The following table presents selected historical consolidated financial information derived from the historical consolidated financial statements of the Company as of and for each of the years in the five-year period ended December 31, 1999. This information should be read in conjunction with the historical consolidated financial statements of the Company and the related notes thereto and
The Company operates its asset-based businesses primarily through its consolidated subsidiaries, Singer and ELB and minority owned subsidiaries, C-BASS and Sherman. The Company's asset-based businesses include the origination, purchase, servicing and/or securitization of special assets, including state lottery awards, structured settlement payments and viatical settlements; sub-performing/non-performing and seller-financed residential mortgages, real estate and subordinated residential mortgage-backed securities; and delinquent unsecured consumer assets.
The Company's revenues consist primarily of (a) premiums earned on insurance and reinsurance contracts, (b) investment income and (c) the sale of securitized deferred payment streams.
YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998
The following table shows net premiums written by line of business for the periods presented:
Net premiums earned grew 1.6% to $103.9 million in 1999 from $102.3 million in 1998. This growth in premiums earned was attributable to increased writings in the direct financial guaranty and trade credit reinsurance business. Also included in 1998 municipal reinsurance result was a cession generating approximately $11.0 in written premium. This opportunity did not recur in 1999. Earned premiums for municipal reinsurance from refundings contributed $13.0 million (or 12.5%) to earned premiums in 1999 compared to $17.9 million in 1998.
The following table shows net premiums earned by line of business for the periods presented:
Incurred losses and loss adjustment expenses ("LAE") were $26.2 million in 1999 unallocated compared with $10.3 million in 1998. Included in 1999 is a $12.5 million increase in unallocated or non-specific reserves to reflect an improved and more refined reserving method, as well as adverse development of $1.8 million relating to a claim reported in the prior year.
Interest expense totaled $11.0 million in 1999 compared to $8.5 million in 1998 reflecting the increase in the Company's short-term debt outstanding.
The Company's effective tax rate was 1.2% for 1999 compared to 26.9% in 1998. The 1999 tax rate is reflective of the April 1999 purchase of a portfolio of residential mortgage-backed securities. The transaction is expected to provide ancillary benefits that will result in a lowering of the Company's effective tax rate through at least 2001. See Note 6 of Notes to Consolidated Financial Statements.
Net income for 1999 decreased 16.8% to $68.6 million from $82.5 million in 1998. On a per share basis, basic earnings per share decreased 17.7% to $1.81 in 1999 from $2.20 in 1998, while diluted earnings per share decreased 16.2% to $1.76 in 1999 from $2.10 in 1998. Basic operating earnings per share decreased 11.4% to $1.95 in 1999, while diluted operating earnings per share decreased 9.5% to $1.90 in 1999. The Company defines operating earnings as net income, less the effect of net realized capital gains and losses, foreign exchange gains and losses, and certain non-recurring items.
The weighted-average shares outstanding for 1999 was 38.0 million compared to 37.5 million for 1998. The diluted weighted-average shares outstanding for 1999 was 39.0 million compared to 39.3 million for 1998.
Municipal new-issue volume was $286.0 billion in 1998, an increase of 29.6% from $220.7 million in 1997 for the financial guaranty insurance industry in total. The insured portion of such new issues was 50.8% and 48.7% for these years respectively. Total municipal bond refunds for 1998 represented approximately 28.6% of the new-issue volume, compared to 26.7% from 1997.
Gross premiums written in 1998 increased 20.5% to $130.4 million from $108.2 million in 1997 due to substantial growth in financial guaranty reinsurance and direct financial guaranty writings, including a non-recurring cession of $11 million. Consequently, net premiums written also increased 28.7% to $129.3 million from $100.5 million in 1997. There was 63.8% growth in municipal assumed reinsurance and a 103.2% growth in direct premium.
Net premiums earned grew 19.6% to $102.3 million in 1998 from $85.5 million in 1997. The growth in premiums earned was primarily attributable to increased writings in assumed municipal and non-municipal reinsurance. In 1998, a one-time cession generated approximately $11.0 million in municipal reinsurance premium. Earned premiums for municipal reinsurance from refundings contributed $17.9 million (or 17.5%) of earned premium in 1998 compared to $8.6 million in 1997.
