In June 2001, we purchased the building that houses our headquarters and most of Legacy Marketing's operations in Petaluma, California. During 2003 we began construction of a building in Rome, Georgia. In May 2004, we completed construction of the building in Rome and moved our employees located in Rome to the new building.
Regan Holding is a holding company whose primary operating subsidiaries are Legacy Marketing and Legacy Financial.
On July 1, 2002, Regan Holding entered into a Purchase Option Agreement with SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the outstanding capital stock of Investors Insurance. Pursuant to the terms of the agreement, SCOR has granted Regan Holding the right to purchase the outstanding capital stock of Investors Insurance in exchange for annual option fees. Regan Holding has paid annual option fees totaling approximately $3.0 million as of December 31, 2004. Regan Holding has the right to exercise the option at any time prior to the expiration date on June 30, 2005. If we elect to exercise the option, we must complete the purchase transaction within two years of exercising the option. Upon completion of a purchase transaction, the option fees will be included in the purchase price. If the option expires unused, the fees paid will be expensed. Before expiration, we can request a refund of fees paid in the event that the financial rating of Investors Insurance declines as defined in the agreement. As of December 31, 2004, the Investors Insurance rating has declined to a level where we can request such a refund. We are exploring various methods to finance the acquisition of Investors Insurance, including the issuance of debt or equity securities by Regan Holding or one of its subsidiaries. As a result, it is possible that we will issue a significant amount of debt or equity securities to one or more new investors. Any such issuance of equity securities would likely reduce the percentage ownership of Regan Holding held by current shareholders.
Legacy Marketing designs, markets and administers 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, 2004, Legacy Marketing had marketing agreements with Investors Insurance, American National, John Hancock, Transamerica and 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 appointing Producers, who have contracted with Legacy Marketing to sell these products, with the applicable insurance carrier. For these services, the insurance carriers pay Legacy Marketing commissions and marketing allowances.
Management's Discussion and Analysis of Financial Condition and Results of Operations is based in large part on the consolidated financial statements of Regan Holding Corp., which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.
We review our goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable, or at least once a year. We are required to test our goodwill for impairment at the reporting unit level by measuring the fair value of the reporting unit. The Company establishes fair value by preparing a forecast of the discounted value of future cash flows expected to be derived by the reporting unit.
Investments classified as available-for-sale are periodically reviewed to determine if declines in fair value below cost are other-than-temporary. Significant and sustained decreases in quoted market prices, a series of historical and projected operating losses by the investee or other factors are considered as part of the review. If the decline in fair value has been determined to be other-than-temporary, an impairment loss is recorded in investment income and the individual security is written down to a new cost basis.
We had a consolidated net loss of $7.5 million in 2004, compared to consolidated net income of $5.0 million in 2003. The unfavorable change of $12.5 million was primarily due to a net loss incurred by Legacy Marketing in 2004, compared to net income in 2003, partially offset by decreased net losses by Values Financial Network and Legacy Financial.
We had consolidated net income of $5.0 million in 2003, compared to consolidated net losses of $60,000 in 2002. The improved results were primarily due to increased net income by Legacy Marketing, partially offset by increased losses by Values Financial Network, Inc. primarily due to asset impairment losses.
Legacy Marketing had a net loss of $5.9 million in 2004, compared to net income of $7.2 million in 2003. The decline in results was primarily due to decreased revenue, partially offset by decreased expenses.
approximately 8% and 34% of our total consolidated revenue for the years ended December 31, 2004 and 2003. Revenue derived from sales and administration of American National products decreased $17.1 million in 2004 compared to 2003. Legacy Marketing has developed new products with American National that may result in increased sales for Legacy Marketing in the long term.
Other revenue decreased $1.6 million (61%) compared to 2003 primarily due to a performance bonus earned during the first half of 2003 on sales of fixed annuity and life products under the terms of one of Legacy Marketing's insurance carrier partner contracts. The contract was amended to terminate the bonus program effective July 1, 2003.
During the year ended December 31, 2004, Legacy Marketing sold and administered products primarily on behalf of three unaffiliated insurance carriers: American National, Transamerica and Investors Insurance. As indicated below, the agreements with these carriers generated a significant portion of our total consolidated revenue:
2004 2003 ----------- ----------- American National 25% 37% Transamerica 24% 25% Investors Insurance 27% 23%
Our consolidated revenues were derived primarily from sales and administration of the following fixed annuity products:
Due to the expiration of some unexercised Producer stock options in 2004, Legacy Marketing wrote off $984,000 of deferred tax assets and established a valuation allowance of $802,000 for remaining deferred tax assets associated with unexercised Producer stock options. In addition, Legacy Marketing established an additional valuation allowance of $776,000 during 2004 related primarily to its state net operating loss carryforward.
