There are no significant management judgements 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 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.
We expect that sales of the SelectMark (SM) series sold on behalf of Transamerica will decrease during 2003, as a result of the product consolidation discussed above.
We require cash for the following purposes: (i) to fund operating expenses, which consist primarily of selling, general and administrative expenses; (ii) to purchase and develop fixed assets, primarily internal use software and computer hardware, in order to increase operational efficiency; (iii) to fund continued product development; and (iv) as a reserve to cover possible redemptions of certain shares of our common stock, which are redeemable at the option of the shareholders. Our primary source of cash is cash flows from operating activities.
Net cash provided by investing activities was $1.9 million, primarily due to net sales of equity securities as discussed above, offset in part by development of internal use software and our purchase of prospectdigital.
Net cash provided by financing activities was $1.1 million. This was primarily due to net proceeds from loans, partially offset by repurchases of our common stock. During 2001, we purchased the office building which houses our headquarters for $10.6 million. In conjunction with the acquisition, we entered into a bridge loan agreement for $4.8 million. In July 2002, we replaced the bridge loan with permanent financing in the amount of $7.4 million. The note is payable over ten years in monthly installments of principal and interest based on a 25-year term. At the end of ten years, we must pay the balance of principal due on the note. For the first five years, the interest rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%, adjusted semi-annually, subject to a maximum semi-annual 1.00% increase/decrease in the interest rate. The maximum interest rate is 10.50%. We are obligated to repurchase certain shares of our common stock. At December 31, 2002 and December 31, 2001, the total redemption value of all redeemable common stock outstanding was $10.1 million and $11.1 million. Cash paid to repurchase some of these shares totaled $964,000 during 2002, and $500,000 during 2001. As the value of our common stock rises, our monetary obligation with respect to the redeemable common stock also increases.
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF 94-3"), "Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Our management anticipates that the implementation of SFAS 146 will not have a material effect on our consolidated results of operations or financial position.
In December 2001, Legacy Marketing and IL Annuity agreed that the IL Annuity product mix being marketed by Legacy Marketing did not provide a sufficient rate of return to IL Annuity. Accordingly, Legacy Marketing began phasing out the marketing of IL Annuity products. The phase-out was completed during the first quarter of 2002. A number of policyholders continue to hold IL Annuity products, however, which require certain administrative services. Legacy Marketing continues to administer IL Annuity products under the terms of an administrative services agreement with IL Annuity and intends to continue doing so for the foreseeable future.
During 2001, the Company purchased the office building which houses its headquarters for $10.6 million. In conjunction with the acquisition, the Company entered into a bridge loan agreement for $4.8 million. In July 2002, the Company replaced the bridge loan with permanent financing in the amount of $7.4 million. This note is payable over ten years in monthly installments of principal and interest based on a 25-year term. At the end of ten years, the Company must pay the balance of principal due on the note. For the first five years, the interest rate is 6.95%. Thereafter, the interest rate is equal to LIBOR plus 2.55%, adjusted semi-annually, subject to a maximum
Year Ended December 31, 2003 $1,047,000 2004 505,000 2005 474,000 2006 307,000 2007 198,000 ---------- Total minimum lease payments $2,531,000 ==========
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. The purchase price was equal to $28 million at December 31, 2002. The Company has purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this obligation in the event of Ms. Regan's death.
The Company is involved in various claims and legal proceedings arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on
For the Year Ended December 31, ------------------------------------------------ 2002 2001 2000 --------- ---------- ------------ Current income taxes: Federal $ 76,000 $ (92,000) $(3,418,000) State 24,000 5,000 (3,000) --------- --------- ----------- Total current 100,000 (87,000) (3,421,000) --------- --------- ----------- Deferred income taxes: Federal (170,000) (117,000) 1,712,000 State 36,000 (16,000) (46,000) --------- --------- ----------- Total deferred (134,000) (133,000) 1,666,000 --------- --------- ----------- Benefit from income taxes $ (34,000) $(220,000) $(1,755,000) ========= ========= ===========