In addition, we lease approximately 18,200 square feet of office space in Des Moines, Iowa, primarily for LifeSurance Corporation’s operations. However, some Legacy Marketing information systems personnel are also located at this facility. This lease expires in October 2004. In February 2001, the Company announced the discontinuance of most of LifeSurance’s operations and is seeking to relocate the remaining operations to smaller facilities. Management expects to sublease the vacated space to unrelated parties.
We believe that existing and planned office and warehouse space is and will continue to be adequate for our operations for the foreseeable future.
Inforce premium and policies are actually statistics of the Carriers but represent factors that directly affect our revenue.
In 1999, the Company changed its method of accounting for the cost of computer software developed or obtained for internal use.
In 2000, the Company changed its method of recognizing revenue for certain contracts with performance obligation provisions.
The table below presents information about our operating segments for the years ended December 31, 2000, 1999 and 1998:
Results of Operations - The Company experienced consolidated net losses of approximately $3.8 million in 2000, compared to consolidated net income of approximately $4.5 million in 1999. The shift is primarily due to decreases in Legacy Marketing revenues and increases in Legacy Marketing expenses, partially offset by increases in Regan Holding Corp. (stand-alone) other income and consolidated income tax benefits. Net losses in 2000 were also impacted by a $3.6 million gain on sale of a building and recognition of approximately $721,000 of losses related to Imagent’s investment in a start-up company. Consolidated net income decreased approximately $5.3 million in 1999, compared to 1998, primarily due to decreases in Legacy Marketing revenues, decreases in income tax benefits, and increased Legacy Marketing expenses. These fluctuations are discussed below.
Results of Operations - Legacy Marketing’s net loss totaled approximately $1.0 million in 2000, compared to net income of approximately $9.6 million in 1999, and net income decreased approximately $2.2 million, or 18.5%, in 1999 compared to 1998. The fluctuation from 1999 to 2000 is primarily due to decreases in revenue and increases in expenses. The change from 1998 to 1999 is primarily due to increases in expenses, as discussed below.
Revenue - Legacy Marketing’s major sources of revenue are marketing allowances, commission income and administrative fees from sales and administration of fixed annuity and life insurance products on behalf of the Carriers. Levels of marketing allowances and commission income are directly related to the sales volume of such products. Administrative fees are a function not only of product sales, but also of administration of policies inforce and producer appointments and terminations. Legacy Marketing’s total revenue decreased approximately $10.2 million, or 21.3%, in 2000 compared to 1999, but increased approximately $3.0 million, or 6.7% in 1999 compared to 1998. The changes in revenues are primarily attributable to fluctuations in premium placed inforce for the Carriers and changes in product mix, as discussed below.
Legacy Marketing’s marketing allowances and commission revenue, combined, increased approximately $1.1 million, or 3.0%, during 1999 compared to 1998 due to a
Administrative fees increased approximately $402,000, or 4.7%, in 2000 compared to 1999, and increased approximately $2.0 million, or 29.6%, in 1999 compared to 1998, due primarily to increases in the number of policies sold and administered during the respective periods and to a continued shift in policies administered to those which generate higher administrative fees.
Although Legacy Marketing markets and administers several products on behalf of the Carriers, the Company’s consolidated revenues are derived primarily from sales and administration of two fixed annuity product series, as indicated below:
The Company has implemented various initiatives to increase the volume of Legacy Marketing’s sales, including launching marketing programs designed to strengthen relationships with existing producers and attract new producers. In addition, Legacy Marketing released several new products and product enhancements at a sales convention in July 2000 that are expected to diversify Legacy Marketing’s product
portfolio, enhance market share, and increase sales. Further, the Company entered into Marketing and Administrative Agreements with John Hancock Life Insurance Company in January 2001 to provide services similar to those performed for the other Carriers. These initiatives, combined with favorable market conditions leading to improved performance of bond investments underlying key products' crediting rates, have resulted in increased sales during the first quarter of 2001. Management expects such increases to continue throughout 2001. However, there can be no assurance that the increased sales volume will continue.
Expenses - Total Legacy Marketing expenses increased approximately $6.5 million, or 19.0%, during 2000 compared to 1999, and increased approximately $6.6 million, or 23.9%, during 1999 compared to 1998. The increase in 2000 from 1999 is primarily due to increases in compensation, professional fees, occupancy, and depreciation and amortization, partially offset by decreases in certain sales promotion programs tied to premium levels, which declined during 2000. The increase in 1999 from 1998 is primarily due to increases in compensation, sales promotion and support, and occupancy, partially offset by lower professional fees. These fluctuations are discussed below.
Professional fees increased approximately $2.9 million, or 194.3%, in 2000 from 1999 and decreased approximately $576,000, or 27.8%, in 1999 from 1998. The increase in 2000 compared to 1999 is primarily due to consulting fees related to various information systems enhancement projects and to the engagement of independent contractors in lieu of long-term employee hires made necessary by the tight local job market. The decrease in 1999 compared to 1998 is primarily due to expenses associated with a $1.1 million settlement of litigation in 1998. Excluding the cost of this settlement, professional fees increased by approximately $355,000 in 1999 from 1998 primarily due to increased consulting fees related to various information systems enhancement projects.
Occupancy expenses consist primarily of office building and equipment leasing costs. These expenses increased approximately $1.0 million, or 59.2%, in 2000 from 1999, and increased approximately $1.1 million, or 164.9%, in 1999 from 1998 primarily due to the leasing of new office space and to overall increases in telephone, utilities, and other related expenses that correspond with increases in employment, as discussed above.
Depreciation and amortization expense increased approximately $1.0 million, or 297.7%, in 2000 from 1999 and increased approximately $237,000, or 235.4%, in 1999 from 1998. The increases are primarily related to the amortization of internal use software and to acquisitions of fixed assets, which were necessary to improve newly leased office space. Also, in 2000 the Company decreased from five years to three years the estimated useful lives over which certain computer hardware and software are depreciated resulting in increased depreciation expense.
Sales promotion and support expense consists primarily of costs related to Legacy Marketing’s annual sales incentive conventions, various sales and training events, and incentives paid to Producers to stimulate sales. Also included in sales and promotion support expense is the cost of designing and printing sales brochures for use by Producers. This expense decreased approximately $1.5 million, or 23.1%, in 2000 from 1999 but increased approximately $1.2 million, or 22.2%, in 1999 from 1998. The decrease in 2000 compared to 1999 is primarily due to decreased commissions paid to Producers and reduced stock awards granted to Wholesalers related to lower sales of fixed annuities, as discussed above. The increase in 1999 compared to 1998 is primarily due to increased incentives paid to Producers to stimulate sales and increased printing costs related to the introduction of new products and enhancements to existing products. Despite the decrease of sales promotion and support expenses in 2000, it is expected that these costs will continue to be a major element of Legacy Marketing’s cost structure, as attendance at the sales incentive conventions increases, as the number of Producers marketing products for Legacy Marketing increases, and as new products are introduced.
Results of Operations - Legacy Financial’s net income increased approximately $131,000, or 48.8%, in 2000 from 1999, and increased approximately $178,000, or 196.3%, in 1999 compared to 1998. These increases are primarily due to increases in revenue, partially offset by increases in expenses, as discussed below.
Revenue - Legacy Financial’s major source of revenue is commission income, which is generated through sales of variable life and annuity products, mutual funds, and debt and equity securities. Levels of commission income are directly related to the volume of sales of such products. Total Legacy Financial revenue increased approximately $1.1 million, or 62.5%, in 2000 from 1999, and increased approximately $873,000, or 106.3%, in 1999 from 1998. These increases are attributable to increases in
Expenses - Total Legacy Financial expenses increased approximately $942,000, or 63.4%, in 2000 from 1999 and increased approximately $624,000, or 72.4%, in 1999 from 1998 primarily due to increases in salaries and benefits, sales promotion and support, and occupancy expenses, which are discussed below.
As a service organization, Legacy Financial’s operating expenses consist primarily of salaries and related employee benefits. These expenses increased approximately $461,000, or 47.0%, in 2000 from 1999, and increased approximately $316,000, or 47.5%, in 1999 from 1998, primarily due to increases in the average number of employees, necessary to accommodate increases in sales volume, and to regular annual pay increases.
Occupancy expenses consist primarily of office building and equipment leasing costs. These expenses increased approximately $69,000, or 190.4%, in 2000 from 1999, and increased approximately $32,000, or 708.7%, in 1999 from 1998 primarily due to overall increases in telephone, utilities, and other related expenses that correspond with increases in employment and sales volume.
