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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2000,

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

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.

$21,435,131

      There is currently no trading market for the registrant’s stock. Accordingly, the foregoing is as of February 28, 2001 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 59

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 28, 2001, including redeemable common stock:

DOCUMENTS INCORPORATED BY REFERENCE

Table of Contents

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” or “We”) is a non-operating holding corporation, incorporated in the State of California, whose primary operating subsidiary is Legacy Marketing Group (“Legacy Marketing”). Legacy Marketing designs, markets and administers fixed life insurance and annuity products on behalf of four unaffiliated insurance carriers in the District of Columbia and in each of the United States, except Alabama and New York.

      Legacy Marketing has entered into marketing agreements (the “Marketing Agreements”) with American National Insurance Company (“American National”), IL Annuity and Insurance Company (“IL Annuity”), Transamerica Life Insurance and Annuity Company (“Transamerica”), and John Hancock Life Insurance Company (“John Hancock”), each of which is an unaffiliated company and are collectively referred to as the “Carriers.” The Marketing Agreements grant Legacy Marketing the exclusive right to market certain annuity and life insurance products issued by the Carriers (the “Policies”). Under the terms of the Marketing Agreements, Legacy Marketing is responsible for the recruiting and appointing of producers (“Producers”) who have contracted with Legacy Marketing to sell the Policies. For these services, the Carriers pay Legacy Marketing commissions and marketing allowances based on the volume of Policies sold. Legacy Marketing is responsible for the funding of commissions paid to Producers for sales of Policies.

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      Legacy Marketing currently markets the Policies through a network consisting of approximately 20,800 Producers, of whom approximately 4,800 generated business during 2000. Each of these Producers has entered into a Producer agreement with Legacy Marketing pursuant to which the services of the Producer are provided on a non-exclusive basis. These agreements may be terminated immediately by either the Producer or Legacy Marketing, with or without cause.

      Legacy Marketing’s sales network is built on a multi-level structure in which Producers may sponsor other Producers. Sponsored Producers are referred to as “downline” Producers within the sponsoring Producer’s downline network. Sponsored Producers may also sponsor other Producers, creating a hierarchy under the original sponsoring Producer. The Producer contract contains a nine-level “open book” design in which a Producer may advance from one level to the next based on commission level and the size of the Producer’s downline network. As a Producer advances to higher levels within the system, the Producer receives a higher commission on sales made directly and through the Producer’s downline network. This creates a financial incentive for Producers to build a hierarchy of Producers, thereby contributing to their own financial growth and to the growth of the Company. Advancements to higher levels can occur as often as every three months. Producers at the highest levels are considered “Wholesalers.”

      Legacy Marketing provides tools and services that assist Wholesalers with recruiting, training and support responsibilities associated with the Producers in their hierarchy. In addition, Legacy Marketing assists Producers with programs designed to increase their sales and better serve their clients. Recruiting and training programs include visual presentations, product videos and seminars, advertising material guidelines and sales flip charts. Legacy Marketing also produces product information, sales brochures, pre-approved advertisements and recruiting material.

      In addition to the Marketing Agreements, Legacy Marketing has entered into insurance administrative agreements (the “Administrative Agreements”) with each of the Carriers pursuant to which we provide application processing, policyholder services and accounting services with respect to the Policies. Such services include billing, collecting and remitting cash on the Policies. For providing such services, we are 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 the Policies were performed at our headquarters in Petaluma, California. However, during 1998, Legacy Marketing began performing administrative services at facilities located in Rome, Georgia.

      Neither the Marketing Agreements nor the Administrative Agreements prevent Legacy Marketing from entering into similar arrangements with other insurance companies. However, the Marketing Agreements prevent Legacy Marketing from marketing products with other carriers which are substantially similar to those being offered under the respective Marketing Agreements. In addition, under the terms of the Marketing Agreements with American National and IL Annuity, Legacy Marketing is

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obligated to give American National and IL Annuity the opportunity to participate in the marketing of any new products developed by Legacy Marketing.

      In addition to Policy marketing and administration, Legacy Marketing also assists the Carriers in Policy design and development. Legacy Marketing’s marketing and actuarial departments work with the Carriers to design proprietary annuity and life insurance products to be marketed by us. Products marketed and designed by Legacy Marketing generally include certain guarantees for the benefit of policyholders that are designed to be unique in the insurance marketplace. Although the guarantees are known as Legacy’s Cornerstone Guarantees, they are guaranteed by the issuing Carriers. Legacy’s Cornerstone Guarantees generally include: (i) a contractually guaranteed maximum administrative fee; (ii) the ability to allocate among various cash value strategies; and (iii) life insurance products providing a guarantee that the cost of insurance will be no greater than the yearly renewable term rates provided by the reinsurers of the Policies, with changes in the cost of insurance resulting solely from changes in the Policies’ future experience factors.

      The Marketing and Administrative Agreements with American National and IL Annuity expire May 15, 2001, 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. The Company is currently in the process of re-negotiating the Marketing and Administrative Agreements with American National. The Marketing and Administrative Agreements with Transamerica and John Hancock 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 Administrative Agreements with American National and IL Annuity were amended during 1999 with respect to various policy administration matters. The Administrative Agreement with Transamerica was amended in 2000 to include newly developed products.

      The Marketing and Administrative Agreements with John Hancock were entered into in January 2001. Design, marketing and administration of products on behalf of John Hancock are expected to begin during the second quarter of 2001.

      In February of 2000, Legacy Marketing entered into an Agency Agreement with Bankers United Life Assurance Company (“Bankers”) pursuant to which Legacy Marketing is authorized to solicit, through its network of independent insurance producers, sales of long-term care products offered by Bankers. For this solicitation, Legacy Marketing 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. Legacy Marketing is licensed in virtually all states to sell long-term care products and began actively marketing in September 2000, resulting in minimal sales to date.

      During 2000, Legacy Marketing generated approximately 90.8% of our consolidated revenues.

      Through our wholly owned broker-dealer subsidiary, Legacy Financial Services, Inc. (“Legacy Financial”), we engage in the offering and sale of variable annuity and life

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insurance products, mutual funds, and debt and equity securities on a fully disclosed basis. Legacy Financial has entered into agreements (the “Agreements”) with various entities pursuant to which Legacy Financial has a nonexclusive right to solicit sales of investment products offered by such entities through its network of independent registered representatives and to provide certain marketing and administrative services in order to facilitate sales of such products. Under the Agreements, we are compensated based upon predetermined percentages of production. The Agreements may be terminated by any party upon 30 days written notice. During 2000, approximately 6.6% of the Company’s consolidated revenues were generated by Legacy Financial.

      Prior to February 2001, LifeSurance Corporation, a wholly owned subsidiary headquartered in Des Moines, Iowa, conducted sophisticated educational programs that provided continuing education credits for Producers at various locations throughout the United States. Producers paid attendance fees to attend the seminars and purchased educational materials that could be used as tools in promoting the sale of life insurance and annuity policies and estate planning concepts. The seminars and educational materials were marketed under the business name Wealth Transfer Educational Systems. In February 2001, the Company announced that it was discontinuing the majority of LifeSurance’s operations. All employees were either terminated or transferred to Legacy Marketing.

      Legacy Advisory Services, Inc. (“Legacy Advisory”) is a wholly owned subsidiary, incorporated in the state of California for the purpose of operating as an “investment advisor,” as defined by and regulated under the Investment Advisors Act of 1940. Legacy Advisory is registered with the SEC as an investment advisor and has conducted limited operations to date.

      During 2000, we formed Imagent Online, LLC (“Imagent”), a Delaware limited liability company and a wholly owned subsidiary of the Company. In May 2000, Imagent invested in an insurance-related company that is developing an Internet-based customer relationship management product. Imagent has no other operations to date.

      In December 2000, the Company acquired the assets and name of Values Financial Network, Inc., and formed Values Financial Network, Inc. (“VFN”), a wholly owned subsidiary of the Company. VFN is a Delaware corporation engaged in the business of values-based investment screening and has conducted limited operations to date.

      See Note 17 to the Company's consolidated financial statements for financial information regarding segment reporting.

Competitive Business Conditions

      The life insurance and annuity business is highly competitive. We face competition from various companies and organizations, including banks, securities brokerage firms, investment advisors, and other financial intermediaries marketing insurance products, annuities, mutual funds, and other retirement-oriented investments. Some of these competitors have substantially greater assets, financial resources and market acceptance than Legacy Marketing. Our distribution system relies on independent insurance producers to effectively market our products. Maintaining relationships with producers requires introducing new products to the market in an efficient and timely

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manner, offering competitive commission schedules, and providing superior marketing training and support.

