Regan is a holding company whose primary operating subsidiary is Legacy Marketing.
The Company and The Legacy Alliance Inc. (“Legacy Alliance”), have entered into an Agreement and Plan of Merger, dated December 1, 2009, as amended by the First Amendment to the Agreement and Plan of Merger, dated January 29, 2010 (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, the Company will merge with a Delaware corporation, Legacy Alliance, with Legacy Alliance surviving the merger (the “Reorganization”).
On February 24, 2010, following a public hearing, the California Department of Corporations certified that the terms and conditions of the offer and sale of the securities in the proposed Reorganization Plan were fair and were approved. In addition, a qualification by permit for the offer and sale of such securities was issued to Legacy Alliance. On March 30, 2010, the Company mailed a notice of special meeting of shareholders to be held on April 20, 2010 along with a proxy statement for solicitation of shareholder approval of the Reorganization.
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, 2009, Legacy Marketing had marketing agreements with American National, Investors Insurance, and OM Financial (Americom). 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.
Any trail commissions that might be received on policies placed in force after the sale date of March 26, 2008, which were specifically excluded from the loan transaction from the Bank, are allocated to the Class A partnership interest. This interest was not pledged as collateral for the Legacy TM loan. The Pittses have no financial interest in the Class A partnership and likewise, the Class A partnership was not pledged as collateral for the loan.
LMG will receive through the Class A partnership interest, on any policies placed in force after March 26, 2008, 100% of the proceeds from the trail commissions. For the period ending December 31, 2009 and 2008, LMG received approximately $43,000 and $4,000, respectively, in trail commissions for these policies. The Class A interest is not expected to have a significant impact on our future operating results.
During the past few years, several proposals relating to our business have been made by federal and state agencies and legislative bodies and securities and insurance self-regulatory organizations. As discussed below, a few of these proposals have become effective, and others may be made or adopted.
FINRA has issued guidance to its members indicating that broker-dealers regulated by FINRA have certain responsibilities with respect to the offer and sale of equity-indexed annuities, including an obligation to determine the suitability of such products for their customers, regardless of whether equity-indexed annuities are deemed to be securities. In addition, some state insurance regulators are considering whether additional suitability and disclosure regulations should be implemented with respect to all sales of fixed annuities, particularly with respect to senior citizens.
Our core business consists of selling fixed annuity products, on behalf of insurance carriers, through a network of independent insurance producers (“Producers”). If the initiatives undertaken by the SEC, FINRA or state insurance regulators with respect to equity indexed or other fixed annuities were to result in new legislation or regulation, the demand for fixed annuities products, our business and those of our Producers could be adversely affected and could have a material adverse effect on the insurance industry in general or 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, and FINRA approval of such withdrawal followed in January 2009.
The fair value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable for all periods presented approximates their respective carrying amounts because of the short maturity of these financial instruments. In addition, the Company’s trading investments reflect their respective fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 157, which was primarily codified in Accounting Standards Codification (“ASC”) 820 - Fair Value Measurements and Disclosures, and SFAS No.133, which was primarily codified into ASC815 - Derivatives and Hedging.
We regularly evaluate the collectability of our accounts and notes receivable. An allowance for doubtful accounts is maintained for estimated losses, and such losses have historically been minimal and within our expectations. We consider a number of factors when estimating losses, including the aging of a producer’s debt, creditworthiness of specific producer, historical trends and other information.
We capitalize external consulting fees, and salaries and benefits for employees who are directly associated with the development of software for internal use and product development, when both of the following occur: (i) the preliminary project stage is completed and the project is therefore in the application development stage and (ii) management authorizes and commits to funding a software or product project and it is probable that the project will be completed and the software or product will be used to perform the function desired or marketed for generation of revenue.
Modifications or enhancements made to an existing software or product that result in additional functionality are also capitalized. When the new software or product is placed in production or marketed, we begin amortizing the asset over its estimated useful life. Training and maintenance costs are accounted for as expenses as they occur. We periodically review capitalized internal use software and products developed to determine if the carrying value is fully recoverable. If there are future cash flows directly related to the software or product we record an impairment loss when the present value of the future cash flows is less than the carrying value. If software or components of software, or the product in development are abandoned, the Company takes a charge to write off the capitalized amount in the period the decision is made to abandon it.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will, or will not, be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management believes it is more likely than not that any deferred tax assets after valuation allowance will be realized.
