When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is placed inforce. Inforce premium and policies are statistics of our carriers but are factors that directly affect our revenue.
Legacy Marketing designs and markets fixed annuity products on behalf of certain unaffiliated insurance carriers in each of the United States, except Alabama and New York. As of December 31, 2008, Legacy Marketing had marketing agreements with American National, Investors Insurance, OM Financial (Americom), and Washington National. The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity products issued by these insurance carriers. Legacy Marketing is responsible for recruiting agents, who have contracted with Legacy Marketing to sell these products, and are appointed with the applicable insurance carrier. For these services, the insurance carriers pay Legacy Marketing commissions and marketing allowances.
On May 31, 2007, Regan Holding Corp. and two of its subsidiaries, Legacy Financial Services Inc. (“Legacy Financial”) and Legacy Advisory Services Inc., entered into an agreement with Multi-Financial Securities Corporation whereby Legacy Financial Services transferred its registered representatives and customer accounts to Multi-Financial Securities Corporation. Under the agreement, on September 28, 2007, Multi-Financial Securities Corporation paid Legacy Financial Services $1 million (11.5%) of the aggregate gross dealer concessions earned at Legacy Financial Services between May 1, 2006, and April 30, 2007, by those transferred representatives who were, as of the measurement date (as defined in the agreement), registered with Multi-Financial Securities Corporation and in good standing with the FINRA. In addition, on each of the first four anniversary dates of the measurement date, subject to certain conditions, Multi-Financial Securities Corporation is obligated to pay Legacy Financial Services an amount representing up to four and a half percent (4.5%) of each transferred representative’s aggregate gross dealer concessions earned with Multi-Financial Securities Corporation during the one year period prior to such anniversary date. As of December 31, 2008, Legacy Financial did not meet the specified terms in order to receive a second payment from Multi-Financial Securities Corporation and does not expect to receive any payments related to this agreement in the future.
The results of our operations are generally affected by the conditions that affect other companies that market fixed annuity and life insurance products. These conditions are increased competition, changes in the regulatory and legislative environments, and changes in general economic and investment conditions.
On December 18, 2008, the SEC adopted Rule 151A which will require certain fixed indexed annuity sales to be registered with the SEC by January 12, 2011. In addition, under the rule registered fixed indexed annuities will only be able to be sold by FINRA registered broker-dealers and representatives. As a result, fixed indexed annuity sales will be subject to regulation and oversight by both the SEC and FINRA. In response to the rule's adoption, a coalition of insurance companies and insurance marketing organizations have filed suit to block the implementation of the rule. In addition, on February 17, 2009 the NAIC and NCOIL (the association of state insurance regulators and a group representing state legislators) also filed a petition with the U.S. Court of Appeals for the D.C. Circuit that seeks to block implementation of the rule. Both suits dispute the SEC's authority to adopt Rule 151A. The industry groups argue the SEC rule violates the Securities Act of 1933 and prior Supreme Court precedents and that the SEC itself violated the Administrative Procedures Act. We cannot at this time predict whether implementation of Rule 151A will be enjoined. If Rule 151A becomes effective as adopted in 2011, the company could be adversely impacted as it would have to expand its distribution capabilities into broker dealers.
Also, in recent years, the U.S. insurance regulatory framework has come under scrutiny. Some state legislatures have considered laws that may alter or increase state regulation of insurance, reinsurance, and holding companies. Moreover, the National Association of Insurance Commissioners and state insurance regulators regularly re-examine existing laws and regulations, often focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws. Changes in these laws and regulations or their interpretation could have a material adverse effect on our financial condition and results of operations.
Legacy Financial, a discontinued operation, was registered as a broker-dealer with, and was subject to regulation by, the SEC, FINRA, the Municipal Securities Rulemaking Board, and various state agencies. This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel. Any proceeding alleging violation of, or noncompliance with, laws and regulations applicable to Legacy Financial could harm its business and financial condition, and our results of discontinued operations. As of September 29, 2008, Legacy Financial withdrew as a broker-dealer with FINRA.
