In June 2001, we purchased the building that houses our headquarters and most of Legacy Marketing's operations in Petaluma, California. During 2003 we began construction of a building in Rome, Georgia. Upon completion, our employees located in Rome will move to the new building.
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 economic and business conditions; political and social conditions; government regulations, especially regulations affecting the insurance industry; demographic changes; the ability to adapt to changes resulting from acquisitions or new ventures; and various other factors referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Legacy Marketing also has administrative agreements with each of the insurance carriers listed above, and with IL Annuity, whose marketing agreement with us was terminated effective during the first quarter of 2002. Under the terms of the administrative agreements, Legacy Marketing provides clerical, administrative and accounting services with respect to the insurance policies. For providing these services, the insurance carriers pay Legacy Marketing administrative fees.
Legacy Marketing has marketing and administrative agreements with certain insurance carriers, listed above. Under the terms of the marketing agreements, Legacy Marketing is responsible for appointing producers with various states' departments of insurance, who have contracted with Legacy Marketing to sell fixed annuity products to the general public.
During 2003, we completed our evaluation of an internal use software project that we initially licensed in 1998 with the intent to modify and customize the licensed software prior to deployment. We began this project intending to replace our administration system after the vendor of our existing administration system required us to migrate from the existing system to an alternative platform. In late 2002, we learned from our vendor that we might be able to retain our existing system. Modification and customization of the licensed software was suspended in December of 2002. A financial analysis completed in the first quarter of 2003 indicated that remaining on the existing system may provide greater benefit than converting to a new system. In the third quarter of 2003, our vendor concluded that we could continue to use our existing system for an extended period. We have completed a rigorous evaluation of our Company-wide technological needs, which included an assessment of the viability of the existing system. As a result of this assessment we concluded that we would use both systems and in the fourth quarter of 2003 we recorded a write-off of $1.1 million associated with abandoned components of the software cost. Our assessment supports the remaining $3.3 million balance.
During 2002, the Company revised the business model for VFN to focus on corporate and individual producer sales and its projections supported the balance of goodwill. In early 2003 the Company further refined its business model for VFN, including identifying a new market and committing additional resources to develop the business. During 2003, due to the failure of VFN to produce revenues as projected, the Company updated its annual measurement of fair value of VFN. The fair value measurement based on a revised cash flow forecast was predicated on VFN realizing a lower level of sales. This forecast of cash flows did not support the balance of goodwill, and the Company recorded a goodwill impairment loss of $491,000 during 2003. Current projections support the remaining balance of goodwill.
Investments classified as available-for-sale are periodically reviewed to determine if declines in fair value below cost are other-than-temporary. Significant and sustained decreases in quoted market prices, a series of historical and projected operating losses by the investee or other factors are considered as part of the review. If the decline in fair value has been determined to be other-than-temporary, an impairment loss is recorded in investment income and the individual security is written down to a new cost basis. During 2001, we determined that certain
We had consolidated net income of $5.0 million in 2003, compared to consolidated net losses of $60,000 in 2002. The improved results are primarily due to increased net income at Legacy Marketing, partially offset by increased losses at Values Financial Network, Inc. primarily due to asset impairment losses.
2003 2002 ---- ---- American National 37% 17% Transamerica 25% 52% Investors Insurance Corporation 23% 6% IL Annuity 6% 12% John Hancock 3% 8%
Legacy Marketing's expenses increased $10.6 million (23%) primarily due to increased selling, general and administrative expenses and other. The increase in selling, general and administrative expenses of $9.7 million (24%) was primarily due to increases in compensation, sales promotion and support expenses, insurance, occupancy, and courier expenses. Compensation increased primarily due to salary increases, incentive based compensation based on our consolidated year-to-date results, temporary help due to increased business volume, and benefits. Sales promotion and support expenses increased primarily due to bonuses for our top independent insurance producers based on their achievement, for the year 2003, of predetermined annual sales targets which were paid in the first quarter of 2004. Increased insurance expenses reflected rising prices for errors and omissions and workers' compensation insurance coverage. The increase in courier expenses was related to increased business volume. Other expenses increased $1.2 million (47%) primarily due to the $1.1 million write-off of internal use software.
During 2002, Legacy Marketing's net income totaled $1.6 million, compared to net income of $2.8 million during 2001. This decrease of $1.2 million was primarily due to decreased revenues, partially offset by decreased expenses and the recognition of investment income in 2002 compared to investment losses in 2001.
