10-Q

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 1999,

OR

[   ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                to               

Commission File Number 0-4366

Regan Holding Corp.

(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)	68-0211359 (I.R.S. Employer Identification No.)
2090 Marina Avenue, Petaluma, California (Address of principal executive offices)	94954 (Zip Code)

(707) 778-8638

(Registrant’s telephone number, including area code)

     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 the number of shares outstanding of the registrant’s common stock, as of October 31, 1999:

Common Stock — Series A	25,755,088
Common Stock — Series B	598,416

TABLE OF CONTENTS

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION
Item  1.	Financial Statements
		Unaudited Consolidated Balance Sheets — September 30, 1999 and December 31, 1998	3
		Unaudited Consolidated Income Statements — Three and Nine Months Ended September 30, 1999 and 1998	4
		Unaudited Consolidated Statement of Shareholders’ Equity	5
		Unaudited Consolidated Statement of Cash Flows — Nine Months Ended September 30, 1999 and 1998	6
		Notes to Consolidated Financial Statements	7
Item  2.	Management’s Discussion and Analysis of Results of Operations and Financial Conditions		11
Item  3.	Quantitative and Qualitative Disclosure About Market Risk		14
PART II. OTHER INFORMATION
Item  6.	Exhibits and Reports on Form 8-K		16

2

PART I.

FINANCIAL INFORMATION

Item  1. Financial Statements

REGAN HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

				September 30, 1999			December 31, 1998
Assets
	Cash and cash equivalents			$	2,172,979		$	5,916,731
	Investments				20,537,119			16,987,628
	Accounts receivable				2,184,708			1,704,265
	Prepaid expenses				1,014,678			768,913
	Income taxes receivable				1,676,243			884,089
	Deferred income taxes – current				744,024			359,421
	Marketing supplies inventory				714,906			385,616
			Total Current Assets		29,044,657			27,006,663
	Fixed assets — net				10,838,740			2,982,267
	Deferred income taxes – non current				2,414,801			904,974
	Software licensing fees				764,064			—
	Other assets				1,287,097			392,109
			Total Non-Current Assets		15,304,702			4,279,350
			Total Assets	$	44,349,359		$	31,286,013
Liabilities, Redeemable Common Stock, and Shareholders’ Equity
Liabilities
	Accounts payable			$	374,978		$	418,821
	Accrued sales convention costs				1,826,005			894,713
	Accrued liabilities				3,628,899			4,388,401
	Software licensing fees payable				492,500			—
	Margin loan payable				1,683,548			—
			Total Current Liabilities		8,005,930			5,701,935
	Loans payable				2,259,589			132,285
	Incentive compensation payable				498,880			530,523
	Deferred compensation payable				903,253			—
			Total Non-Current Liabilities		3,661,722			662,808
			Total Liabilities		11,667,652			6,364,743
Commitments and Contingencies					—			—
Redeemable Common Stock, Series A and B					10,864,710			11,225,431
Shareholders’ Equity
	Preferred stock, no par value:
		Authorized: 100,000,000 shares
		No shares issued or outstanding			—			—
	Series A common stock, no par value:
		Authorized: 45,000,000 shares Issued and outstanding: 20,809,070 and 20,530,224 shares at September 30, 1999 and December 31, 1998, respectively			3,602,609			3,248,874
	Paid-in capital from retirement of common stock				871,540			888,109
	Paid-in capital from producer stock options				2,892,000			25,000
	Retained earnings				14,966,315			9,587,775
	Accumulated other comprehensive income – net				(515,467	)		(53,919	)
			Total Shareholders’ Equity		21,816,997			13,695,839
			Total Liabilities, Redeemable Common Stock and Shareholders’ Equity	$	44,349,359		$	31,286,013

See accompanying notes to consolidated financial statements

3

REGAN HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Unaudited)

			For the Three Months Ended				For the Nine Months Ended
			September 30,				September 30,
			1999		1998		1999		1998
Revenue:
	Marketing allowances		$	5,369,512	$	7,619,535	$	21,446,302	$	19,299,171
	Commissions			3,421,286		3,586,450		12,220,510		9,180,142
	Administrative fees			2,041,769		1,798,173		6,674,185		4,872,523
	Other operating revenue			174,926		37,567		462,246		194,805
		Total Revenue		11,007,493		13,041,725		40,803,243		33,546,641
Expenses:
	Salaries and related benefits			5,439,391		4,777,738		16,890,272		12,501,208
	Sales promotion and support			1,706,676		2,008,943		5,522,917		3,963,870
	Producer stock options			845,000		6,250		2,867,000		18,750
	Litigation settlement (Note 3)			—		—		—		1,104,404
	Professional fees			645,895		332,168		1,474,687		906,570
	Occupancy			515,791		334,254		1,283,934		805,744
	Depreciation and amortization			326,451		295,422		1,135,628		724,422
	Stationery and supplies			338,968		232,491		693,249		560,691
	Courier and postage			245,576		202,118		770,910		515,246
	Travel and entertainment			260,466		204,122		511,297		447,504
	Equipment			330,145		176,769		769,537		432,154
	Insurance			104,070		38,850		313,554		123,491
	Other expenses			214,635		33,119		339,622		133,199
		Total Expenses		10,973,064		8,642,244		32,572,607		22,237,253
Operating Income				34,429		4,399,481		8,230,636		11,309,388
Other Income
	Investment income — net			316,459		332,228		868,921		833,332
Income Before Income Tax				350,888		4,731,709		9,099,557		12,142,720
Provision For Income Taxes				88,113		1,864,576		3,721,017		4,850,528
Net Income			$	262,775	$	2,867,133	$	5,378,540	$	7,292,192
Earnings Per Share:
	Weighted average shares — basic			26,375,095		26,600,241		26,403,061		26,703,920
	Basic earnings per share		$	.01	$	.11	$	.20	$	.27
	Weighted average shares — diluted			27,724,135		27,263,913		27,759,434		27,090,580
	Diluted earnings per share		$	.01	$	.11	$	.19	$	.27

See accompanying notes to consolidated financial statements.

4

REGAN HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

									Paid-in Capital
			Series A Common Stock						from			Paid-in Capital
									Retirement of			from
			Shares			Amount			Common Stock			Producer Options
Balance January 1, 1999				20,530,224		$	3,248,874		$	888,109		$	25,000
Comprehensive Income:
	Net income for the nine months ended September 30, 1999
	Unrealized losses on investments
	Realized losses on sales of investments
	Deferred tax on net unrealized losses
		Total Comprehensive Income
Redemption and retirement of common stock				(69,788	)		(81,455	)		(16,569	)
Stock awarded to producers				330,634			419,905
Exercise of stock options				18,000			15,285
Producer stock option expense													2,867,000
Balance September 30, 1999				20,809,070		$	3,602,609		$	871,540		$	2,892,000

[Additional columns below]

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

					Accumulated
					Other
			Retained		Comprehensive
			Earnings		Income			Total
Balance January 1, 1999			$	9,587,775	$	(53,919	)	$	13,695,839
Comprehensive Income:
	Net income for the nine months ended September 30, 1999			5,378,540					5,378,540
	Unrealized losses on investments					(855,582	)		(855,582	)
	Realized losses on sales of investments					89,628			89,628
	Deferred tax on net unrealized losses					304,406			304,406
		Total Comprehensive Income							4,916,992
Redemption and retirement of common stock									(98,024	)
Stock awarded to producers									419,905
Exercise of stock options									15,285
Producer stock option expense									2,867,000
Balance September 30, 1999			$	14,966,315	$	(515,467	)	$	21,816,997

See accompanying notes to consolidated financial statements.