Year ended December 31, 2009 compared with year ended December 31, 2008
We had consolidated income from continuing operations, before income taxes, of $2.6 million for the year ended December 31, 2009 compared to $701,000 for the same period of 2008. Our revenue decreased $718,000 (4%) in 2009 compared to 2008 primarily due to the sale of limited partnership interest in 2008 for $6.5 million, a decrease in trailing commissions of $1.2 million and a decrease in other revenue of $655,000; partially offset by an increase in marketing allowances and commissions of $7.6 million. Marketing allowances and commissions increased $7.6 million (99%) primarily due to an overall increase in the sales of fixed annuity products and varying marketing allowance rates on certain products.
The rate of provision for income taxes for 2009 and 2008 differs from the federal and state statutory rate primarily due to the expected utilization of federal net operating loss carryforwards.
Our revenue decreased $727,000 (4%) in 2008 compared to 2007 primarily due to decreased marketing allowances and commissions of $1.1 million, administrative fees of $5.3 million, and trailing commissions of $1.7 million; partially offset by an increase in other revenue of $1 million and the sale of limited partnership interests of $6.5 million. Marketing allowances and commissions decreased $1.1 million (12%) primarily due to an overall decrease in the sales of fixed annuity products and lower marketing allowance rates on some of the products.
Other revenue increased $843,000 (31%) primarily due. to payments received from Perot for the transitioned and retained employee salaries and benefits, certain software and hardware costs, and other occupancy and equipment costs.
Other miscellaneous expenses decreased in 2008, as 2007 included a $1.2 million impairment charge for internal use software. In addition, there was a decrease in equipment leasing and maintenance expense in 2008 primarily due to the renegotiation of contracts and reduction of office equipment.
On October 17, 2007, Legacy Marketing entered into an agreement and strategic alliance with a subsidiary of Perot Systems Corporation (“Perot Systems”), whereby Legacy Marketing transferred its third party administration services function and the employees located in Rome, Georgia, who provides these services to Perot Systems in exchange for Perot Systems’ assumption of such administrative service functions. Administrative revenues for 2007 were $5.3 million. Administrative expenses for 2007 were $6.9 million. The impact of the termination of our administrative services, based on the revenue earned and expenses incurred in 2007, reduced the Company’s revenue and expenses for 2009 by approximately $3.2 million and $4.8 million, respectively, and for 2008 by approximately $2.4 million and $4 million, respectively.
As of September 29, 2008 Legacy Financial withdrew as a broker-dealer registered with FINRA, and FINRA approval of such withdrawal followed in January 2009.
We 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’s results are being reported as discontinued operations. On our consolidated balance sheet, Legacy Financial’s assets consist of $166,000 in prepaid expenses and $183,000 in accounts receivable as of December 31, 2009 and $294,000 in prepaid expenses as of December 31, 2008. Legacy Financial’s liabilities consist of $213,000 in accrued liabilities and $115,000 in accounts payable as of December 31, 2009 and $291,000 in accrued liabilities and $75,000 in accounts payable as of December 31, 2008.
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.
In January 2006, we decided to discontinue the operations of Values Financial Network (“VFN”). We incurred insignificant costs in connection with exiting the operations of VFN. As of December 31, 2009, VFN was dissolved.
Our cash provided by (used in) operating activities was $8.8 million in 2008 and 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 was $6.2 million in 2007 and 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.
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, 2009, 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.
Starting in 2008, we have also benefited from an increase in the aggregate amount of fixed annuity sales, which we believe is due to the dramatic drop in the equity markets that began last year. The combination of increased sales and reduced costs has resulted in improved cash flows. Although, this may or may not be sustainable, it had a positive impact on the initial operating results for 2009.
In January 2007, we exited the prospectdigital business and disposed of its assets. This action eliminated approximately $1.2 million of annual cash use. We have completed the sale of Legacy Financial’s registered representatives and customer accounts, and we received $1 million of cash proceeds from that sale on September 28, 2007. We used the cash proceeds from this sale to settle pending Legacy Financial matters.