Legacy Marketing's expenses decreased $2.9 million (6%) primarily attributable to decreases in selling, general and administrative expenses. The decrease in selling, general and administrative expenses of $2.9 million (7%) was primarily due to decreases in professional fees, commissions, compensation, and occupancy expenses. Professional fees decreased primarily due to lower consulting fees related to internal use software maintenance, and reduced legal expenses. The decrease in commissions was primarily related to lower sales. Compensation decreased primarily due to the effect of attrition, as Legacy Marketing's headcount decreased 4% in 2002. The decreased occupancy expense was primarily a result of our purchasing the building that houses our headquarters, which resulted in no rent expense after June 2001, partially offset by increased interest expense from financing the building purchase.
Legacy Financial incurred net losses of $683,000 during 2003, compared to net losses of $595,000 during 2002. Results declined primarily due to increased expenses partially offset by increased revenues.
Legacy Financial revenue increased $460,000 (18%) during 2003 compared to 2002, primarily due to increased reimburseable insurance premiums and increased sponsorship revenues, partially offset by decreased marketing allowances and commissions related to lower overall sales volume and changes in product mix.
Legacy Financial expenses increased $582,000 (17%) in 2003 compared to 2002. The increase was primarily due to an increase in selling, general and administrative expenses and other expenses. Selling, general and administrative expenses increased $359,000 (11%) primarily attributable to increased sales promotion expenses, increased errors and omissions insurance premiums, and increased incentive compensation. Other expenses increased $223,000 (71%) primarily due to increased equipment maintenance expenses and increased insurance costs.
Legacy Financial revenue increased $387,000 (18%) primarily due to increases in the volume of sales resulting from a more attractive product mix for Legacy Financial's distribution network of registered representatives.
independent appraisal. In connection with the updated measurement of the fair value of the VFN asset group as discussed above, the Company recorded a long-lived asset impairment loss of $394,000 during 2003, included in Other expenses.
Values Financial Network, Inc. incurred net losses of $520,000 during 2002, compared to net losses of $1.2 million during 2001, primarily due to reduced expenses partially offset by lower revenues. Total revenues decreased $38,000 (84%) primarily due to decreased sales leads revenue. Total expenses decreased $1.2 million (58%) in 2002 primarily resulting from the termination of employees and decreased IT consulting fees.
In January 2002, we purchased all of the remaining outstanding stock of prospectdigital for $225,000 in cash, a non-recourse note payable in the amount of $75,000 and payable out of the future profits of prospectdigital, and $100,000 of contingent consideration based on future income. Under the terms of the purchase agreement, prospectdigital remained liable for payment of the $1.5 million indebtedness, plus accrued interest, due to us. Prospectdigital is now a wholly owned subsidiary, and the results of prospectdigital's operations have been included in the Consolidated Financial Statements since the date of acquisition.
Net cash provided by operating activities was $12.0 million for 2003 compared to $410,000 in 2002, primarily due to increased operating results, lower net purchases of trading securities, and the application of a prepaid deposit toward a Producer incentive trip, offset in part by unrealized gains on trading securites in 2003 compared to unrealized losses in 2002.
Net cash used in investing activities was $5.2 million compared to net cash provided by investing activities of $1.9 million for 2002, primarily due to increased purchases and lower sales of available-for-sale securities, partially offset by lower cash outlays for the development of internal use software.
Net cash used in financing activities was $1.6 million for 2003 compared to net cash provided by financing activities of $1.1 million for 2002, primarily due to lower net proceeds from loans and higher repurchases of our common stock during 2003. 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, 2003 and December 31, 2002, the total redemption value of all redeemable common stock outstanding was $9.0 million and $10.1 million. Cash paid to repurchase some of these shares totaled $1.2 million during 2003, and $964,000 during 2002. As the value of our common stock rises, our monetary obligation with respect to the redeemable common stock also increases.
We lease office and warehouse premises and certain office equipment under non-cancelable operating leases. As of December 31, 2003, our total contractual cash obligations, including the building financing discussed above, were as follows:
During 2003, the Company amended its Shareholder Agreement with Lynda L. Regan, Chief Executive Officer of the Company and Chairman of the Company's Board of Directors. Under the terms of the amended agreement, upon the death of Ms. Regan, the Company 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 the Company. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares. As of December 31, 2003, the Company believes that 125% of the fair market value of the shares owned by Ms. Regan was equal to $28.3 million. The Company has purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this potential obligation upon Ms. Regan's death.