5

REGAN HOLDING CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

					For the Nine Months Ended
					September 30,
					1999			1998
Cash flows from operating activities:
	Net income				$	5,378,540		$	7,292,192
	Adjustments to reconcile net income to cash provided by operating activities:
		Depreciation and amortization of fixed assets				1,081,636			671,665
		Amortization of intangible assets				53,992			52,757
		Common stock awarded to producers				419,905			—
		Producer stock option expense				2,867,000			18,750
		Amortization/accretion of investments				(13,561	)		(46,765	)
		Realized losses (gains) on sales of investments				89,628			(14,463	)
		Changes in assets and liabilities:
			Net change in accounts receivable			(480,443	)		(660,476	)
			Net change in prepaid expenses			(245,765	)		(25,472	)
			Net change in income taxes receivable			(792,154	)		461,373
			Net change in deferred income taxes			(1,590,024	)		(342,182	)
			Net change in marketing supplies inventory			(329,290	)		(171,075	)
			Net change in software licensing fees			(271,564	)		—
			Net change in accounts payable			(43,843	)		42,782
			Net change in accrued sales convention costs			931,292			955,810
			Net change in accrued liabilities			(759,502	)		3,221,252
			Net change in other assets and liabilities			572,630			265,551
				Net cash provided by operating activities		6,868,477			11,721,699
Cash flows from investing activities:
	Purchases of investments					(13,045,133	)		(10,049,466	)
	Proceeds from sales and maturities of investments					8,653,621			2,802,196
	Purchases of fixed assets					(8,938,109	)		(1,300,432	)
	Payments for organization costs					—			(17,806	)
				Net cash used in investing activities		(13,329,621	)		(8,565,508	)
Cash flows from financing activities:
	Proceeds from notes payable					4,132,500			—
	Repayments of notes payable					(321,648	)		—
	Payment for building loan reserve					(650,000	)		—
	Payments for redemption and retirement of common stock					(458,745	)		(266,537	)
	Proceeds from stock option exercises					15,285			—
				Net cash provided by (used in) financing activities		2,717,392			(266,537	)
Increase (decrease) in cash and cash equivalents						(3,743,752	)		2,889,654
Cash and cash equivalents, beginning of period						5,916,731			5,194,332
Cash and cash equivalents, end of period					$	2,172,979		$	8,083,986

See accompanying notes to consolidated financial statements.

6

REGAN HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Financial Information

      The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principles and include the accounts of Regan Holding Corp. (the “Company”) and its wholly-owned subsidiaries, Legacy Marketing Group (“LMG”), Legacy Financial Services, Inc., Legacy Advisory Services, Inc., Legacy Reinsurance Company, and LifeSurance Corporation. All intercompany transactions have been eliminated.

      The statements are unaudited but reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations. The consolidated balance sheet data at December 31, 1998 was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the entire year. Users of these financial statements are encouraged to refer to the Annual Report on Form 10-K for the year ended December 31, 1998 for additional disclosure.

2.  Building Purchase and Loan

      On May 7, 1999, the Company purchased for $4.3 million the building in Petaluma, California, in which the Company’s headquarters were formerly located. In conjunction with the building acquisition, the Company paid $2.2 million of the purchase price in cash and entered into a loan payable for the remaining $2.1 million. The loan has a ten year term and is payable in monthly installments plus one balloon payment of approximately $1.8 million, due on May 10, 2009. The loan bears interest at 0.5% per annum above the Prime Rate, as published in the West Coast Edition of the Wall Street Journal. The loan is fully guaranteed by each of the Company’s subsidiaries. In addition, the loan agreement contains certain covenants with which the Company must comply, including restrictions on indebtedness or investments outside the ordinary course of business and restrictions on dividends or other changes in the Company’s capital structure. One of the covenants requires management to obtain lender approval prior to repurchasing non-redeemable common stock. The Lender has waived this covenant through September 30, 2000, provided that such voluntary repurchases do not exceed $125,000 per quarter. Pursuant to the loan agreement, the Company was also required to place approximately $650,000 in reserve to cover loan payments in the event of default and to provide for certain repair costs. Such reserved amounts are classified as Other Assets in the accompanying consolidated financial statements.

      Aggregate principal payments for the five years subsequent to September 30, 1999 are as follows:

Year	Principal
Three months ended December 31, 1999	$	6,450
Year ended December 31, 2000	$	27,166
Year ended December 31, 2001	$	29,509
Year ended December 31, 2002	$	32,053
Year ended December 31, 2003	$	34,817
Thereafter	$	1,997,309

7

REGAN HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.  Internal Use Software

      In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). SOP 98-1 provides guidance on determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. During the three months ended September 30, 1999, the Company capitalized $697,930 in salaries and $343,640 in consulting fees in accordance with SOP 98-1. Such amounts are reflected as Fixed Assets in the accompanying consolidated financial statements and are being amortized on a straight-line basis over the estimated useful lives of each software project.

4.  Software Licensing Fees

      In March 1999, LMG entered into a license agreement with a software vendor (the “Agreement”), pursuant to which LMG has the non-exclusive right to use certain computer software programs in administering policies on behalf of the carriers with whom the Company contracts. For this right, LMG incurred an initial licensing fee of $800,000, of which $200,000 was paid in April 1999 and $107,500 was paid in September 1999. The balance is due in March 2000. In addition, LMG agreed to pay licensing charges of $8,333 per month, increasing each year to $22,667 per month during the eighth year, plus cost of living adjustments each year. The term of the Agreement extends through March 2007, but may be terminated by LMG with six months written notice after March 2004. The $800,000 initial licensing fee has been recorded as Software Licensing Fees, net of amortization. The unpaid portion of the initial licensing fee payable, equal to $492,500, has been recorded as Software Licensing Fees Payable. The monthly licensing fees are being expensed as incurred.

5.  Margin Loan Payable

      During the third quarter of 1999, the Company obtained a margin loan in the amount of $2,000,000 from its investment broker. The margin loan is payable upon demand, but is expected to be repaid with dividends and interest earned on the underlying investments. The loan bears interest at  1/2% above the Call Rate, as published in the Wall Street Journal and is collateralized by the Company’s investment portfolio. As of September 30, 1999, $1,683,548 remained payable under this arrangement.

6.  Deferred Compensation Payable

      During 1999, $758,752 in commissions were deferred by producers under the Regan Holding Corp. Producer Commission Deferral Plan and $114,710 in compensation was deferred by key employees under the Regan Holding Corp. Key Employee Deferred Compensation Plan. Such amounts have been recorded as a liability in the accompanying consolidated financial statements, plus Company matching contributions of $36,902 and net of accumulated losses of $7,111.

8

REGAN HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.  Redeemable Common Stock

      The Company is obligated to repurchase certain of its shares of common stock pursuant to various agreements under which the common stock was issued. During the nine months ended September 30, 1999, redeemable common stock was redeemed and retired as follows:

	Series A Redeemable						Series B Redeemable						Total Redeemable
	Common Stock						Common Stock						Common Stock
				Carrying						Carrying						Carrying
	Shares			Amount			Shares			Amount			Shares			Amount
Balance January 1, 1999		5,171,447		$	9,428,047			599,128		$	1,797,384			5,770,575		$	11,225,431
Redemption and retirement of common stock		(212,429	)		(358,585	)		(712	)		(2,136	)		(213,141	)		(360,721	)
Balance September 30, 1999		4,959,018		$	9,069,462			598,416		$	1,795,248			5,557,434		$	10,864,710

8.  Stock Option Expense

      During the second quarter of 1999, the Company recorded $2,022,000 of expense related to stock options that were granted to independent insurance producers in 1998 and 1999. During the third quarter of 1999, this expense was increased by $845,000 for changes in estimates related to the Company’s estimated fair value of the options. These charges were a result of the Company’s decision to waive the options’ vesting provisions, thereby converting the options from “variable” options to “fixed” options pursuant to guidance prescribed in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as interpreted by Emerging Issues Task Force Issue 96-18. These charges reflect a re-measurement of the options based upon management’s best estimate of the fair value of the options at the date the vesting provisions were waived. The fair value of the options was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rates ranging from 5.29% to 6.02%, expected volatility ranging from 27.71% to 39.51%; and expected lives ranging from 1 to 5 years. A dividend yield assumption was not applicable, as the Company’s stock is not publicly traded nor does the Company pay dividends.

9.  Amendments to Marketing and Insurance Processing Agreements

      In October 1999, LMG and American National amended the terms of the Marketing Agreement and the Insurance Processing Agreement to extend the terms to January 31, 2000. In addition, the Insurance Processing Agreement was amended with respect to various policy administration matters. LMG and American National are in the process of negotiating a five year extension for both agreements.

