,100) $ 1.02
Forfeited (46,100) $ 1.06 (20,750) $ 1.17
-------------- ------------
Outstanding at
December 31, 1999 2,987,750 $ 1.02 5,821,900 $ 1.19
============== ============
Exercisable at
December 31, 1999 343,650 $ 0.77 5,821,900 $ 1.19
============== ============
Total
-----------------------------
Weighted-average
Shares Exercise Price
------ ------------------
<C> <C>
Outstanding at
January 1, 1998 -- $ --
Granted 2,505,000 $ 0.75
Forfeited (29,500) $ 0.73
----------
Outstanding at
December 31, 1998 2,475,500 $ 0.75
Granted 6,473,450 $ 1.27
Exercised (72,450) $ 0.99
Forfeited (66,850) $ 1.09
-----------
Outstanding at
December 31, 1999 8,809,650 $ 1.13
==========
Exercisable at
December 31, 1999 6,165,550 $ 1.16
==========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999 under both plans:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------
Weighted Weighted
Average Average
Remaining Exercise
Range of exercise prices Shares Contractual Life Price
------------------------ ------ ---------------- ------
<S> <C> <C> <C>
$0.73 - $0.84 2,284,300 6.4 $0.73
$1.03 129,750 4.4 $1.03
$1.27 - $1.40 6,395,600 5.9 $1.27
---------
8,809,650 6.0 $1.13
=========
Options Exercisable
-----------------------------------------
Weighted
Average
Exercise
Shares Price
------ -----
<C> <C>
1,170,300 $0.73
107,250 $1.03
4,888,000 $1.27
---------
6,165,550 $1.16
=========
</TABLE>
During the first quarter of 2000, the Company granted 2,120,247
options to producers under the Producer Option Plan and 2,146,800
options to employees under the Employee Option Plan.
13. 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.
Page 29
<PAGE> 30
The provisions for federal and state income taxes consist of amounts
currently payable and amounts deferred which, for the periods
indicated, are shown below:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998
<S> <C> <C>
Current income taxes:
Federal $ 3,481,693 $ 5,002,541
State 926,890 1,375,980
------------------ ------------------
Total current 4,408,583 6,378,521
------------------ ------------------
Deferred income taxes:
Federal (1,094,714) 55,818
State (225,605) (8,417)
------------------ -----------------
Total deferred (1,320,319) 47,401
------------------ ------------------
Provision for income taxes $ 3,088,264 $ 6,425,922
================== ==================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997
----
<S> <C>
Current income taxes:
Federal $ 1,262,317
State 572,332
----------------
Total current 1,834,649
----------------
Deferred income taxes:
Federal 405,951
State (45,576)
----------------
Total deferred 360,375
----------------
Provision for income taxes $ 2,195,024
================
</TABLE>
The Company's deferred tax assets (liabilities) consist of the
following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Alternative minimum tax credit carryforward $ 319,236 $ 373,620
Sales incentive trip accrual 895,841 359,424
Fixed asset depreciation (703,713) 130,115
Producer stock option expense 1,861,483 223,165
Capital loss, net of valuation allowance of
$23,864 and $0, respectively -- --
Other 553,987 178,071
------------------ ------------------
Total deferred tax assets $ 2,926,834 $ 1,264,395
================== ==================
</TABLE>
The provisions for income taxes differ from the provisions computed
by applying the statutory federal income tax rate (34%) to income
before taxes, as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Federal income taxes due at
statutory rate (34%) $ 2,569,076 $ 5,566,612
Increases (reductions) in income taxes resulting from:
State franchise taxes, net of
federal income tax benefit 492,966 907,981
Other 26,222 (48,671)
------------------ ------------------
Provision for income taxes $ 3,088,264 $ 6,425,922
================== ==================
</TABLE>
<TABLE>
<CAPTION>
1997
----
<S> <C>
Federal income taxes due at
statutory rate (34%) $ 1,817,462
Increases (reductions) in income taxes resulting from:
State franchise taxes, net of
federal income tax benefit 375,892
Other 1,670
-----------------------
Provision for income taxes $ 2,195,024
=======================
</TABLE>
As of December 31, 1999, the Company also has, for income tax
purposes, $319,236, in alternative minimum tax credits which can be
used to reduce income taxes in subsequent years to the extent
regular tax exceeds tentative minimum tax. The credits have no
expiration date.
Page 30
<PAGE> 31
14. EARNINGS PER SHARE
Following is a reconciliation of the numerator and denominator of
the basic and diluted earnings per share calculations. No
potentially dilutive securities existed prior to January 1, 1998.
<TABLE>
<CAPTION>
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
For the year ended December 31, 1999
Basic earnings per share
Income available to common shareholders $ 4,467,834 26,393,679 $ 0.17
Effective of dilutive securities
Employee and producer stock options -- 1,366,461
--------------- ----------------
Diluted earnings per share $ 4,467,834 27,760,140 $ 0.16
=============== ================
For the year ended December 31, 1998
Basic earnings per share
Income available to common shareholders $ 9,770,208 26,543,535 $ 0.37
Effective of dilutive securities
Employee and producer stock options -- 643,901
--------------- ----------------
Diluted earnings per share $ 9,770,208 27,187,436 $ 0.36
=============== ================
</TABLE>
Options to purchase 25,500 shares of common stock at $1.39 per
share were outstanding during the second half of 1999 and remained
outstanding at December 31, 1999, but were not included in the
computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the
common shares during the year.
15. SEGMENT INFORMATION
The Company's reportable segments are those that are based on the
Company's method of internal reporting, which desegregates its
business into two primary reportable segments: Legacy Marketing
Group, and Legacy Financial Services, Inc. The financial results of
the Company's operating segments are presented on an accrual basis.
There are no significant differences between the accounting policies
of the segments as compared to the Company's consolidated financial
statements. In addition to revenues and expenses recorded directly
by each segment, the Company evaluates the performance of its
segments and allocates resources to them based on estimates of
salaries and other expenses attributed to each of the segments'
operations. There are no material intersegment revenues.