During 2003, Legacy Marketing's revenue increased $20.2 million (42%) primarily due to increased commissions and marketing allowances. Marketing allowances and commissions increased $16.3 million (46%). Legacy Marketing's sales increase was driven by sales of declared rate and equity index annuities, reflecting a shift in the marketplace toward more traditional fixed income-based annuities. The overall increase in commissions and marketing allowances during 2003 was offset in part by the effect of discontinuing several annuity products issued by Transamerica. Legacy Marketing will continue to administer these annuity products and to accept additional premium payments, subject to applicable additional deposit limitations for these products. The discontinued products accounted for approximately 3% and 31% of our total consolidated revenue during 2003 and 2002. In addition, during the second quarter of 2003, American National reduced the crediting rates of several annuity products marketed by Legacy Marketing and lowered the commission rates that they pay to Legacy Marketing for sales of these products. As a result, sales of annuity products on behalf of American National began to decrease during the second quarter of 2003. This trend continued throughout the remainder of 2003. Furthermore, during the third quarter of 2003, Legacy Marketing discontinued the marketing of the AssureMark (SM) fixed annuity product series issued by John Hancock. As a result, sales of annuity products on behalf of John Hancock decreased during 2003.
Administrative fees increased $1.9 million (16%) during 2003 compared to 2002 primarily due to increased issuing and maintenance fees. Other income increased $2.0 million during 2003 compared to 2002. This increase was primarily due to a performance bonus earned on sales of fixed annuity and life products under the terms of one of our insurance carrier partner contracts.
Legacy Marketing's expenses increased $10.6 million (23%) primarily due to increased selling, general and administrative expenses and other expenses. The increase in selling, general and administrative expenses of $9.7 million (24%) was primarily due to increases in compensation, sales promotion and support expenses, insurance, occupancy, and courier expenses. Compensation increased primarily due to salary increases, incentive based compensation based on our consolidated year-to-date results, temporary help due to increased business volume, and benefits. Sales promotion and support expenses increased primarily due to bonuses for our top independent insurance producers based on their achievement, for the year 2003, of predetermined annual sales targets which were paid in the first quarter of 2004. Increased insurance expenses reflected rising prices for errors and omissions and workers' compensation insurance coverage. The increase in courier expenses was related to increased business volume. Other expenses increased $1.2 million (47%) primarily due to the $1.1 million write-off of internal use software.
Legacy Financial revenue increased $288,000 (10%) in 2004 compared to 2003 primarily due to increased commission income as a result of increased sales volume.
Legacy Financial expenses decreased $217,000 (5%) in 2004 compared to 2003. The decrease was primarily due to a decrease in selling, general and administrative expenses of $206,000 (6%). The decrease was mainly attributable to a decrease in compensation resulting from decreased headcount, reduction in temporary help and decreased employee incentive-based compensation.
Legacy Financial revenue increased $460,000 (18%) during 2003 compared to 2002, primarily due to increased reimbursable insurance premiums and increased sponsorship revenues, partially offset by decreased marketing allowances and commissions related to lower overall sales volume and changes in product mix.
Values Financial Network, Inc. ("VFN") incurred a net loss of $751,000 in 2004 compared to a net loss of $1.0 million in 2003. The reduction in net loss was primarily due to a reduction in goodwill, intangibles and long-lived asset impairment losses, in addition to a reduction in depreciation and amortization resulting from the related reduction in intangible and asset balances.
During 2002, we revised the business model for VFN to focus on corporate and individual producer sales and our projections supported the balance of goodwill. In early 2003 we further refined our business model for VFN, including identifying a new market and committing additional resources to develop the business. During 2003, due to the failure of VFN to produce revenues as projected, we updated our annual measurement of fair value of VFN. The fair value measurement based on a revised cash flow forecast was predicated on VFN realizing a lower level of sales. This forecast of cash flows did not support the balance of goodwill, and we recorded a goodwill impairment loss of $491,000 during 2003. Projections of future cash flows supported the remaining balance of goodwill at that time.
