We own an office building in Rome, Georgia, which is used to accommodate some of Legacy Marketing Group's operating activities. We financed the property with a mortgage loan, which totaled $2.8 million at December 31, 2005. We currently lease two office buildings in Petaluma, California, which serve as the principal executive offices of Legacy Marketing and Legacy Financial.
Certain statements contained in this document, including Management's Discussion and Analysis of Financial Condition and Results of Operations, that are not historical facts, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of Regan Holding Corp. and its businesses to be materially different from that expressed or implied by such forward-looking statements. These risks, uncertainties and factors include, among other things, the following: general market conditions and the changing interest rate environment; the interruption, deterioration, or termination of our relationships with the insurance carriers who provide our products or the agents who market and sell them; the ability to develop and market new products to keep up with the evolving industry in which we operate; increased governmental regulation, especially regulations affecting insurance, reinsurance, and holding companies; the ability to attract and retain talented and productive personnel; the ability to effectively fund our working capital requirements; the risk of substantial litigation or insurance claims; and other factors referred to under Item 1A. Risk Factors.
On June 14, 2005, and in connection with the originally scheduled expiration of the administrative agreement with IL Annuity on December 31, 2005, Legacy Marketing agreed with AmerUs Annuity Group Co. ("AmerUs"), the parent company of IL Annuity, on the process to be followed to transition to AmerUs the administration of certain IL Annuity insurance contracts, which Legacy Marketing has been administering under the terms of the administrative agreement since January 1, 1996. On December 19, 2005, AmerUs and Legacy Marketing agreed to extend the term of the administrative agreement through April 30, 2006. In the twelve months ended December 31, 2005, Legacy Marketing received approximately $1.7 million in gross revenue under the administrative agreement. The expiration of the administrative agreement will not affect the commissions earned by Legacy Marketing on additional premium received or assets under management with respect to the underlying IL Annuity insurance contracts.
On November 18, 2005, Regan Holding sold its office buildings in Petaluma, California for $12.8 million. Regan Holding and the third party buyer (the "Buyer") further agreed to enter into a ten year lease agreement, concurrently with the sale of the buildings, whereby we are leasing back (i) 71,612 square feet for a period not to exceed eighteen months and (ii) between 35,612 and 51,612 square feet for the remainder of the lease term. The monthly base rent is $1.25 per square foot and will increase annually by three percent during the term of the lease, in addition to monthly taxes and operating expenses. Pursuant to the terms of the lease, we paid the Buyer a security deposit of $1.0 million
and advance rent of $980,000. The advance rent will be utilized to pay the monthly base rent, monthly taxes and operating expenses during the first nine months of the lease term. The security deposit will be reduced if we meet certain profitability criteria as specified in the Agreement.
On July 1, 2002, Regan Holding entered into a Purchase Option Agreement with SCOR, a 100% owner of the outstanding capital stock of Investors Insurance Corporation. Pursuant to the terms of the agreement, SCOR granted Regan Holding the right to purchase the outstanding capital stock of Investors Insurance in exchange for annual option fees. Regan Holding had the right to exercise the option at any time on or prior to June 30, 2005, or terminate the Option Agreement in accordance with its terms before such date if the A.M. Best rating of Investors Insurance declined below a specified level. The A.M. Best rating of Investors Insurance fell below the specified level. On June 22, 2005, Regan Holding terminated the Option Agreement. SCOR has repaid the option fees paid by Regan Holding pursuant to the Option Agreement, including interest, totaling approximately $3.3 million.
The results of our operations are generally affected by the conditions that affect other companies that market fixed annuity and life insurance products, and third-party administrators of those products. These conditions are increased competition, changes in the regulatory and legislative environments, and changes in general economic and investment conditions.
During the past few years, several federal, state and insurance self-regulatory organization proposals have been made that could affect our business. As discussed below, a few of these proposals have become effective, and others may be made or adopted.
In December 2004, the National Association of Insurance Commissioners (the "NAIC") approved amendments to the NAIC's Producer Licensing Model Act (the "Model Act"). Under the Model Act, producers, like Legacy Marketing's Producers, who have been appointed by an insurer as its agent and do not receive compensation from a customer, are not required to disclose the amount of compensation received from the insurer. However, under the Model Act, producers are required to disclose to the customer, prior to selling insurance to that customer, that the producer will be receiving compensation from the insurer, or that the producer represents the insurer and may provide services to the customer for the insurer. A few states have adopted regulations based on the Model Act and other states are considering similar regulation or legislation.
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 regulations with similar provisions are adopted by states in which we conduct business, the manner in which we and the Producers conduct business could be negatively impacted. Similarly, if the initiatives undertaken by California and other states, the Securities and Exchange Commission or the NASD with respect to equity-indexed and other annuities result in new regulation or legislation, our operations and those of our Producers could be adversely affected. We are unable to predict whether, or which, of these initiatives will result in new laws or regulations, or whether other initiatives may affect our business and the demand for fixed annuity products marketed by Legacy Marketing. If such proposals or initiatives result in new regulation or laws, they could have a material adverse effect on the insurance industry in general or on our financial condition and results of operations.
There are no significant management judgments associated with reporting these revenues. When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is considered inforce and Legacy Marketing recognizes marketing allowances and commission income. Legacy Marketing's carriers grant policyholders a contractual right to terminate the insurance contract ten to thirty days after a policy is placed
Legacy Marketing's revenue decreased $9.2 million (27%) in 2005 compared to 2004 primarily due to decreased marketing allowances and commissions and administrative fees. Marketing allowances and commissions decreased $7.2 million (32%) primarily due to decreased sales of fixed annuity products issued by Legacy Marketing's carriers.
result, sales of fixed annuity products issued by Investors Insurance began to decline significantly in the second quarter of 2004 and continued to steadily decline through the end of 2004. In addition, we discontinued selling fixed annuity products issued by Investors Insurance in certain states during 2005 due to changes in regulatory requirements related to minimum guaranteed rates, which contributed to the decrease in sales of fixed annuity products in the second half of 2005. Revenues from the sales and administration of Investors Insurance products decreased $4.5 million in 2005 compared to 2004 and accounted for 20% and 27% of our total consolidated revenue for the years ended December 31, 2005 and 2004.
Legacy Marketing's fixed annuity product sales were positively impacted in 2005, as compared to 2004, by revenue derived from sales and administration of products issued by Americom. In June 2004, Legacy Marketing entered into marketing and administrative services agreements with Americom and began marketing and administering Americom products in November 2004. Revenue derived from sales and administration of Americom products was $3.2 million in 2005 and accounted for approximately 11% of our total consolidated revenue for the year ended December 31, 2005.
Administrative fees decreased $1.7 million (16%) in 2005 compared to 2004 primarily due to decreased issuing and maintenance fees resulting from decreased fixed annuity product sales.
During the year ended December 31, 2005, Legacy Marketing sold and administered products primarily on behalf of three unaffiliated insurance carriers: American National, Investors Insurance and Transamerica. As indicated below, the agreements with these carriers generated a significant portion of our total consolidated revenue:
2005 2004 ---- ---- American National 23% 25% Investors Insurance 20% 27% Transamerica 18% 24%
2005 2004 ---- ---- BenchMark (SM) series (sold on behalf of American National) 22% 24% SelectMark (SM) series (sold on behalf of Transamerica) 18% 24% MarkOne (SM) series (sold on behalf of Investors Insurance) 13% 23%
Legacy Marketing's operating expenses decreased $2.9 million (7%) in 2005 compared to 2004 primarily due to decreased selling, general and administrative expenses. Excluding the $2.9 million impairment charge for internal use software, Legacy Marketing's expenses decreased $5.8 million (15%) in 2005 compared to 2004. Selling, general and administrative expenses decreased $5.6 million (16%) primarily due to decreased compensation and benefits and professional fees. Compensation and benefits decreased primarily due to decreased employee headcount and a reduction in temporary help. Professional fees decreased primarily due to decreased consulting fees.
Legacy Marketing has established a valuation allowance related primarily to its federal and state deferred tax assets, which increased $3.0 million in 2005.
Legacy Marketing's revenue decreased $34.0 million (50%) in 2004 compared to 2003 primarily due to decreased marketing allowances and commissions. Marketing allowances and commissions decreased $28.8 million (56%) primarily due to decreased sales of fixed annuity products issued by Legacy Marketing's carriers. The low interest rate environment causes many carriers that issue declared rate fixed annuity products, such as American National, to reduce crediting rates and compensation paid to Legacy Marketing and its network of Producers on certain products. As a result, sales of the affected products were lower in 2004 than in 2003. The affected products accounted for 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 and accounted for 25% and 37% of our total consolidated revenue for the years ended December 31, 2004 and 2003.