We generated $12.0 million and $410,000 of cash flow from operations in 2003 and 2002. However, if requests to repurchase redeemable common stock increase significantly, a cash shortfall could ultimately occur. Management believes that existing cash and investment balances, together with anticipated cash flow from operations, will provide sufficient funding for the foreseeable future. However, in the event that a cash shortfall were to occur, management believes that adequate financing could be obtained to meet our cash flow needs. There can be no assurances that such financing would be available on favorable terms.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue 00-21 ("EITF 00-21). "Accounting for Revenue Arrangements with Multiple Deliverables". EITF 00-21 provides guidance on when and how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The Company adopted EITF 00-21 on July 1, 2003. The adoption of EITF 00-21 did not have a material effect on the Company's consolidated financial position and results of operations.
Legacy Marketing discontinued the marketing of several annuity products issued by Transamerica during the first quarter of 2003 primarily because those products no longer met Transamerica's profitability targets. Legacy Marketing will continue to administer these annuity products and to accept additional premium payments, subject to applicable additional deposit limitations for these products. The discontinued products accounted for approximately 3%, 31%, and 59% of our total consolidated revenue for the years ended December 31, 2003, 2002, and 2001. However, effective in May 2004 Legacy Marketing will discontinue marketing Transamerica products, as a result our sales of Transamerica products will likely decrease. We intend to continue providing administrative services.
During the second quarter of 2003, American National reduced the crediting rates of several annuity products marketed by Legacy Marketing. In addition, American National lowered the commission rates that they pay to Legacy Marketing for sales of these products. As a result, sales of annuity products on behalf of American National began to decrease through the remainder of 2003. We believe this trend may continue for 2004. It is possible that overall consolidated revenues may also decline due to this event. Legacy Marketing is developing new annuity products with American National that may result in increased sales for Legacy Marketing in the long term.
In June 2002, Legacy Marketing entered into marketing and administrative services agreements with Investors Insurance Corporation, an unaffiliated insurance carrier. Under these agreements, Legacy Marketing will sell and administer annuity products on behalf of Investors Insurance Corporation. Legacy Marketing has an option to buy Investors Insurance Corporation. The option expires on June 30, 2005. If Legacy Marketing exercises the option, it must complete the purchase transaction within two years of exercising the option. Sales on behalf of Investors Insurance Corporation began in June 2002.
Our success depends largely on the skills, experience and performance of certain key members of our management. In the recent past, we have been successful at attracting and retaining key personnel. We have no agreements with these individuals requiring them to maintain their employment with us. If we lose one or more of these key employees, particularly Lynda L. Regan, Chairman of the Board and Chief Executive Officer, or R. Preston Pitts, President and Secretary, our business, operating results, and financial condition could be diminished because we rely on their contacts, insurance carrier and Producer relationships, and strategic direction to drive our revenues. However, we are not aware of any key personnel who are planning to retire or leave our company in the near future. Although we maintain and are the beneficiary of key person life insurance policies on the lives of Lynda L. Regan and R. Preston Pitts, we do not believe the proceeds would be adequate to compensate us for their loss.
o The ability of Legacy Marketing to recruit, train, and motivate Producers.
A large percentage of our revenue is derived from sales of fixed annuities. The historical crediting rates of fixed annuities are directly affected by financial market conditions. Changes in market conditions can affect demand for these annuities. Our future success depends on our ability to introduce and market new products and services that are financially attractive and address our customers' changing demands. We may experience difficulties that delay or prevent the successful design, development, introduction, marketing, or administration of our products and services. These delays may cause customers to forego purchases of our products and services and instead purchase those of our competitors. The failure to be successful in our sales efforts could significantly decrease our revenue and operating results, resulting in weakened financial condition and prospects.
