We currently lease approximately 72,000 square feet of office space in Petaluma, California, where our headquarters and most of Legacy Marketing’s operations are located. This lease expires in April 2009, subject to extension at our option for two additional terms of five years each. We plan to acquire this property in the second quarter of 2001, in accordance with a purchase option contained in the lease. We also lease approximately 5,700 square feet of warehouse space in Petaluma, primarily for Legacy Marketing supplies inventory storage and processing.
As a service organization, Legacy Marketing’s primary expenses are salaries and related employee benefits. These expenses increased approximately $3.0 million, or 14.3%, in 2000 from 1999, and increased $3.8 million, or 22.3%, in 1999 from 1998. These increases resulted primarily from regular annual pay increases and from increases in the average number of employees, who are needed to support initiatives designed to increase sales. In addition, during the third quarter of 2000, the Company hired several employees at higher salary levels, including one executive officer. Such increases in senior personnel are considered necessary to support the strategic planning of the Company. Accordingly, salaries and benefits expense is expected to increase in 2001.
In December 2000, the Company sold the office building and two parcels of land, as discussed above, and recorded a pre-tax gain of approximately $3.6 million. Because the Company expects to meet the criteria of Section 1031 of the Internal Revenue Code, payment of income taxes on the gain realized on the sale of the property will be deferred.
During the third quarter of 2001, the Company expects to receive federal and state income tax refunds of approximately $3.7 million, resulting from applied overpayments and 2000 net operating loss carrybacks.
Investments include corporate bonds and equity securities, and obligations backed by U.S. government agencies. The Company’s investments are classified as available-for-sale and are carried at market value. Market values are determined using published quotes as of the close of business. Unrealized gains and losses, net of the related tax effect, are excluded
from earnings and are reported as a separate component of shareholders’ equity, within “accumulated other comprehensive income (loss),” until realized.
During 1999, the Company entered into a loan payable for $2.1 million related to the purchase of a building in Petaluma. The loan had a ten-year term and was payable in monthly installments plus one balloon payment of approximately $1.8 million, due on May 10, 2009. The loan bore interest at 0.5% per annum above the Prime Rate, as published in the West Coast Edition of The Wall Street Journal. Pursuant to the loan agreement, the Company was also required to place approximately $560,000 in deposits to cover loan payments in the event of default and to provide for certain repair costs. Such deposits are classified as Other Assets in the accompanying Consolidated Balance Sheet at December 31, 1999. During the first quarter of 2000, the lender under the 1999 Loan released approximately $379,000 of such deposits for general use by the Company. The remaining reserves were released in the second quarter of 2000.
In December 2000, the Company sold two parcels of land and the building in Petaluma. Approximately $2.1 million of the consideration was used to discharge the Company’s remaining obligation under the 2000 Loan.
The Company also sponsors a non-qualified tax deferral compensation plan under which producers may defer, on a pre-tax basis, up to 50% of annual commissions (the “Producer Commission Deferral Plan”). Producers who earn a minimum of $100,000 in annual commission are eligible to participate in the Producer Commission Deferral Plan and defer up to 50% of their commissions earned. In addition, the Company will match producer contributions for those producers who earn over $250,000 in annual commissions at rates ranging from 1% to 5% of amounts deferred, depending on the level of annual commissions earned. Deferrals of commissions by producers began in 1999. During the years ended December 31, 2000 and 1999, matching contributions charged to sales promotion and support expense related to the Producer Commission Deferral Plan were $31,592 and $55,710, respectively. As of December 31, 2000 and 1999, producer contributions and Company matching contributions, net of accumulated losses, totaled $2,644,144 and $1,170,001, respectively. Such amounts are reflected as liabilities in the accompanying Consolidated Balance Sheets.
In March 2001, LMG and American National amended their Marketing and Administrative Agreements by extending the terms to May 15, 2001. The companies are currently negotiating to extend these agreements.