Page 31
<PAGE> 32
The table below presents information about the Company's operating segments for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Legacy Legacy
Marketing Financial
Group Services, Inc. Other Total
----- -------------- ----- -----
<S> <C> <C> <C> <C>
Year Ended December 31,
1999
Total revenue $ 48,117,700 $ 1,694,680 $ 218,237 $ 50,030,617
Total expenses 34,291,486 1,485,463 7,926,249 43,703,198
------------------ --------------------- --------------------- ---------------------
Operating income (loss) 13,826,214 209,217 (7,708,012) 6,327,419
Other income 1,202,854 3,155 22,670 1,228,679
------------------ --------------------- --------------------- ---------------------
Income (loss) before tax 15,029,068 212,372 (7,685,342) 7,556,098
Tax provision (benefit) 5,413,341 (55,514) (2,269,563) 3,088,264
------------------ --------------------- --------------------- ---------------------
Net income (loss) $ 9,615,727 $ 267,886 $ (5,415,779) $ 4,467,834
================== ===================== ===================== =====================
Year Ended December 31,
1998
Total revenue $ 45,113,652 $ 821,512 $ -- $ 45,935,164
Total expenses 27,649,023 861,486 2,449,557 30,960,066
------------------ --------------------- --------------------- ---------------------
Operating income (loss) 17,464,629 (39,974) (2,449,557) 14,975,098
Other income (loss) 1,220,313 1,439 (720) 1,221,032
------------------ --------------------- --------------------- ---------------------
Income (loss) before tax 18,684,942 (38,535) (2,450,277) 16,196,130
Tax provision (benefit) 6,880,139 (128,953) (325,264) 6,425,922
------------------ --------------------- --------------------- ---------------------
Net income (loss) $ 11,804,803 $ 90,418 $ (2,125,013) $ 9,770,208
================== ===================== ===================== =====================
Year Ended December 31,
1997
Total revenue $ 21,571,588 $ 311,894 $ -- $ 21,883,482
Total expenses 15,011,972 653,926 1,569,699 17,235,597
------------------ --------------------- --------------------- ---------------------
Operating income (loss) 6,559,616 (342,032) (1,569,699) 4,647,885
Other income (loss) 715,168 -- (17,575) 697,593
------------------ --------------------- --------------------- ---------------------
Income (loss) before tax 7,274,784 (342,032) (1,587,274) 5,345,478
Tax provision (benefit) 2,420,753 (230,335) 4,606 2,195,024
------------------ ---------------------- --------------------- ---------------------
Net income (loss) $ 4,854,031 $ (111,697) $ (1,591,880) $ 3,150,454
================== ===================== ====================== =====================
Total assets
December 31, 1999 $ 27,652,585 $ 1,300,153 $ 17,639,658 $ 46,592,396
================== ===================== ===================== =====================
December 31, 1998 $ 21,777,580 $ 823,714 $ 8,684,719 $ 31,286,013
================== ===================== ===================== =====================
</TABLE>
The "Other" segment above includes Regan Holding Corp.
(stand-alone) and its remaining subsidiaries, LifeSurance
Corporation, Legacy Advisory Services, Inc., and Legacy Reinsurance
Company. Such entities' operations do not currently factor
significantly into management decision making and, accordingly, were
not separated for purposes of this disclosure.
16. RELATED PARTY TRANSACTIONS
The Company paid Ashley A. Penney, a director until August 1997,
$133,113 for services provided as a human resources consultant
during the year ended December 31, 1997.
17. CONCENTRATION OF RISK
At December 31, 1999, the Company was contracted with over 19,000
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
1999.
Page 32
<PAGE> 33
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 10.5%, 12.7%, and
36.2% of total revenues to the Company during 1999, 1998 and 1997,
respectively. In December 1995, the Company contracted to provide
marketing and administrative services for IL Annuity. This
arrangement generated approximately 73.5% 79.9% and 57.0% of the
Company's revenues during 1999, 1998 and 1997, respectively. In May
1998, the Company contracted to provide marketing and administrative
services for Transamerica. These agreements generated approximately
11.3% and 1.7% of the Company's revenue during 1999 and 1998,
respectively. However, neither the Marketing Agreements nor the
Administrative Agreements prevent the Company from entering into
similar arrangements with other insurance companies.
Although the Company markets and administers several annuity and
life insurance products on behalf of the Carriers, the Company's
revenues are derived primarily from sales and administration of
certain annuity products, especially the VisionMark(TM) annuity
offered by IL Annuity. During 1999, 1998, and 1997, 56.2%, 70.6% and
52.4%, respectively, of the Company's consolidated revenue resulted
from sales of the VisionMark(TM) annuity.
At December 31, 1999, the Company's investment portfolio included a
$12 million investment in Indianapolis Life Group of Companies
("Indianapolis Group"), an affiliate of IL Annuity, which represents
25.8% of the Company's total assets. In the first quarter of 2000,
the Indianapolis Group repurchased the equity securities from the
Company for $12,546,099, pursuant to the terms of the Investment
Agreement.
18. SUBSEQUENT EVENTS
In February 2000, LMG entered into an Agency Agreement with Bankers
United Life Assurance Company ("Bankers") pursuant to which LMG is
authorized to solicit, through its network of independent insurance
producers, sales of long-term care products offered by Bankers. For
this solicitation, LMG will receive commissions based on the volume
of premiums sold and the age of the policyholder. The Agency
Agreement may be terminated by either party with 15 days notice
without cause, and may be terminated by either party immediately for
cause. LMG is currently working to become licensed in several states
to sell long-term care products. Accordingly, no sales of long-term
care products have occurred to date.
During the first quarter of 2000, the Marketing and Administrative
Agreements with American National were amended to extend the terms
of the agreements to April 30, 2000. LMG and American National are
in the process of negotiating a five year extension for both
agreements.