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Regulatory Environment

      Legacy Marketing, or a licensed individual acting on behalf of Legacy Marketing (in the states that do not permit the licensing of corporations), is licensed as an insurance agent and/or non-resident third party administrator in all states that require such licensure. As a result of being licensed as an insurance agency, Legacy Marketing’s business practices are subject to regulation, including its sales and marketing practices, fiduciary responsibilities, and compliance with pertinent statutes and regulations. As a result of being licensed as a third-party administrator, Legacy Marketing 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 forced the National Association of Insurance Commissioners and state insurance departments to examine existing laws and regulations affecting insurance companies, especially those laws and regulations involving insurance company solvency, marketing and sales practices, and investment policies. We have responded to this increased scrutiny by instituting strict advertising guidelines, generating consistent marketing materials and testimonies addressing appropriate marketing practices, and including this topic at our biannual Wholesaler meetings. Although we are not an insurance company, changes in the regulatory environment that affect the insurance companies with which we contract and the products that we market can impact our operations.

      Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the SEC and the NASD. Legacy Financial is also registered as a fully disclosed broker-dealer in several states. As a result of federal and state broker-dealer registration and its self-regulatory organization (“SRO”) memberships, Legacy Financial is subject to overlapping regulation that covers many aspects of its securities business. Such regulations cover matters including capital requirements, record keeping and reporting requirements, supervisory and organizational procedures intended to assure compliance with securities laws and to prevent the improper trading on material nonpublic information, employee-related matters, including qualification and licensing of supervisory and sales personnel, and rules of the SROs designed to promote high standards of commercial honor and just and equitable principles of trade. A particular focus of the applicable regulations concerns the relationship between broker-dealers and their customers. As a result, many aspects of the broker-dealer customer relationship are subject to regulation, including “suitability” determinations as to customer transactions, limitations in the amounts that may be charged to customers, and correspondence with customers.

      Compliance with many of the regulations applicable to us or our subsidiaries involves a number of risks, particularly because applicable regulations in a number of areas may be subject to varying interpretation. Regulators make periodic examinations and review annual, monthly, and other reports on our operations and financial condition. In the event of a violation of or noncompliance with any applicable law or regulation, governmental regulators and SROs may institute administrative or judicial proceedings

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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 noncompliant broker-dealer, the suspension or disqualification of a broker-dealer’s officers or employees, and other adverse consequences. Such violations or noncompliance could also subject us and/or our employees to civil actions by private persons. Any governmental, SRO, or private proceeding alleging violation of or noncompliance with laws and regulations applicable to us or our subsidiaries could have a material adverse effect upon our business, financial condition, results of operations, and business prospects.

Employees

      As of February 28, 2001, we employed 531 full-time equivalent employees (all are employees of our subsidiaries). None of our employees is represented by a collective bargaining agreement. We consider our relations with our employees to be good, and we will continue to strive to provide a positive work environment for our employees.

Information about the Company

      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 website 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

      We currently lease approximately 72,000 square feet of office space in Petaluma, California, where our headquarters and most of Legacy Marketing’s operations are located. This lease expires in April 2009, subject to extension at our option for two additional terms of five years each. We plan to acquire this property in the second quarter of 2001, in accordance with a purchase option contained in the lease. We also lease approximately 5,700 square feet of warehouse space in Petaluma, primarily for Legacy Marketing supplies inventory storage and processing.

      We lease approximately 30,500 square feet of office space in Rome, Georgia, for the remainder of Legacy Marketing’s operations. This lease expires in December 2001.

      In addition, we lease approximately 18,200 square feet of office space in Des Moines, Iowa, primarily for LifeSurance Corporation’s operations. However, some Legacy Marketing information systems personnel are also located at this facility. This lease expires in October 2004. In February 2001, the Company announced the discontinuance of most of LifeSurance’s operations and is seeking to relocate the remaining operations to smaller facilities. Management expects to sublease the vacated space to unrelated parties.

      In 1999, we purchased a building in Petaluma. The building consists of approximately 53,700 total square feet of useable office and warehouse space. Approximately 13,700 square feet of the building is currently used for Legacy Financial operations and training facilities for Legacy Marketing and Legacy Financial employees. The remaining approximate 40,000 square feet is leased to unrelated parties. We sold the building in December 2000. Legacy Financial will remain on-site under the terms of a minor lease agreement that expires in December 2002.

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      We believe that existing and planned office and warehouse space is and will continue to be adequate for our 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 2000.

PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

      As of February 28, 2001, the Company’s Series A common stock was held by approximately 1,400 shareholders of record and the Company’s Series B common stock was held by approximately 9,700 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. As of December 31, 2000, the Company does not anticipate paying dividends on any of its outstanding common stock in the foreseeable future.