If our cash inflows and existing cash and investments become insufficient to support future operating requirements or the redemption of our common stock, we will need to obtain additional funding either by incurring additional debt or issuing equity to investors in either the public or private capital markets. Our cash flows are primarily dependent upon the commissions we receive based on the premium generated from the sale of annuity products that we sell. The market for these products is extremely competitive. New products are constantly being developed to replace existing products in the marketplace. If we are unable to keep pace with the development of such new products, our cash inflows could decrease. Due to this changing environment in which we operate, we are unable to predict whether our cash inflows will be sufficient to support future operating requirements. Our failure to obtain additional funding when needed could delay new product introduction or business expansion opportunities which could cause a decrease in our operating results and financial condition. We are unaware of any material limitations on our ability to obtain additional funding. If additional funds are raised through the issuance of equity securities, the ownership percentage of our then-current shareholders would be reduced. Furthermore, any equity securities issued in the future may have rights, preferences, or privileges senior to that of our existing common stock.
Our cash positions at December 31, 2003 and December 31, 2002 were $9.9 million and $4.8 million.
Significant repurchases of our common stock could materially decrease our cash position.
Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Regan, our Chief Executive Officer, upon the death of Ms. Regan, the heirs of Ms. Regan will have the option (but not the obligation) to sell to us all or a portion of the shares of the Company owned by Ms. Regan at the time of her death and we will have the obligation to buy those shares. The purchase price to be paid buy us, if any, shall be equal to 125% of the fair market value of the shares. As of December 31, 2003, we believe 125% of the fair market value of the shares owned by Ms. Regan was equal to $28.3 million. We have purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this potential obligation. There can be no assurances, however, that the proceeds from these insurance policies will be available or sufficient to cover the purchase price of the shares owned by Ms. Regan at the time of her death. If the proceeds from the insurance policies were not available or sufficient to cover the purchase price of Ms. Regan's shares at the time of her death, our operating results and financial condition could be adversely affected.
The fixed annuity business is rapidly evolving and intensely competitive. Legacy Marketing's primary market is fixed annuities sold through independent producers. In addition, Legacy Marketing administers the products sold by Producers on behalf of the issuing insurance carriers. Fixed annuity sales in the United States were approximately $88 billion in 2003. Some of Legacy Marketing's top competitors selling fixed annuities through independent sales channels are Allianz Life of North America, American Equity Investment Life, Jefferson Pilot Financial Insurance Company, and AmerUs Group. These competitors may have greater financial resources than we do. However, our business model allows us greater flexibility, as we can adjust the mix of business sold if one or more of our carriers were to experience capital constraints or other events that affect their business models. Our competitors may respond more quickly than us to new or emerging products and changes in customer requirements. We are not aware of any significant new means of competition, products or services that our competitors provide or will soon provide. However, in the highly competitive fixed annuity marketplace, new distribution models, product innovations and technological advances may occur at any time and could present us with competitive challenges. There can be no assurance that we will be able to compete successfully. In addition, our business model relies on Wholesaler distribution networks to effectively market our products competitively. Maintaining relationships with these Wholesaler distribution networks requires introducing new products and services to the market in an efficient and timely manner, offering competitive commission schedules, and providing superior marketing, training, and support. In the recent past, we have been reasonably successful in expanding and maintaining our current Wholesaler distribution network. We are not aware of any Wholesaler who may discontinue marketing our products. Due to competition among insurance companies and insurance marketing organizations for successful Wholesalers, there can be no assurance that we will be able to retain some or all of our Wholesaler distribution networks.
Legacy Financial is registered as a broker-dealer with, and is subject to regulation by, the SEC, NASD, Municipal Securities Rulemaking Board, and various state agencies. This regulation covers matters such as capital requirements, recordkeeping and reporting requirements, and employee-related matters, including qualification and licensing of supervisory and sales personnel. Any proceeding alleging violation of, or noncompliance with, laws and regulations applicable to us or our subsidiaries could harm our business, financial condition, results of operations, and business prospects. In addition, changes in federal legislation, state legislation, court decisions and administrative policies could significantly and adversely affect the securities industry generally and our business in particular.
Under the Internal Revenue Code of 1986, as amended, income tax payable by policyholders on investment earnings is deferred during the accumulation period of most of the annuity products that we market. This favorable income tax treatment results in our policyholders paying no income tax on their earnings in the annuity products until they take a cash distribution. We believe that the tax deferral features contained within the annuity products that we market give our products a competitive advantage over other non-insurance investment products where income taxes may be due on current earnings. If the tax code is revised to reduce the tax-deferred status of annuity products or to increase the tax-deferred status of competing products, our business could be adversely impacted because our competitive advantage could be weakened. In addition, some products that we sell receive favorable estate tax treatment under the tax code. If the tax code is revised to change existing estate tax laws, our business could be adversely affected. We cannot predict other future tax initiatives that the federal government may propose that may affect us.