Page 33
<PAGE> 34
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidating Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Legacy
Regan Legacy Financial
Holding Marketing Services, LifeSurance
Corp. Group Inc. Corporation
----- ----- ---- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 450,749 $ (138,068) $ 416,243 $ 348,090
Investments -- 20,861,973 -- --
Accounts receivable 448,657 1,551,644 625,708 (146)
Prepaid expenses 122,033 397,346 78,667 43,713
Income taxes receivable (payable) 5,430,529 (3,034,756) (41,409) 533,624
Intercompany receivable (payable) (15,962,012) 15,996,961 18,136 --
Deferred income taxes--current -- 895,841 -- --
Marketing supplies inventory -- 691,559 14,859 --
--------------- ---------------- ----------------- ----------------
Total current assets (9,510,044) 37,222,500 1,112,204 925,281
---------------- ---------------- ----------------- ----------------
Net fixed assets 8,097,314 3,980,657 -- 90,164
Investment in subsidiaries 35,701,393 -- -- --
Deferred income taxes--non-current 1,283,011 739,218 8,764 --
Prepaid software licensing fees -- 779,375 -- --
Other assets 562,730 927,796 197,321 120,739
--------------- ---------------- ----------------- ----------------
Total non-current assets 45,644,448 6,427,046 206,085 210,903
--------------- ---------------- ----------------- ----------------
TOTAL ASSETS $ 36,134,404 $ 43,649,546 $ 1,318,289 $ 1,136,184
=============== ================ ================= ================
LIABILITIES
Accounts payable $ 42,865 $ 338,859 $ 23,059 $ 31,216
Accrued sales convention costs -- 2,248,913 -- --
Accrued liabilities 354,628 3,111,976 611,744 273,789
Software licensing fees payable -- 537,500 -- --
Other current liabilities -- 107,384 -- --
Margin loan payable -- 3,088,918 -- --
--------------- ---------------- ----------------- ----------------
Total current liabilities 397,493 9,433,550 634,803 305,005
--------------- ---------------- ----------------- ----------------
Loan payable 2,124,133 132,285 -- --
Incentive compensation payable -- 469,720 -- --
Deferred compensation payable -- 1,364,713 -- --
Other liabilities -- 167,641 -- --
--------------- ---------------- ------------------------------------
Total non-current liabilities 2,124,133 2,134,359 -- --
--------------- ---------------- ----------------- ----------------
TOTAL LIABILITIES 2,521,626 11,567,909 634,803 305,005
--------------- ---------------- ----------------- ----------------
COMMITMENTS AND CONTINGENCIES -- -- -- --
REDEEMABLE COMMON STOCK 11,563,285 -- -- --
--------------- ---------------- ----------------- ----------------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 3,659,367 100,000 50,000 --
Paid-in capital from retirement
of common stock 927,640 510,753 1,650,000 9,277,919
Paid-in capital from producer stock
options 2,870,000 -- 22,000 --
Retained earnings (accumulated deficit) 14,592,486 32,042,988 (1,038,514) (8,446,740)
Accumulated other comprehensive
income-net -- (572,104) -- --
--------------- ----------------- ----------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 22,049,493 32,081,637 683,486 831,179
--------------- ---------------- ----------------- ----------------
TOTAL LIABILITIES, REDEEMABLE
COMMON STOCK & SHAREHOLDERS'
EQUITY(DEFICIT) $ 36,134,404 $ 43,649,546 $ 1,318,289 $ 1,136,184
=============== ================ ================= ================
<CAPTION>
Legacy
Advisory Legacy Combined
Services, Reinsurance December 31,
Inc. Company 1999
---- ------- ----
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 13,115 $ 4,630 $ 1,094,759
Investments -- -- 20,861,973
Accounts receivable 4 -- 2,625,867
Prepaid expenses -- -- 641,759
Income taxes receivable (payable) 5,713 -- 2,893,701
Intercompany receivable (payable) (28,429) (24,656) --
Deferred income taxes--current -- -- 895,841
Marketing supplies inventory -- -- 706,418
--------------- --------------- -----------------
Total current assets (9,597) (20,026) 29,720,318
---------------- --------------- -----------------
Net fixed assets -- -- 12,168,135
Investment in subsidiaries -- -- 35,701,393
Deferred income taxes--non-current -- -- 2,030,993
Prepaid software licensing fees -- -- 779,375
Other assets -- 209,989 2,018,575
--------------- --------------- -----------------
Total non-current assets 209,989 52,698,471
--------------- --------------- -----------------
TOTAL ASSETS $ (9,597) $ 189,963 $ 82,418,789
=============== =============== =================
LIABILITIES
Accounts payable $ -- $ -- $ 435,999
Accrued sales convention costs -- -- 2,248,913
Accrued liabilities -- -- 4,352,137
Software licensing fees payable -- -- 537,500
Other current liabilities -- -- 107,384
Margin loan payable -- -- 3,088,918
--------------- --------------- -----------------
Total current liabilities -- 10,770,851
--------------- --------------- -----------------
Loan payable -- -- 2,256,418
Incentive compensation payable -- -- 469,720
--------------- --------------- -----------------
Deferred compensation payable -- -- 1,364,713
Other liabilities -- -- 167,641
--------------- --------------- -----------------
Total non-current liabilities -- -- 4,258,492
--------------- --------------- -----------------
TOTAL LIABILITIES -- -- 15,029,343
--------------- --------------- -----------------
COMMITMENTS AND CONTINGENCIES -- -- --
REDEEMABLE COMMON STOCK -- -- 11,563,285
--------------- --------------- -----------------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock -- 100,000 3,909,367
Paid-in capital from retirement
of common stock -- 100,000 12,466,312
Paid-in capital from producer stock
options -- -- 2,892,000
Retained earnings (accumulated deficit) (9,597) (10,037) 37,130,586
Accumulated other comprehensive
income-net -- -- (572,104)
--------------- --------------- -----------------
TOTAL SHAREHOLDERS' EQUITY (9,597) 189,963 55,826,161
--------------- --------------- -----------------
TOTAL LIABILITIES, REDEEMABLE
COMMON STOCK & SHAREHOLDERS'
EQUITY(DEFICIT) $ (9,597) $ 189,963 $ 84,418,789
=============== =============== =================
<CAPTION>
Consolidated
December 31,
Eliminations 1999