There are no significant management judgments associated with reporting our revenues. When a policyholder remits a premium payment to that insurance carrier with an accurate and completed application for an insurance policy, the policy is considered inforce and Legacy Marketing recognizes marketing allowances and commission income. Legacy Marketing’s carriers grant policyholders a contractual right to terminate the insurance contract ten to thirty days after a policy is placed inforce. This return period varies depending on the carrier, the type of policy and the jurisdiction in which the policy is sold. Legacy Marketing gathers historical product return data that does not vary significantly from quarter to quarter, and has historically been predictive of future events. Returns are estimated using this data and have been reflected in the Consolidated Financial Statements.
The carrying values of the Company’s financial instruments, including cash equivalents, trading investments, accounts receivable, accounts payable, accrued liabilities and notes payable are based on their respective fair market values in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 157 and SFAS No.133. 1
The Company has adopted SFAS No. 123R (revised 2004), “Share-Based Payments,” which addresses the accounting for stock-based payment transactions whereby an entity receives employee services in exchange for equity instruments, including stock options. Under this method, the Company records stock-based compensation expense for all new stock options that are ultimately expected to vest as the requisite service is rendered. The Company issues new shares of common stock upon the exercise of stock options.
Year ended December 31, 2008 compared with year ended December 31, 2007
The remaining increase of $6.5 million in revenue was due to the gain on the sale of the Limited Partnership Class B shares in Legacy TM, LP.
Administrative fees decreased $2.1 million (28%) in 2007 compared to 2006 primarily due to the termination of administrative agreements with Washington National, American National, Investors Insurance, Americom and Transamerica effective October 17, 2007, as the result of an agreement with a subsidiary of Perot Systems, whereby we agreed to transfer our third party administration services function and the employees who provide these services to Perot Systems in exchange for Perot Systems assumption of such administrative service functions. As a result of this transaction, Legacy Marketing recognized a non-cash internal use software impairment charge of approximately $1.2 million in the fourth quarter of 2007.
Prospectdigital received $116,000 in consideration of the sale, which was greater than the estimated fair value of the assets of prospectdigital being sold, as determined by a third-party independent valuation. The amount of consideration was approved by the Board of Directors of Regan Holding Corp.
Our cash provided by or used in operating activities generally follows the trend in our revenue and operating results. Our cash provided by (used in) operating activities was $8.8 million, ($6.2 million), and ($4.5 million) in 2008, 2007 and 2006, respectively. Our cash provided by operating activities in 2008 was primarily the result of proceeds from and on the sale of trading securities and non-cash charges such as depreciation and amortization and capital losses, partially offset by our net loss and a decrease in the deferred compensation payable.
Our cash used in operating activities in 2007 was primarily the result of our net loss and a decrease in the accounts payable and accrued liabilities, partially offset by proceeds from the sale of trading securities and non-cash charges such as depreciation and amortization and losses on write-off of fixed assets.
Net cash used in investing activities of $2.3 million in 2006 consisted primarily of purchases of fixed assets.
In April 2004, we completed construction of our office building in Rome, Georgia, financing it with a $2.9 million note. The outstanding balance of the note as of December 31, 2007, was $2.6 million. On May 23, 2008, the Company sold its office building in Rome, Georgia to Freehold Capital Advisors Ltd. for $3.5 million for a gain of $214,000. Net proceeds from the sale of the building were used to repay the mortgage on the property, the outstanding balance of which was $2.6 million.
We lease office and warehouse premises and certain office equipment under non-cancelable operating and capital leases. As of December 31, 2008, our total contractual cash obligations, including the line of credit loan discussed above, were as follows:
Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Pitts, Chief Executive Officer of the Company and Chairman of our Board of Directors, upon the death of Mrs. Pitts, we would have the option (but not the obligation) to purchase from Mrs. Pitts’ estate all shares of common stock that were owned by Mrs. Pitts at the time of her death, or were transferred by her to one or more trusts prior to her death. In addition, upon the death of Mrs. Pitts, her heirs would have the option (but not the obligation) to sell their inherited shares to us. The purchase price to be paid by us shall be equal to 125% of the fair market value of the shares. As of December 31, 2008, we believe that 125% of the fair market value of the shares owned by Mrs. Pitts was equal to $562,000. We have purchased life insurance coverage for the purpose of funding this potential obligation upon Mrs. Pitts’ death.