Net investment income increased 5.5% to $53.4 million in 1998 from $50.6 million for 1997 reflecting the growth in invested assets in the period offset, in part, by a shift in the portfolio towards tax-exempt securities. After-tax investment income increased 7.6% in 1998 over 1997. The average yields on the Company's investment portfolio, after deducting associated costs, were 6.1% and 6.2% for the years ended December 31, 1998 and 1997, respectively. The average yields on the Company's investment portfolio on an after-tax basis, net of associated costs, were 5.1% and 5.1% for the years ended December 31, 1998 and 1997, respectively. In addition, the Company realized $2.4 million and $0.7 million of net capital gains in 1998 and 1997, respectively. Net investment income is presented net of both external investment management fees and internal costs associated with managing the investment portfolio.
The Company's effective tax rate was 26.9% for 1998 compared to 26.8% in 1997.
Enhance Reinsurance and Asset Guaranty increased their funds held balances with ceding reinsurers to $437.3 million as of December 31, 1999 from $312.0 million as of December 31, 1998.
Enhance Financial is party to a Credit Agreement with major commercial banks providing for borrowing by Enhance Financial of up to $125 million to be used for general
The Company and Mortgage Guaranty Insurance Company ("MGIC") each own 48% interest, which decreased to 46% effective January 1, 2000, in C-BASS. The Company contributed $55.5 million to C-BASS from its inception in 1996 through December 1999, including its 100% interest in Litton Loan Servicing Inc. during 1998, and expects that it will provide additional funding to C-BASS, all on a pari passu basis with MGIC.
In December 1998, the Company and MGIC formed Sherman, a joint venture in which the Company and MGIC each own a 45% interest. The Company has committed to contribute a total of $20.2 million to Sherman, of which $9.0 million has been contributed as of December 31, 1999, including $1.6 million in cash and the Company's contribution of assets or equity in the subsidiaries of Alegis Group, Inc. The Company expects that it will provide additional funding in addition to its original capital commitment to Sherman from time to time. In May 1999, the Company guaranteed repayment by Sherman of up to 50% of the amount outstanding under a $50 million revolving credit facility that Sherman obtained from a major commercial bank. As of December 31, 1999, the outstanding principal balance under the facility was approximately $21.8 million, of which the Company hs guaranteed $10.9 million.
In July 1998, the Company acquired an 80% ownership interest in AGS Financial LLC. The Company is obligated to pay $3.1 million, as and when needed, of which $2.1 million has been paid.
In 1995, the Company acquired a 50% joint venture interest in Singer. In 1997, the Company acquired the remaining 50% of Singer in a series of all-stock transactions. The Company issued 1,006,228 shares of its common stock in connection with the 1997 transactions.
In December 1996, the board of directors terminated the existing stock repurchase program and authorized the repurchase of up to 1,500,000 shares of Enhance Financial's common stock from that date. No shares were repurchased during 1999 and the Company currently does not plan to repurchase shares in 2000.
The Company has material commitments for capital or other expenditure relating to office equal improvements during 2000 aggregating $11.0 million.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (In thousands except share amounts)
ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company, through its consolidated subsidiaries, Singer Asset Finance Company, L.L.C. ("Singer", See Note 5), Enhance Life Benefits LLC ("ELB") and AGS Financial L.L.C. ("AGS Financial"), and partially-owned subsidiaries, Credit-Based Asset Servicing and Securitization LLC ("C-BASS", See Note 5) and Sherman Financial Group LLC ("Sherman" see Note 5), is also engaged in the origination, purchase, servicing and/or securitization of special assets, including lottery awards, structured settlement payments, viatical settlements, sub-performing/non-performing residential mortgages and unsecured delinquent consumer assets including credit cards receivables.
The accompanying financial statements include the accounts of Enhance Financial, Enhance Investment Corporation, the Insurance Subsidiaries, AGS Financial, Singer, ELB, Van-Am and EnRe Bermuda (collectively the "Company"). Investments in which the Company owns from 20% to 50% of those companies and where the Company has a majority voting interest, but where the
minority shareholders have substantive participating rights, are accounted for in accordance with the equity method of accounting (See Note 5). All significant intercompany accounts and transactions, and intercompany profits and losses, including these transactions with equity method investee companies, have been eliminated.