Imagent Online had net losses of $606,000 during 2003, compared to net losses of $648,000 during 2002. This favorable change of $42,000 was primarily due to increased revenues in 2003.
Year ended December 31, 2004 compared with year ended December 31, 2003
Net cash used by operating activities was $4.4 million in 2004 compared to net cash provided by operating activities of $12.7 million in 2003. The change was primarily due to (1) decreased operating results, (2) decreased accounts payable and accrued liabilities, primarily due to the payment of bonuses to Wholesalers based on their achievement of predetermined 2003 sales targets, payments of employee 2003 incentive bonuses and payments associated with a
Producer incentive trip, (3) increase in income taxes receivable due to a pre-tax loss in 2004, (4) a smaller decrease in prepaid expenses and deposits in 2004 compared to 2003 and a (5) decrease in the write-off of fixed assets. These amounts were partially offset by decreased accounts receivable primarily due to a decline in sales volume and decreased deferred tax assets, primarily due to a write-off of deferred tax assets associated with unexercised stock options and an increase in the valuation allowance related to unexercised stock options and Legacy Marketing's state net operating loss carryforward.
Net cash used in investing activities was $3.4 million in 2004 compared to $6.0 million in 2003. The decrease was primarily due to reduced purchases and increased liquidation of available-for-sale securities to meet operating cash needs. The decrease was partially offset by increased purchases of fixed assets primarily due to construction costs related to our new servicing facility building in Rome, Georgia and an increase in computer software purchases.
We lease office and warehouse premises and certain office equipment under non-cancelable operating leases. As of December 31, 2004, our total contractual cash obligations, including the building financing discussed above, were as follows:
During 2003, we amended our Shareholder Agreement with Lynda L. Regan, Chief Executive Officer of the Company and Chairman of our Board of Directors. Under the terms of the amended agreement, upon the death of Ms. Regan, we would have the option (but not the obligation) to purchase from Ms. Regan's estate all shares of common stock that were owned by Ms. Regan 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 Ms. Regan, 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, 2004, we believe that 125% of the fair market value of the shares owned by Ms. Regan was equal to $26.0 million. We have purchased four life insurance policies with a combined face amount of $33 million for the purpose of funding this potential obligation upon Ms. Regan's death.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity
to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. We continue to assess the potential impact that the adoption of SFAS No. 123(R) could have on our financial position, results of operations or statement of cash flows.
We had a net loss of $7.5 million for the year ended December 31, 2004. The loss was primarily due to a loss at Legacy Marketing resulting from decreased revenue. The decrease in revenue was due to decreased sales of declared rate annuities resulting from a continuing low interest rate environment during 2004. The low interest rate environment caused many carriers that issue declared rate annuities to reduce the crediting rates and compensation paid on some of their products, which negatively impacted sales of declared rate annuities. Legacy Marketing's annuity sales were also negatively affected by the Company discontinuing marketing Transamerica products effective May 3, 2004.
Legacy Marketing has marketing agreements with Transamerica Life Insurance and Annuity Company, American National Insurance Company, John Hancock Variable Life Insurance Company, Investors Insurance Corporation, and Americom Life & Annuity Insurance Company. Legacy Marketing has also entered into administrative agreements with each of the five insurance carriers and IL Annuity and Insurance Company, whose marketing agreement terminated during the first quarter of 2002. During 2004, 25%, 24%, and 27%, of our total consolidated revenue resulted from agreements with American National, Transamerica, and Investors Insurance. During 2003, 37%, 25%, and 23% of our total consolidated revenue was generated from agreements with American National, Transamerica, and Investors Insurance.
Effective May 3, 2004, Legacy Marketing discontinued marketing Transamerica products that were marketed exclusively by Legacy Marketing primarily because those products no longer met Transamerica's profitability targets. Legacy Marketing will continue to administer these annuity products and to accept additional premium payments, subject to applicable additional deposit limitations for these products. The discontinued products accounted for approximately 24% and 25% of our total consolidated revenue for the years ended December 31, 2004 and 2003. Revenue from sales and administration of Transamerica products decreased $8.5 million in 2004 compared to 2003 and accounted for approximately 24% of our total consolidated revenue for the year ended December 31, 2004.