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Item 6. Selected Consolidated Financial Data

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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.

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Results of Operations

      The table below presents information about our operating segments for the years ended December 31, 2000, 1999 and 1998:

      In 2000, “Other” segment above includes Legacy Advisory Services, Inc., Legacy Reinsurance Company, and Values Financial Network, Inc. In 1999 and 1998, “Other” segment includes Legacy Advisory Services, Inc. and Legacy Reinsurance Company. These entities’ operations do not currently represent amounts that are material to our results and, accordingly, were not separated for purposes of this disclosure.

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Analysis of Regan Holding Corp. Consolidated

      Results of Operations — The Company experienced consolidated net losses of approximately $3.8 million in 2000, compared to consolidated net income of approximately $4.5 million in 1999. The shift is primarily due to decreases in Legacy Marketing revenues and increases in Legacy Marketing expenses, partially offset by increases in Regan Holding Corp. (stand-alone) other income and consolidated income tax benefits. Net losses in 2000 were also impacted by a $3.6 million gain on sale of a building and recognition of approximately $721,000 of losses related to Imagent’s investment in a start-up company. Consolidated net income decreased approximately $5.3 million in 1999, compared to 1998, primarily due to decreases in Legacy Marketing revenues, decreases in income tax benefits, and increased Legacy Marketing expenses. These fluctuations are discussed below.

Analysis of Legacy Marketing Group

      Results of Operations — Legacy Marketing’s net loss totaled approximately $1.0 million in 2000, compared to net income of approximately $9.6 million in 1999, and net income decreased approximately $2.2 million, or 18.5%, in 1999 compared to 1998. The fluctuation from 1999 to 2000 is primarily due to decreases in revenue and increases in expenses. The change from 1998 to 1999 is primarily due to increases in expenses, as discussed below.

      Revenue — Legacy Marketing’s major sources of revenue are marketing allowances, commission income and administrative fees from sales and administration of fixed 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 and terminations. Legacy Marketing’s total revenue decreased approximately $10.2 million, or 21.3%, in 2000 compared to 1999, but increased approximately $3.0 million, or 6.7% in 1999 compared to 1998. The changes in revenues are primarily attributable to fluctuations in premium placed inforce for the Carriers and changes in product mix, as discussed below.

      Legacy Marketing’s marketing allowances and commission revenue, combined, decreased approximately $10.5 million, or 26.7%, in 2000 compared to 1999, due to a 35.5% decrease in fixed annuity premium, partially offset by a shift to fixed annuity and life insurance products that yield higher commissions. This overall decrease in premium is primarily attributable to the poor performance of bond investments underlying the annuities’ crediting rates.

      Legacy Marketing’s marketing allowances and commission revenue, combined, increased approximately $1.1 million, or 3.0%, during 1999 compared to 1998 due to a

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shift in product mix to products which yielded higher commission income, partially offset by a 2.3% decrease in overall fixed annuity premium placed inforce for the Carriers. This decrease is attributable primarily to the poor performance of bond investments underlying the annuities’ crediting rates during the latter half of 1999.

      Administrative fees increased approximately $402,000, or 4.7%, in 2000 compared to 1999, and increased approximately $2.0 million, or 29.6%, in 1999 compared to 1998, 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.

      During 2000, Legacy Marketing marketed and administered fixed annuity and life insurance products on behalf of three unaffiliated insurance carriers: American National, IL Annuity, and Transamerica. The agreements with these carriers generated a significant portion of the Company’s total consolidated revenue at the dates indicated, as follows (sales on behalf of Transamerica began in the third quarter of 1998):

      Although Legacy Marketing markets and administers several products on behalf of the Carriers, the Company’s consolidated revenues are derived primarily from sales and administration of two fixed annuity product series, as indicated below:

      The shift between Carrier’s products is primarily attributable to more favorable acceptance of Transamerica’s annuity products in the marketplace, which is expected to continue for the foreseeable future.

      The Company has implemented various initiatives to increase the volume of Legacy Marketing’s sales, including launching marketing programs designed to strengthen relationships with existing producers and attract new producers. In addition, Legacy Marketing released several new products and product enhancements at a sales convention in July 2000 that are expected to diversify Legacy Marketing’s product

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portfolio, enhance market share, and increase sales. Further, the Company entered into Marketing and Administrative Agreements with John Hancock Life Insurance Company in January 2001 to provide services similar to those performed for the other Carriers. These initiatives, combined with favorable market conditions leading to improved performance of bond investments underlying key products' crediting rates, have resulted in increased sales during the first quarter of 2001. Management expects such increases to continue throughout 2001. However, there can be no assurance that the increased sales volume will continue.