Other invested assets consist of residential mortgage-backed securities (See Note 6), which are classified as trading securities and are carried at fair value, with changes in fair value recognized in income currently. At December 31, 1999, the carrying value approximates cost.
The Company uses interest rate swaps and forward treasury lock agreements to hedge interest rate risk associated with unsecuritized assets held and anticipated acquisitions of assets by Singer. Gains and losses on such instruments that qualify as accounting hedges are deferred until the underlying hedged asset is sold, at which time the gain or loss on the related hedge is recognized in income.
The Company uses forward currency contracts to hedge foreign currency exchange risk associated with fixed maturity investments denominated in foreign currencies. Gains and losses on open forward currency exchange contracts, which qualify as accounting hedges are deferred and recognized as an adjustment of the carrying amount of the hedged assets. Gains and losses on expired contracts are recognized currently.
insurers and annual increases in the total net par amount outstanding of the Company's insured obligations ($85.6 billion as of December 31, 1999). The Company records a specific provision for losses and related LAE when reported by primary insurers or when, in the Company's opinion, an insured risk is in default or a default is probable and the amount of the loss is reasonably estimable. In the case of obligations with fixed periodic payments, the provision for losses and LAE represents the present value of the Company's ultimate expected losses, adjusted for estimated recoveries under salvage or subrogation rights. The non-specific reserves represent the Company's best estimate of total reserves, less provisions for specific reserves. Generally, when a case basis reserve is established or adjusted, a corresponding adjustment is made to the non-specific reserve. The Company discounts certain financial guaranty liabilities at annual rates which correspond to the Insurance Subsidiaries investment yields ranging from 5.95% to 6.35%. These discounted liabilities at December 31, 1999 and 1998 were $14.9 million and $17.5 million respectively, net of discounts of $12.0 million and $11.0 million, respectively.
Reserves for losses and LAE for the Company's other lines of business, primarily trade credit reinsurance, are based on reports and individual loss estimates received from ceding companies, net of anticipated estimated recoveries under salvage and subrogation rights. In addition, a liability is included for losses and LAE incurred but not reported.
The Company periodically evaluates its estimates for losses and LAE and may adjust such reserves based on the Company's actual loss experience, mix of business and economic conditions. Changes in total estimates for losses and LAE are reflected in current earnings. The Company believes that its total reserves for losses and LAE are adequate to cover the ultimate cost of all claims net of reinsurance recoveries. However, the reserves are based on estimates of losses and LAE, and there can be no assurance that the ultimate liability of the Company will not exceed such estimates.
The Company has in effect a stock option program for key employees and a directors' stock option program for the benefit of directors who are not employees of the Company. In March 1998, the board of directors adopted the Director Stock Ownership Plan pursuant to which directors are entitled to elect to receive all or a portion of their directors fees in the form of Enhance Financial common stock. Under these programs, awards are granted to eligible employees and directors of the Company in the form of Incentive Stock Options, where they qualify under the Internal Revenue Code, or Non-Qualified Stock Options. The Company follows the intrinsic value based method of accounting for stock based compensation as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has provided pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied (See Note 12).
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of Enterprise and Related Information." This pronouncement requires a company to present disaggregated information based on the internal segments used in managing its business. The adoption of this statement did not impact the Company's financial position or results of operations, but it did affect the presentation of the Company's segment disclosures (See Note 17).
In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (the "Codification"). The Codification is intended to standardize regulatory accounting and reporting for the insurance industry and is proposed to be effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices, and it is uncertain when or if, the State of New York will require adoption of the Codification for the preparation of statutory financial statements. The Company has not finalized the quantification of the effects of Codification on its statutory financial statements.
Furniture, fixtures and equipment are carried at depreciated cost. Depreciation is provided using the straight-line method over the estimated economic lives of the assets, which range from 3 to 7 years. Leasehold improvements are amortized over the lesser of 5 years or the lease term.