LMG received $6.5 million in cash for its Class B interest from the Partnership. To accomplish the cash settlement, the Partnership and its general partners, Lynda Pitts, Chief Executive Officer and R. Preston Pitts, President, Chief Operations Officer and Chief Financial Officer, each of whom is a director of the Company, pledged the Class B interest in order to obtain funds to finance the transaction. The Partnership executed a loan agreement, promissory note and commercial pledge agreement to which LMG was not a party and in which it asserted no conditions. The general partners, Lynda Pitts and R. Preston Pitts who are partners in the Class B partnership each executed a commercial pledge agreement of their Legacy TM partnership interests and other assets as a condition for funding. LMG was not a party and asserted no conditions in regard to the pledge agreements. LMG not only confirmed that it had no interest in the Class B interest, but it also confirmed the Partnership and the Pittses had the right to pledge the Class B interest.
The loan between Legacy TM and the Bank of Marin (“Bank”) is a term loan with a fixed interest rate of 8% per annum. The term is five years and scheduled payments are due monthly. The Pittses had to make personal guarantees which included using their personal real estate (“other assets”) as a part of that guarantee. The Pittses, not LMG, are individually responsible for the obligation.
“The general partner will have exclusive management and control of the business partnership, and all decisions regarding the management and affairs of the partnership will be made by the general partner. The general partner will have all the rights and powers of general partners as provided in the [California Revised Limited Partnership] Act and as otherwise provided by law.”
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 was primarily codified into ASC 825 - Financial Instruments. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. ASC 825 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted ASC 825 on January 1, 2008 and it did not have a material effect on our results of operations or financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”), which was primarily codified into ASC 805 - Business Combinations. This statement 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. ASC 805 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 May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of SFAS No. 60, Accounting and Reporting by Insurance Enterprises, which was primarily codified into ASC 944 - Financial Services - Insurance. The statement helps resolve diversity resulting in inconsistencies in the recognition and measurement of claim liabilities because of differing views about when a loss has been incurred. In addition, the Statement clarifies the financial reporting requirements under SFAS No. 60 of financial guarantee insurance contracts for better comparability. This Statement is effective for financial statements issued for fiscal years beginning after December 31, 2008. Adoption of ASC 944 did not have a material effect on our results of operations and financial condition.
The update also clarifies that a quoted price in an active market for an identical liability at the measurement date or when an identical liability is traded as an asset qualify as a Level 1 input. This update is effective for the first reporting period after issuance. Adoption of ASU 2009-05 did not have a material effect on our results of operations and financial condition.
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements under Topic 820 - Fair Value Measurements and Disclosures. This update provides amendments to Subtopic 820-10 that requires new disclosures as follows:
An entity that either (a) is an SEC filer or (b) is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets) is required to evaluate subsequent events through the date that the financial statements are issued. If an entity meets neither of those criteria, then it should evaluate subsequent events through the date the financial statements are available to be issued.
ASU 2010-09 is effective upon issuance of the update. The adoption of this update did not have any material effect on our financials.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor have we been engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Regan Holding Corp. and its subsidiaries as of December 31, 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule as of and for the years ended December 31, 2009 and 2008, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As of December 31, 2009, Legacy Marketing had marketing agreements with American National Insurance Company (“American National”), Investors Insurance Corporation (“Investors Insurance”), and OM Financial (Americom) Life Insurance Company (“OM Financial (Americom), (collectively, the “carriers”). Under the terms of the marketing agreements, Legacy Marketing is responsible for recruiting Producers, who have contracted with Legacy Marketing to sell fixed annuity products and are licensed with various states’ departments of insurance and appointed with the applicable insurance carriers. For these services, the insurance carriers pay Legacy Marketing commissions and marketing allowances.
On December 1, 2009, the Company and The Legacy Alliance Inc. (“Legacy Alliance”), had entered into an Agreement and Plan of Merger, as amended by the First Amendment to the Agreement and Plan of Merger, dated January 29, 2010 (as amended, the “Merger Agreement”). Pursuant to the Merger Agreement, the Company will merge with a Delaware corporation, Legacy Alliance, with Legacy Alliance surviving the merger (the “Reorganization”).