Results of Operations - LifeSurance Corporation recorded net losses of approximately $942,000 in 2000 compared to net losses of approximately $863,000 in 1999. The increase in net losses is primarily due to increased expenses, partially offset by increased revenues, as discussed below.
In February 2001, the Company announced a plan to discontinue the majority of operations of LifeSurance Corporation. Factors leading to this decision included: (i) consistent losses since inception; (ii) declining attendance at seminars; and (iii) anticipated future declines in attendance and increases in costs.
Expenses - LifeSurance Corporation’s expenses primarily consist of salaries and related benefits, sales promotion and support costs, and occupancy expenses. In 2000, total operating expenses increased by approximately $172,000, or 10.7%, which is attributable to sales promotion and support costs, increasing in 2000 compared to 1999 by approximately $55,000, or 12.3%, and occupancy expenses, increasing by approximately $123,000, or 121.4%. The increase in sales promotion and support costs is primarily related to overall increased seminar attendance during the first half of the year, as discussed above. The increase in occupancy expenses is primarily due to costs associated with increases in leased office space. Sales promotion and support costs, and occupancy expenses are expected to decrease in 2001 due to discontinuance of the majority of LifeSurance Corporation's operations, as discussed above.
As a result of the discontinuance of the majority of LifeSurance Corporation's operations, which was announced in February 2001, certain employees were terminated and others were transferred to Legacy Marketing. The Company plans to sublease LifeSurance Corporation’s office space and relocate the remaining Des Moines office employees.
Results of Operations - Regan Holding Corp. recorded net losses of approximately $1.4 million in 2000 compared to net losses of approximately $4.5 million and approximately $2.1 million in 1999 and 1998, respectively. The decreased losses in 2000 compared to 1999 are primarily due to a gain of approximately $3.6 million recognized upon the sale of an office building, as well as increases in revenue and decreases in expenses, which are discussed below. The increased losses in 1999 compared to 1998 are primarily due to increased expenses, as discussed below.
Revenue - Revenue increased to approximately $551,000 in 2000 from approximately $13,000 in 1999 due to rental revenue from unaffiliated tenants of an office building that was purchased in mid-1999. The Company sold the building in December 2000. As a result, no rental income is anticipated in future periods.
The Company’s principal needs for cash are: (i) funding operating expenses, which consist primarily of salaries and benefits and sales promotion support costs; (ii) purchases of fixed assets, primarily computer hardware and software, to accommodate new employees and support anticipated growth in operations; (iii) funding continued product development and strategic acquisitions; and (iv) as a reserve to cover possible redemptions of certain shares of the Company’s common stock, which are redeemable at the option of shareholders under various agreements with the Company.
During December 2000, the Company sold land and a building in Petaluma, California, for $8.4 million and recognized a pre-tax gain of approximately $3.6 million. However, in order to comply with the provisions of Section 1031 of the Internal Revenue Code that will allow the Company to defer payment of income tax on the gain, the $5.8 million proceeds from the property sale will remain in trust with a qualified intermediary. Proceeds from the sale will be applied during the second quarter toward the purchase of the building which houses the Company’s headquarters in Petaluma. For the new building, the Company will pay approximately $10.6 million in accordance with a purchase option in the existing lease agreement. The Company plans to obtain financing for the difference between the purchase price and the sale proceeds.
Management expects to outlay cash of approximately $500,000 per month related to operations and development of Values Financial Network, Inc. until an obligation under a consulting services contract is satisfied in mid-2001. Thereafter, cash outflows will decrease to approximately $300,000 per month and will gradually diminish through 2001 as revenues increase. Management expects positive cash flows from operations as early as fourth quarter 2001. However, until projected revenue is achieved, cash outflows related to Values Financial Network, Inc. could continue at mid-2001 levels.
The Company is obligated to repurchase certain shares of its common stock pursuant to contractual agreements under which the shares were issued. At December 31, 2000 and December 31, 1999, the total redemption value of all redeemable common stock outstanding was approximately $11.2 million and $11.6 million, respectively. Cash paid pursuant to redemption requests from shareholders totaled approximately $821,000 during 2000, and approximately $425,000 during 1999. These securities are excluded from shareholders’ equity and are recorded at the greater of issuance price or redemption value. As the value of our common stock rises, our obligation for the redeemable common stock also increases, and could result in negative equity.