$8.8 million of cash was provided by operations in 2008. We used $6.2 million and $4.5 million of cash in operations in 2007 and 2006. We also incurred consolidated net losses of$110,000, $9.1 million and $6.3 million in 2008, 2007, and 2006, respectively. If our consolidated net losses continue, a cash shortfall could occur. To address this issue, during 2007 and 2008, we lowered our cost structure by reducing our employee headcount, by repayment of debt, and by reducing the amount of office equipment leases. In March 2008, we repaid the Washington National loan using the proceeds from the sale of partnership interests in Legacy TM, LP. In May 2008, we sold our facility in Rome, Georgia and used a portion of the proceeds to repay the mortgage loan. In October 2008, we liquidated a portion of our investment portfolio to repay the margin loans obtained from our investment broker. All of these actions eliminated approximately $1.6 million of annual cash use for interest and principal payments in 2008.
In the event that a cash shortfall does occur, we believe that adequate financing could be obtained to meet our cash flow needs. However, there can be no assurances that such financing would be available on favorable terms.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for us beginning January 1, 2009. The Company expects this pronouncement to have a significant impact on future acquisitions.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Adoption of SFAS No. 160 is not expected to have a material effect on our results of operations and financial condition.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. The statement amends SFAS No. 133 to enhance the disclosure requirement of derivative and hedging activities by providing adequate information on how such activities impact an entity’s financial position, financial performance, and cash flow. This is intended to improve the transparency of financial reporting related to derivative and hedging activities. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Adoption of SFAS No. 161 is not expected to have a material effect on our results of operations and financial condition.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. The statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Adoption of SFAS No. 162 is not expected to have a material effect on our results of operations and financial condition.
In April 2008, the FASB Staff Position (FSP) issued FAS No. 142-3, Determination of the Useful Life of Intangible Assets to amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No 141, Business Combinations, and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years with early adoption prohibited. Adoption of FAS No. 142-3 is not expected to have a material effect on our results of operations and financial condition.
We have audited the accompanying consolidated balance sheets of Regan Holding Corp. and its subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in Item 15(a)(2) as of and for the years ended December 31, 2008 and 2007. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
As of December 31, 2008, Legacy Marketing had marketing agreements with American National Insurance Company (“American National”), Investors Insurance Corporation (“Investors Insurance”), OM Financial (Americom) Life Insurance Company (“OM Financial (Americom)”), and Washington National Insurance Company (“Washington National”) (collectively, the “carriers”). The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity products issued by the carriers (the “policies”). In addition, Legacy Marketing is responsible for recruiting independent insurance producers, who contract with Legacy Marketing to sell policies, and are appointed with the applicable carrier. For providing these services, the carriers pay Legacy Marketing commissions and marketing allowances.
Discontinued operations of the prior year financial statements presented were reclassified for comparative purposes to conform to current year discontinued operations.
$8.8 million of cash was provided by operations in 2008. We used $6.2 million and $4.5 million of cash in operations in 2007 and 2006, respectively. We also incurred consolidated net losses of $110,000, $9.1 million and $6.3 million in 2008, 2007, and 2006, respectively. If our consolidated net losses continue, a cash shortfall will occur. To address this issue, during 2007 and 2008, we lowered our cost structure by reducing our employee headcount, by repayment of debt, and by reducing the amount of office equipment leases. In March 2008, we repaid the Washington National loan using the proceeds from the sale of partnership interests in Legacy TM, LP. In May 2008, we sold our facility in Rome, Georgia and used a portion of the proceeds to repay the mortgage loan. In October 2008, we liquidated our investment portfolio to repay the margin loans obtained from our investment broker and leaving the remaining balance in a money fund. All of these actions eliminated approximately $1.6 million of annual cash used for interest and principal payments in 2008.
On October 17, 2007, Legacy Marketing entered into an agreement and strategic alliance with a subsidiary of Perot Systems, whereby Legacy Marketing agreed to transfer its third party administration services function and the employees who provide these services to Perot Systems in exchange for Perot Systems’ assumption of such administrative service functions.