------------ ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ -- $ 1,094,759
Investments -- 20,861,973
Accounts receivable -- 2,625,867
Prepaid expenses (125,000) 516,759
Income taxes receivable (payable) -- 2,893,701
Intercompany receivable (payable) -- --
Deferred income taxes--current -- 895,841
Marketing supplies inventory -- 706,418
------------------ ----------------
Total current assets (125,000) 29,595,318
------------------ ----------------
Net fixed assets -- 12,168,135
Investment in subsidiaries (35,701,393) --
Deferred income taxes--non-current -- 2,030,993
Prepaid software licensing fees -- 779,375
Other assets 2,018,575
------------------ ----------------
Total non-current assets (35,701,393) 16,997,078
------------------- ----------------
TOTAL ASSETS $ (35,826,393) $ 46,592,396
=================== ================
LIABILITIES
Accounts payable $ -- $ 435,999
Accrued sales convention costs -- 2,248,913
Accrued liabilities (125,000) 4,227,137
Software licensing fees payable -- 537,500
Other current liabilities -- 107,384
Margin loan payable 3,088,918
------------------ ----------------
Total current liabilities (125,000) 10,645,851
------------------ ----------------
Loan payable -- 2,256,418
Incentive compensation payable -- 469,720
Deferred compensation payable -- 1,364,713
Other liabilities -- 167,641
------------------ ----------------
Total non-current liabilities -- 4,258,492
------------------ ----------------
TOTAL LIABILITIES (125,000) 14,904,343
------------------ ----------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE COMMON STOCK -- 11,563,285
------------------ ----------------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock (250,000) 3,659,367
Paid-in capital from retirement
of common stock (11,538,672) 927,640
Paid-in capital from producer stock
options -- 2,892,000
Retained earnings (accumulated deficit) (23,912,721) 13,217,865
Accumulated other comprehensive
income-net -- (572,104)
------------------ ----------------
TOTAL SHAREHOLDERS' EQUITY (35,701,393) 20,124,768
------------------ ----------------
TOTAL LIABILITIES, REDEEMABLE
COMMON STOCK & SHAREHOLDERS'
EQUITY(DEFICIT) $ (35,826,393) $ 46,592,396
================== ================
</TABLE>
Page 34
<PAGE> 35
REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidating Income Statement
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Legacy
Regan Legacy Financial
Holding Marketing Services, LifeSurance
Corp. Group Inc. Corporation
----- ----- ---- -----------
<S> <C> <C> <C> <C>
INCOME
Marketing allowances $ -- $ 25,363,487 $ 113,857 $ --
Commission income -- 13,900,907 1,491,835 --
Administrative fees -- 8,637,245 -- --
Intercompany management fee income 1,643,532 213,800 -- --
Seminar income -- 179,330 -- 201,989
Other income 12,921 36,731 88,988 705
--------------- ---------------- ----------------- ----------------
Total Income 1,656,453 48,331,500 1,694,680 202,694
--------------- ---------------- ----------------- ----------------
EXPENSES
Salaries and related benefits -- 20,620,054 979,325 617,518
Sales promotion and support 449,118 6,602,008 234,422 449,089
Producer stock options 2,845,000 -- 22,000 --
Professional fees 640,170 1,498,873 63,791 142,151
Occupancy 363,750 1,692,601 36,318 100,963
Depreciation and amortization 1,341,603 337,642 7,723 67,897
Equipment 354,498 637,097 25,415 2,065
Courier and postage 20,534 882,157 61,078 44,733
Stationery and supplies 1,335 882,978 3,489 66,436
Travel and entertainment 774 590,044 35,550 81,408
Insurance 68,481 336,425 (8,984) 4,007
Miscellaneous 212,713 211,607 25,336 23,404
Intercompany management fees -- 1,500,000 357,332 --
--------------- ---------------- ----------------- ----------------
Total expenses 6,297,976 35,791,486 1,842,795 1,599,671
--------------- ---------------- ----------------- ----------------
INCOME BEFORE INCOME FROM
SUBSIDIARIES (4,641,523) 12,540,014 (148,115) (1,396,977)
INCOME FROM SUBSIDIARIES 7,360,176 -- -- --
--------------- ---------------- ----------------- ----------------
OPERATING INCOME 2,718,653 12,540,014 (148,115) (1,396,977)
OTHER INCOME
Investment income-net 17,201 1,202,854 3,155 839
--------------- ---------------- ----------------- ----------------
INCOME BEFORE INCOME TAXES 2,735,854 13,742,868 (144,960) (1,396,138)
PROVISION FOR INCOME TAXES (1,731,980) 5,413,341 (55,514) (533,636)
--------------- ---------------- ----------------- ----------------
NET INCOME (LOSS) $ 4,467,834 $ 8,329,527 $ (89,446) $ (862,502)
=============== ================ ================= ================
<CAPTION>
Legacy Combined
Advisory Legacy Year Ended
Services, Reinsurance December 31,
Inc. Company 1999
---- ------- ----
<S> <C> <C> <C>
INCOME
Marketing allowances $ -- $ -- $ 25,477,344
Commission income 2,517 -- 15,395,259
Administrative fees -- -- 8,637,245
Intercompany management fee income -- -- 1,857,332
Seminar income -- -- 381,319
Other income 105 -- 139,450
--------------- --------------- -----------------
Total Income 2,622 -- 51,887,949
--------------- --------------- -----------------
EXPENSES
Salaries and related benefits -- -- 22,216,897
Sales promotion and support 360 -- 7,734,997
Producer stock option expense -- -- 2,867,000
Professional fees 13,504 14,595 2,373,084
Occupancy -- -- 2,193,632
Depreciation and amortization -- -- 1,754,865
Equipment -- -- 1,019,075
Courier and postage -- -- 1,008,502
Stationery and supplies 120 -- 954,358
Travel and entertainment -- -- 707,776
Insurance -- -- 399,929
Miscellaneous -- 23 473,083
Intercompany management fees -- -- 1,857,332
--------------- --------------- -----------------
Total Expenses 13,984 14,618 45,560,530
--------------- --------------- -----------------
INCOME BEFORE INCOME FROM
SUBSIDIARIES (11,362) (14,618) 6,327,419
INCOME FROM SUBSIDIARIES -- -- 7,360,176
--------------- --------------- -----------------
OPERATING INCOME (11,362) (14,618) 13,687,595
OTHER INCOME
Investment income-net -- 4,630 1,228,679
--------------- --------------- -----------------
INCOME BEFORE INCOME TAXES (11,362) (9,988) 14,916,274
PROVISION FOR INCOME TAXES (3,997) 50 3,088,264
--------------- --------------- -----------------
NET INCOME $ (7,365) $ (10,038) $ 11,828,010