In 1998, the Company entered into a Shareholder’s Agreement with Lynda L. Regan, Chief Executive Officer and Chairman of the Board of Directors. Under the terms of this agreement, in the event of the death of Ms. Regan, the Company is obligated to repurchase from Ms. Regan’s estate all of the shares of the Company’s common stock that were owned by Ms. Regan at the time of her death or that were transferred by her to one or more trusts prior to her death. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares, which totaled approximately $26.8 million at December 31, 2000. The Company has purchased two life insurance policies with a combined face amount of $29.0 million for the purpose of funding this obligation in the event of Ms. Regan’s death.
Management intends to continue to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.
Income (loss) before income taxes, and before cumulative effect of accounting change
The Company, through its wholly owned subsidiary Legacy Marketing Group (“LMG”), has entered into marketing agreements (the “Marketing Agreements”) with American National Insurance Company (“American National”), IL Annuity and Insurance Company (“IL Annuity”), Transamerica Life Insurance and Annuity Company (“Transamerica”), and commencing in January 2001, John Hancock Life Insurance Company (“John Hancock”), collectively referred to herein as the “Carriers.” The Marketing Agreements grant the Company the exclusive right to market certain fixed annuity and life insurance products issued by the Carriers (the “Policies”). In addition, the Company is responsible for the recruiting and appointing of producers who contract with LMG to sell the Policies. The highest producing producers are referred to as Wholesalers. For these services, the Carriers pay LMG marketing allowances and commissions based on the volume of premiums from Policies sold.
The Company has also entered into administrative agreements (the “Administrative Agreements”) with the Carriers pursuant to which the Company provides application processing, policyholder services and accounting services with respect to the Policies. Such services include billing, collecting and remitting cash on the Policies. However, all cash receipts are deposited into accounts maintained by the Carriers upon receipt by the Company and all cash remitted is paid from accounts maintained by the Carriers. For providing such services, the Company is paid on a per transaction basis with the amount of the fee depending on the type of policy and type of transaction.
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Regan Holding Corp. and its wholly owned subsidiaries, Legacy Marketing Group, Legacy Financial Services, Inc., LifeSurance Corporation, Legacy Advisory Services, Inc., Legacy Reinsurance Company, Imagent Online, LLC, and Values Financial Network, Inc. All significant intercompany accounts and transactions have been eliminated.
Under the Marketing Agreement with Transamerica, the Company is obligated to repay to Transamerica $250,000 each year, representing 0.25% of the first $100,000,000 in premiums generated during each twelve month period ending July 31st. The Company records a liability to Transamerica equal to the first $250,000 of commission revenue resulting from sales of Transamerica products.
Under the Marketing Agreement with American National, the Company is obligated to repay to American National an annual amount equal to 0.1% of specified premium levels to the extent that such premiums are below the minimum production requirement of $500,000,000 during each twelve month period ended September 30th (the “Premium Deficiency”). Prior to December 31, 1999, the Company recorded revenue throughout the twelve month period net of 0.1% of the projected annual Premium Deficiency. Effective January 1, 2000, the Company adopted SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. As a result, the Company changed its revenue recognition policy to recognize commission revenue net of 0.1% of the Premium Deficiency assuming no additional premiums will be sold under the American National Marketing Agreement. The effect of adopting SAB 101 is reflected in the accompanying Statements of Operations as a cumulative effect of accounting change of $225,638, net of taxes of $149,362, during the year ended December 31, 2000. The change in accounting principle would not have a material effect on the Statements of Operations in 1999 or 1998 if adopted in these periods.
Cash and cash equivalents include cash on hand and in banks and short-term investments with an original maturity of 90 days or less at the date of purchase. The short-term investments included in cash and cash equivalents are carried at cost, which approximates market value.
Premiums and discounts are amortized or accreted over the life of the related investment as an adjustment to yield using the effective interest method. Interest income is recognized when earned. Realized gains and losses on sales of investments are included in earnings in the period sold and are derived using the specific identification method for determining the cost of investments sold.