On July 1, 2002, Regan Holding entered into a Purchase Option Agreement with SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the outstanding capital stock of Investors Insurance. Pursuant to the terms of the agreement, SCOR has granted us the right to purchase the outstanding capital stock of Investors Insurance in exchange for annual option fees. We have paid annual option fees totaling approximately $3.0 million as of December 31, 2004. We have the right to exercise the option at any time prior to the expiration date on June 30, 2005. If we elect to exercise the option, we must complete the purchase transaction within two years of exercising the option. Upon completion of a purchase transaction, the option fees will be included in the purchase price. If the option expires unused, the fees paid will be expensed. Before expiration, we can request a refund of fees paid in the event that the financial rating of Investors Insurance declines as defined in the agreement. As of December 31, 2004, the Investors Insurance rating has declined to a level where we can request such a refund. We are exploring various methods to finance the acquisition of Investors Insurance, including the issuance of debt or equity securities by Regan Holding or one of our subsidiaries. As a result, it is possible that we will issue a significant amount of debt or equity securities to one or more new investors. Any such issuance of equity securities would likely reduce the percentage ownership of Regan Holding held by current shareholders.
Any interruption, deterioration, or termination of the relationship with any of Legacy Marketing's insurance carriers could be disruptive to our business and harm our results of operations and financial condition.
Our consolidated revenues may decrease significantly due to the discontinuation of the marketing of Transamerica products.
Effective May 3, 2004, Legacy Marketing discontinued marketing Transamerica products that were marketed exclusively by Legacy Marketing. As a result, sales of Transamerica products decreased during 2004. Sales of Transamerica products represented 24% and 25% of our consolidated revenue during the years ended December 31, 2004 and 2003. The failure to develop new products or the failure to increase the sales of other new annuity products could adversely affect our results of operations and financial condition.
Our success depends largely on the skills, experience and performance of certain key members of our management. In the recent past, we have been successful at attracting and retaining key personnel. We have no agreements with these individuals requiring them to maintain their employment with us. If we lose one or more of these key employees, particularly Lynda L. Regan, Chairman of the Board and Chief Executive Officer, or R. Preston Pitts, President, Chief Operating Officer and Secretary, our business, operating results, and financial condition could be diminished because we rely on their contacts, insurance carrier and Producer relationships, and strategic direction to drive our revenues. However, we are not aware of any key personnel who are planning to retire or leave our company in the near future. Although we maintain and are the beneficiary of key person life insurance policies on the lives of Lynda L. Regan and R. Preston Pitts, we do not believe the proceeds would be adequate to compensate us for their loss.
If our cash inflows and existing cash balances become insufficient to support future operating requirements or the redemption of our common stock, we will need to obtain additional funding either by incurring additional debt or issuing equity to investors in either the public or private capital markets. Our cash flows are primarily dependent upon the commissions we receive based on the premium generated from the sale of annuity products that we sell. The market for these products is extremely competitive. New products are constantly being developed to replace existing products in the marketplace. If we are unable to keep pace with the development of such new products, our cash inflows could decrease. Due to this changing environment in which we operate, we are unable to predict whether our cash inflows will be sufficient to support future operating requirements. Our failure to obtain additional funding when needed could delay new product introduction or business expansion opportunities, which could cause a decrease in our operating results and financial condition. We are unaware of any material limitations on our ability to obtain additional funding. If additional funds can be raised through the issuance of equity securities, the ownership percentage of our then-current shareholders would be reduced. Furthermore, any equity securities issued in the future may have rights, preferences, or privileges senior to that of our existing common stock.
As of December 31, 2004, we were obligated to redeem 2,853,000 shares of Series A Common Stock at the option of the holders of these shares. Of the 553,000 shares of Series B Common Stock outstanding at December 31, 2004, we were obligated to redeem up to 10% of these shares at the option of the holders of these shares, limited to a specified twenty-day period each year. The price per share is based on the estimated fair market value of the stock on the redemption date. 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, which would materially decrease our cash position.
Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Regan, our Chief Executive Officer, upon the death of Ms. Regan, the heirs of Ms. Regan will have the option (but not the obligation) to sell to us all or a portion of the shares of the Company owned by Ms. Regan at the time of her death and we will have the obligation to buy those shares. The purchase price to be paid by us, if any, shall be equal to 125% of the fair market value of the shares. As of December 31, 2004, we believe 125% of the fair market value of the shares owned by Ms. Regan was equal to $26.0 million. We have purchased four life insurance policies with a combined face amount of $33 million for the purpose of funding this potential obligation. There can be no assurances, however, that the proceeds from these insurance policies will be available or sufficient to cover the purchase price of the shares owned by Ms. Regan at the time of her death. If the proceeds from the insurance policies were not available or sufficient to cover the purchase price of Ms. Regan's shares at the time of her death, our operating results and financial condition could be adversely affected.