Legacy Marketing also experienced a decrease in sales of fixed annuity products issued by Investors Insurance in 2004. We believe the decrease was primarily attributable to a downgrade in the A.M. Best credit rating of Investors Insurance from an A- rating to a B++ rating in September 2003. Revenue derived from sales and administration of Investors Insurance products decreased $5.3 million in 2004 compared to 2003 and accounted for 27% and 22% of our total consolidated revenue for the years ended December 31, 2004 and 2003.
VFN incurred a net loss of $1.4 million in 2005 compared to a net loss of $751,000 in 2004. The increase in net loss was primarily due to an increase in the valuation allowance against VFN's deferred tax assets of $1.0 million and a valuation allowance of $201,000 recorded for a long-lived asset. These expenses were partially offset by decreased goodwill impairment losses of $679,000 resulting from a goodwill impairment charge in 2004 and a decrease in compensation and benefits and professional fees in 2005.
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 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.
Imagent Online had a net loss of $962,000 in 2005 compared to a net loss of $515,000 in 2004. The increased losses were primarily due to higher selling, general and administrative expenses and depreciation expense. Selling, general and administrative expenses increased in 2005 mainly due to increased compensation and benefits expense resulting from increased headcount. Depreciation expense increased in 2005 primarily due to accelerating depreciation on certain capitalized software, which was replaced by a new version.
Net cash provided by investing activities of $12.6 million in 2005 primarily consisted of the proceeds from the sale of our office buildings in Petaluma, California, and a refund of option fees pursuant to the terms of the Purchase Option Agreement with SCOR totaling $3.0 million, excluding interest, partially offset by purchases of fixed assets totaling $2.7 million.
Net cash used in investing activities of $3.4 million in 2004 consisted primarily of purchases of fixed assets of $7.7 million mainly due to increased computer software costs and construction costs related to our office building in Rome, Georgia, and option fees of $1.8 million paid by Regan Holding pursuant to the terms of the SCOR Purchase Option Agreement. These costs were partially offset by proceeds from sales of available-for-sale securities totaling $5.9 million.
Net cash used in investing activities of $6.0 million in 2003 consisted primarily of purchases of fixed assets of $4.2 million and purchases of available-for-sale securities of $1.0 million.
Net cash used in financing activities in 2005 of $7.4 million was primarily due to the payoff of the mortgage loan in conjunction with the sale of our office buildings in Petaluma, California.
Net cash provided by financing activities in 2004 of $2.2 million primarily reflected net proceeds of $2.7 million from our mortgage loan to finance our office building in Rome, Georgia, and proceeds from the exercise of stock options, partially offset by repurchases of our common stock.
Net cash used in financing activities in 2003 of $1.6 million was primarily the result of repurchases of our common stock.
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, 2005, we believe that 125% of the fair market value of the shares owned by Ms. Regan was equal to $8.8 million. We have purchased life insurance coverage for the purpose of funding this potential obligation upon Ms. Regan's death.
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, 2005 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein for the year ended December 31, 2005.
/s/ Burr, Pilger & Mayer, LLP San Francisco, California March 3, 2006
REGAN HOLDING CORP. AND SUBSIDIARIES Consolidated Statement of Shareholders' Equity For the years ended December 31, 2005, 2004, and 2003
Legacy Marketing also has administrative agreements with the carriers and with IL Annuity, whose administrative agreement is scheduled to expire on April 30, 2006. Pursuant to the administrative agreements, Legacy Marketing provides clerical, administrative, and accounting services with respect to the policies. These services include billing, collecting and remitting premium for the policies. For providing these services, the carriers pay Legacy Marketing administrative fees.
When a policyholder remits a premium payment 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 grant policyholders a contractual right to terminate the insurance contract ten to thirty days after a policy is placed inforce. This return period varies depending on the carrier, 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. Legacy Marketing recognizes administrative fees on a per transaction basis as services are performed, with the amount of the fee depending on the type of policy and type of service.