Discontinued operations, the current portion of deferred compensation payable, and payments towards capital lease liability of the prior year financial statements presented were reclassified for comparative purposes to conform to current year’s discontinued operations, deferred compensation payable, and capital lease liability in accordance with generally accepted accounting principles.
Management has evaluated subsequent events through the date the consolidated financial statements are issued. See note 15.
$849,000 of cash was provided by operations in 2009 and $8.8 million in 2008. We used $6.2 million of cash in operations in 2007. Though we generated net income of $2.2 million in 2009, we incurred consolidated net losses of $110,000 and $9.1 million in 2008 and 2007, respectively. To mitigate possible cash shortfalls, we are currently in the process of obtaining shareholder approval to deregister as a public company in order to reduce costs associated with reporting obligations under the Securities and Exchange Act of 1934. The estimated direct and indirect cost savings would be approximately $453,000 per year, plus an additional $257,000 in annual costs relating to compliance with Section 404 of the Sarbanes-Oxley Act. In 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 January 2007, the Company exited the prospectdigital business and disposed of its assets. This action eliminated approximately $1.2 million of annual cash use.
In 2007 the Company and two of its subsidiaries, Legacy Financial Services Inc. (“Legacy Financial”) and Legacy Advisory Services Inc., completed the sale of Legacy Financial’s registered representatives and customer accounts, and the Company received $1 million of cash proceeds from that sale on September 28, 2007. The cash proceeds from this sale were used to settle pending Legacy Financial matters.
When a policyholder remits a premium payment to the insurance carrier with an accurate and completed application for an insurance policy, the policy is placed inforce and Legacy Marketing recognizes marketing allowances and commission income. Legacy Marketing’s carriers’ policyholders have a contractual right to terminate the insurance contract ten to thirty days after a policy is placed inforce. This return period varies on 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 fair value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable for all periods presented approximates their respective carrying amounts because of the short maturity of these financial instruments. In addition, the Company’s trading investments reflect their respective fair value in accordance with Statement of Accounting Standards (“SFAS”) No. 157, which was primarily codified into ASC 820 - Fair Value Measurements. ASC 820 is based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy established in ASC 820 prioritizes the inputs used in valuation techniques into three levels as follows:
Observable inputs other than the quoted prices in active markets for identical assets and liabilities - such as quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, or other inputs that are observable or can be corroborated by observable market data;
Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
As of December 31, 2009 trading securities valued at $3.1 million and a deferred compensation liability valued at $5.0 million were valued using level 1 inputs.
The Company’s investments are classified as trading securities and are carried at fair value in accordance with SFAS No. 157, which was primarily codified into ASC820 - Fair Value Measurements and Disclosures. For trading securities, unrealized gains and losses are reported in Selling, general and administrative expenses.
The Company regularly evaluates the collectability of its accounts and notes receivable. An allowance for doubtful accounts is maintained for estimated losses, and such losses have historically been minimal and within our expectations. The Company considers a number of factors when estimating losses, including the aging of a producer’s debt, creditworthiness of specific producer, historical trends and other information.
Fixed assets are stated at cost, less accumulated depreciation and amortization. The Company capitalizes consulting fees and salaries and benefits for employees who are directly associated with the development of software for internal use when both of the following occur: (i) the preliminary project stage is completed and therefore the project is in the application development stage and (ii) management authorizes and commits to funding a software project and it is probable that the project will be completed and the software will be used to perform the function desired.
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, which was primarily codified into ASC815 - Hedging and Derivatives. ASC815 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.
The Company measures and recognizes stock based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments,” which was primarily codified into ASC718 - Compensation - Stock Compensation. ASC718 requires compensation expense related to share-based payment transactions, measured at the grant date fair value, to be recognized in the financial statements over the period that an employee provides service in exchange for the award. The Company issues new shares of common stock upon the exercise of stock options.
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 was primarily codified into ASC 825 - Financial Instruments. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. ASC 825 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted of ASC 825 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”), which was primarily codified into ASC 805 - Business Combinations. . This Statement 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. ASC 805 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 ASC 805 to have a material impact on future acquisitions.
