Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K / A

[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.

2090 MARINA AVENUE PETALUMA, CALIFORNIA 94954

(707) 778-8638

Securities registered under

     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

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

     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:

DOCUMENTS INCORPORATED BY REFERENCE

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

3

Table of Contents

      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

4

Table of Contents

      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 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,

5

Table of Contents

      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.

6

Table of Contents

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.

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

7

Table of Contents

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.

      The table below presents information about the Company’s operating segments for the years ended December 31, 1999, 1998 and 1997:

8

Table of Contents

      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.

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.

      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.

9

Table of Contents

      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.

      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.

10

Table of Contents

      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™ annuity, which was introduced in 1999 to replace the original VisionMark™. 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.

      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™ annuity, respectively. However, during the fourth quarter of 1999, 17.8% of the Company’s total revenues resulted from sales of the SelectMark™ annuity, offered through Transamerica. This shift from the VisionMark™ annuity and the VisionMark II™ annuity, to the SelectMark™ annuity is attributable primarily to market acceptance of the SelectMark™ 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 84.2%, during 1998 compared to 1997. These increases

11

Table of Contents

      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 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

12

Table of Contents

      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

13

Table of Contents

      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:

      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.

14

Table of Contents

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and 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 the 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. However, the consolidating information on pages 34 and 35 has been subjected to the auditing procedures applied to 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

March 23, 2000

15

Table of Contents

REGAN HOLDING CORP. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

16

Table of Contents

REGAN HOLDING CORP. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

17

Table of Contents

REGAN HOLDING CORP. AND SUBSIDIARIES

[Additional columns below]

[Continued from above table, first column(s) repeated]

					Paid-in
					Capital				Retained				Accumulated
					from				Earnings				Other
					Producer				(Accumulated				Comprehensive
					Options				Deficit)				Income				Total
Balance
	January 1, 1997				$	—			$	(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																		152,292
Balance
	December 31, 1997					—				(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																		142,510
Producer stock option expense						25,000												25,000
Balance
	December 31, 1998					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										(50,488	)							(92,413	)
Accretion of redeemable common stock to redemption value										(787,256	)							(787,256	)
Issuance of common stock																		491,949
Producer stock option expense						2,867,000												2,867,000
Balance
	December 31, 1999				$	2,892,000			$	13,217,865			$	(572,104	)		$	20,124,768

See accompanying notes to consolidated financial statements.

18

Table of Contents

REGAN HOLDING CORP. AND SUBSIDIARIES