Our core business consists of selling fixed annuity products, on behalf of insurance carriers, through a network of approximately 24,400 Producers. If the amendments to the model Act, or similar or additional regulations, were to be adopted in states that we conduct business, the Producers would have to disclose to potential purchasers of fixed annuity products, compensation they may receive from Legacy Marketing or the insurance carriers. They may also have to disclose that the Producer represents the insurance carriers and may provide services to the customer on behalf of the carriers. We are unable to predict which states will adopt the amendments to the model Act and whether other new initiatives may affect our business and the demand for the fixed annuity products marketed by Legacy Marketing. It is possible, however, that enactment of the amendments to the model Act, or similar or additional regulations, could have a material adverse effect on the insurance industry in general or on our financial condition and results of operations.
As of December 31, 2004, Legacy Marketing had marketing agreements with Transamerica Life Insurance and Annuity Company ("Transamerica"), American National Insurance Company ("American National"), John Hancock Variable Life Insurance Company ("John Hancock"), Investors Insurance Corporation ("Investors Insurance"), and Americom Life & Annuity Insurance Company ("Americom") (collectively, the "carriers"). During 2002, Legacy Marketing terminated its marketing agreement with IL Annuity and Insurance Company ("IL Annuity"). The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity and life insurance products issued by the carriers (the "policies"). In addition, Legacy Marketing is responsible for appointing independent insurance producers, who contract with Legacy Marketing to sell policies, with the applicable carrier. For providing these services, the carriers pay Legacy Marketing commissions and marketing allowances.
Legacy Financial recognizes commission revenue when clients remit payment with a signed and completed variable annuity or investment contract. Under the terms of the sales agreements between Legacy Financial and various investment companies, Legacy Financial is compensated based upon predetermined percentages of actual sales levels.
Fixed assets are stated at cost, including capitalized interest during construction of $24,000 during 2003, 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:
In accordance with Statement of Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Measurement of the impairment of long-lived assets is based upon management's estimate of undiscounted future cash flows. The Company periodically reviews capitalized internal use software to determine if the carrying value is fully recoverable. If there are future cash flows directly related to the software or the business unit of which it is a part, as applicable, 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, 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.
Redeemable common stock is carried at the greater of the issuance value or the redemption value. Periodic adjustments to reflect increases or decreases in redemption value are recorded as accretion, with an offsetting adjustment to retained earnings.
The Company has a stock-based employee compensation plan (see Note 13) and accounts for this plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under the plan had an exercise price equal to the fair market value of the underlying common stock on the date of grant.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. The Company continues to assess the potential impact that the adoption of SFAS No. 123(R) could have on its financial position, results of operations or statement of cash flows.
When the Company purchased Value Financial Network, Inc. ("VFN") in 2000, among the assets acquired were long lived assets comprised of a website, which incorporates sales lead management, investment screening and asset allocation functionalities, and copyrights related to two books. These assets were recorded at fair value, as determined by an independent appraisal. In connection with the updated measurement of the fair value of the VFN asset group as discussed in Note 4 below, the Company recorded a long-lived asset impairment loss of $394,000 during 2003, included in Other expenses.
The aggregate amortization expense for the years ended December 31, 2004, 2003 and 2002 was $74,000, $89,000 and $91,000. The estimated amortization expense for the years ended December 31, 2005, 2006 and 2007 is $74,000, $45,000 and $4,000.
The Company has a mortgage of $7.1 million on the office building, which houses its headquarters. Payment in full of this note is due on August 1, 2012. Payments are due on the note based on a 25-year amortization schedule. On August 1, 2012, the Company must pay the remaining principal due on the note, which will be approximately $5.9 million. Prior to August 1, 2006 the interest rate on the note is 6.95%. Thereafter, the interest rate will be equal to LIBOR plus 2.55%, adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease in the interest rate. The maximum interest rate is 10.50%. As of December 31, 2004, the Company made payments of $267,000 toward the principal balance of the note. The required principal payments over the next five years are: $125,000, $135,000, $144,000, $154,000, and $166,000.
