On May 31, 2007, Regan 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. At the end 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 did note receive any payments related to this agreement as of December 31, 2009.
The Company has adopted SFAS No. 123R (revised 2004), “Share-Based Payments,” which was primarily codified into ASC 505 - Equity. This topic 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.
Selling, general and administrative expenses increased $376,000 (3%) in 2009 compared to 2008 primarily due to a $505,000 increase in deferred compensation as a result of the fluctuation in market value on previously recognized liabilities under our deferred compensation plans. In addition, there was a $253,000 increase in sales promotion and support and a $216,000 increase in professional fees, offset in part by a $214,000 decrease in salaries and related benefits as a result of reduced headcount, a $155,000 decrease in occupancy expense, a $108,000 decrease in insurance expense, a $66,000 decrease in office supplies, and a $56,000 decrease in travel and entertainment. The reduction in headcount and occupancy expense for 2009 was primarily due to the transfer of our policy administration function to Perot Systems. The increase in sales and promotional support in 2009 was primarily due to higher incentives paid as a result of increased sales. The increase in professional fees was primarily due to an increase in reorganization costs and regulatory filings.
Lynda Pitts, Chief Executive Officer, and R. Preston Pitts, President, Chief Operating Officer, Chief Financial Officer and Secretary of Regan, are the primary owners of PD Holdings. In connection with the sale, also entered into a service agreement with PD Holdings, pursuant to which subsidiaries of Regan provided certain administrative services to PD Holdings, for a fee equal to the cost of the services provided.
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, Derivatives 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.
ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. We do not expect the adoption of this update to have any material effect on our financials.
Effective October 17, 2007 (“Transaction Date”), Legacy Marketing entered into an agreement with a subsidiary of Perot Systems Corporation (“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. The estimated time to complete the transition of these administrative services to Perot was 18 months. Accordingly, the Company reviewed the remaining estimated useful life of internal use software associated with its administrative business and reduced the remaining useful life to 18 months for the affected internal use software assets.
Under the terms of Legacy's marketing agreements with each carrier, they provide that for the sales of insurance policies placed in-force, Legacy is paid a marketing allowance and commission override based on the premium amount of the underlying policy. Legacy is also responsible for facilitating payment of commissions from the carrier to the producer who sold the policy. Each producer is an independent contractor of Legacy and must be appointed with the carrier in order to receive such commission. Because Legacy’s role is to serve as an agent for the commission payment processing and to maintain a liability for any unpaid sales commissions, the Company pays the commissions to its producers but records the revenue based on the net amount retained. The Company paid out approximately $59,506,000, $32,943,000, and $36,606,000 in sales commissions to its producers for the periods 2009, 2008, and 2007, respectively. This information is not captured as revenue or expense but is recorded net under the guidance provided by EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, which was primarily codified into ASC605 - Revenue Recognition
In January 2006, the Company decided to discontinue the operations of Values Financial Network (“VFN”). The Company incurred insignificant costs in connection with exiting the operations. As of December 31, 2009, VFN was dissolved.
Outstanding options to purchase 1.9 million, 2.3 million, and 3.2 million shares of the Company’s common stock on December 31, 2009, 2008 and 2007, respectively, were excluded from the computation of diluted net income (loss) per share for those periods, as the effect would have been antidilutive.
On February 24, 2010, a hearing was held before the California Department of Corporations, as requested by the Company and The Legacy Alliance Inc. (“Legacy Alliance”) to rule on the fairness of the terms and conditions of the offer and sale of securities outlined in the Agreement and Plan of Merger, dated December 1, 2009, between Regan and Legacy Alliance, 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, if shareholder approval is obtained, the Company intends to merge with a Delaware corporation, Legacy Alliance, with Legacy Alliance surviving the merger (the “Reorganization”).