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities- an amendment of SFAS No. 133, which was primarily codified into Topic 815, Derivative and Hedging, in the ASC. This statement enhances 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. Our adoption of ASC 815 was effective beginning January 1, 2009, and did not 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, which was primarily codified into ASC 105 - 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 Principle. Adoption of ASC 105 did not have a material effect on our results of operations and financial condition.
In May 2009, The FASB issued SFAS No. 165, Subsequent Events, which was primarily codified into Topic 855 - Subsequent Events in the ASC. This guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It alerts all users of financial statements that an entity has not evaluated subsequent events after that date in the set of interim and annual financial statements being presented. This standard is effective for interim or annual periods ending after June 15, 2009. Therefore, we have performed an evaluation of subsequent events through the date the financial statements are issued. Our adoption of ASC 855 did not have a material effect on our results of operations and financial condition.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets- an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which has not yet been codified in the ASC. This statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets and the effects the transfer will have on its financial position, performance, and cash flows. This statement is effective for financial statements issued for interim and annual reporting beginning after November 15, 2009. Adoption of SFAS No. 166 is not expected to have a material effect on our results of operations and financial condition.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value under Topic 820 - Fair Value Measurements and Disclosures in the ASC. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:
Another valuation technique that is consistent with the principles of Topic 820. Two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.
In December 2009, the FASB issued ASU 2009-16, Accounting for Transfers of Financial Assets under Topic 860 - Transfers and Servicing in the ASC. The update provides additional accounting and reporting standards for the transfers and servicing of financial assets and servicing rights by establishing additional criteria to determine if there is any continuing involvement with either the assets transferred or with the transferee. Some of the examples given in ASU 2009-16 of continuing involvement with the transferred financial assets are (a) servicing arrangements, (b) recourse arrangements, (c) guarantee arrangements, (d) purchase or redemption arrangements, (e) options written or held, (f) derivative financial instruments that are entered into contemporaneously with, or in contemplation of, the transfer, (g) arrangements to provide financial support, (h) pledges of collateral, and (i) the transferor’s beneficial interest in the transferred asset. Since the transfer of financial assets with continuing interests raises issues regarding whether the transfers should be considered sales (of all or part) or secured borrowings, the ASU 2009-16 establishes standards for resolving those issues. We have reviewed ASU 2009-16 and determined that the sale of partnership interest did not meet the criteria for any continuing involvement and thus, did not have a material effect on our results of operations.
Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.
In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements under Topic 855 - Subsequent Events. The update provides amendments as follows:
An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC’s requirements.
The glossary of Topic 855 is amended to remove the definition of public entity. The definition of a public entity in Topic 855 was used to determine the date through which subsequent events should be evaluated. Based on the amendments, that definition is no longer necessary for purposes of Topic 855.
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. At December 31, 2008, Legacy Financial did not meet the specified terms in order to receive a second payment from Multi-Financial Securities Corporation and did not receive any payments related to this agreement as of December 31, 2009.
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’s results are being reported as discontinued operations. On our consolidated balance sheet, Legacy Financial’s assets consist of $166,000 in prepaid expenses and $183,000 in accounts receivable as of December 31, 2009 and $294,000 in prepaid expenses as of December 31, 2008. Legacy Financial’s liabilities consist of $213,000 in accrued liabilities and $115,000 in accounts payable as of December 31, 2009 and $291,000 in accrued liabilities and $75,000 in accounts payable as of December 31, 2008.
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 is being reported as a discontinued operation for the twelve months ended December 31, 2009 and 2008. On our consolidated balance sheet, prospectdigital’s assets consist of $29,000 in accounts receivable as of December 31, 2009 and $28,000 in accounts receivable as of December 31, 2008. Prospectdigital’s liabilities consist of $23,000 in accrued liabilities as of December 31, 2009 and $32,000 in accrued liabilities as of December 31, 2008. We incurred an $189,000 loss on the sale of prospectdigital’s assets in 2007.
Lynda Pitts, Chief Executive Officer, and R. Preston Pitts, President, Chief Operating Officer, Chief Financial Officer and Secretary of the Company, are the primary owners of PD Holdings. In connection with the sale, the Company also entered into a service agreement with PD Holdings, pursuant to which subsidiaries of the Company provide certain administrative services to PD Holdings, for a fee equal to the cost of the services provided.