=============== =============== =================
<CAPTION>
Consolidated
Year Ended
December 31,
Eliminations 1999
------------ ----
<S> <C> <C>
INCOME
Marketing allowances $ -- $ 25,477,344
Commission income -- 15,395,260
Administrative fees -- 8,637,245
Intercompany management fee income (1,857,332) --
Seminar income -- 381,319
Other income -- 139,450
------------------ ----------------
Total Income (1,857,332) 50,030,617
------------------ ----------------
EXPENSES
Salaries and related benefits -- 22,216,897
Sales promotion and support -- 7,734,997
Producer stock option expense -- 2,867,000
Professional fees -- 2,373,084
Occupancy -- 2,193,632
Depreciation and amortization -- 1,754,865
Equipment -- 1,019,075
Courier and postage -- 1,008,502
Stationery and supplies -- 954,358
Travel and entertainment -- 707,776
Insurance -- 399,929
Miscellaneous -- 473,083
Intercompany management fees (1,857,332) --
------------------ ----------------
Total Expenses (1,857,332) 43,703,198
------------------ ----------------
INCOME BEFORE INCOME FROM
SUBSIDIARIES -- 6,327,419
INCOME FROM SUBSIDIARIES (7,360,176) --
------------------ ----------------
OPERATING INCOME -- 6,327,419
OTHER INCOME
Investment income-net -- 1,228,679
INCOME BEFORE INCOME TAXES (7,360,176) 7,556,098
PROVISION FOR INCOME TAXES -- 3,088,264
------------------ ----------------
NET INCOME $ (7,360,176) $ 4,467,834
================== ================
</TABLE>
Page 35
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held May 23, 2000, is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Exhibits and Financial Statement Schedules:
1. The following financial statements are included in Item 8:
(i) Independent Accountants Report.
(ii) Consolidated Balance Sheets as of December 31, 1999
and 1998.
(iii) Consolidated Income Statements for the years ended
December 31, 1999, 1998 and 1997.
(iv) Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1999, 1998 and 1997.
(v) Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997.
(vi) Notes to Consolidated Financial Statements.
(vii) Supplemental Consolidating Data
2. Financial statement schedules are omitted because the information
is not required or has been included in the financial statements
and related notes.
3. The following exhibits are included in response to Item 14(c):
3(a) Restated Articles of Incorporation.(1)
3(b) Amended and Restated Bylaws of the Company.(1)
4 Certificate of Determination of Preferences of
Series C Common Stock of Regan Holding Corp.(2)
10(a) Administrative Services Agreement effective January
1, 1991, as amended, between Allianz Life Insurance
Company of North America and the Company.(2)
10(b)(1) Marketing Agreement effective June 1, 1993, as
amended, between American National Insurance Company
and the Company.(2)
10(b)(2) Amendment Three to Marketing Agreement with American
National Insurance Company.(3)
10(b)(3) Amendment Four to Marketing Agreement with American
National Insurance Company.(3)
10(b)(4) Amendment Five to Marketing Agreement with American
National Insurance Company.(4)
- -----------------------------------
(1) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended September 30, 1996.
(2) Incorporated herein by reference from the Company's annual report on Form
10-K for the year ended December 31, 1994.
(3) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended June 30, 1998.
(4) Incorporated herein by reference from the Company's annual report on Form
10-K for the year ended December 31, 1998.
Page 36
<PAGE> 37
10(b)(5) Amendment Six to Marketing Agreement with American
National Insurance Company.(1)
10(b)(6) Amendment Seven to Marketing Agreement with American
National Insurance Company.(2)
10(b)(7) Amendment Eight to Marketing Agreement with American
National Insurance Company.(3)
10(b)(8) Amendment Nine to Marketing Agreement with American
National Insurance Company.(3)
10(b)(9) Amendment Ten to Marketing Agreement with American
National Insurance Company.(4)
10(b)(10) Amendment Eleven to Marketing Agreement with
American National Insurance Company.
10(b)(11) Amendment Twelve to Marketing Agreement with
American National Insurance Company.
10(c)(1) Insurance Processing Agreement effective June 1,
1993, as amended, between American National
Insurance Company and the Company.(5)
10(c)(2) Amendment to Insurance Processing Agreement with
American National Insurance Company.(6)
10(c)(3) Amendment Two to Insurance Processing Agreement with
American National Insurance Company.(7)
10(c)(4) Amendment Three to Insurance Processing Agreement
with American National Insurance Company.(8)
10(c)(5) Amendment Four to Insurance Processing Agreement
with American National Insurance Company.(9)
10(c)(6) Amendment Five to Insurance Processing Agreement
with American National Insurance Company.(9)
10(c)(7) Amendment Six to Insurance Processing Agreement with
American National Insurance Company.(2)
10(c)(8) Amendment Seven to Insurance Processing Agreement
with American National Insurance Company.(3)
10(c)(9) Amendment Eight to Insurance Processing Agreement
with American National Insurance Company.(3)
10(c)(10) Amendment Nine to Insurance Processing Agreement
with American National Insurance Company.(4)
- -----------------------------------
(1) Incorporated herein by reference from the Company's annual report on Form
10-K for the year ended December 31, 1998.
(2) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended March 31, 1999.
(3) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended June 30, 1999.
(4) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended September 30, 1999.
(5) Incorporated herein by reference from the Company's annual report on Form
10-K for the year ended December 31, 1994.
(6) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended March 31, 1998.
(7) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended June 30, 1998.
(8) Incorporated herein by reference from the Company's quarterly Form 10-Q for
the three months ended September 30, 1998.
(9) Incorporated herein by reference from the Company's annual report on Form
10-K for the year ended December 31, 1998.