Under the New York Insurance Law, the Insurance Subsidiaries may declare or distribute dividends only out of earned surplus. The maximum amount of dividends which may be paid by the Insurance Subsidiaries to Enhance Financial without prior approval of the Superintendent of Insurance is subject to restrictions relating to statutory surplus and net investment income as defined by statute. Enhance Re declared and paid a dividend of $22 million and Asset Guaranty declared and paid a dividend of $4 million for the year ended December 31, 1999. At December 31, 1999, the Insurance Subsidiaries had an additional $11.0 million available for dividend distribution.
Proceeds from sales of available for sale investments in fixed maturities during 1999, 1998 and 1997 were approximately $348 million, $301 million and $407 million, respectively. Gross gains of $5.5 million and gross losses of $3.3 million were realized in 1999. A write-down of book values for fixed income securities, in the amount of $5.3 million, resulted in a net realized loss on the sale of investments of $3.0 million in 1999. Gross gains of $5.0 million and gross losses of $2.6 million were realized on those sales in 1998. Gross gains of $4.8 million and gross losses of $4.2 million were realized on those sales in 1997.
Sources of the Company's consolidated net investment income are as follows (in 000s):
The net unrealized appreciation (depreciation) of investments included as a component of other accumulated comprehensive income at December 31, 1999 and 1998 is as follows (in 000s):
The Company owns a controlling equity interest in the outstanding stock of Van-Am and accounts for its investment on a consolidated basis. Due to intense pricing competition in Van-Am's core business and a poor strategic fit with the Company's other operations, the Company
In 1996, the Company and MGIC Investment Corporation formed C-BASS, with members of management thereof. C-BASS evaluates, purchases, services and securitizes sub-performing, non-performing, and seller financed residential mortgages and real estate and subordinated residential mortgage-backed securities. At December 31,1999 the Company owned approximately a 48% interest in C-BASS, which is being accounted for on the equity basis of accounting. Effective January 1, 2000, the Company owns approximately a 46% interest in C-BASS. In 1998, the Company contributed substantially all of the assets of in LLSI to C-BASS as part of its initial capital commitment. At December 31, 1999, the Company had contributed $55.5 million of capital to C-BASS. The following table sets forth combined C-BASS financial data as of the date indicated and for the periods then ended (in millions):
investment in SBF as of December 31, 1999 and December 31, 1998 was approximately $3.4 and $4.5 million, respectively, and is being accounted for on the equity methods of accounting.
Total assets of the Company's unconsolidated subsidiaries and affiliates accounted for by the equity method of accounting at December 31, 1999 and 1998 were $1,275.5 and $707.2 million, respectively. Total liabilities at December 31, 1999 and 1998 were $868.4 and $507.3 million, respectively. Total net income for the years' ended December 31, 1999 and 1998 was $40.3 and $30.5 million, respectively.
A reconciliation from the tax provision calculated at the federal statutory rate of 35% to the actual tax is as follows (in 000s):
Prepaid federal income taxes includes Tax and Loss Bonds of $24.8 million and $29.3 million as of December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company has net operating loss carryforwards of $12 million which expire in 2019.
Enhance Financial maintains an unsecured credit facility through a credit agreement (the "Credit Agreement") with major commercial banks providing for borrowing by Enhance Financial of up to $100 million due June 27, 2000, (which was temporarily increased by $25 million from September 29, 1999 through March 31, 2000) to be used for general corporate purposes. Advances under the Credit Agreement bear interest at variable LIBOR-based rates. The average interest rate paid on such advances in 1999 was 6.02%. The Credit Agreement prohibits the Company from incurring additional indebtedness to the extent the resulting total would exceed 25% of the Company's total capitalization as defined or 50% of sum of the Insurance Subsidiaries combined statutory surplus and contingency reserves, and includes certain covenants, none of which significantly restricts the Company's operating activities or dividend-paying ability. The total outstanding under the Credit Agreement at December 31, 1999 was $110 million.
termination in the amount of $4.6 million. The gain ($1.8 million at December 31, 1999) has been deferred and is being amortized over the original term of the swap.