As a professional services firm primarily engaged in marketing and administration of annuity products, we encounter litigation in the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with legal counsel, that the ultimate disposition of these claims will not have a material adverse effect on our financial condition, cash flows or results of operations. In addition, companies in the life insurance industry have been subject to substantial claims involving sales practices, agent misconduct, failure to properly supervise agents, and other matters in connection with sale of life insurance, annuities, and other investment products. Increasingly, these lawsuits have resulted in the award of substantial judgments, including material amounts of punitive damages that are disproportionate to the actual damages. In some states juries have substantial discretion in awarding punitive damages that creates the potential for material adverse judgments in litigation. If any similar lawsuit or other litigation is brought against us, such proceedings may materially harm our business, financial condition, or results of operations.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Regan Holding Corp. and its subsidiaries (the "Company") at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company changed its method of accounting for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets during the year ended December 31, 2002.
Legacy Marketing also has administrative agreements with the carriers (including IL Annuity) pursuant to which 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.
Legacy Financial recognizes commission revenue when clients remit payment with a signed and completed variable annuity or investment contract. Under the terms of the sales agreements between Legacy Financial and
various investment companies, Legacy Financial is compensated based upon predetermined percentages of actual sales levels.
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 recognized in the period sold using the specific identification method for determining cost.
Computer hardware and purchased software 3-5 years Internal use software development costs 3-5 years Leasehold improvements 2-10 years Furniture and equipment 5 years Building 40 years
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased amortizing goodwill beginning January 1, 2002 (see Note 4). As required by SFAS 142, the Company performs an annual goodwill impairment test. The impairment test of SFAS 142 requires the Company to measure fair value of the reporting unit. The Company established fair value by preparing a forecast of the discounted value of future cash flows expected to be derived from VFN. Intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years.
2003 2002 2001 ------------ ------------ ------------ Risk-free interest rates 1.45%-3.20% 4.08%-4.52% 4.50%-4.88% Expected life 3-5 years 3-5 years 3-5 years Dividend yield None None None
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. The provisions of SFAS 150 require that some of these instruments now be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for existing financial instruments beginning on July 1, 2003. The implementation of SFAS 150 had no material effect on the Company's consolidated results of operations or financial position.
During 2002, the Company revised the business model for VFN to focus on corporate and individual producer sales and its projections supported the balance of goodwill. During 2003 the Company further refined its business model for VFN, including identifying a new market and committing additional resources to develop the business. During 2003 the Company updated its annual measurement of fair value of VFN due to the failure of VFN to produce revenues as projected. The fair value measurement based on a revised cash flow forecast was predicated on VFN realizing a lower level of sales. This forecast of cash flows did not support the balance of goodwill, and the Company recorded a goodwill impairment loss of $491,000 during 2003.
December 31, ------------------------------------------------ 2003 2002 ---------------------- ---------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ Copyrights $ 203,000 $(145,000) $ 250,000 $(100,000) Software license $ 223,000 $ (85,000) $ 223,000 $ (41,000) --------- --------- --------- --------- Total $ 426,000 $(230,000) $ 473,000 $(141,000) ========= ========= ========= =========
The aggregate amortization expense for the years ended December 31, 2003, 2002 and 2001 was $89,000, $91,000 and $102,000. The estimated amortization expense for each of the next two years ended December 31, 2005 is $74,000, and the estimated amortization expense for the years ended December 31, 2006 and 2007 are $45,000 and $3,000.
The Company also sponsors a non-qualified tax deferred compensation plan, which is available to certain employees who, because of Internal Revenue Code limitations, are prohibited from contributing the maximum percentage of salary to the 401(k) Plan. Under this deferred compensation plan, certain employees may defer, on a pre-tax basis, a percentage of annual compensation, including bonuses. The Company matches 50% of each employee's contributions, up to a maximum of 6% of annual compensation, less amounts already matched under the 401(k) plan. The Company made matching contributions of $32,000, $59,000, and $55,000 during the years ended December 31, 2003, 2002, and 2001. As of December 31, 2003 and 2002, employee contributions and Company matching contributions, net of accumulated investment losses, totaled $610,000 and $650,000.