Effective January 1, 1999, the Company adopted the AICPA Statement of Position 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of the computer software developed or obtained for internal use. In accordance with SOP 98-1, in 1999 the Company capitalized approximately $1.3 million of internal and external costs, incurred subsequent to December 31, 1998, which were directly associated with the development of internal use software. Upon project completion, these costs are amortized over the estimated useful life of the software on a straight-line basis. Previously, these costs were expensed as incurred. Prior costs have not been restated.
The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the useful life or to the undepreciated balance is warranted.
Intangible assets, primarily purchased intangible assets and goodwill resulting from the Company’s acquisition of VFN, are amortized on a straight-line basis ranging from 3 to 10 years, depending on the estimated useful life of each asset. Management uses a discounted cash flows approach to evaluate the recoverability of goodwill. Other
intangible assets are assessed for recoverability when events or circumstances indicate possible impairment. Any resulting impairment charge is recorded as a change in estimate within operating income.
Between 1990 and 1992, the Company issued certain Series A and Series B common stock (“Redeemable Stock”) in accordance with various agreements with shareholders (“Shareholder Agreements”). The Shareholder Agreements require that the Redeemable Stock is to be repurchased by the Company at the current fair market value based primarily on the net present value of insurance policy cash flows. However, since the Company no longer operates an insurance company, this methodology is not applicable. Further, there is no active trading market for the Company’s stock that would establish market value. Accordingly, the Company’s Board of Directors approved a redemption value of $2.10 per share and $1.99 per share as of December 31, 2000 and 1999, respectively, based on an independent appraisal obtained by management. Redeemable Common Stock is recorded at the greater of the issuance value or the redemption value. Periodic adjustments to reflect increases in redemption value are recorded as accretion, with an offsetting adjustment to retained earnings.
m. Accounting pronouncements to be adopted subsequent to December 31, 2000
difficulties expected to arise. The Company adopted SFAS No. 133 as amended by SFAS No. 138 as of the beginning of 2001, which did not result in a material effect on its financial position or results of operations.
Income from investments at the dates indicated is comprised of the following for the years ended December 31:
In December 31, 2000, the Company sold two parcels of land and an office building in Petaluma, California, and recorded a pre-tax gain of approximately $3.6 million. In accordance with the provisions of Section 1031 of the Internal Revenue Code, the Company assigned its rights to the net cash consideration of approximately $5.8 million, after repayment of the Company's $2.1 million loan payable, to a qualified exchange intermediary (the "Intermediary") in order to defer payment of income taxes on the gain on sale. The Intermediary will hold the proceeds until the Company secures financing to acquire the building in Petaluma which houses its headquarters, at which time the Intermediary will apply the proceeds toward the purchase of the new building. The proceeds assigned to the Intermediary have been reflected as a Note Receivable in the accompanying Consolidated Balance Sheets as of December 31, 2000.
In December 2000, the Company sold two parcels of land and a building in Petaluma and recorded a pre-tax gain of approximately $3.6 million (see Note 3).
On December 8, 2000, the Company paid total consideration of approximately $3.7 million for the purchase of VFN assets. Among the assets acquired were 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 market value, as determined by an independent appraisal. Payments in excess of the identifiable assets were recorded as goodwill and will be amortized on a straight-line basis over ten years. Goodwill and copyrights, recorded at $1,354,010 and $250,000, respectively, have been reflected as Intangible Assets in the accompanying balance sheets at December 31, 2000. In conjunction with the acquisition, the Company is obligated to pay the former sole shareholder of VFN royalties based on specified percentages of net income upon achievement of net income targets. Such royalty payments will be recorded as increases to goodwill as paid. In addition, the Company assumed an obligation of approximately $1.1 million payable to a software developer related to usage and modification of a website acquired in the transaction. Results of VFN’s operations from December 8, 2000 to December 31, 2000 have been included in the Consolidated Results of Operations.
In February 2001, the Company obtained and repaid an additional $500,000 margin loan from its investment broker.
In June 2000, the Company refinanced the 1999 Loan. Pursuant to the new loan agreement (the “2000 Loan”), the Company borrowed $2,100,000 at an annual interest rate of 9.01% per annum, payable monthly through August 2010, at which time a balloon payment of approximately $1.8 million becomes due. The 2000 Loan was collateralized by the purchased building, contained no restrictive covenants, and required no cash reserves.