Observable inputs - quoted prices in active markets for identical assets and liabilities;
As of December 31, 2008 trading securities valued at $641,000 and a deferred compensation liability valued at $5.3 million were valued using level 1 inputs.
As required by the Financial Industry Regulatory Authority (“FINRA”), the cash balances of Legacy Financial Services are set aside to satisfy customer claims, settlements and other financial exposures. As of September 29, 2008, Legacy Financial withdrew as a broker-dealer with FINRA and as of December 31, 2008, all the temporarily restricted cash had been expended on claim expenses and other financial exposures as required.
Depreciation is computed using the straight-line method over the estimated useful life of each type of asset, as follows:
The Company accounts for derivative financial instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). SFAS 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability. For derivatives designated as cash flow hedges, changes in fair value of the derivative are reported as other comprehensive income and are subsequently reclassified into earnings when the hedged transaction affects earnings. Changes in fair value of derivative instruments not considered hedging instruments and ineffective portions of hedges are recognized in earnings in the current period.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted of SFAS No. 159 as of January 1, 2008 and it did not have a material effect on our results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for us beginning January 1, 2009. The Company expects the adoption of SFAS 141R to have a material impact on future acquisitions.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Adoption of SFAS No. 160 is not expected to have a material effect on our results of operations and financial condition.
On May 31, 2007, Regan Holding and two of its subsidiaries, Legacy Financial and Legacy Advisory Services Inc., entered into an agreement with Multi-Financial Securities Corporation whereby Legacy Financial transferred its registered representatives and customer accounts to Multi-Financial Securities Corporation. Under the agreement, on September 28, 2007, Multi-Financial Securities Corporation paid Legacy Financial Services $1 million (11.5%) of the aggregate gross dealer concessions earned at Legacy Financial Services between May 1, 2006, and April 30, 2007, by those transferred representatives who were, as of the measurement date (as defined in the agreement), registered with Multi-Financial Securities Corporation and in good standing with the FINRA . In addition, on each of the first four anniversary dates of the measurement date, subject to certain conditions, Multi-Financial Securities Corporation is obligated to pay Legacy Financial Services an amount representing up to four and a half percent (4.5%) of each transferred representative’s aggregate gross dealer concessions earned with Multi-Financial Securities Corporation during the one year period prior to such anniversary date. As of December 31, 2008, Legacy Financial did not meet the specified terms in order to receive a second payment from Multi-Financial Securities Corporation and does not expect to receive any payments related to this agreement in the future.
The Company recognized a $1 million gain on the transfer of Legacy Financial’s registered representatives and customer accounts to Multi-Financial Securities Corporation in 2007, and as a result Legacy Financial had net income of $133,000 for the twelve months ended December 31, 2007. Legacy Financial incurred losses of $660,000 for the twelve months ended December 31, 2006. Legacy Financial’s results are being reported as discontinued operations. On the Company’s consolidated balance sheet, Legacy Financial’s assets consist of $294,000 in prepaid expenses as of December 31, 2008 and $282,000 in prepaid expenses and $98,000 in accounts receivable as of December 31, 2007. Legacy Financial’s liabilities consist of $291,000 in accrued liabilities and $75,000 in accounts payable as of December 31, 2008 and $115,000 in accrued liabilities, $55,000 in commissions payable, and $40,000 in accounts payable as of December 31, 2007
On January 25, 2007, prospectdigital LLC ("prospectdigital"), an indirect wholly owned subsidiary of the Company, sold certain of its assets, which primarily included fixed assets and other miscellaneous operating assets, to PD Holdings LLC ("PD Holdings"). In addition, PD Holdings agreed to assume certain liabilities of prospectdigital. The action was taken in a continuing effort to reduce our operating expenses, as prospectdigital continued to sustain losses through the date of sale. Prospectdigital’s results are being reported as discontinued operations. On our consolidated balance sheet, prospectdigital’s assets consist of $28,000 in accounts receivable as of December 31, 2008 and $61,000 in accounts receivable as of December 31, 2007. Prospectdigital’s liabilities consist of $32,000 in accrued liabilities as of December 31, 2008 and $139,000 in accrued liabilities as of December 31, 2007.