Page 37
<PAGE> 38
10(c)(11) Amendment Ten to Insurance Processing Agreement with
American National Insurance Company.
10(c)(12) Amendment Eleven to Insurance Processing Agreement
with American National Insurance Company.
10(d) Form of Producer Agreement.(1)
10(e) Lease Agreement dated September 26, 1996, for 1179
North McDowell Blvd., Petaluma, California 94954.(1)
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.(1)
10(g) 401(K) Profit Sharing Plan & Trust dated July 1,
1994.(1)
10(h) Marketing Agreement effective January 1, 1996
between IL Annuity and Insurance Company and the
Company.(2)
10(i) Insurance Processing Agreement effective January 1,
1996 between IL Annuity and Insurance Company and
the Company.(2)
10(j) Marketing Agreement effective January 1, 1996
between Indianapolis Life Insurance Company and the
Company.(2)
10(k) Insurance Processing Agreement effective January 1,
1996 between Indianapolis Life Insurance Company and
the Company.(2)
10(l) Marketing Agreement effective May 29, 1998 between
Transamerica Life Insurance and Annuity Company and
Legacy Marketing Group.(3)
10(m)(1) Administrative Services Agreement effective May 29,
1998 between Transamerica Life Insurance and Annuity
Company and Legacy Marketing Group.(3)
10(m)(2) Amendment to the Administrative Services Agreement
with Transamerica Life Insurance and Annuity
Company.
10(m)(3) Amendment Two to the Administrative Services
Agreement with Transamerica Life Insurance and
Annuity Company.
10(n)(1) Agreement of purchase and sale, dated March 8,
1999, by and among Regan Holding Corp., North
McDowell Investments and Jane Crocker.(4)
10(n)(2) Business Loan Agreement, dated May 6, 1999, by and
between Regan Holding Corp. and National Bank of
the Redwoods.(4)
10(n)(3) Promissory Note, dated May 6, 1999, by and between
Regan Holding Corp. and National Bank of the
Redwoods.(4)
21 Subsidiaries of the Company.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
- -----------------------------------
(1) Incorporated herein by reference from the Company's annual report on Form
10-K for the year ended December 31, 1994.
(2) Incorporated herein by reference from the Company's annual report on Form
10-K for the year ended December 31, 1995.
(3) Incorporated herein by reference from the Company's Form 8-K, dated June 1,
1998.
(4) Incorporated herein by reference from the Company's quarterly Form 10-Q
for the three months ended March 31, 1999.
Page 38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGAN HOLDING CORP.
By: /s/ R. Preston Pitts Date: March 30, 2000
------------------------------------------ ---------------
R. Preston Pitts, President and Chief Operating Officer
By: /s/ David A. Skup Date: March 30, 2000
------------------------------------------ ---------------
David A. Skup, Chief Financial Officer
Pursuant to the requirements of the securities Exchange act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Lynda L. Regan Date: March 30, 2000
------------------------------------------ ---------------
Lynda L. Regan, Chairman
By: /s/ Steven C. Anderson Date: March 30, 2000
------------------------------------------ ---------------
Steven C. Anderson, Director
By: /s/ R. Preston Pitts Date: March 30, 2000
------------------------------------------ ---------------
R. Preston Pitts, Director
By: /s/ Ute Scott-Smith Date: March 30, 2000
------------------------------------------ ---------------
Ute Scott-Smith, Director
Page 39
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Item No. Description Page
- -------- ----------- ----
<S> <C> <C>
10(b)(10) Amendment Eleven to Marketing Agreement with American
National Insurance Company 40
10(b)(11) Amendment Twelve to Marketing Agreement with American
National Insurance Company 41
10(c)(11) Amendment Ten to Processing Agreement with American
National Insurance Company. 42
10(c)(12) Amendment Eleven to Processing Agreement with American
National Insurance Company. 43
10(m)(2) Amendment to the Administrative Services Agreement with
Transamerica Life Insurance and Annuity Company 44
10(m)(3) Amendment to the Administrative Services Agreement with
Transamerica Life Insurance and Annuity Company 45
27 Financial Data Schedule 47
</TABLE>
Page 40
<PAGE> 1
EXHIBIT 10(b)(10)
AMENDMENT ELEVEN TO MARKETING AGREEMENT
This document is Amendment Ten to the Marketing Agreement ("Agreement"), made
and entered into effective June 1, 1993, and amended by Amendment One to
Marketing Agreement dated September 16, 1993; Amendment Two to Marketing
Agreement dated June 4, 1998; Amendment Three to Marketing Agreement dated
September 25, 1998; Amendment Four to Marketing Agreement dated October 19,
1998; and Amendment Five to Marketing Agreement dated December 15, 1998;
Amendment Six to Marketing Agreement dated March 25, 1999, Amendment Seven to
Marketing Agreement dated May 10, 1999, Amendment Eight to Marketing Agreement
dated June 24, 1999, (the "Agreement"), Amendment Nine to Marketing Agreement
dated August 5, 1999, and Amendment Ten to Marketing Agreement dated October 1,
1999, by and between American National Insurance Company ("American National") a
Texas corporation, and Legacy Marketing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
1. Section 3.1 of the Agreement is hereby deleted in its entirety and the
following new Section 3.1 shall be substituted therefore:
"3.1 Subject to termination as hereinafter provided, this Agreement
shall remain in force and effect until the close of business on February
29, 2000, the term of this Agreement. This Agreement may be renewed by
mutual agreement for successive terms of one (1) year unless terminated
by either party by prior written notice to the other at least one
hundred eighty (180) days prior to the end of the initial term or the
renewal term."
Except as specifically amended hereby, all terms and provisions of the Marketing
Agreement shall remain in full force and effect.