Effective October 17, 2007, Legacy Marketing entered into an agreement with a subsidiary of Perot Systems Corporation, whereby Legacy Marketing agreed to transfer its third party administration services function and certain 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.
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.
On June 19, 2009, the Company entered into a Promissory Note with an unrelated third-party for $561,000. The note is secured by certain asset-based trail commissions and interest on the unpaid principal accrues daily at a rate of 7% per annum with payments of principal to be made in installments. As of December 31, 2009, the net balance of the note is $309,000 with the remaining installment of $75,000 paid on January 15, 2010. The unpaid balance, plus $5,000 in accrued interest, of approximately $239,000 is due on April 15, 2010.
On September 8, 2008, the Company entered into a Line of Credit Promissory Note with Lynda Pitts, Chief Executive Officer and Preston Pitts, Chief Operating Officer, Chief Financial Officer and Secretary of the Company of which $225,000 has been advanced. Interest on the unpaid principal accrues monthly at a rate of 6% per annum. Principal and interest are due upon demand. On June 30, 2009, the note plus accrued interest was paid in full.
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 was available for general corporate purposes.
On July 20, 2006, Legacy Marketing entered into a credit agreement (the “Credit Agreement”) with Washington National Insurance Company (the “Lender”). Pursuant to the terms of the Agreement, the Lender made a non-revolving multiple advance term loan (the “Term Loan”) to Legacy Marketing totaling $6.0 million. On April 12, 2007, Legacy Marketing amended certain terms of the Credit Agreement through the execution of Amendment No. 1 to the Credit Agreement (the Credit Agreement, as amended by Amendment No. 1, the “Amended Agreement”) and (1) extended the final maturity of the loan under the Credit Agreement from April 1, 2012, to December 31, 2012; (2) changed certain of the requirements for mandatory prepayments under the Credit Agreement; (3) changed certain terms of the financial covenants specified in the Credit Agreement; and (4) revised certain definitions contained in the Credit Agreement. On March 28, 2008, the balance due of $6.0 million, plus accrued interest, on the Credit Agreement was repaid.
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 $16,500 and catch-up contributions of $5,500. The Company typically matches 50% of each employee’s contributions up to 6% of their annual compensation. The Company’s matching contributions were $120,000, $134,000, and $223,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
The Company also sponsors a non-qualified tax deferred compensation plan under which producers who earn a minimum of $100,000 may defer, on a pre-tax basis, up to 50% of annual commissions. In addition, the Company will match producer contributions for those producers who earn over $250,000 in annual commissions at rates ranging from 2% to 5% of amounts deferred, depending on the level of annual commissions earned. Each year, Legacy evaluates the interest in Deferred Compensation Plan and the cost benefit of holding an open enrollment. In the last few years, participation in the plan has been low. As of November 1, 2008, the Company decided not to hold an open enrollment for participation in 2009. During the years ended December 31, 2009, 2008, and 2007, matching contributions related to the producer commission deferral plan were $0, $2,000, and $1,000, respectively. As of December 31, 2009, cumulative investment gains (losses), including distributions, resulted in an ending balance of $4.6 million. As of December 31, 2008, Producer contributions and Company matching contributions, including cumulative investment gains and distributions, resulted in an ending balance of $5 million. The liability to the employee or producer is credited or charged based on indexes selected by the participant.
During 2009, 2008 and 2007, 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 $1.0 million during the year ended December 31, 2009, related to these programs, of which $353,000 was paid as of December 31, 2009. 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 amounts expensed are included in selling, general and administrative expenses.
The Company leases office and warehouse premises and certain office equipment under non-cancelable operating leases. Related rent expense of $1.2 million, $1.2 million, and $1.3 million, is included in occupancy costs for the years ended December 31, 2009, 2008, and 2007, respectively. Total rentals for leases of equipment included in equipment expense were $93,000, $461,000, and $653,000 for the years ended December 31, 2009, 2008, and 2007, respectively.