In December 1996, the board of directors terminated the then existing repurchase program and authorized the repurchase of up to 1,500,000 shares of its common stock from that date. Enhance Financial purchased 666,394 and 355,850 shares of its common stock at an average price of $26.72 and $19.73 per share in 1998 and 1997 respectively. No shares were repurchased in 1999.
In connection with the repurchase program, Enhance Financial entered into a forward purchase agreement during 1997 regarding 256,394 shares of its common stock at a forward purchase price of $21.25 per share. The agreement settles quarterly on a net basis in shares of Enhance Financial stock or in cash at Enhance Financial's election. To the extent that the market price of Enhance Financial common stock on a settlement date was higher (lower) than the forward purchase price, the net differential was received (paid) by Enhance Financial. During 1998, settlements resulted in Enhance Financial receiving 106,394 shares, which were recorded as treasury shares. The agreement terminated in June 1998 after Enhance Financial repurchased the full amount under the program.
During 1998, Enhance Financial issued 454,473 shares of common stock in connection with its acquisition of Alegis Group Inc. (See Note 5).
The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
SHORT-TERM INVESTMENTS - Fair values of short-term investments are assumed to equal cost.
DEFERRED PREMIUM REVENUE - The fair value of the Company's deferred premium revenue, net of prepaid reinsurance premium, is based on the estimated cost of entering into a cession of the entire portfolio with third-party reinsurers under market conditions. This figure was determined by using the statutory basis unearned premiums adjusted for ceding commission based on current market rates.
LOSS AND LOSS ADJUSTMENT RESERVES - The carrying amount, net of reinsurance recoverable on unpaid losses, is composed of the present value of the expected cash flows for specifically identified claims combined with a general estimate for non-specific reserves. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve.
SHORT-TERM DEBT -The fair value of short-term debt, which bears interest at variable rates, is assumed to equal the carrying value of the debt.
DERIVATIVE INSTRUMENTS - The fair values of foreign currency contracts are based on the estimated termination values as of the balance sheet date. The fair values of interest rate swaps and forward treasury lock agreements (notional amounts of $65 million and $15 million, respectively, at December 31,1999) are determined by the Company using relevant market information and appropriate valuation methodologies.
The Company principally insures and reinsures financial guaranties issued to support public and private borrowing arrangements, including commercial paper, bond financings, and similar
transactions. Financial guaranties are conditional commitments which guaranty the performance of a customer to a third party.
The net post-retirement benefit cost for 1999, 1998, and 1997 was $180,000, $140,000, and $127,000, respectively, and includes service cost, interest cost and amortization of the transition obligation and prior service cost.
In January 1996, the Company implemented a 401(k) retirement savings plan covering substantially all employees of the Company. Under this plan, the Company provides a matching contribution of 50% on contributions up to 6% of base salary made to the plan by eligible employees. The Company's matching contributions were $275,000, $120,000, and $106,000 in 1999, 1998 and 1997, respectively.
All options are exercisable at the option price, being the fair value of the stock at the date of grant. The board of directors has authorized a maximum of 11,631,050 shares of common stock to be awarded as options, of which 9,172,435 options for shares (net of expirations and cancellations) had been awarded as of December 31, 1999. Information regarding activity in the option programs follows:
income and earnings per share would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average grant date fair value of option grants were $6.78, $16.62, and $12.01 in 1999, 1998 and 1997, respectively. The following assumptions were used for option grants awarded in 1999, 1998 and 1997:
The Company has committed to lease office space under non-cancelable leases which expire at various dates through August 2015. The leases provided for escalations resulting from increased assessments for taxes, utilities and maintenance. Future minimum rental payments on all leases, before any deductions for estimated sublease income, are as follows (in 000s):
The Company does not believe that the downgrade of the senior long-term debt rating of Enhance Financial from Aa3 to A2 has had or should have a material adverse effect on Enhance Financial, except to the extent that it could have a material adverse effect on Enhance Re. However, such downgrade could result in an increase, which could be significant, in the costs to Enhance Financial of borrowing funds or raising capital. Similarly, any additional downgrade of the senior long-term debt rating of Enhance Financial could increase costs of borrowing funds or raising capital, or could make certain types of borrowings or capital unavailable to the Company, which could have a material adverse effect on the Company.