The Company sponsors a qualified defined contribution 401(k) plan (the “401(k) Plan”), which is available to all employees. The 401(k) Plan allows employees to defer, on a pretax basis, a portion of their compensation as contributions to the 401(k) Plan. Employees may elect to contribute up to 15% of their annual compensation (not to exceed $10,500 and $10,000 annually for 2000 and 1999, respectively) to the 401(k) Plan. The Company matches 50% of each employee’s contributions, up to a maximum of 6% of annual compensation. The Company’s matching contributions charged to operating expenses were $408,728, $348,132, and $272,658, for the years ended December 31, 2000, 1999, and 1998, respectively.
expense during the years ended December 31, 2000 and 1999, respectively. As of December 31, 2000 and 1999, employee contributions and Company matching contributions, net of accumulated losses, totaled $391,067 and $213,045, respectively. Such amounts are reflected as liabilities in the accompanying Consolidated Balance Sheets.
Assets held by the Company in the Key Employee Deferred Compensation Plan and the Producer Commission Deferral Plan are subject to the general creditors of the Company. LMG invests the amounts paid by the Company under both plans and bears all administrative expenses. All market risk relating to the Producer Commission Deferral Plan is borne by the Producers.
The Company leases office and warehouse premises and certain office equipment under non-cancelable operating leases. Related rent expense of $1,520,144, $875,971, and $369,231 are included in occupancy costs for the years ended December 31, 2000, 1999, and 1998, respectively. Total rentals for leases of equipment included in equipment expense were $801,531, $416,770, $255,078, for the years ended December 31, 2000, 1999, and 1998, respectively.
The Company leases approximately 72,000 square feet of office space at its headquarters in Petaluma. This lease expires in July 2009, and includes an option to extend the term for two five-year periods. Pursuant to the lease, the Company paid monthly base rent of $71,612 in 1999, plus a pro-rata share of property taxes and operating expenses based on leased square footage. The base rent increased to $75,193 per month in July 2000 and increases by 6% every twenty four months thereafter. The terms of the lease give the Company the right to purchase the building on a specified date at a fixed price.
Effective March 2000, the Company entered into a lease for approximately 5,700 square feet of warehouse space in Petaluma at a rate of $4,500 per month expiring in February 2006.
In addition, the Company leases 18,200 square feet of office space in Des Moines, Iowa, for its producer training operations. The base monthly rent is $26,179 per month, expiring in October 2004. In February 2001, the Company announced that it is restructuring the operations of the subsidiary which occupies most of this space and is seeking to sublease the entire office space.
In 1998, the Company entered into a Shareholder’s Agreement with Lynda L. Regan, Chief Executive Officer of the Company and Chairman of the Company’s Board of Directors. Under the terms of this agreement, in the event of the death of Ms. Regan, the Company shall repurchase 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. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares, which is approximately $26.8 million at December 31, 2000. The Company has purchased two life insurance policies with a combined face amount of $29.0 million for the purpose of funding this obligation in the event of Ms. Regan’s death.
As a professional services firm engaged in marketing and servicing life insurance and annuity products, the Company encounters litigation in the normal course of business, including the activities relating to its former business of operating an insurance company. In 1996, LMG and American National were named in a lawsuit filed in the Circuit Court of Jefferson County, Alabama, alleging misrepresentation and price discrimination in connection with the sale of certain annuity products issued by American National and marketed by LMG. American National and LMG have denied the allegations contained in the complaint as well as any wrongdoing with respect to the sale and issuance of annuities. However, in 1998, in order to avoid protracted litigation, American National and LMG entered into a settlement agreement with the plaintiffs and other class members. LMG’s
Shares of Redeemable Common Stock are excluded from total shares issued and outstanding in the accompanying Consolidated Balance Sheets.
During the second quarter of 2000, the Company became obligated to award to two LMG Wholesalers 65,359 shares of Series A common stock in exchange for achievement of certain milestones in conjunction with a sales incentive program. As of December 31, 2000, these shares had not been issued. To reflect this obligation, the Company recorded Common Stock Committed in the amount of $100,000, based on the market value of the stock at the date of commitment.
The Company currently sponsors two stock-based compensation plans, which are described below. Under both plans, the exercise price of each option equals the estimated fair market value of the underlying common stock on the date of grant, as estimated by management (see Note 1), except for incentive stock options granted to 10% shareholders where the exercise price equals 110% of the estimated fair market value. Both plans are administered by committees, which are appointed by the Company’s Board of Directors.