9

REGAN HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10.  Segment Information

      The table below presents information about the Company’s operating segments:

		Legacy		Legacy
		Marketing		Financial
		Group		Services, Inc.			Other			Total
Nine months ended September 30, 1999:
	Total revenue	$	39,413,147	$	1,170,701		$	219,395		$	40,803,243
	Total expenses		25,140,286		1,071,868			6,360,453			32,572,607
	Operating income (loss)		14,272,861		98,833			(6,141,058	)		8,230,636
	Other income		868,921		—			—			868,921
	Income (loss) before tax		15,141,782		98,833			(6,141,058	)		9,099,557
	Tax provision (benefit)		5,634,834		(58,855	)		(1,854,962	)		3,721,017
	Net income (loss)	$	9,506,948	$	157,688		$	(4,286,096	)	$	5,378,540
Nine months ended September 30, 1998:
	Total revenue	$	32,951,440	$	595,919		$	(718	)	$	33,546,641
	Total expenses		20,082,505		616,814			1,537,934			22,237,253
	Operating income (loss)		12,868,935		(20,895	)		(1,538,652	)		11,309,388
	Other income		833,332		—			—			833,332
	Income (loss) before tax		13,702,267		(20,895	)		(1,538,652	)		12,142,720
	Tax provision (benefit)		5,068,652		(94,268	)		(123,856	)		4,850,528
	Net income (loss)	$	8,633,615	$	73,373		$	(1,414,796	)	$	7,292,192
Total Assets:
	September 30, 1999	$	25,490,782	$	1,290,377		$	17,568,200		$	44,349,359
	December 30, 1998	$	21,777,580	$	823,714		$	8,684,719		$	31,286,013

      “Other” segments above include Regan Holding Corp. (stand-alone) and its remaining subsidiaries, Legacy Advisory Services, Inc., Legacy Reinsurance Company and LifeSurance Corporation. Such entities’ operations do not currently factor significantly into management decision making and, accordingly, were not separated for purposes of this disclosure.

11.  Reclassifications

      Certain amounts in the 1998 consolidated financial statements have been reclassified to conform with 1999 classifications. Such reclassifications had no impact on net income or retained earnings.

12.  Concentration of Risk

      At September 30, 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 27.1% of the Company’s total assets.

10

Item  2. 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-Q 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.

Results of Operations

  Summary

      The Company’s net income for the quarter ended September 30, 1999 decreased approximately $2.6 million, or 90.8%, from the corresponding quarter in 1998 and decreased approximately $1.9 million, or 26.2%, during the nine months ended September 30, 1999, compared with the corresponding period in 1998. The decrease between the three month periods is due primarily to decreases in revenue and increases in expenses, as discussed below. The decrease between nine month periods is due primarily to increases in expenses net of increases in revenue, as discussed below.

  Revenue

      The Company’s major sources of operating revenue are marketing allowances, commission overrides and administrative fees from sales and administration of annuity and life insurance products on behalf of American National Insurance Company (“American National”), IL Annuity and Insurance Company (“IL Annuity”), and Transamerica Life Insurance and Annuity Company (“Transamerica”), each of which is an unaffiliated insurance company (collectively referred to herein as the “Carriers”). Levels of marketing allowances and commission overrides are directly related to, and increase with, the volume of sales of such products. Administrative fees are a function not only of product sales, but also administration of policies inforce and producer appointments. Total operating revenue decreased $2.0 million, or 15.6%, during the three months ended September 30, 1999, compared to the three months ended September 30, 1998. For the nine months ended September 30, 1999, total operating revenue increased $7.3 million, or 21.6%, over the corresponding nine month period in 1998.

      Marketing allowances and commission revenue, combined, decreased approximately $2.4 million, or 21.6%, in the third quarter of 1999, compared to the third quarter of 1998. Such allowances and commissions increased approximately $5.2 million, or 18.2%, for the nine months ended September 30, 1999, compared with the nine months ended September 30, 1998. These fluctuations are due primarily to changes in the volume of sales by the Company’s distribution network on behalf of the Carriers. Premium placed inforce for the Carriers totaled approximately $338.9 million and $1.4 billion during the three months and nine months ended September 30, 1999, respectively, compared to $484.7 million and $1.2 billion during the same periods in 1998, representing a 30.1% decrease for the third quarter and a 12.3% increase for the nine months ended September 30, 1999. Also contributing to the increase in operating revenue during the first nine months of 1999, and offsetting the decrease between quarters, was a shift in sales mix to sales of products which yield higher marketing allowances and commission income.

      Although premium placed inforce, and the resulting Company’s revenues, increased between the nine month periods, third quarter premium and revenue decreased significantly from prior quarters. Preliminary marketing statistics indicate that the decreased sales levels will likely continue through the fourth quarter of 1999. This trend is attributable to higher interest rates negatively affecting bond values which resulted in lower sales of annuity products that are indexed to bond performance.

11

Management believes that this downward trend is temporary. However, there can be no assurance as to when or if this trend will reverse.

      Approximately 15.3% of the Company’s operating revenue during the three months ended September 30, 1999 and 29.4% during the nine months ended September 30, 1999 was generated by LMG through sales of the VisionMark Annuity on behalf of IL Annuity. The current reinsurer of this product has informed LMG that it will not reinsure this product beyond December 31, 1999. Management is currently working to replace the VisionMark product with the VisionMark II annuity, which will be reinsured by another carrier and which has been approved for sale in several states. However, approximately 13.6% of the Company’s revenue during the three months ended September 30, 1999 and 14.1% during the nine months ended September 30, 1999 was generated by sales of the original VisionMark in Texas and Washington where the VisionMark II is not yet approved for sale. Management believes that the VisionMark II will be approved in Texas and Washington before December 31, 1999 or that reinsurance of the original VisionMark will be extended until state approval is obtained. However, if neither of these events occur, the Company’s revenue could be adversely affected beginning the first quarter of 2000.

      Administrative fees increased approximately $244,000, or 13.5%, in the third quarter of 1999, compared to the same period in 1998. For the nine months ended September 30, 1999, administrative fees increased approximately $1.8 million, or 37.0%, over the corresponding period in 1998. The increase between quarters is attributable to increases in maintenance fees, which is related to increases in the cummulative number of policies administered. This increase is offset by decreases in issuance fees, resulting from a decrease in the number of policies sold. The increase between nine month periods is due primarily to increases in the number of policies sold and administered during the period.

      During the three months ended September 30, 1999, 11.3%, 71.2%, 10.9% of the Company’s total revenue resulted from agreements with American National, IL Annuity, and Transamerica, respectively, compared to 9.6%, 86.2%, and 1.0% from American National, IL Annuity, and Transamerica, respectively, during the three months ended September 30, 1998. During the nine months ended September 30, 1999, 10.1%, 76.4%, 9.3% of the Company’s total revenue resulted from agreements with American National, IL Annuity, and Transamerica, respectively, compared with 13.4%, 83.3%, and 0.3% from American National, IL Annuity, and Transamerica, respectively, during the nine months ended September 30, 1998. Sales and administration of Transamerica products began during the third quarter of 1998.

  Expenses

      Total expenses increased approximately $2.3 million, or 27.0%, during the three months ended September 30, 1999, compared to the three months ended September 30, 1998, and $10.3 million, or 46.5%, during the nine months ended September 30, 1999, compared to the corresponding nine months of 1998. These increases are attributable primarily to increases in compensation, sales promotion and support and stock option expense, as discussed below.

      As a service organization, the Company’s primary expenses are salaries and related employee benefits, which increased approximately $662,000, or 13.8%, during the three months ended September 30, 1999, compared to the same period in 1998, and approximately $4.4 million, or 35.1%, in the first nine months of 1999 compared to the same period in 1998. These increases resulted primarily from increases in the average number of full-time equivalent employees, which rose to 465 during the quarter ended September 30, 1999, compared with 324 during the quarter ended September 30, 1998, a 43.5% increase, and rose to 422 during the nine months ended September 30, 1999, compared with 278 during the nine months ended September 30, 1998, a 51.8% increase. Such increases in employment were primarily in operations at lower pay levels. Therefore, salaries and

12

employee benefits did not increase as significantly as the increase in the number of employees. The increases in employment were necessary to accommodate actual and anticipated increases in sales volume. Also offsetting the increase between quarters was the capitalization of approximately $698,000 of salaries related to software development, in accordance with The American Institute of Certified Public Accountants Statement of Position 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use.”

      Sales promotion and support expense consists primarily of costs related to the Company’s annual national sales conventions, incentives paid to the Company’s higher-level producers for recruitment and development of additional producers, and costs relating to various sales meetings and training activities. Also included in sales promotion and support expense is the cost of designing and printing sales brochures for use by producers. It is expected that these expenses will continue to be a major element of the Company’s cost structure, as attendance at the national sales conventions increases, as the number of producers marketing products for the Company increases, and as new products are introduced. This expense decreased approximately $302,000, or 15.1%, for the quarter ended September 30, 1999, compared with the quarter ended September 30, 1998, and increased approximately $1.6 million, or 39.3%, in the first nine months of 1999, compared to the same period in 1998. These fluctuations are due primarily to timing of awards of the Company’s common stock to producers who recruited and developed other producers who reached certain sales milestones and payments of additional commissions to producers, both of which correspond with fluctuations in sales volume.

      During the second quarter of 1999, the Company recorded $2,022,000 of stock option expense related to stock options that were granted to independent insurance Producers in 1998 and 1999. During the third quarter of 1999, this expense was increased by $845,000 for changes in estimate related to the Company’s estimated fair value of the options. These charges were a result of the Company’s decision to waive the options’ vesting provisions, thereby converting the options from “variable” options to “fixed” options pursuant to guidance prescribed in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as interpreted by Emerging Issues Task Force Issue 96-18. Management anticipates granting a significant number of options to producers in late 1999 or early 2000. The exact number of options to be granted will be based on individual producer sales levels. As a result, additional option expense will be recorded at the grant date in accordance with SFAS No. 123.

      In 1998, in order to avoid protracted future litigation, the Company’s principal subsidiary, LMG, together with American National, entered into an agreement to settle a lawsuit filed in Jefferson County, Alabama. LMG’s net cost of the settlement, approximately $1.1 million, was recorded as an expense during the second quarter of 1998. No such settlement occurred during 1999.

      Professional fees increased approximately $314,000, or 94.4%, during the three months ended September 30, 1999, compared with the corresponding period in 1998, and approximately $568,000, or 62.7%, for the nine months ended September 30, 1999, compared with the corresponding period in 1998. These increases are primarily the result of consulting fees related to various information systems and marketing projects and legal fees related to filing new products in various states.

      Occupancy expense increased approximately $182,000, or 54.3%, during the third quarter of 1999 compared to the third quarter of 1998, and $478,000, or 59.3%, for the nine month period ended September 30, 1999, due primarily to maintenance costs related to additional leased space in Petaluma, California, and Rome, Georgia.

13

Liquidity and Capital Resources

      Included in investments at September 30, 1999 is a $12.0 million investment in Indianapolis Life Group of Companies (“Indianapolis Group”), an affiliate of IL Annuity. Management expects that this investment will be returned to LMG during late 1999 pursuant to the terms of the Investment and Funding Agreement between LMG, Indianapolis Group and other parties. If, however, certain events which trigger the return of the investment do not occur, these funds could be invested in Indianapolis Group for up to eight years at a yield to equal that earned by the Indianapolis Group on this investment portfolio.

      On May 7, 1999, the Company and its subsidiaries purchased for $4.3 million the building in Petaluma, California, in which the Company’s headquarters were previously located. In conjunction with the building acquisition, the Company paid $2.2 million of the purchase price in cash and entered into a loan payable for the remaining $2.1 million. The loan has a ten year term and is payable in monthly installments plus one balloon payment of approximately $1.8 million, due on May 10, 2009. The loan bears interest at 0.5% per annum above the Prime Rate, as published in the West Coast Edition of the Wall Street Journal. Pursuant to the loan agreement, the Company was required to place approximately $650,000 in reserve to cover loan payments in the event of default and to provide for certain repair costs.

      Management believes that cash and investments on hand, plus cash generated by ongoing operating activities, are adequate to meet the Company’s needs for cash, both on a long-term and a short-term basis.

Year 2000

      As the year 2000 approaches, a critical business issue has emerged regarding how existing application software and operating systems can accommodate this date value. In brief, many existing application software products in the marketplace were designed to only accommodate a two digit date position which represents the year (e.g., ‘95 is stored in the system and represents the year 1995). As a result, the year 1999 (i.e., ‘99) could be the maximum date value these systems will be able to accurately process. Management has developed and fully implemented a plan to insure that the Company will be year 2000 compliant. This plan consisted of the following four stages: (i) conducting an inventory of all hardware, software and support systems; (ii) assessing whether such hardware, software and support systems are year 2000 compliant; (iii) correcting or replacing any non-compliant hardware, software and support systems; and (iv) testing to ensure that all corrections or replacements made pursuant to the third phase of the plan are functioning properly. The four stages of the Company’s year 2000 plan have been completed for mission-critical systems. Management is of the opinion that there are no significant barriers to being able to conduct normal business operations during the transition to year 2000 and beyond.

      The Company is also working closely with significant customers and vendors to ensure that their systems will be fully year 2000 compliant. However, there can be no assurance that potential interruptions due to year 2000 would not have a material adverse effect on the Company’s business, financial condition, results of operations and business prospects.

Item  3. Quantitative and Qualitative Disclosure About Market Risk

      The Company invests its cash in a variety of financial instruments, including government agency notes, corporate equity securities and fixed income corporate obligations. These investments are denominated in U. S. dollars.

      Interest income on the Company’s investments is reflected in “Investment Income” in the Company’s consolidated financial statements. The Company accounts for its investment instruments

14

in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). All of the cash equivalents and short-term investments are treated as available-for-sale under SFAS 115.

      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 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 are cash flows from principal amounts and related weighted average interest rates by expected maturity dates for fixed income investments held at September 30, 1999 and December 31, 1998. No maturities are expected in the year 2000. Actual cash flows could differ from expected amounts.

																	Total
																			Estimated
																	Amortized		Market
		1999			2001			2002			2003			Thereafter			Cost		Value
September 30, 1999:
	Fixed maturities	$	12,000,000		$	—		$	—		$	499,204			$4,855,948		$	17,355,152	$	17,983,787
	Average interest rate		5.00	%		—			—			5.32	%		6.53	%
December 31, 1998:
	Fixed maturities	$	—		$	501,654		$	1,004,337		$	996,676			$7,411,305		$	9,913,972	$	10,449,800
	Average interest rate		—			6.67	%		6.81	%		3.30	%		4.04	%
	Mortgage-backed securities		—			—			—			—			$1,524,500		$	1,524,500	$	1,523,415
	Average interest rate		—			—			—			—			5.67	%

      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 are high quality and readily marketable. The original cost and fair values of the Company’s marketable equity securities are shown below:

	Original Cost		Fair Value
September 30, 1999	$	3,124,932	$	2,553,332
December 31, 1998	$	5,139,732	$	5,014,413

      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.

15

PART II. OTHER INFORMATION

Item  6. Exhibits and Reports on Form 8-K

      (a)  Index to Exhibits

Exhibit 10.1	Amendment Ten to the Marketing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated October 1, 1999.
Exhibit  10.2	Amendment Nine to the Insurance Processing Agreement by and between Legacy Marketing Group and American National Insurance Company, dated October 1, 1999.
Exhibit  11.1	Computation of Earnings Per Share-Basic
Exhibit  11.2	Computation of Earnings Per Share-Diluted
Exhibit 27	Financial Data Schedule

      (b)  Reports on Form 8-K.

      No reports on Form 8-K were filed during the third quarter of 1999.

16

SIGNATURES

       Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:  November 12, 1999

REGAN HOLDING CORP.

/s/ R. PRESTON PITTS
_________________________________________
R. Preston Pitts

President & Chief Operating Officer

/s/ DAVID A. SKUP
_________________________________________
David A. Skup,

Chief Financial Officer

17 EX-10.1 2 AMENDMENT TEN TO MARKETING AGREEMENT 1 EXHIBIT 10.1 AMENDMENT TEN TO MARKETING AGREEMENT This document is Amendment Ten to the Marketing Agreement ("Agreement) made and entered into effective June 1, 1993, and amended by Amendment One to Marketing Agreement dated September 16, 1993; Amendment Two to Marketing Agreement dated June 4, 1998; Amendment Three to Marketing Agreement dated September 25, 1998; Amendment Four to Marketing Agreement dated October 19, 1998; and Amendment Five to Marketing Agreement dated December 15, 1998; Amendment Six to Marketing Agreement dated March 25, 1999, and Amendment Seven to Marketing Agreement dated May 10, 1999, Amendment Eight to Marketing Agreement dated June 24, 1999, (the "Agreement"), and Amendment Nine to Marketing Agreement dated August 5, 1999, by and between American National Insurance Company ("American National") a Texas corporation, and Legacy Marketing Group ("LMG"), a California corporation. In consideration of mutual covenants contained herein, the parties agree as follows: 1. Section 3.1 of the Agreement is hereby deleted in its entirety and the following new Section 3.1 shall be substituted therefore: "3.1 Subject to termination as hereinafter provided, this Agreement shall remain in force and effect until the close of business on January 31, 2000, the term of this Agreement. This Agreement may be renewed by mutual agreement for successive terms of one (1) year unless terminated by either party by prior written notice to the other at least one hundred eighty (180) days prior to the end of the initial term or the renewal term." 2. Except as specifically amended hereby, all terms and provisions of the Marketing Agreement shall remain in full force and effect. LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE COMPANY By: /s/ Gregory C Egger By: /s/ Debra Knowles ----------------------- -------------------------- Title: Chief Marketing Officer Title: Assistant Vice President ----------------------- -------------------------- Witness: /s/ Stephanie Molteni Witness: /s/ Gretchen M. Childress ----------------------- -------------------------- Date: October 1, 1999 Date: October 1, 1999 ----------------------- -------------------------- Page 15 of 23 EX-10.2 3 AMENDMENT NINE TO INSURANCE PROCESSING AGREEMENT 1 EXHIBIT 10.2 AMENDMENT NINE TO INSURANCE PROCESSING AGREEMENT This document is Amendment Nine to the Insurance Processing Agreement ("Agreement") made and entered into effective June 1, 1993, and amended by Amendment One to Insurance Processing Agreement dated June 4, 1998; Amendment Two to Insurance Processing Agreement dated September 25, 1998; Amendment Three to Insurance Processing Agreement dated October 19, 1998; Amendment Four to Insurance Processing Agreement dated December 15, 1998, Amendment Five to Insurance Processing Agreement dated March 25, 1999, and Amendment Six to Insurance Processing Agreement dated May 10, 1999, Amendment Seven to the Insurance Processing Agreement dated June 24, 1999, and Amendment Eight to the Insurance Processing Agreement dated August 5, 1999 (the "Agreement"), by and between American National Insurance Company ("American National") a Texas corporation, and Legacy Insurance Processing Group ("LMG"), a California corporation. In consideration of mutual covenants contained herein, the parties agree as follows: 1. Section 6.1 of the Agreement is hereby deleted in its entirety and the following new Section 6.1 shall be substituted therefore: "Subject to termination as hereinafter provided, this Agreement shall remain in force and effect until the close of business on January 31, 2000, the term of this Agreement. This Agreement may be renewed by mutual agreement for additional successive terms of one (1) year unless terminated by either party by prior written notice to the other at least one hundred eighty (180) days prior to the end of the initial term or the renewal term." 2. "Section 5" of the Agreement is hereby deleted in its entirety and the following new Section 5 shall be substituted therefore: "This Agreement shall be retained as part of the official record of both LMG and American National for the duration of the agreement and for seven (7) years after the termination of this Agreement." "LMG will maintain complete books and records of all transactions between LMG, American National, and the contract owners. LMG will preserve detailed and adequate books and records of all administered transactions among LMG, American National and contract owners, sufficient to permit the insurer to fulfill all of its contractual obligations to contract owners. These books and records shall be maintained in accordance with prudent standards generally accepted in business insurance record keeping. The documentation will contain all pertinent documents in sufficient detail to maintain complete dates, events, and persons participating in those insurance events. The books and records shall be maintained throughout the agreement and for a minimum period of ten (10) years after the completion of the entire transaction to which they respectively relate." "American National shall own the records generated by LMG pertaining to American National; however, LMG shall retain the right to continuing access to records to permit LMG to fulfill all of its contractual obligations. All such records are proprietary information of American National. American National shall have continuing right to access and copy all accounts and records maintained by LMG related to American National's business. Any appropriately authorized governmental agency shall have access to all books, bank accounts, and records of LMG and American National for the purpose of examination, inspection, and audit. All information contained in the aforementioned books and records, including the identity and addresses of policyholders shall be kept confidential, except that such information may be used in proceedings instituted against LMG, or otherwise required to be disclosed by proper federal, state or regulatory agencies or by court order." Page 16 of 23 2 "American National shall have on-line access to the American National policy information maintained by LMG's policy administration system and on-line access to its accounting system. LMG will provide policyholder information on request by American National within a time period mutually agreeable and appropriate with the request." "In the event that LMG and American National cancel this Agreement, LMG may, by written agreement with American National, transfer all records to a successor administrator or to American National rather than retain them for the aforementioned period. If LMG transfers the records to a successor administrator or to American National, LMG is no longer responsible for retaining such records. Any successor third party administrator shall acknowledge in writing to LMG that it is responsible for retaining the records for which LMG had previously been responsible." 3. Add "Section 8.13," as follows: "It is the sole responsibility of American National to provide for competent administration of its programs." 4. Add "Section 8.14," as follows: "American National shall be responsible for determining the benefits, premium rates, underwriting criteria, and claims payment procedures applicable to such coverage and for securing reinsurance, if any." 5. Add "Section 8.15," as follows: "American National shall have the sole responsibility for filing advertising materials in those states that so require prior to approving their use by LMG. All costs associated with such filings will be the responsibility of American National." 6. Add "Section 8.16," as follows: "American National shall, at least semiannually, conduct a review of operations of LMG. At least one such review will be an on-site audit of the operations of LMG. American National shall forward an agenda for such audit at least five (5) days in advance of the scheduled audit." 7. Add "Section 8.17," as follows: "LMG shall handle all correspondence of a routine nature and other general functions necessary for satisfactory administration of the insurance and shall maintain files relative thereto. Specific services are outlined in APPENDIX C. Subject to American National's right to approve the resolution thereof, LMG shall handle all insurance department complaints and inquiries and policy owner and beneficiary complaints, whether written or oral, and all attorney letters containing complaints and any other complaints related to the policies administered hereunder. LMG will notify American National of complaints from regulatory agencies within twenty-four (24) hours of receipt thereof. Details of such complaints will be forwarded to American National within five (5) business days. However, American National will respond to summons and complaints commencing legal actions on its own behalf." 8. Add "Section 8.18," as follows: "LMG will provide written notice, approved in writing by American National, to policyholders advising them of the identity of American National and LMG, and the relationship between LMG, the policyholder, and American National." Page 17 of 23 3 9. Add "Section 8.19," as follows: "When a policy is issued to a trustee or trustees, a copy of the trust agreement and any amendment thereto, shall be furnished to American National by LMG and shall be retained as part of the official records of both LMG and American National for the duration of the policy and for six (6) years thereafter." 10. Add "Section 8.20," as follows: "LMG will only use advertising pertaining to the business underwritten by American National that American National has approved in writing in advance of its use. If so required, American National shall obtain the prior approval of the appropriate Department of Insurance before approving advertising for use by LMG." 11. Add "Section 8.21," as follows: "LMG will possess and maintain an adequate fidelity and/or surety bond as so required in the states in which it is compelled to do so. LMG will file such bond, if so required, with the appropriate agency. The bond shall be executed by a corporate insurer authorized to transact business in the states which mandate the maintenance of such bond." 12. Add "Section 8.22," as follows: "LMG will possess and maintain at all times errors and omissions coverage or other appropriate liability insurance, written by an insurer authorized to transact business in the states which mandate the maintenance of such insurance. Such coverage will comply with the requirements of the states in which such insurance coverage is required." 13. Add "Section 8.23," as follows: "Payment to LMG of any premiums or charges for insurance by or on behalf of the insured party shall be deemed to have been received by American National, and the payment of return premiums or claim payments forwarded by American National to LMG shall not be deemed to have been paid to the insured party or claimant until such payments are received by the insured party or claimant." 14. Add "Section 8.24," as follows: "Currently, LMG does not perform underwriting for American National; however, if granted such authority, LMG will comply with all underwriting standards established by American National and adhere to all pertinent provisions contained in applicable Third Party Administrator statues. American National shall be responsible for the underwriting or other standards pertaining to the business underwritten by American National." 15. Add "Section 8.25," as follows: "Any policies, certificates, booklets, termination notices, or other written communications delivered by American National to LMG for delivery to insured parties or covered individuals shall be delivered by LMG within ten (10) days after receipt of instructions from American National to deliver them. Costs associated with the distribution of items not normally distributed will be reviewed on a case by case basis to determine the responsible party and will be mutually agreed upon by American National and LMG." Page 18 of 23 4 16. Add "Section 8.26," as follows: "All insurance charges or premiums collected by LMG on behalf of American National, and return premiums received from American National, shall be held by LMG in a fiduciary capacity and will not be used as general operating funds of LMG. Such funds shall, within two (2) business days, be remitted to the person or persons entitled to them or shall be deposited, within two (2) business days, into a Premium Fiduciary Account established and maintained by American National in a federally or state insured financial institution, separate and apart from any funds belonging to LMG or third parties. American National agrees that any such funds collected by LMG will be included in determining the amount of premium tax for which it may be responsible." 17. Add "Section 8.27," as follows: "This Premium Fiduciary Account will at all times have a balance equal to contributions plus any interest earned less authorized disbursements by American National. If LMG is authorized to draw checks on the Premium Fiduciary Account this will clearly be indicated on their face. LMG may retain float with prior written agreement of American National." 18. Add "Section 8.28," as follows: "LMG may not pay any claim by withdrawals from the aforementioned Premium Fiduciary Account. Withdrawals from the Premium Fiduciary Account shall be made as provided in this written agreement between LMG and American National for any of the following: a) Remittance to American National, if so entitled to such remittance; b) Deposit in an account maintained in the name of American National; c) Transfer to and deposit in a claims-paying account, with claims to be paid as provided by American National." 19. Add "Section 8.29," as follows: "LMG is not authorized to adjust, settle or pay claims on behalf of American National. In the event that American National grants LMG such authority, LMG will pay such claims from funds collected on behalf of American National and shall be paid only on drafts of, and as authorized by, American National. In the event that LMG received monies to pay claims on behalf of American National, such funds will be held in a fiduciary capacity. No deposits will be made into or disbursements made from this fiduciary account except for claims and claim adjustment expenses. This fiduciary account will at all times have a balance equal to the amount deposited less claims and claims adjustment expenses paid." 20. Add "Section 8.30," as follows: "This Administrative Agreement shall not provide for compensation, commissions, fees, or charges which are contingent upon savings effected in the adjustment, settlement, and payment of losses (the loss ratio) covered by American National's obligations. In the event that American National grants LMG the authority to adjust or settle claims on its behalf, such compensation shall in no way be contingent on claims experience." 21. Add "Section 8.31," as follows: "This provision does not prevent the compensation of LMG from being based on premiums or charges collected or the number of claims paid or processed or performance-based compensation for providing auditing services. LMG will not receive any administrative compensation except as expressly set forth in this Agreement between LMG and American National." Page 19 of 23 5 Except as specifically amended hereby, all terms and provisions of the Insurance Processing Agreement shall remain in full force and effect. LEGACY MARKETING GROUP AMERICAN NATIONAL INSURANCE COMPANY By: /s/ Gregory C Egger By: /s/ Debra Knowles -------------------------- ---------------------------- Title: Chief Marketing Officer Title: Assistant Vice President -------------------------- ---------------------------- Witness: /s/ Stephanie Molteni Witness: /s/ Gretchen M. Childress -------------------------- ---------------------------- Date: October 1, 1999 Date: October 1, 1999 -------------------------- ---------------------------- Page 20 of 23 EX-11.1 4 COMPUTATION OF EARNING PER SHARE-BASIC 1 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) BASIC EARNINGS PER SHARE

Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average shares outstanding--basic 26,375,095 26,600,241 26,403,061 26,703,920 =========== =========== =========== =========== Net income $ 262,775 $ 2,867,133 $ 5,378,540 $ 7,292,192 =========== =========== =========== =========== Basic net income per share $ 0.01 $ 0.11 $ 0.20 $ 0.27 =========== =========== =========== ===========

EX-11.2 5 COMPUTATION OF EARNINGS PER SHARE-DILUTED 1 EXHIBIT 11 (CONTINUED) COMPUTATION OF EARNINGS PER SHARE UNAUDITED DILUTED EARNINGS PER SHARE

Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average shares outstanding--basic 26,375,095 26,600,241 26,403,061 26,703,920 Plus incremental shares from assumed conversions 1,349,040 663,672 1,356,373 386,660 ----------- ----------- ----------- ----------- Number of shares for computation of diluted net income per share 27,724,135 27,263,913 27,759,434 27,090,580 =========== =========== =========== =========== Net income $ 262,775 $ 2,867,133 $ 5,378,540 $ 7,292,192 =========== =========== =========== =========== Diluted net income per share $ 0.01 $ 0.11 $ 0.19 $ 0.27 =========== =========== =========== ===========

EX-27 6 FINANCIAL DATA SCHEDULE

<ARTICLE> 5

<LEGEND> This schedule contains summary financial information extracted from the unaudited consolidated financial statements contained in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1999, and is qualified in its entirety by reference to such financial statements.

<PERIOD-TYPE> 9-MOS <FISCAL-YEAR-END> DEC-31-1999 <PERIOD-START> JAN-01-1999 <PERIOD-END> SEP-30-1999 <CASH> $2,172,979 <SECURITIES> 20,537,119 <RECEIVABLES> 2,184,708 <ALLOWANCES> 0 <INVENTORY> 714,906 <CURRENT-ASSETS> 29,044,657 <PP&E> 13,677,757 <DEPRECIATION> (2,839,017) <TOTAL-ASSETS> 44,349,359 <CURRENT-LIABILITIES> 8,005,930 <BONDS> 0 <PREFERRED-MANDATORY> 10,864,710 <PREFERRED> 0 <COMMON> 3,602,609 <OTHER-SE> 18,214,388 <TOTAL-LIABILITY-AND-EQUITY> 44,349,359 <SALES> 40,803,243 <TOTAL-REVENUES> 40,803,243 <CGS> 0 <TOTAL-COSTS> 32,572,607 <OTHER-EXPENSES> 0 <LOSS-PROVISION> 0 <INTEREST-EXPENSE> 0 <INCOME-PRETAX> 9,099,557 <INCOME-TAX> 3,721,017 <INCOME-CONTINUING> 5,378,540 <DISCONTINUED> 0 <EXTRAORDINARY> 0 <CHANGES> 0 <NET-INCOME> 5,378,540 <EPS-BASIC> .20 <EPS-DILUTED> .19

-----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

   1

                                  EXHIBIT 10.1

                      AMENDMENT TEN TO MARKETING AGREEMENT

This document is Amendment Ten to the Marketing Agreement ("Agreement) made and
entered into effective June 1, 1993, and amended by Amendment One to Marketing
Agreement dated September 16, 1993; Amendment Two to Marketing Agreement dated
June 4, 1998; Amendment Three to Marketing Agreement dated September 25, 1998;
Amendment Four to Marketing Agreement dated October 19, 1998; and Amendment Five
to Marketing Agreement dated December 15, 1998; Amendment Six to Marketing
Agreement dated March 25, 1999, and Amendment Seven to Marketing Agreement dated
May 10, 1999, Amendment Eight to Marketing Agreement dated June 24, 1999, (the
"Agreement"), and Amendment Nine to Marketing Agreement dated August 5, 1999, by
and between American National Insurance Company ("American National") a Texas
corporation, and Legacy Marketing Group ("LMG"), a California corporation.

In consideration of mutual covenants contained herein, the parties agree as
follows:

1.   Section 3.1 of the Agreement is hereby deleted in its entirety and the
     following new Section 3.1 shall be substituted therefore:

     "3.1 Subject to termination as hereinafter provided, this Agreement shall
     remain in force and effect until the close of business on January 31, 2000,
     the term of this Agreement. This Agreement may be renewed by mutual
     agreement for successive terms of one (1) year unless terminated by either
     party by prior written notice to the other at least one hundred eighty
     (180) days prior to the end of the initial term or the renewal term."

2.   Except as specifically amended hereby, all terms and provisions of the
     Marketing Agreement shall remain in full force and effect.


     LEGACY MARKETING GROUP               AMERICAN NATIONAL INSURANCE COMPANY

     By:        /s/ Gregory C Egger       By:         /s/ Debra Knowles
                -----------------------               --------------------------

     Title:     Chief Marketing Officer   Title:      Assistant Vice President
                -----------------------               --------------------------

     Witness:   /s/ Stephanie Molteni     Witness:    /s/ Gretchen M. Childress
                -----------------------               --------------------------

     Date:      October 1, 1999           Date:       October 1, 1999
                -----------------------               --------------------------



                                 Page 15 of 23

EX-10.2

   1


                                  EXHIBIT 10.2

                AMENDMENT NINE TO INSURANCE PROCESSING AGREEMENT

This document is Amendment Nine to the Insurance Processing Agreement
("Agreement") made and entered into effective June 1, 1993, and amended by
Amendment One to Insurance Processing Agreement dated June 4, 1998; Amendment
Two to Insurance Processing Agreement dated September 25, 1998; Amendment Three
to Insurance Processing Agreement dated October 19, 1998; Amendment Four to
Insurance Processing Agreement dated December 15, 1998, Amendment Five to
Insurance Processing Agreement dated March 25, 1999, and Amendment Six to
Insurance Processing Agreement dated May 10, 1999, Amendment Seven to the
Insurance Processing Agreement dated June 24, 1999, and Amendment Eight to the
Insurance Processing Agreement dated August 5, 1999 (the "Agreement"), by and
between American National Insurance Company ("American National") a Texas
corporation, and Legacy Insurance Processing Group ("LMG"), a California
corporation.

In consideration of mutual covenants contained herein, the parties agree as
follows:

1.   Section 6.1 of the Agreement is hereby deleted in its entirety and the
     following new Section 6.1 shall be substituted therefore:

     "Subject to termination as hereinafter provided, this Agreement shall
     remain in force and effect until the close of business on January 31, 2000,
     the term of this Agreement. This Agreement may be renewed by mutual
     agreement for additional successive terms of one (1) year unless terminated
     by either party by prior written notice to the other at least one hundred
     eighty (180) days prior to the end of the initial term or the renewal
     term."

2.   "Section 5" of the Agreement is hereby deleted in its entirety and the
     following new Section 5 shall be substituted therefore:

     "This Agreement shall be retained as part of the official record of both
     LMG and American National for the duration of the agreement and for seven
     (7) years after the termination of this Agreement."

     "LMG will maintain complete books and records of all transactions between
     LMG, American National, and the contract owners. LMG will preserve detailed
     and adequate books and records of all administered transactions among LMG,
     American National and contract owners, sufficient to permit the insurer to
     fulfill all of its contractual obligations to contract owners. These books
     and records shall be maintained in accordance with prudent standards
     generally accepted in business insurance record keeping. The documentation
     will contain all pertinent documents in sufficient detail to maintain
     complete dates, events, and persons participating in those insurance
     events. The books and records shall be maintained throughout the agreement
     and for a minimum period of ten (10) years after the completion of the
     entire transaction to which they respectively relate."

     "American National shall own the records generated by LMG pertaining to
     American National; however, LMG shall retain the right to continuing access
     to records to permit LMG to fulfill all of its contractual obligations. All
     such records are proprietary information of American National. American
     National shall have continuing right to access and copy all accounts and
     records maintained by LMG related to American National's business. Any
     appropriately authorized governmental agency shall have access to all
     books, bank accounts, and records of LMG and American National for the
     purpose of examination, inspection, and audit. All information contained in
     the aforementioned books and records, including the identity and addresses
     of policyholders shall be kept confidential, except that such information
     may be used in proceedings instituted against LMG, or otherwise required to
     be disclosed by proper federal, state or regulatory agencies or by court
     order."



                                 Page 16 of 23

   2

     "American National shall have on-line access to the American National
     policy information maintained by LMG's policy administration system and
     on-line access to its accounting system. LMG will provide policyholder
     information on request by American National within a time period mutually
     agreeable and appropriate with the request."

     "In the event that LMG and American National cancel this Agreement, LMG
     may, by written agreement with American National, transfer all records to a
     successor administrator or to American National rather than retain them for
     the aforementioned period. If LMG transfers the records to a successor
     administrator or to American National, LMG is no longer responsible for
     retaining such records. Any successor third party administrator shall
     acknowledge in writing to LMG that it is responsible for retaining the
     records for which LMG had previously been responsible."

3.   Add "Section 8.13," as follows:

     "It is the sole responsibility of American National to provide for
     competent administration of its programs."

4.   Add "Section 8.14," as follows:

     "American National shall be responsible for determining the benefits,
     premium rates, underwriting criteria, and claims payment procedures
     applicable to such coverage and for securing reinsurance, if any."

5.   Add "Section 8.15," as follows:

     "American National shall have the sole responsibility for filing
     advertising materials in those states that so require prior to approving
     their use by LMG. All costs associated with such filings will be the
     responsibility of American National."

6.   Add "Section 8.16," as follows:

     "American National shall, at least semiannually, conduct a review of
     operations of LMG. At least one such review will be an on-site audit of the
     operations of LMG. American National shall forward an agenda for such audit
     at least five (5) days in advance of the scheduled audit."

7.   Add "Section 8.17," as follows:

     "LMG shall handle all correspondence of a routine nature and other general
     functions necessary for satisfactory administration of the insurance and
     shall maintain files relative thereto. Specific services are outlined in
     APPENDIX C. Subject to American National's right to approve the resolution
     thereof, LMG shall handle all insurance department complaints and inquiries
     and policy owner and beneficiary complaints, whether written or oral, and
     all attorney letters containing complaints and any other complaints related
     to the policies administered hereunder. LMG will notify American National
     of complaints from regulatory agencies within twenty-four (24) hours of
     receipt thereof. Details of such complaints will be forwarded to American
     National within five (5) business days. However, American National will
     respond to summons and complaints commencing legal actions on its own
     behalf."

8.   Add "Section 8.18," as follows:

     "LMG will provide written notice, approved in writing by American National,
     to policyholders advising them of the identity of American National and
     LMG, and the relationship between LMG, the policyholder, and American
     National."

                                 Page 17 of 23
   3



9.   Add "Section 8.19," as follows:

     "When a policy is issued to a trustee or trustees, a copy of the trust
     agreement and any amendment thereto, shall be furnished to American
     National by LMG and shall be retained as part of the official records of
     both LMG and American National for the duration of the policy and for six
     (6) years thereafter."

10.  Add "Section 8.20," as follows:

     "LMG will only use advertising pertaining to the business underwritten by
     American National that American National has approved in writing in advance
     of its use. If so required, American National shall obtain the prior
     approval of the appropriate Department of Insurance before approving
     advertising for use by LMG."

11.  Add "Section 8.21," as follows:

     "LMG will possess and maintain an adequate fidelity and/or surety bond as
     so required in the states in which it is compelled to do so. LMG will file
     such bond, if so required, with the appropriate agency. The bond shall be
     executed by a corporate insurer authorized to transact business in the
     states which mandate the maintenance of such bond."