On February 29, 2000, Moody's advised the Company that it had placed on review for possible further downgrade both the above ratings. Moody's explained that this review will focus on the uncertainty surrounding management's strategy with respect to the Company's higher risk specialty finance businesses, the reliance on these business lines to achieve publicly stated earnings targets, the Company's future capital plans and the Company's financial flexibility. Moody's indicated that the outcome of the review will depend on the Company's future plans for achieving a balance between the financial guaranty insurance operations and the Company's other lines of business. The Company does not believe that a downgrade of Enhance Re's financial strength rating from Aa2 to Aa3, should it occur, should have a material adverse effect on Enhance Re's competitive position or Enhance Re's costs associated with cessions from primary insurers under their treaties with Enhance Re. This is because many of Enhance Re's reinsurance competitors do not have materially higher financial strength ratings from Moody's than would Enhance Re and because of the terms of the amendments of certain of its existing treaties and its new treaties with the Company's primary insurers. In cases where a prior treaty with a primary insurer remains in effect or a primary insurer had waived its rights with respect to the 1999 downgrade, any additional downgrade could result in those primary insurers recapturing business previously ceded to Enhance Re. However, a downgrade in Enhance Re's financial strength rating to (or below) A could have a material adverse effect on Enhance Re's competitive position. Such a downgrade may so diminish the value of Enhance Re's reinsurance to the
primary insurers that they could either materially increase the costs to Enhance Re associated with cessions under their treaties with Enhance Re or recapture business previously ceded to Enhance. In either case, the effect of such changes could materially adversely affect the Company's ability to continue to engage in the reinsurance of monoline financial guaranty insurers business. While the Company believes that the recapture of business by the primaries would otherwise be inconsistent with their long-standing risk-management practices, such action, if it occurs and depending on its magnitude, could have a material adverse effect on the Company.
The following are the condensed balance sheets of Enhance Financial as of December 31, 1999 and 1998 and its condensed statements of income and cash flows for the years ended December 31, 1999, 1998 and 1997 (in 000s).
The Company derives a substantial portion of its premium writings from a small number of primary insurers. The following table states the percentage of gross premiums written for the years ended December 31, 1999, 1998 and 1997 for the Company's four most significant primary insurers:
The incurred loss and paid loss information presented above is classified as "current year" and "prior year" based upon the year in which the related reinsurance contract or insurance policy was underwritten. Therefore, amounts presented as "net incurred related to prior years" are not indicative of redundancies or deficiencies in total reserves held as of prior year ends. During the years ended December 31, 1999, 1998 and 1997, the actual adverse (redundant) development of reserves held as of prior year ends was $2.3 million, $(0.2) million, and $1.5 million, respectively.
The Company has two reportable segments: insurance and asset-based businesses. The insurance segment provides credit-related insurance coverage to meet the needs of customers in a wide variety of domestic and international markets. The Company's largest insurance business is the provision of reinsurance to the monoline primary financial guaranty insurers for both municipal bonds and non-municipal obligations. The Company also provides trade credit reinsurance, financial responsibility bonds, excess-SIPC insurance and direct financial guaranty insurance. The asset-based businesses segment deals primarily with credit-based servicing and securitization of assets in underserved markets, in particular, the origination, purchase, servicing and securitization of special assets, including lottery awards, viatical settlements, structured settlement payments, sub-performing/non-performing and seller financed residential mortgages and delinquent consumer assets. The Company's reportable segments are strategic business units which are managed separately as each business requires different marketing and sales expertise.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operating earnings, which it defines as net income excluding the impact of capital and foreign
exchange gains and losses, and certain non-recurring items, net of taxes. Summarized financial information concerning the Company's operating segments is presented in the following tables (in 000s):
The Company's revenues from external customers, by product line, are as follows (in 000s):
In February 2000, the Company announced that it had implemented cost control initiatives and a reduction in staff. The Company estimates a first quarter charge of approximately $1.9 million related to staff reductions.