      Under the Marketing Agreement with American National, the Company is obligated to repay to American National an annual amount equal to 0.1% of specified premium levels to the extent that such premiums are below the minimum production requirement of $500,000,000 during each twelve month period ended September 30th (the “Premium Deficiency”). Prior to December 31, 1999, the Company recorded revenue throughout the twelve month period net of 0.1% of the projected annual Premium Deficiency. Effective January 1, 2000, the Company adopted SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. As a result, the Company changed its revenue recognition policy to recognize commission revenue net of 0.1% of the Premium Deficiency assuming no additional premiums will be sold under the American National Marketing Agreement. The effect of adopting SAB 101 is reflected in the accompanying Statements of Operations as a cumulative effect of accounting change of $225,638, net of taxes of $149,362, during the year ended December 31, 2000. The change in accounting principle would not have a material effect on the Statements of Operations in 1999 or 1998 if adopted in these periods.

      Expenses — Total Legacy Marketing expenses increased approximately $6.5 million, or 19.0%, during 2000 compared to 1999, and increased approximately $6.6 million, or 23.9%, during 1999 compared to 1998. The increase in 2000 from 1999 is primarily due to increases in compensation, professional fees, occupancy, and depreciation and amortization, partially offset by decreases in certain sales promotion programs tied to premium levels, which declined during 2000. The increase in 1999 from 1998 is primarily due to increases in compensation, sales promotion and support, and occupancy, partially offset by lower professional fees. These fluctuations are discussed below.

      As a service organization, Legacy Marketing’s primary expenses are salaries and related employee benefits. These expenses increased approximately $3.0 million, or 14.3%, in 2000 from 1999, and increased $3.8 million, or 22.3%, in 1999 from 1998. These increases resulted primarily from regular annual pay increases and from increases in the average number of employees, who are needed to support initiatives designed to increase sales. In addition, during the third quarter of 2000, the Company hired several employees at higher salary levels, including one executive officer. Such increases in senior personnel are considered necessary to support the strategic planning of the Company. Accordingly, salaries and benefits expense is expected to increase in 2001.

      Professional fees increased approximately $2.9 million, or 194.3%, in 2000 from 1999 and decreased approximately $576,000, or 27.8%, in 1999 from 1998. The increase in 2000 compared to 1999 is primarily due to consulting fees related to various information systems enhancement projects and to the engagement of independent contractors in lieu of long-term employee hires made necessary by the tight local job market. The decrease in 1999 compared to 1998 is primarily due 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 primarily due to increased consulting fees related to various information systems enhancement projects.

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      Occupancy expenses consist primarily of office building and equipment leasing costs. These expenses increased approximately $1.0 million, or 59.2%, in 2000 from 1999, and increased approximately $1.1 million, or 164.9%, in 1999 from 1998 primarily due to the leasing of new office space and to overall increases in telephone, utilities, and other related expenses that correspond with increases in employment, as discussed above.

      Depreciation and amortization expense increased approximately $1.0 million, or 297.7%, in 2000 from 1999 and increased approximately $237,000, or 235.4%, in 1999 from 1998. The increases are primarily related to the amortization of internal use software and to acquisitions of fixed assets, which were necessary to improve newly leased office space. Also, in 2000 the Company decreased from five years to three years the estimated useful lives over which certain computer hardware and software are depreciated resulting in increased depreciation expense.

      Sales promotion and support expense consists primarily of costs related to Legacy Marketing’s annual sales incentive conventions, various sales and training events, and incentives paid to Producers to stimulate sales. Also included in sales and promotion support expense is the cost of designing and printing sales brochures for use by Producers. This expense decreased approximately $1.5 million, or 23.1%, in 2000 from 1999 but increased approximately $1.2 million, or 22.2%, in 1999 from 1998. The decrease in 2000 compared to 1999 is primarily due to decreased commissions paid to Producers and reduced stock awards granted to Wholesalers related to lower sales of fixed annuities, as discussed above. The increase in 1999 compared to 1998 is primarily due 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. Despite the decrease of sales promotion and support expenses in 2000, it is expected that these costs will continue to be a major element of Legacy Marketing’s cost structure, as attendance at the sales incentive conventions increases, as the number of Producers marketing products for Legacy Marketing increases, and as new products are introduced.

      Equipment expenses increased approximately $183,000, or 28.7%, in 2000 from 1999, and increased approximately $309,000, or 94.1%, in 1999 from 1998 primarily due to increases in leased office space and increases in employment, both of which are discussed above.

Analysis of Legacy Financial Services, Inc.

      Results of Operations — Legacy Financial’s net income increased approximately $131,000, or 48.8%, in 2000 from 1999, and increased approximately $178,000, or 196.3%, in 1999 compared to 1998. These increases are primarily due to increases in revenue, partially offset by increases in expenses, as discussed below.

      Revenue — Legacy Financial’s major source of revenue is commission income, which is generated through sales of variable life and annuity products, mutual funds, and debt and equity securities. Levels of commission income are directly related to the volume of sales of such products. Total Legacy Financial revenue increased approximately $1.1 million, or 62.5%, in 2000 from 1999, and increased approximately $873,000, or 106.3%, in 1999 from 1998. These increases are attributable to increases in

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the volume of sales by Legacy Financial’s distribution network of registered representatives.

      Expenses — Total Legacy Financial expenses increased approximately $942,000, or 63.4%, in 2000 from 1999 and increased approximately $624,000, or 72.4%, in 1999 from 1998 primarily due to increases in salaries and benefits, sales promotion and support, and occupancy expenses, which are discussed below.

      As a service organization, Legacy Financial’s operating expenses consist primarily of salaries and related employee benefits. These expenses increased approximately $461,000, or 47.0%, in 2000 from 1999, and increased approximately $316,000, or 47.5%, in 1999 from 1998, primarily due to increases in the average number of employees, necessary to accommodate increases in sales volume, and to regular annual pay increases.

      Sales promotion and support expenses increased approximately $323,000, or 126.0%, in 2000 from 1999, and increased approximately $200,000, or 352.5%, in 1999 from 1998, primarily due to increased expenses incurred to stimulate sales and to greater attendance at the annual sales convention.

      Occupancy expenses consist primarily of office building and equipment leasing costs. These expenses increased approximately $69,000, or 190.4%, in 2000 from 1999, and increased approximately $32,000, or 708.7%, in 1999 from 1998 primarily due to overall increases in telephone, utilities, and other related expenses that correspond with increases in employment and sales volume.

Analysis of LifeSurance Corporation

      Results of Operations — LifeSurance Corporation recorded net losses of approximately $942,000 in 2000 compared to net losses of approximately $863,000 in 1999. The increase in net losses is primarily due to increased expenses, partially offset by increased revenues, as discussed below.

      In February 2001, the Company announced a plan to discontinue the majority of operations of LifeSurance Corporation. Factors leading to this decision included: (i) consistent losses since inception; (ii) declining attendance at seminars; and (iii) anticipated future declines in attendance and increases in costs.

      Revenue – LifeSurance Corporation’s primary source of revenue is fees paid by Producers for attendance at estate planning seminars. In 2000, total revenue increased by approximately $281,000, or 138.4%, primarily due to overall increased seminar attendance. However, in the second half of 2000, seminar attendance significantly declined. This decrease in attendance is attributed to the fact that Producers began obtaining continuing education credits more easily either by attending local seminars or by utilizing Internet-based alternatives.

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      Expenses — LifeSurance Corporation’s expenses primarily consist of salaries and related benefits, sales promotion and support costs, and occupancy expenses. In 2000, total operating expenses increased by approximately $172,000, or 10.7%, which is attributable to sales promotion and support costs, increasing in 2000 compared to 1999 by approximately $55,000, or 12.3%, and occupancy expenses, increasing by approximately $123,000, or 121.4%. The increase in sales promotion and support costs is primarily related to overall increased seminar attendance during the first half of the year, as discussed above. The increase in occupancy expenses is primarily due to costs associated with increases in leased office space. Sales promotion and support costs, and occupancy expenses are expected to decrease in 2001 due to discontinuance of the majority of LifeSurance Corporation's operations, as discussed above.

      As a result of the discontinuance of the majority of LifeSurance Corporation's operations, which was announced in February 2001, certain employees were terminated and others were transferred to Legacy Marketing. The Company plans to sublease LifeSurance Corporation’s office space and relocate the remaining Des Moines office employees.

      In 1998, Producer seminar expenses were recorded in Legacy Marketing’s results and it would have been impractical to present them separately for comparative purposes in this analysis.