Prospectdigital is being reported as a discontinued operation for the twelve months ended December 31, 2008 and 2007. On the Company’s consolidated balance sheet, prospectdigital’s assets consist of $28,000 in accounts receivable as of December 31, 2008 and $61,000 in accounts receivable as of December 31, 2007. Prospectdigital’s liabilities consist of $32,000 in accrued liabilities as of December 31, 2008 and $139,000 in accrued liabilities as of December 31, 2008. Prospectdigital incurred an $189,000 loss on the sale of its assets in 2007.
A special committee of the Board of Directors of the Company comprising the independent directors, Ute Scott-Smith, J. Daniel Speight, Jr. and Donald Ratajczak, approved the amount of consideration. In connection with the committee’s deliberations the Company obtained a fairness opinion from an independent third party stating that the total value of the transaction to the Company was within an acceptable range of estimated fair values of the future trail commission cash flows. A portion of the proceeds was used to pay the $6 million note payable, plus accrued interest, to Washington National Insurance Company and interest accrued thereon. The remainder of the proceeds is available for general corporate purposes.
The Company had a mortgage on its office building in Rome, Georgia. The outstanding balance of the note was $2.6 million as of December 31, 2007. On May 23, 2008, the Company sold its office building in Rome, Georgia for $3.5 million for a gain of $214,000. Proceeds from the sale of the building were used to repay the mortgage on the property, the outstanding balance of which was $2.6 million.
The Company sponsors a qualified defined contribution 401(k) plan, which is available to all employees. The 401(k) plan allows employees to defer, on a pre-tax basis, up to 70% of their annual compensation as contributions to the 401(k) plan, subject to a maximum of $15,500. The Company typically matches 50% of each employee’s contributions up to 6% of their annual compensation, subject to a maximum of $7,750. The Company’s matching contributions were $134,000, $223,000, and $223,000 for the years ended December 31, 2008, 2007, and 2006, respectively.
The Company also sponsors a non-qualified tax deferred compensation plan, which is available to certain employees who, because of Internal Revenue Code limitations, are prohibited from contributing the maximum percentage of salary to the 401(k) Plan. Under this deferred compensation plan, certain employees may defer, on a pre-tax basis, a percentage of annual compensation, including bonuses. The Company typically matches 50% of each employee’s contributions up to a maximum of 6% of annual compensation, less amounts already matched under the 401(k) plan. The Company made matching contributions of $0, $0, and $2,000 during the years ended December 31, 2008, 2007, and 2006, respectively. As of December 31, 2008 and 2007, employee contributions and Company matching contributions, including cumulative investment gains (losses), totaled $361,000 and $547,000, respectively.
All contributions made to and earnings incurred thereon the employee and producer non-qualified tax deferred compensation plans are considered deemed investments and are not to be considered or construed as an actual investment of funds. The participant’s deemed investment is administered by a third-party to reflect the respective market activity and in turn, the fair value of the liability to the Company. In addition, the employee or producer who is a participant in the plan shall remain at all times an unsecured creditor of the Company.
During 2008, 2007 and 2006, Legacy Marketing initiated sales incentive programs for its independent insurance producers and its top producers (“Wholesalers”), which granted bonuses to the producers and Wholesalers based upon their achievement of predetermined monthly sales targets. The Company recorded expense of $642,000 during the year ended December 31, 2008, related to these programs, of which $321,000 was paid as of December 31, 2008. The Company recorded expense of $1.0 million during the year ended December 31, 2007, related to these programs, of which $707,000 was paid as of December 31, 2007. The Company recorded expense of $1.9 million during the year ended December 31, 2006 related to these programs, of which $332,000 was paid as of December 31, 2006. The amounts expensed are included in selling, general and administrative expenses.
