We review our other long-lived assets, including property and equipment and other intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We periodically review capitalized internal use software to determine if the carrying value is fully recoverable. Recoverability is measured by a comparison of the assets' carrying amount to their expected future undiscounted cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds the present value of future discounted cash flows.
2004 2003 ---- ---- BenchMark (SM) series (sold on behalf of American National) 24% 37% SelectMark (SM) series (sold on behalf of Transamerica) 24% 25% MarkOne (SM) series (sold on behalf of Investors Insurance) 23% 23%
During the second quarter of 2004, due to the failure of VFN to produce revenues as projected, particularly in the corporate arena, we decided to cease actively marketing to the corporate market. As a result, management lowered its expectations for future sales. This event met the criteria of a "triggering event" for testing the recoverability of long-lived assets as required by Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for
the Impairment or Disposal of Long-Lived Assets". Accordingly, we compared the carrying amount of VFN's long-lived assets to the projected sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. Based on the fact that the sum of the undiscounted cash flows exceeded VFN's assets, we concluded no impairment had occurred to the long-lived assets. As a result of performing the impairment tests required under SFAS 144, we were then required under the provisions of SFAS 142 to perform a goodwill impairment test using the revised cash flows forecast discounted at an appropriate cost of capital. The results of this test indicated that our goodwill was not recoverable. Accordingly, we recorded a goodwill impairment loss on the remaining balance of $679,000 during the second quarter of 2004.
During 2004, combined net income from Legacy Advisory Services and Legacy Re, which is inactive, was $148,000 compared to combined net income of $122,000 in 2003. The favorable change was primarily due to increased advisory fee revenues, partially offset by an increase in professional fees.
We are obligated to repurchase certain shares of our common stock. Cash paid to repurchase some of these shares totaled $966,000 in 2004 and $1.2 million in 2003. Based upon the estimated fair market values of the Series A and B Redeemable Common Stock as of December 31, 2004, the redemption of all eligible shares during 2005 would require $5.9 million. As the value of our common stock rises, our monetary obligation with respect to the redeemable common stock also increases.
Our cash and available-for-sale marketable security positions at December 31, 2004, 2003 and 2002 were $4.3 million, $15.8 million and $9.7 million.
As a professional services firm primarily engaged in marketing and administration of annuity products, we encounter litigation in the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with legal counsel, that the ultimate disposition of these claims will not have a material adverse effect on our financial condition, cash flows or results of operations. In addition, companies in the life insurance industry have been subject to substantial claims involving sales practices, agent misconduct, failure to properly supervise agents, and other matters in connection with the sale of life insurance, annuities, and other investment products. Increasingly, these lawsuits have resulted in the award of substantial judgments, including material amounts of punitive damages that are disproportionate to the actual damages. In some states juries have substantial discretion in awarding punitive damages that creates the potential for material adverse judgments in litigation. If any similar lawsuit or other litigation is brought against us, such proceedings may materially harm our business, financial condition, or results of operations.
The Company's future minimum annual lease commitments under all operating leases as of December 31, 2004 are as follows:
Year Ended December 31, 2005 $ 749,000 2006 582,000 2007 491,000 2008 108,000 2009 45,000 Thereafter - ----------- Total minimum lease payments $ 1,975,000 ===========
The Company currently sponsors two stock-based compensation plans. Under both plans, the exercise price of each option equals the estimated fair value of the underlying common stock on the date of grant, as estimated by management,
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. Total stock options granted to Producers for 2004, 2003, and 2002 were 15,000, 15,000, and 10,000. Total expenses recorded for Producer stock option grants were $12,000, $10,000, and $4,000 during 2004, 2003 and 2002. The Producer stock options granted for each of the three years ended December 31, 2004 vested immediately upon the grant date and expire six years from the date of grant. The fair value of the Producer options were estimated using the Black-Scholes option-pricing model with the following assumptions:
2004 2003 2002 ---- ---- ---- American National 25% 37% 17% Transamerica 24% 25% 52% Investors Insurance 27% 23% 6% IL Annuity 9% 6% 12% John Hancock 2% 3% 8%