During 2003, the Company began construction of a new building in Rome, Georgia and established a $2.7 million loan facility to finance construction costs. The balance due under this loan facility on December 31, 2003 was $191,000. During April 2004, the Company refinanced its construction loan replacing it with a $2.9 million variable interest rate note indexed to LIBOR plus 1.9%. The note is payable over ten years in monthly installments of principal, amortized on the basis of a 20-year term, and interest. At the end of the ten years, the Company must pay the balance of the principal due on the note. The outstanding balance of the note as of December 31, 2004 was $2.8 million. To manage interest expense, the Company entered into an interest rate swap agreement with a notional amount equal to the principal balance of the note, which modifies its interest expense from a variable rate to a fixed rate. The April 2004 swap agreement involves the exchange of interest obligations from April 2004 through April 2014 whereby the Company pays a fixed rate of 6.8% in exchange for LIBOR plus 1.9%. As of December 31, 2004, the Company made payments of $46,000 toward the principal balance of the note. The required principal payments over the next five years are: $73,000, $78,000, $84,000, $90,000, and $96,000.
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 1% to 5% of amounts deferred, depending on the level of annual commissions earned. During the years ended December 31, 2004, 2003, and 2002, matching contributions related to the producer commission deferral plan were $18,000, $16,000, and $19,000. As of December 31, 2004 and 2003, producer contributions and Company matching contributions, including cumulative investment gains, totaled $7.0 million and $5.7 million. The liability to the employee or producer is credited or charged based on the performance of the investment option selected by the participant.
During 2003, the Company amended its Shareholder Agreement with Lynda L. Regan, Chief Executive Officer of the Company and Chairman of the Company's Board of Directors. Under the terms of the amended agreement, upon the death of Ms. Regan, the Company would have the option (but not the obligation) to purchase from Ms. Regan's estate all shares of common stock that were owned by Ms. Regan 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 Ms. Regan, 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, 2004, the Company believes that 125% of the fair market value of the shares owned by Ms. Regan was equal to $26.0 million. The Company has purchased four life insurance policies with a combined face amount of $33 million for the purpose of funding this potential obligation upon Ms. Regan's death.
As part of the Company's agreements with certain of its insurance producers, the Company may, under certain circumstances, be obligated to offer to purchase the business of the producers. At December 31, 2004, there were no outstanding commitments by the Company relating to such obligations.
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 approved a redemption value for Series A redeemable common stock of $2.03 per share and $2.21 per share, and a redemption value for Series B redeemable common stock of $1.67 and $1.82 per share, as of December 31, 2004 and 2003, based on an independent appraisal of the stock value obtained by management.
Outstanding at December 31, 2002 15,949,000 $ 1.38 Granted 788,000 $ 1.69 Exercised (155,000) $ 1.27 Forfeited (797,000) $ 1.38
Outstanding at December 31, 2003 15,785,000 $ 1.39 Granted 327,000 $ 1.69 Exercised (841,000) $ 1.12 Forfeited (6,482,000) $ 1.29
Exercisable at December 31, 2002 12,407,000 $ 1.32 Exercisable at December 31, 2003 13,106,000 $ 1.35 Exercisable at December 31, 2004 7,365,000 $ 1.48
The following table summarizes information about stock options outstanding at December 31, 2004 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. As of December 31, 2004, the Company had $148,000 of deferred tax assets related to Producer stock options after a 2004 valuation allowance of $885,000 was recorded. During 2004, $984,000 of deferred tax assets were expensed due to the expiration of some unexercised Producer stock options. Based upon the past experience of Producers exercising stock options, management believes it is more likely than not that the remaining deferred tax benefits attributable to producer stock options will be realized and no additional related valuation allowance is currently deemed necessary.
As the Company incurred net losses in the years ended December 31, 2004 and 2002, options to purchase 8.8 million and 15.8 million shares of the Company's common stock were excluded from the computation of diluted net loss per share for those periods, as the effect would have been antidilutive. Options to purchase 699,000 shares of the Company's common stock were excluded from the computation of diluted net income per share for the year ended December 31, 2003, as the option's exercise prices were greater than the average market price of the common stock, and, therefore, the effect would have been antidilutive.
As of December 31, 2004, Legacy Marketing sold and administered its products primarily on behalf of five unaffiliated insurance carriers: American National, Transamerica, John Hancock, Investors Insurance and IL Annuity. Effective during the first quarter of 2002, Legacy Marketing and IL Annuity terminated their marketing agreement. The agreements with the following carriers generated a significant portion of the Company's total consolidated revenue (sales on behalf of Investors Insurance began in the second quarter of 2002):