IN WITNESS HEREOF, the parties hereto have executed this Agreement.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ DAVID A. SKUP By: /s/ DAVID BEHRENS
-------------------------------- -----------------------------------
Title: CFO Title: Exec VP Ind. MKTG
----------------------------- --------------------------------
Witness: /s/ STEPHANIE MOLTENI Witness: /s/ LORI L. HERRER
--------------------------- ------------------------------
Date: 1-31-2000 Date: 1/28/2000
------------------------------ ---------------------------------
<PAGE> 1
EXHIBIT 10(b)(11)
AMENDMENT TWELVE TO MARKETING AGREEMENT
This document is Amendment Ten to the Marketing Agreement ("Agreement"), made
and entered into effective June 1, 1993, and amended by Amendment One to
Marketing Agreement dated September 16, 1993; Amendment Two to Marketing
Agreement dated June 4, 1998; Amendment Three to Marketing Agreement dated
September 25, 1998; Amendment Four to Marketing Agreement dated October 19,
1998; and Amendment Five to Marketing Agreement dated December 15, 1998;
Amendment Six to Marketing Agreement dated March 25, 1999, Amendment Seven to
Marketing Agreement dated May 10, 1999, Amendment Eight to Marketing Agreement
dated June 24, 1999, (the "Agreement"), Amendment Nine to Marketing Agreement
dated August 5, 1999, Amendment Ten to Marketing Agreement dated October 1,
1999, and Amendment Eleven to Marketing Agreement dated January 31, 2000, by and
between American National Insurance Company ("American National") a Texas
corporation, and Legacy Marketing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
1. Section 3.1 of the Agreement is hereby deleted in its entirety and the
following new Section 3.1 shall be substituted therefore:
"3.1 Subject to termination as hereinafter provided, this Agreement
shall remain in force and effect until the close of business on April
30, 2000, the term of this Agreement. This Agreement may be renewed by
mutual agreement for successive terms of one (1) year unless terminated
by either party by prior written notice to the other at least one
hundred eighty (180) days prior to the end of the initial term or the
renewal term."
Except as specifically amended hereby, all terms and provisions of the Marketing
Agreement shall remain in full force and effect.
IN WITNESS HEREOF, the parties hereto have executed this Agreement.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ DAVID A. SKUP By: /s/ DEBRA KNOWLES
-------------------------------- -----------------------------------
Title: Chief Financial Officer Title: Assistant Vice President
----------------------------- --------------------------------
Witness: /s/ SANDY LOPES Witness: /s/ NICOLE ABRAHAM
--------------------------- ------------------------------
Date: 3/1/00 Date: 2/29/00
------------------------------ ---------------------------------
<PAGE> 1
EXHIBIT 10(c)(11)
AMENDMENT TEN TO INSURANCE PROCESSING AGREEMENT
This document is Amendment Nine to the Insurance Processing Agreement
("Agreement"), made and entered into effective June 1, 1993, and amended by
Amendment One to Insurance Processing Agreement dated June 4, 1998; Amendment
Two to Insurance Processing Agreement dated September 25, 1998; Amendment Three
to Insurance Processing Agreement dated October 19, 1998; Amendment Four to
Insurance Processing Agreement dated December 15, 1998, Amendment Five to
Insurance Processing Agreement dated March 25, 1999, Amendment Six to Insurance
Processing Agreement dated May 10, 1999, Amendment Seven to Insurance Processing
Agreement dated June 24, 1999, Amendment Eight to Insurance Processing Agreement
dated August 5, 1999, and Amendment Nine to Insurance Processing Agreement dated
October 1, 1999 (the "Agreement"), by and between American National Insurance
Company ("American National") a Texas corporation, and Legacy Insurance
Processing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
1. "Section 6.1" of the Agreement is hereby deleted in its entirety and the
following new Section 6.1 shall be substituted therefore:
"Subject to termination as hereinafter provided, this Agreement shall remain in
force and effect until the close of business on February 29, 2000, the term of
this Agreement. This Agreement may be renewed by mutual agreement for additional
successive terms of one (1) year unless terminated by either party by prior
written notice to the other at least one hundred eighty (180) days prior to the
end of the initial term or the renewal term."
Except as specifically amended hereby, all terms and provisions of the Insurance
Processing Agreement shall remain in full force and effect.
IN WITNESS HEREOF, the parties hereto have executed this Agreement.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ DAVID A. SKUP By: /s/ DAVID BEHRENS
-------------------------------- -----------------------------------
Title: CFO Title: Exec VP Ind. MKTG
----------------------------- --------------------------------
Witness: /s/ STEPHANIE MOLTENI Witness: /s/ LORI L. HERRER
--------------------------- ------------------------------
Date: 1-31-2000 Date: 1/28/2000
------------------------------ ---------------------------------
<PAGE> 1
EXHIBIT 10(c)(12)
AMENDMENT ELEVEN TO INSURANCE PROCESSING AGREEMENT
This document is Amendment Nine to the Insurance Processing Agreement
("Agreement"), made and entered into effective June 1, 1993, and amended by
Amendment One to Insurance Processing Agreement dated June 4, 1998; Amendment
Two to Insurance Processing Agreement dated September 25, 1998; Amendment Three
to Insurance Processing Agreement dated October 19, 1998; Amendment Four to
Insurance Processing Agreement dated December 15, 1998, Amendment Five to
Insurance Processing Agreement dated March 25, 1999, Amendment Six to Insurance
Processing Agreement dated May 10, 1999, Amendment Seven to Insurance Processing
Agreement dated June 24, 1999, Amendment Eight to Insurance Processing Agreement
dated August 5, 1999, Amendment Nine to Insurance Processing Agreement dated
October 1, 1999, and Amendment Ten to Insurance Processing Agreement dated
January 31, 2000, (the "Agreement"), by and between American National Insurance
Company ("American National") a Texas corporation, and Legacy Insurance
Processing Group ("LMG"), a California corporation.
In consideration of mutual covenants contained herein, the parties agree as
follows:
1. "Section 6.1" of the Agreement is hereby deleted in its entirety and the
following new Section 6.1 shall be substituted therefore:
"Subject to termination as hereinafter provided, this Agreement shall remain in
force and effect until the close of business on April 30, 2000, the term of this
Agreement. This Agreement may be renewed by mutual agreement for additional
successive terms of one (1) year unless terminated by either party by prior
written notice to the other at least one hundred eighty (180) days prior to the
end of the initial term or the renewal term."
Except as specifically amended hereby, all terms and provisions of the Insurance
Processing Agreement shall remain in full force and effect.