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 1% to 5% of amounts deferred, depending on the level of annual commissions earned. During the years ended December 31, 2003, 2002, and 2001, matching contributions related to the producer commission deferral plan were $16,000, $19,000, and $36,000. As of December 31, 2003 and 2002, producer contributions and Company matching contributions, net of accumulated investment losses, totaled $5.7 million and $3.6 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 Group 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.
The Company's future minimum annual lease commitments under all operating leases as of December 31, 2003 are as follows:
Year Ended December 31, 2004 $ 610,000 2005 465,000 2006 323,000 2007 219,000 2008 18,000 Thereafter 3,000 ------------ Total minimum lease payments $ 1,638,000 ============
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, 2003, there were no outstanding commitments by the Company relating to such obligations.
The Company recorded redeemable common stock accretion of $70,000 and $26,000 and related to Series A redeemable common stock for the years ended December 31, 2003 and 2002. The carrying value of Series B redeemable common stock is greater than the redemption value, and has not been accreted.
Producer Option Plan -- Under the Regan Holding Corp. Producer Stock Option and Award plan (the "Producer Option Plan"), the Company may grant to Legacy Marketing producers and Legacy Financial registered representatives shares of the Company's common stock and non-qualified stock options (the "Producer Options") to purchase the Company's common stock. A total of 12.5 million shares have been reserved for grant under the Producer Option Plan. Total stock options granted to Producers for 2003, 2002, and 2001 were 15,000, 10,000, and 265,000. Total expenses recorded for Producer stock option grants were $10,000, $4,000, and $96,000 during 2003, 2002 and 2001. The Producer stock options granted for each of the three years ended December 31, 2003 vested immediately upon the grant date. The fair value of the Producer options were estimated using the Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001 ---- ---- ---- Risk-free interest rates 3.19% 4.78% 5.13%-6.80% Volatility 27% 27% 27%-31% Dividend yield None None None Expected life 6 years 6 years 6-10 years
Exercisable at December 31, 2001 11,512,000 $ 1.31 Exercisable at December 31, 2002 12,407,000 $ 1.32 Exercisable at December 31, 2003 13,106,000 $ 1.35
The provisions for (benefit from) federal and state income taxes consist of amounts currently (receivable) payable and amounts deferred which, for the periods indicated, are shown below:
For the Year Ended December 31, ----------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Current income taxes: Federal $ 3,311,000 $ 76,000 $ (92,000) State 944,000 24,000 5,000 ----------- ----------- ----------- Total current 4,255,000 100,000 (87,000) ----------- ----------- ----------- Deferred income taxes: Federal (696,000) (170,000) (117,000) State (168,000) 36,000 (16,000) ----------- ----------- ----------- Total deferred (864,000) (134,000) (133,000) ----------- ----------- ----------- Income tax (benefit) expense $ 3,391,000 $ (34,000) $ (220,000) =========== =========== ===========
December 31, -------------------------- 2003 2002 ----------- ----------- Producer stock option and stock awards $ 2,186,000 $ 2,182,000 Producer deferred compensation 2,492,000 1,696,000 Accrued sales convention costs 543,000 663,000 State net operating loss carryforward, less valuation allowance of $385,000 and $362,000, net of federal taxes 250,000 248,000 Alternative minimum tax credit carryforward 263,000 304,000 Capital loss 357,000 353,000 Unrealized losses -- 427,000 Other 1,090,000 817,000 ----------- ----------- Subtotal deferred tax assets 7,181,000 6,690,000 ----------- ----------- Fixed asset depreciation (2,985,000) (3,611,000) Deferred gain on building sale (1,364,000) (1,364,000) Unrealized gains (306,000) -- ----------- ----------- Subtotal deferred tax liabilities (4,655,000) (4,975,000) ----------- ----------- Deferred tax assets, net $ 2,526,000 $ 1,715,000 =========== ===========
2003 2002 2001 ---- ---- ---- BenchMark(SM) series (sold on behalf of American National) 37% 16% 4% SelectMark(SM) series (sold on behalf of Transamerica) 25% 51% 67% MarkOne(SM) series (sold on behalf of Investors Insurance Corporation 23% 6% -- VisionMark(SM) series (sold on behalf of IL Annuity) 4% 11% 19% AssureMark(SM) series (sold on behalf of John Hancock) 3% 8% --
During the first quarter of 2003, Legacy Marketing discontinued marketing life insurance products issued by American National. Certain Legacy Marketing employees who were supporting the life insurance product operations were either terminated or reassigned to other positions in Legacy Marketing.