Analysis of Regan Holding Corp. (stand-alone)

      Results of Operations — Regan Holding Corp. recorded net losses of approximately $1.4 million in 2000 compared to net losses of approximately $4.5 million and approximately $2.1 million in 1999 and 1998, respectively. The decreased losses in 2000 compared to 1999 are primarily due to a gain of approximately $3.6 million recognized upon the sale of an office building, as well as increases in revenue and decreases in expenses, which are discussed below. The increased losses in 1999 compared to 1998 are primarily due to increased expenses, as discussed below.

      Revenue – Revenue increased to approximately $551,000 in 2000 from approximately $13,000 in 1999 due to rental revenue from unaffiliated tenants of an office building that was purchased in mid-1999. The Company sold the building in December 2000. As a result, no rental income is anticipated in future periods.

      Expenses — Regan Holding Corp.’s expenses decreased approximately $1.1 million, or 17.1%, in 2000 from 1999, and increased approximately $3.7 million, or 153.0%, in 1999 from 1998. The decrease in 2000 expenses is primarily due to a decrease in the number of non-employee stock options granted during 2000, compared to 1999. In 2001, grants to the highest performing Wholesalers are still expected to occur which will result in additional expense in the first quarter. The increase in 1999 expenses compared to 1998 is primarily due to: (i) $2.9 million in stock option expenses related to stock options that were granted to Legacy Marketing Producers during 1999 and 1998; (ii) awards of the Company’s common stock to Wholesalers, which resulted in recognition of approximately $420,000 in related expenses during 1999; and (iii)

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increases in legal and consulting fees related to various Company strategic planning projects.

      In December 2000, the Company sold the office building and two parcels of land, as discussed above, and recorded a pre-tax gain of approximately $3.6 million. Because the Company expects to meet the criteria of Section 1031 of the Internal Revenue Code, payment of income taxes on the gain realized on the sale of the property will be deferred.

Analysis of Imagent Online, LLC

      Results of Operations — Imagent was formed in 2000 and recorded a net loss of approximately $580,000, primarily due to equity investment losses related to its investment in a start-up company, as discussed above. Such losses by the start-up company are expected to continue for the foreseeable future.

Analysis of Other Segments

      Results of Operations — Other segments consist of Legacy Advisory Services, Inc., Legacy Reinsurance Company, and Values Financial Network, Inc. in 2000. In 1999 and 1998, Other segments included Legacy Advisory Services, Inc. and Legacy Reinsurance Company. Combined net losses from these entities increased to approximately $266,000 in 2000, compared to approximately $17,000 in 1999 and approximately $3,000 in 1998. The increased losses in 2000 from 1999 are primarily due to such losses incurred by Values Financial Network, Inc. Such losses are expected to continue through the first half of 2001.

Liquidity and Capital Resources

      The Company’s principal needs for cash are: (i) funding operating expenses, which consist primarily of salaries and benefits and sales promotion support costs; (ii) purchases of fixed assets, primarily computer hardware and software, to accommodate new employees and support anticipated growth in operations; (iii) funding continued product development and strategic acquisitions; and (iv) as a reserve to cover possible redemptions of certain shares of the Company’s common stock, which are redeemable at the option of shareholders under various agreements with the Company.

      Cash and short-term investment-grade securities represented 28.7% of the Company’s total consolidated assets at December 31, 2000, compared with 47.1% at December 31, 1999. This decrease is primarily due to a decrease in combined cash and short-term investment balances of approximately $9.7 million at December 31, 2000, compared to December 31, 1999, which is attributable to: (i) purchases of fixed assets of approximately $5.6 million related to capitalization of salaries and benefits paid to develop internal use software and purchases to upgrade computer hardware and software; (ii) cash of approximately $2.4 million paid to acquire the assets of Values Financial Network, Inc; (iii) Imagent’s investment in and loan to an insurance-related start-up company for approximately $1.5 million; and (iv) repurchases of the Company’s common stock for approximately $1.0 million. These decreases in cash and investment were partially offset by cash provided by operating activities of approximately $248,000.

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      At December 31, 1999, the Company’s investment portfolio included $12.0 million in equity securities of an affiliate of an insurance carrier with which Legacy Marketing contracts. In the first quarter of 2000, the carrier affiliate repurchased the equity securities from the Company for approximately $12.5 million, pursuant to the terms of the agreement under which the securities were purchased.

      During the first quarter of 2000, the Company repaid an existing margin loan in the amount of $3.1 million. In the last quarter of 2000, the Company obtained approximately $2.5 million in advances under the margin loan, primarily to fund the acquisition of assets of Values Financial Network, as described above. These advances were repaid in first quarter of 2001.

      During December 2000, the Company sold land and a building in Petaluma, California, for $8.4 million and recognized a pre-tax gain of approximately $3.6 million. However, in order to comply with the provisions of Section 1031 of the Internal Revenue Code that will allow the Company to defer payment of income tax on the gain, the $5.8 million proceeds from the property sale will remain in trust with a qualified intermediary. Proceeds from the sale will be applied during the second quarter toward the purchase of the building which houses the Company’s headquarters in Petaluma. For the new building, the Company will pay approximately $10.6 million in accordance with a purchase option in the existing lease agreement. The Company plans to obtain financing for the difference between the purchase price and the sale proceeds.

      Management expects to outlay cash of approximately $500,000 per month related to operations and development of Values Financial Network, Inc. until an obligation under a consulting services contract is satisfied in mid-2001. Thereafter, cash outflows will decrease to approximately $300,000 per month and will gradually diminish through 2001 as revenues increase. Management expects positive cash flows from operations as early as fourth quarter 2001. However, until projected revenue is achieved, cash outflows related to Values Financial Network, Inc. could continue at mid-2001 levels.

      The Company, through Imagent, has committed to loan up to $400,000 in additional advances to the start-up company discussed above. No further advances to the start-up are expected to occur.

      During the third quarter of 2001, the Company expects to receive federal and state income tax refunds of approximately $3.7 million, resulting from applied overpayments and 2000 net operating loss carrybacks.

      The Company is obligated to repurchase certain shares of its common stock pursuant to contractual agreements under which the shares were issued. At December 31, 2000 and December 31, 1999, the total redemption value of all redeemable common stock outstanding was approximately $11.2 million and $11.6 million, respectively. Cash paid pursuant to redemption requests from shareholders totaled approximately $821,000 during 2000, and approximately $425,000 during 1999. These securities are excluded from shareholders’ equity and are recorded at the greater of issuance price or redemption value. As the value of our common stock rises, our obligation for the redeemable common stock also increases, and could result in negative equity.

      In 1998, the Company entered into a Shareholder’s Agreement with Lynda L. Regan, Chief Executive Officer and Chairman of the Board of Directors. Under the terms of this agreement, in the event of the death of Ms. Regan, the Company is obligated to 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, which totaled approximately $26.8 million at December 31, 2000. The Company has purchased two life insurance policies with a combined face amount of $29.0 million for the purpose of funding this obligation in the event of Ms. Regan’s death.

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      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.

      Generally, the Company’s cash needs are met through cash provided by operating activities, which decreased approximately $7.3 million in 2000, compared to 1999. This decrease is primarily attributable to decreases in Legacy Marketing’s sales volume during 2000. As discussed above, Legacy Marketing's sales increased in the first quarter of 2001 are are expected to continue to increase through 2001. However, if sales decline or if increases in sales are not sufficient to offset increased expenses, operating activities could generate negative cash flows. In addition, the Company is obligated to repurchase certain shares of its common stock pursuant to various contracts under which the shares were issued. If the Company’s net losses continue, or if requests for repurchase of redeemable common stock increase significantly, a cash shortfall could occur. Management believes that existing cash and investment balances, together with anticipated 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.

Item 7a. 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 interest rates by expected maturity dates for fixed income investments held at December 31, 2000 and 1999. Actual cash flows could differ from expected amounts.

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																											Amortized				Estimated
December 31, 1999			2000		2001				2002				2003				2004				Thereafter				Cost					Fair Value
Fixed maturities		$	12,000,000			$	—			$	—			$	499,251			$	250,000			$	4,602,143			$	17,351,394			$	17,093,404
Average interest rate			5.18%				—				—				5.23%				5.25%				6.53%

      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, 2000 and 1999. 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 our investment broker is used to analyze individual securities, as well as the entire portfolio.

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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 operations, 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.

      As discussed Note 1, in 2000, the Company changed its method of recognizing revenue for contracts with sales obligation provisions. Additionally, in 1999, the Company changed its method of accounting for the cost of computer software developed or obtained for internal use.

PricewaterhouseCoopers LLP

San Francisco, California

March 26, 2001

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REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations

See accompanying notes to consolidated financial statements.

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REGAN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statement of Shareholders’ Equity