The Company’s future minimum annual lease commitments under all non-cancelable operating leases as of December 31, 2008 are as follows:
Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Pitts, Chief Executive Officer of the Company and Chairman of the Company’s Board of Directors, upon the death of Mrs. Pitts, the Company would have the option (but not the obligation) to purchase from Mrs. Pitts’ estate all shares of common stock that were owned by Mrs. Pitts at the time of her death, or were transferred by her to one or more trusts prior to her death. In addition, upon the death of Mrs. Pitts, her heirs would have the option (but not the obligation) to sell their inherited shares to the Company. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares. As of December 31, 2008, the Company believes that 125% of the fair market value of the shares owned by Mrs. Pitts was equal to $562,000. The Company has purchased life insurance coverage for the purpose of funding this potential obligation upon Mrs. Pitts’ death.
Between 1990 and 1992, the Company issued Series A and Series B redeemable common stock to certain shareholders. The Company is obligated to repurchase the redeemable common stock at the current fair market value. Because there is no active trading market for the Company’s stock that would establish market value, the Company’s Board of Directors typically approve a redemption value for Series A redeemable common stock and for Series B redeemable common stock based on the stock valuation prepared by management. However, the Company is currently unable to redeem its redeemable common stock due to restrictions in the California corporations law.
Producer Option Plan - Under the Regan Holding Corp. Producer Stock Option and Award Plan (the “Producer Option Plan”), the Company may grant to Legacy Marketing producers and Legacy Financial registered representatives shares of the Company’s common stock and non-qualified stock options (the “Producer Options”) to purchase the Company’s common stock. A total of 12.5 million shares have been reserved for grant under the Producer Option Plan. We did not grant any stock options in either 2008 or 2007 and granted a total of 15,000 stock options to a Producer in the year ended December 31, 2006. Compensation expense related to stock options awarded during 2006 and 2005 was immaterial. There were no shares of Series A common stock awarded to non-employees during 2008, 2007 and 2006.
Employee Option Plan - Under the Regan Holding Corp. 1998 Stock Option Plan (the “Employee Option Plan”), the Company may grant to employees and directors incentive stock options and non-qualified options to purchase the Company’s common stock (collectively referred to herein as “Employee Options”). A total of 8.5 million shares have been reserved for grant under the Employee Option Plan. The Employee Options generally vest over four or five years and expire in ten years, except for incentive stock options granted to shareholders who own 10% or more of the outstanding shares of the Company’s stock, which expire in five years.
The income tax (benefit) provision attributable to our continuing and discontinued operations was as follows:
The income tax provision (benefit) in 2008, 2007 and 2006 differed from the amounts computed by applying the statutory federal income tax rate of 34% to pretax income (loss) as a result of the following:
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation creates a two step approach for evaluation of uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (step two) determines the highest amount of benefit that more likely than not will be realized upon settlement. The Company does not currently have an unrecognized tax benefit balance and for federal income tax purposes, the statute of limitations is open for tax years 2005 through 2008. The adoption of FIN 48 did not have a significant impact on the Company’s financial condition or results of operations.
In 2008, Legacy Marketing sold and marketed its products primarily on behalf of four unaffiliated insurance carriers: Investors Insurance, Washington National, American National, and OM Financial (Americom). The agreements with those carriers generated a significant portion of the Company’s total consolidated revenue of $12.6 million, which excludes the gain on the sale of partnership interests of $6.5 million:
Legacy Marketing’s revenues are derived primarily from sales and marketing of the following fixed annuity product series:
Effective October 17, 2007, Legacy Marketing entered into an agreement and strategic alliance with a subsidiary of Perot Systems, whereby Legacy Marketing agreed to transfer its third party administration services function and the employees who provide these services to Perot Systems in exchange for Perot Systems’ assumption of such administrative service functions. Perot Systems will also become the exclusive provider of administrative services for Legacy Marketing’s future portfolio of annuity products. Pursuant to this arrangement, the Company had a $21,172 payable to Perot Systems at December 31, 2008. In the twelve months ended December 31, 2007 and 2006, Legacy Marketing received approximately $5.3 million and $7.4 million, respectively, in gross revenue under the administrative agreements with carriers. The termination of administrative agreements does not affect the commissions earned by Legacy Marketing on additional premiums received or assets under management with respect to the underlying insurance contracts.