IN WITNESS HEREOF, the parties hereto have executed this Agreement.
LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE
COMPANY
By: /s/ DAVID A. SKUP By: /s/ DEBRA KNOWLES
-------------------------------- -----------------------------------
Title: Chief Financial Officer Title: Assistant Vice President
----------------------------- --------------------------------
Witness: /s/ SANDY LOPES Witness: /s/ NICOLE ABRAHAM
--------------------------- ------------------------------
Date: 3/1/00 Date: 2/29/00
------------------------------ ---------------------------------
<PAGE> 1
EXHIBIT 10(m)(2)
AMENDMENT TO
ADMINISTRATIVE SERVICES AGREEMENT
The Administrative Services Agreement ("Agreement") as entered into on May 29,
1998 between Transamerica Life Insurance and Annuity Company, ("Transamerica"),
a North Carolina corporation, and Legacy Marketing Group, ("LMG"), a California
corporation, is hereby amended, effective May 29, 1998, as follows:
ADD TO 3. HOLD HARMLESS AND INDEMNIFICATION:
3.1
(f) In addition to the foregoing, LMG shall indemnify and
hold harmless Transamerica from and against any tax,
interest or penalties imposed by the IRS or any state or
local taxing authority on Transamerica, as well as any
liability Transamerica may incur to Policyholders caused
by or relating to LMG's failure to properly apply the
rules under IRC Section 72, or its failure to: (i)
deposit the correct amount of income tax withholding on
time; (ii) issue timely information returns; (iii)
correctly process tax related transactions related to
non-resident aliens; and (iv) correctly process tax
related transactions related to death claims.
ADD TO 7. GENERAL PROVISIONS:
7.17 Section 9.2 shall also be deemed to survive the termination of
this Agreement.
The parties agree as above.
LEGACY MARKETING GROUP
By /s/ R. PRESTON PITTS
------------------------------------
Title President
---------------------------------
Date 6/9/98
----------------------------------
TRANSAMERICA LIFE INSURANCE AND ANNUITY COMPANY
By /s/ WILLIAM N. SCOTT
------------------------------------
Title Vice President
---------------------------------
Date June 3, 1998
----------------------------------
<PAGE> 1
EXHIBIT 10(m)(3)
AMENDMENT 2 TO
ADMINISTRATIVE SERVICES AGREEMENT
THIS SECOND AMENDMENT TO THE ADMINISTRATIVE SERVICES AGREEMENT is effective as
of the 18th day of October, 1999, by and between TRANSAMERICA LIFE INSURANCE AND
ANNUITY COMPANY, hereinafter referred to as "Transamerica," a North Carolina
corporation, and LEGACY MARKETING GROUP, hereinafter referred to as "LMG," a
California corporation.
WHEREAS, Transamerica and LMG entered into an Administrative Services Agreement,
dated May 29, 1998, as amended, hereinafter referred to as the "Agreement,"
wherein LMG agreed to provide certain Transamerica accounting and service
functions in consideration of the fees as set forth in APPENDIX B of the
Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and mutual promises
hereinafter contained and other good and valuable consideration, the parties
hereto do agree as follows:
1. Add to APPENDIX A, Policy Forms, as follows:
"Group Master Policy# T-GMY0799-7-100
T-GMY0799-7-75/25
T-GMY0799-7-50/50
T-GBR-0799 (Beneficiary Rider)
Policy # T-PMY0799-7-100
T-PMY0799-7-75/25
T-PMY0799-7-50/50
T-PBR-0799 (Beneficiary Rider)"
2. Add to APPENDIX B, as follows:
"1.1 Beneficiary Rider
a. MAINTENANCE: $.25 per month per inforce Rider
T-CBR-0799 or T-PBR-0799."
3. APPENDIX C, Section 1, Services: Appointment, sub-section 3, is
hereby amended to read as follows:
"If a Wholesaler/Producer meets LMG/Transamerica's contracting
criteria, LMG will complete and mail all state required
appointment forms or electronic transmission of appointment data
to state.
Page 1 of 2
<PAGE> 2
4. APPENDIX D, Schedule of Authorized Personnel, is hereby amended
to read as follows:
"REPRESENTING TRANSAMERICA
Authorized to modify this Agreement:
Ken Kilbane, Vice President
Ron Wagley, Sr. Vice President"
Authorized to provide day to day direction of LMG employees for
policies and procedures not specifically covered in this
Agreement:
Ken Kilbane, Vice President
Nancy DeWitt
Kristina Barker"
5. All other provisions in the Agreement not specifically amended
above remain in effect and unchanged.
IN WITNESS HEREOF, the parties have hereto executed this Agreement.
LEGACY MARKETING GROUP
By /s/ DAVID A. SKUP
------------------------------------
Title CFO + TREASURER
---------------------------------
Date 2/18/00
----------------------------------
Witness /s/ STEPHANIE MOLTENI
-------------------------------
TRANSAMERICA LIFE INSURANCE AND ANNUITY COMPANY
By /s/ WILLIAM N. SCOTT
------------------------------------
Title VICE PRESIDENT
---------------------------------
Date FEB 11, 2000
----------------------------------
Witness [SIG]
-------------------------------
Page 2 of 2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
audited financial statements contained in the Company's annual report on Form
10-K for the year ended December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,094,759
<SECURITIES> 20,861,973
<RECEIVABLES> 2,627,867
<ALLOWANCES> 0
<INVENTORY> 706,418
<CURRENT-ASSETS> 29,595,318
<PP&E> 15,082,221
<DEPRECIATION> (2,914,086)
<TOTAL-ASSETS> 46,592,396
<CURRENT-LIABILITIES> 10,645,851
<BONDS> 11,563,285
0
0
<COMMON> 3,659,367
<OTHER-SE> 16,465,401
<TOTAL-LIABILITY-AND-EQUITY> 46,592,396
<SALES> 0
<TOTAL-REVENUES> 50,030,617
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,703,198
<INCOME-PRETAX> 7,556,098
<INCOME-TAX> 3,088,264
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,467,834
<EPS-BASIC> .17
<EPS-DILUTED> .16
</TABLE>