In 2000, the Company recorded $1,552,366 of sales promotion and support expense related to Producer Options. The fair value of the options was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rates ranging from 6.1% to 6.6%, expected volatility ranging from 28.3% to 34.2%, and expected lives ranging from six to ten years. All Producer Options were immediately vested upon grant, and generally
Under the Producer Option Plan, the Company may also award shares of its common stock to Producers. During 1999, 330,634 shares of Series A common stock were awarded to producers, when the estimated fair market value of the shares was $1.27 per share. As a result, the Company recorded marketing and sales promotion expense of $419,905 during the year ended December 31, 1999. During 2000, the Company recorded marketing and sales promotion expense of $100,000 related to stock awards that the Company has committed to award to producers but had not yet awarded as of year end.
For purposes of estimating the fair value of the Employee Options for the pro-forma amounts listed above, the Company applied the minimum value method, as prescribed in SFAS No. 123, with risk-free interest rate assumptions ranging from 5.9% to 6.7% and expected life assumptions ranging from five to seven years. Volatility and dividend yield assumptions were not applicable, as the Company’s stock is not publicly traded nor does the Company pay dividends.
Capital loss, net of valuation allowance of $0 and $23,864, respectively
As of December 31, 2000, the Company has state net operating loss carryforwards of $5,671,185 which expire on December 31, 2010. The Company also has, for state income tax purposes, $303,593 in alternative minimum tax credits which can be used to
Effect of dilutive securities - employee and producer stock options (1)
The diluted share base for the year ended December 31, 2000 excludes incremental shares of 2,254,977 related to employee and non-employee stock options. These shares are excluded due to their antidilutive effect as a result of the Company’s net losses incurred during 2000.
Options to purchase 86,300 and 76,900 shares of common stock at $1.53 and $1.39 per share, respectively, were outstanding at December 31, 2000 and 1999, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares during the year.
During the year ended December 31, 2000, the Company recorded net losses of approximately $3.8 million, which, when combined with investing and financing activities, resulted in a significant decrease in working capital during the period. In addition, the Company is obligated to repurchase certain shares of its common stock pursuant to various contractual agreements under which the shares were issued. If the Company’s net losses continue or if requests for repurchase of redeemable common stock increase significantly, a cash shortfall could occur. However, management anticipates that future cash flows from operations, combined with existing cash and investment balances, will provide sufficient funding for the foreseeable future. Further, in the event that a shortfall were to occur, management believes that adequate financing could be obtained to meet the Company’s cash flow needs.
The financial results of the Company’s operating segments are presented on an accrual basis. There are no significant differences between the accounting policies of the segments as compared to the Company’s consolidated financial statements. Intersegment sales are generally accounted for at amounts comparable to sales to unaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies, as discussed in Note 1. Certain items are maintained on the records of Regan Holding (stand-alone) and are not allocated to the segments. They primarily include most of the Company’s fixed asset depreciation and amortization, as well as certain stock option and stock award expenses.
At December 31, 2000, LMG was contracted with approximately 20,800 independent insurance producers, of whom approximately 4,800 generated business during 2000. The producers can sell fixed annuity and life insurance products in the District of Columbia and in each of the United States, except Alabama and New York. Sales in California accounted for 13.9% of the Company’s total consolidated revenue during 2000.
Although LMG markets and administers several annuity and life insurance products on behalf of the Carriers, its revenues are derived primarily from sales and administration of certain annuity product series, as indicated below:
At December 31, 1999, the Company’s investment portfolio included $12 million in equity securities of Indianapolis Life Group of Companies (“Indianapolis Group”), an affiliate of IL Annuity, which represented 25.8% of the Company’s total assets at December 31, 1999. In the first quarter of 2000, the Indianapolis Group repurchased the equity securities from the Company for $12,546,099, pursuant to the terms of the Investment Agreement.
All cash deposits at December 31, 2000 were held by a single financial institution, which exceeds federal deposit insurance limits.
In January 2001, LMG entered into Marketing and Administrative Agreements with John Hancock. Pursuant to these agreements, LMG will design, market, and
administer fixed annuity and life insurance products on behalf of John Hancock. Sales of products on behalf of John Hancock are expected to begin in the second quarter of 2001.