12.  Add "Section 8.22," as follows:

     "LMG will possess and maintain at all times errors and omissions coverage
     or other appropriate liability insurance, written by an insurer authorized
     to transact business in the states which mandate the maintenance of such
     insurance. Such coverage will comply with the requirements of the states in
     which such insurance coverage is required."

13.  Add "Section 8.23," as follows:

     "Payment to LMG of any premiums or charges for insurance by or on behalf of
     the insured party shall be deemed to have been received by American
     National, and the payment of return premiums or claim payments forwarded by
     American National to LMG shall not be deemed to have been paid to the
     insured party or claimant until such payments are received by the insured
     party or claimant."

14.  Add "Section 8.24," as follows:

     "Currently, LMG does not perform underwriting for American National;
     however, if granted such authority, LMG will comply with all underwriting
     standards established by American National and adhere to all pertinent
     provisions contained in applicable Third Party Administrator statues.
     American National shall be responsible for the underwriting or other
     standards pertaining to the business underwritten by American National."

15.  Add "Section 8.25," as follows:

     "Any policies, certificates, booklets, termination notices, or other
     written communications delivered by American National to LMG for delivery
     to insured parties or covered individuals shall be delivered by LMG within
     ten (10) days after receipt of instructions from American National to
     deliver them. Costs associated with the distribution of items not normally
     distributed will be reviewed on a case by case basis to determine the
     responsible party and will be mutually agreed upon by American National and
     LMG."

                                 Page 18 of 23
   4


16.  Add "Section 8.26," as follows:

     "All insurance charges or premiums collected by LMG on behalf of American
     National, and return premiums received from American National, shall be
     held by LMG in a fiduciary capacity and will not be used as general
     operating funds of LMG. Such funds shall, within two (2) business days, be
     remitted to the person or persons entitled to them or shall be deposited,
     within two (2) business days, into a Premium Fiduciary Account established
     and maintained by American National in a federally or state insured
     financial institution, separate and apart from any funds belonging to LMG
     or third parties. American National agrees that any such funds collected by
     LMG will be included in determining the amount of premium tax for which it
     may be responsible."

17.  Add "Section 8.27," as follows:

     "This Premium Fiduciary Account will at all times have a balance equal to
     contributions plus any interest earned less authorized disbursements by
     American National. If LMG is authorized to draw checks on the Premium
     Fiduciary Account this will clearly be indicated on their face. LMG may
     retain float with prior written agreement of American National."

18.  Add "Section 8.28," as follows:

     "LMG may not pay any claim by withdrawals from the aforementioned Premium
     Fiduciary Account. Withdrawals from the Premium Fiduciary Account shall be
     made as provided in this written agreement between LMG and American
     National for any of the following:

     a)   Remittance to American National, if so entitled to such remittance;

     b)   Deposit in an account maintained in the name of American National;

     c)   Transfer to and deposit in a claims-paying account, with claims to be
          paid as provided by American National."

19.  Add "Section 8.29," as follows:

     "LMG is not authorized to adjust, settle or pay claims on behalf of
     American National. In the event that American National grants LMG such
     authority, LMG will pay such claims from funds collected on behalf of
     American National and shall be paid only on drafts of, and as authorized
     by, American National. In the event that LMG received monies to pay claims
     on behalf of American National, such funds will be held in a fiduciary
     capacity. No deposits will be made into or disbursements made from this
     fiduciary account except for claims and claim adjustment expenses. This
     fiduciary account will at all times have a balance equal to the amount
     deposited less claims and claims adjustment expenses paid."

20.  Add "Section 8.30," as follows:

     "This Administrative Agreement shall not provide for compensation,
     commissions, fees, or charges which are contingent upon savings effected in
     the adjustment, settlement, and payment of losses (the loss ratio) covered
     by American National's obligations. In the event that American National
     grants LMG the authority to adjust or settle claims on its behalf, such
     compensation shall in no way be contingent on claims experience."

21.  Add "Section 8.31," as follows:

     "This provision does not prevent the compensation of LMG from being based
     on premiums or charges collected or the number of claims paid or processed
     or performance-based compensation for providing auditing services. LMG will
     not receive any administrative compensation except as expressly set forth
     in this Agreement between LMG and American National."

                                 Page 19 of 23
   5



Except as specifically amended hereby, all terms and provisions of the Insurance
Processing Agreement shall remain in full force and effect.

    LEGACY MARKETING GROUP                 AMERICAN NATIONAL INSURANCE COMPANY

    By:       /s/ Gregory C Egger          By:      /s/ Debra Knowles
              --------------------------            ----------------------------

    Title:    Chief Marketing Officer      Title:   Assistant Vice President
              --------------------------            ----------------------------

    Witness:  /s/ Stephanie Molteni        Witness: /s/ Gretchen M. Childress
              --------------------------            ----------------------------

    Date:     October 1, 1999              Date:    October 1, 1999
              --------------------------            ----------------------------

                                 Page 20 of 23

EX-11.1

   1
                                   EXHIBIT 11

                        COMPUTATION OF EARNINGS PER SHARE
                                   (UNAUDITED)

                            BASIC EARNINGS PER SHARE



                                                        Three Months Ended                  Nine Months Ended
                                                          September 30,                       September 30,
                                                     1999             1998              1999              1998
                                                     ----             ----              ----              ----
                                                                                           
Weighted average shares outstanding--basic        26,375,095        26,600,241        26,403,061        26,703,920
                                                 ===========       ===========       ===========       ===========

Net income                                       $   262,775       $ 2,867,133       $ 5,378,540       $ 7,292,192
                                                 ===========       ===========       ===========       ===========





Basic net income per share                       $      0.01       $      0.11       $      0.20       $      0.27
                                                 ===========       ===========       ===========       ===========

EX-11.2

   1



                             EXHIBIT 11 (CONTINUED)

                        COMPUTATION OF EARNINGS PER SHARE
                                    UNAUDITED

                           DILUTED EARNINGS PER SHARE



                                                            Three Months Ended                   Nine Months Ended
                                                               September 30,                        September 30,
                                                           1999              1998               1999              1998
                                                           ----              ----               ----              ----
                                                                                                 
Weighted average shares outstanding--basic              26,375,095        26,600,241        26,403,061        26,703,920

Plus incremental shares from assumed conversions         1,349,040           663,672         1,356,373           386,660
                                                       -----------       -----------       -----------       -----------

Number of shares for computation of diluted
      net income per share                              27,724,135        27,263,913        27,759,434        27,090,580
                                                       ===========       ===========       ===========       ===========

Net income                                             $   262,775       $ 2,867,133       $ 5,378,540       $ 7,292,192
                                                       ===========       ===========       ===========       ===========


Diluted net income per share                           $      0.01       $      0.11       $      0.19       $      0.27
                                                       ===========       ===========       ===========       ===========

EX-27

 

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements contained in the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1999, and is qualified
in its entirety by reference to such financial statements.


                             
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               SEP-30-1999
<CASH>                                      $2,172,979
<SECURITIES>                                20,537,119
<RECEIVABLES>                                2,184,708
<ALLOWANCES>                                         0
<INVENTORY>                                    714,906
<CURRENT-ASSETS>                            29,044,657
<PP&E>                                      13,677,757
<DEPRECIATION>                             (2,839,017)
<TOTAL-ASSETS>                              44,349,359
<CURRENT-LIABILITIES>                        8,005,930
<BONDS>                                              0
<PREFERRED-MANDATORY>                       10,864,710
<PREFERRED>                                          0
<COMMON>                                     3,602,609
<OTHER-SE>                                  18,214,388
<TOTAL-LIABILITY-AND-EQUITY>                44,349,359
<SALES>                                     40,803,243
<TOTAL-REVENUES>                            40,803,243
<CGS>                                                0
<TOTAL-COSTS>                               32,572,607
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                              9,099,557
<INCOME-TAX>                                 3,721,017
<INCOME-CONTINUING>                          5,378,540
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 5,378,540
<EPS-BASIC>                                        .20
<EPS-DILUTED>                                      .19