Under both of the Company’s employee and producer non-qualified deferred compensation plans, the Company pays out distributions that have come due for that year in accordance with the each of the deferred compensation participants’ irrevocable election: attainment age, termination, or the early of both. In 2009, the Company paid out $1.3 million, which includes the amount that was converted into a note payable, and expects to pay out $549,000 in 2010. However, the Company reserves the right to delay or suspend a payment that may jeopardize the Company’s financial condition, as outlined in the IRS regulation 401A.
The following table summarizes information about stock options outstanding at December 31, 2009, under both plans:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will, or will not, be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Due to cumulative losses in recent years, management established a valuation allowance of $12.5 million as of December 31, 2009. This represents a net increase (decrease) in the valuation allowance on deferred tax assets of ($744,000) and $66,000 in 2009 and 2008, respectively.
The income tax provision (benefit) in 2009, 2008 and 2007 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,” which was primarily codified into ASC740-10 - Income Taxes. 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 recognizes interest and penalties on any unrecognized tax benefits as a component of income tax expense and these amounts are insignificant for all periods presented. The Company has not had an unrecognized tax benefit balance and for federal income tax purposes, the statute of limitations is open for tax years 2006 through 2009. The adoption of ASC740-10 did not have a significant impact on the Company’s financial condition or results of operations.
In accordance with ASC 740, the remaining portion of income tax expense (benefit) for the periods presented after the allocation to continuing operations has been made is attributed to discontinued operations. A supplemental schedule is provided below reconciling the income tax expense (benefit) differences in 2009, 2008, and 2007 for discontinued operations from the statutory federal income tax rate.
The income tax provision (benefit) in 2009, 2008, and 2007 for discontinued operations 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:
The basic and diluted income (loss) per share calculations are based on the weighted average number of common shares outstanding including shares of redeemable common stock.
Weighted average shares used to compute basic and diluted net income (loss) per share amounts:
In 2009, 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 $18.4 million:
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 and $0 payable to Perot Systems at December 31, 2008 and 2009, respectively. In the twelve months ended December 31, 2007, Legacy Marketing received approximately $5.3 million, in gross revenue under the administrative agreements with carriers. The impact of the termination of our administrative services, based on the revenue earned and expenses incurred in 2007, reduced the Company’s revenue and expenses for 2009 by approximately $3.2 million and $4.8 million, respectively, and for 2008 by approximately $2.4 million and $4 million, respectively. 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.
The Company has evaluated subsequent events occurring after the balance sheet through the date, the consolidated financial statements are issued.
Management is currently pursuing a going private transaction in order to realize significant cost savings resulting from the termination of our current reporting obligations under the Securities Exchange Act of 1934, as amended, which will be achieved by reducing the total number of record holders of Regan Common Stock to below 300.
Effective February 24, 2010, the California Department of Corporations ruled that the terms and conditions of the offer and sale of the securities in the proposed Reorganization Plan were fair and were approved. As a result, a qualification by permit was issued to Legacy Alliance. The permit allows the securities to be issued by Legacy Alliance in connection with the Reorganization to be exempt from registration under the Securities Act of 1933, as amended.
In connection with the Reorganization, Regan has filed on March 29, 2010 with the SEC a proxy statement on Schedule 14A for solicitation of shareholder approval of the Reorganization. Since the Reorganization will constitute a “going-private” transaction under Rule 13e-3 of the Exchange Act, Regan has filed on March 29, 2010 with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3. Before making any voting or investment decision with respect to the Reorganization, investors and shareholders of Regan are urged to read the proxy statement and any other relevant documents carefully once they are received because they will contain important information about Regan, Legacy Alliance and the proposed Reorganization. Investors and shareholders may obtain free copies of these documents through the SEC’s web site at www.sec.gov. In addition, copies will be available free of charge by submitting a written request to R. Preston Pitts, President, at 2090 Marina Avenue, Petaluma, California 94954.
The following table sets forth our unaudited quarterly summary consolidated statements of operations for each of the quarters for the years ended December 31, 2009 and 2008. The information for each of these quarters is unaudited and has been prepared on the same basis as our audited consolidated financial statements. This data should be read in conjunction with our consolidated financial statements and related notes. These operating results may not be indicative of results to be expected for any future period.