The Company's investments are classified as available-for-sale or trading securities and are carried at fair value. For available-for-sale securities, unrealized gains and losses, net of the related tax effect, are reported as a separate component of shareholders' equity. For trading securities, unrealized gains and losses are reported in Selling, general and administrative expenses.
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" ("SFAS 133"). SFAS 133 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.
2005 2004 2003 ----------- ----------- ----------- Risk-free interest rates 3.73%-4.43% 2.84%-4.03% 1.45%-3.20% Expected life 3-5 years 3-5 years 3-5 years Dividend yield None None None
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement No. 154, "Accounting Changes and Error Corrections, a replacement of Accounting Principles Board ("APB") Opinion No. 20 and FASB Statement No. 3" ("FAS 154"). FAS 154 provides guidance on the accounting for, and reporting of, a change in accounting principle, in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most
December 31, ----------------------------- 2005 2004 ------------ ------------ Computer hardware and purchased software $ 6,510,000 $ 10,465,000 Internal use software development costs 15,956,000 18,560,000 Leasehold improvements 1,161,000 1,361,000 Furniture and equipment 2,621,000 3,213,000 Building 3,108,000 10,884,000 Land and land improvements 338,000 3,092,000 ------------ ------------ 29,694,000 47,575,000 Accumulated depreciation and amortization (16,270,000) (19,900,000) ------------ ------------ Total $ 13,424,000 $ 27,675,000 ============ ============
In 1998, the Company began a project intending to replace our existing policy administration system with new licensed software after the vendor of the existing policy administration system required us to migrate from the existing system to an alternative platform. In late 2002, the Company learned from the vendor that we might be able to retain the existing system. Modification and customization of the licensed software was suspended in December of 2002. As a result of an evaluation of the Company-wide technological needs, which included an assessment of the viability of the existing system, it was concluded that the Company would use both systems. In the fourth quarter of 2003 the Company recorded a write-off of $1.1 million associated with the abandoned components of the software costs.
During the second quarter of 2004, due to the failure of VFN to produce revenues as projected, particularly in the corporate arena, management 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, the Company 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, the Company concluded no impairment had occurred to the long-lived assets.
December 31, -------------------------------------------------- 2005 2004 ---------------------- ----------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization --------- --------- --------- --------- Copyrights $ 203,000 $(203,000) $ 203,000 $(174,000) Software license 223,000 (175,000) 223,000 (130,000) --------- --------- --------- --------- Total $ 426,000 $(378,000) $ 426,000 $(304,000) ========= ========= ========= =========
Intangible assets are amortized on a straight-line basis over their estimated useful life of 5 years. The aggregate amortization expense for the years ended December 31, 2005, 2004 and 2003 was $74,000, $74,000 and $89,000. The estimated amortization expense for the years ended December 31, 2006 and 2007 is $45,000 and $3,000.
December 31, -------------------------------- 2005 2004 ----------- ----------- Accrued compensation $ 1,825,000 $ 1,952,000 Commissions payable 749,000 381,000 Payable to insurance carrier 620,000 387,000 Accrued software costs 675,000 730,000 Accrued sales bonus 485,000 95,000 Accounts payable 206,000 391,000 Miscellaneous accrued expenses 924,000 1,307,000 ----------- ----------- Total $ 5,484,000 $ 5,243,000 =========== ===========
The Company has a mortgage on its office building in Rome, Georgia. The note has a variable interest rate indexed to 30-day LIBOR plus 1.9% and 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, 2005 and 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, 2005, the Company made payments of $119,000 toward the principal balance of the note. The required principal payments over the next five years are: $78,000, $84,000, $90,000, $96,000 and $103,000.
As of December 31, 2004, the Company had an outstanding mortgage due of $7.1 million on its office buildings in Petaluma, California. The note bore interest at 6.95% and was originally due by August 1, 2012. On November 18, 2005, in connection with the sale of its office buildings in Petaluma, California (see Note 18), the Company repaid the outstanding mortgage due on the buildings.
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. During the years ended December 31, 2005, 2004, and 2003, matching contributions related to the producer commission deferral plan were $8,000, $18,000, and $16,000. As of December 31, 2005 and 2004, producer contributions and Company matching contributions, including cumulative investment gains, totaled $7.5 million and $7.0 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, Legacy Marketing earned a performance bonus from sales of fixed annuity and life products under the terms of one of its insurance carrier partner contracts. Amounts were earned when fixed and determinable and all revenue recognition criteria had been met. The Company recorded revenue of $2.0 million during 2003. These amounts are included in Other revenue. The carrier paid Legacy Marketing Group in full during 2003 and both parties agreed to terminate the bonus program effective July 1, 2003.
During 2005 and 2004, 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 $910,000 during the year ended December 31, 2005 related to this program, of which $425,000 was paid as of December 31, 2005. The amount expensed in 2004 was $392,000. The amounts expensed are included in selling, general and administrative expenses.
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, 2005, 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 $0.69 per share and $2.03 per share, and a redemption value for Series B redeemable common stock of $0.57 and $1.67 per share, as of December 31, 2005 and 2004, based on an independent appraisal of the stock value obtained by management.
The Company recorded redeemable common stock accretion/(reduction) of ($871,000), ($512,000) and $34,000 related to Series A redeemable common stock for the years ended December 31, 2005, 2004 and 2003.
2005 2004 2003 ------ ------ ------ Risk-free interest rates 3.99% 3.71% 3.19% Volatility 27% 27% 27% Dividend yield None None None Expected life 6 years 6 years 6 years
For the Year Ended December 31, ----------------------------------------- 2005 2004 2003 ----------- ----------- ----------- Current income taxes: Federal $ 190,000 $(3,341,000) $ 3,311,000 State 11,000 (36,000) 944,000 ----------- ----------- ----------- Total current 201,000 (3,377,000) 4,255,000
As of December 31, 2005, the Company has federal and primary state net operating loss carryforwards of $5.3 million and $23.0 million. On December 31, 2024 and 2025, $251,000 and $5.0 million of the federal net operating losses will expire. On December 31, 2012, $4.9 million of the state net operating losses will begin to expire. The Company also has federal and state alternative minimum tax credit carryforwards of $191,000 and $275,000. These credits do not have an expiration date. Federal and state tax valuation allowances have been established for all of the federal and state net operating loss carryforwards and the federal and state tax credit carryforwards.
The basic and diluted earnings (loss) per share calculations are based on the weighted average number of common shares outstanding including shares of redeemable common stock.
As the Company incurred net losses in the years ended December 31, 2005 and 2004, options to purchase 6.0 million and 8.8 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.
The Company has identified its reportable segments based on its method of internal reporting and segregates its business into four primary reportable segments: Legacy Marketing, Legacy Financial, Imagent Online, and Values Financial Network. Intersegment transactions are eliminated in consolidation. The Legacy Marketing business segment includes the results of selling and administering fixed annuity and life insurance products and general corporate expenses not allocated to the Company's other segments.
In January 2006, management of the Company decided to discontinue the operations of VFN. We will incur insignificant costs associated with exiting the operations.
In June 2005, management of the Company authorized the dissolution of its Other segement, Legacy Reinsurance Company ("Legacy Re"). The dissolution became effective in July 2005. Legacy Re did not have any results of operations in the years ended December 31, 2005, 2004 and 2003.
As of December 31, 2005, Legacy Marketing sold and administered its products primarily on behalf of three unaffiliated insurance carriers: American National, Investors Insurance and Transamerica. The agreements with those carriers generated a significant portion of the Company's total consolidated revenue:
2005 2004 2003 ---- ---- ---- American National 23% 25% 37% Investors Insurance 20% 27% 23% Transamerica 18% 24% 25%
Legacy Marketing's revenues are derived primarily from sales and administration of the following fixed annuity product series:
On November 18, 2005, the Company sold its office buildings in Petaluma, California for $12.8 million. The Company and the third party buyer (the "Buyer") further agreed to enter into a ten year lease agreement, concurrently with the sale of the buildings, whereby the Company is leasing back (i) 71,612 square feet for a period not to exceed eighteen months and (ii) between 35,612 and 51,612 square feet for the remainder of the lease term. The monthly base rent is $1.25 per square foot and will increase annually by three percent during the term of the lease, in addition to monthly taxes and operating expenses. Pursuant to the terms of the lease, the Company paid the Buyer a security deposit of $1.0 million and advance rent of $980,000. The advance rent will be utilized to pay the monthly base rent, monthly taxes and operating expenses during the first nine months of the lease term. The security deposit will be reduced if the Company meets certain profitability criteria as specified in the Agreement.