Revenue--The Company's major sources of revenue are marketing allowances, commission overrides and administrative fees. Marketing allowances and commission overrides are directly related to sales of annuities and life insurance products. Administrative fees are a function not only of product sales, but also producer appointments and administration of the insurance policies inforce each month.
In May 1995, the Company formed Legacy Financial Services, Inc. ("LFS"), a wholly-owned broker/dealer subsidiary. In December 1995, LFS was approved by the National Association of Securities Dealers and the Securities and Exchange Commission to engage in the offering and sale of variable annuity and life insurance products, mutual funds and certain debt and equity securities (collectively, the "Products") on a fully disclosed basis. LFS has entered into agreements (the "Agreements") with various entities licensed to sell the Products. The Agreements grant LFS the non-exclusive right to solicit sales of the Products through its network of independent representatives and to provide certain marketing and administrative services in order to facilitate solicitations for and sales of the Products. Under the Agreements, the Company is compensated based upon pre-determined percentages of production. The Agreements may be terminated by any party upon 30 days written notice. Sales of the Products pursuant to the Agreements began during the first quarter of 1996.
Investments include mortgage-backed securities, corporate bonds and equity securities, and obligations backed by U.S. government agencies. The Company's investments are classified as available-for-sale and are carried at market value. Market values are determined using published quotes as of the close of business. Unrealized gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders' equity (deficit) until realized.
In February 1997, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"). SFAS No. 128 is designed to improve the earnings per share ("EPS") information provided in the financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of EPS data on an international basis. SFAS No. 128 is effective for financial statements issued for periods ending after December 31, 1997, including interim periods. The Company will implement SFAS No. 128 in 1997. Management has not yet determined the impact that SFAS No. 128 may have on the financial statements.
Redeemable Common Stock has been recorded at the greater of the issuance value or the redemption value as of December 31, 1996 and 1995. The 701 Plan, the Subscription Agreement, and the Merger Agreement specify that the Redeemable Common Stock is to be redeemed at a rate per share based upon current fair market value. These Agreements specify factors to be considered in determining fair market value, including the net present value of inforce insurance policy cash flows. However, since the Company no longer operates an insurance business, this factor is not applicable. Further, there is no active trading market for the Company's stock which would establish market value. Accordingly, the Company's Board of Directors has approved a redemption value of $.78 per share as of December 31, 1996 based on management's estimate of fair value. The total redemption value for Series A and Series B Redeemable Common Stock was $4,499,887 and $476,054, respectively, at December 31, 1996. Carrying value exceeded redemption value by $7,367,060 at December 31, 1996. As the shares are redeemed, the excess of carrying value over redemption value will be reflected as additional paid-in capital.
The executive officers of the Company and LMG, the Company's primary operating subsidiary, serve at the pleasure of the Board of Directors. The executive officers include Lynda L. Regan, Chief Executive Officer, and R. Preston Pitts, President, Chief Financial Officer and Secretary, about whom information is provided above, and the following persons: