Legacy Marketing designs and markets fixed annuity products on behalf of certain unaffiliated insurance carriers in each of the United States, except Alabama and New York. As of December 31, 2007, Legacy Marketing had marketing agreements with American National, Investors Insurance, Transamerica, Americom, Washington National and John Hancock. The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity products issued by these insurance carriers. Legacy Marketing is responsible for appointing Producers, who have contracted with Legacy Marketing to sell these products, with the applicable insurance carrier. For these services, the insurance carriers pay Legacy Marketing commissions and marketing allowances.
On January 25, 2007, prospectdigital LLC ("prospectdigital"), an indirect wholly owned subsidiary of Regan Holding, sold certain of its assets, which primarily included fixed assets and other miscellaneous operating assets, to PD Holdings LLC ("PD Holdings"). In addition, PD Holdings agreed to assume certain liabilities of prospectdigital. The action was taken in a continuing effort to reduce Regan Holding’s operating expenses, as prospectdigital continued to sustain losses through the date of sale.
Pursuant to the terms of the Amended Agreement, beginning April 1, 2008, Legacy Marketing will be required to make quarterly principal payments on the Term Loan equal to a percentage of the outstanding principal balance of the Term Loan as of June 30, 2007, as follows: 3.75% of the balance for the first four payments, 5.0% of the balance for the next twelve payments and 6.25% of the balance for the final four payments. The quarterly principal payments will be reduced, in order of maturity, by any optional prepayments by Legacy Marketing or prepayments resulting from prepayment events specified in the Amended Agreement. Additionally, beginning September 30, 2008, Legacy Marketing will be required to semi-annually prepay the Term Loan on March 31 and September 30 in an amount equal to fifty percent of the Company’s excess cash flow (as defined in the Amended Agreement) for the immediately preceding six month periods ended December 31 and June 30, subject to certain conditions specified in the Amended Agreement. Interest on the unpaid principal balance of the Term Loan is currently payable on a monthly basis and accrues at the LIBOR-based rate (as defined in the Credit Agreement) plus 3.5%, which was 8.10% as of December 31, 2007. The principal balance and accrued interest on the Term Loan is payable in full by December 31, 2012.
The Term Loan is primarily secured by Regan Holding’s bank and securities accounts, equipment and investment property, and Legacy Marketing’s obligations are currently guaranteed by Regan Holding., Legacy Advisory Services, Inc., Imagent Online LLC and certain shareholders of Regan Holding. In addition, Legacy Marketing is required to comply with other financial and non-financial covenants specified in the Credit Agreement. In the event of default under the Credit Agreement, the entire balance of the Term Loan would become immediately payable.
On November 18, 2005, Regan Holding sold its office buildings in Petaluma, California for $12.8 million. Regan Holding and the third party buyer (the “Buyer”) further agreed to enter into a ten year lease agreement, concurrently with the sale of the buildings, whereby it leased back 71,612 square feet through March 14, 2007, and will continue to lease back 47,612 square feet for the remainder of the lease term. The monthly base rent is $1.29 per square foot and will increase annually by three percent during the term of the lease, in addition to monthly taxes and operating expenses.
In 2005, after conducting an independent research, we concluded that the advances in technology and functionality that these new designs have delivered, along with the associated financial benefits, are greater than we would realize by completing our plans to implement the new administration system. In addition, the vendor of the new administration system announced that it will no longer be providing the appropriate updates for the system to the licensed users for all future regulatory changes, and that it will be the responsibility of each company that uses the system to modify the system for such changes. As a result, management determined that the internal use software project associated with the new administration system had been impaired, and in the second quarter of 2005, we recorded a write-off of $2.9 million associated with abandoned components of the internal use software project.
In recent years, the Securities and Exchange Commission (“SEC”) has been examining whether all equity-indexed annuities need to be registered under the Securities Act of 1933. Additionally, FINRA has issued guidance to its members indicating that broker-dealers regulated by the FINRA have certain responsibilities with respect to the offer and sale of equity-indexed annuities, including an obligation to determine the suitability of such products for their customers, regardless of whether equity-indexed annuities are deemed to be securities. Finally, some state insurance regulators are considering whether additional suitability and disclosure regulations should be implemented with respect to all sales of fixed annuities, particularly with respect to senior citizens.
Our core business consists of selling fixed annuity products, on behalf of insurance carriers, through a network of independent insurance producers (“Producers”). If the initiatives undertaken by the Securities and Exchange Commission, the FINRA or state insurance regulators with respect to equity-indexed and other annuities were to result in new regulation or legislation, the demand for fixed annuities products, our operations and those of our Producers could be adversely affected. If such initiatives were to result in new regulation or laws, they could have a material adverse effect on the insurance industry in general or on our financial condition and results of operations.
Also, in recent years, the U.S. insurance regulatory framework has also come under scrutiny. Some state legislatures have considered laws that may alter or increase state regulation of insurance, reinsurance, and holding companies. Moreover, the National Association of Insurance Commissioners and state insurance regulators regularly re-examine existing laws and regulations, often focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws. Changes in these laws and regulations or their interpretation could have a material adverse effect on our financial condition and results of operations.
Legacy Financial, a discontinued operation, is registered as a broker-dealer with, and is subject to regulation by, the SEC, FINRA, 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 Legacy Financial could harm its business and financial condition, and our results of discontinued operations.
The preliminary project stage is completed and the project is therefore in the application development stage; and
Legacy Marketing’s operating expenses decreased $4.6 million (14%) in 2007 compared to 2006 primarily due to decreased selling, general and administrative expenses, partially offset by a $1.2 million impairment charge for internal use software. Selling, general and administrative expenses decreased $5.5 million (19%) primarily due to reduced compensation and benefits and lower sales promotion and support costs. Compensation and benefits decreased primarily due to decreased employee headcount, and sales promotion and support decreased in 2007 primarily as the result of reduced sales incentive costs as a function of overall sales. Legacy Marketing has established a valuation allowance related primarily to its federal and state deferred tax assets, which increased $3.4 million in 2007.
Legacy Marketing’s operating expenses decreased $3.7 million (10%) in 2006 compared to 2005 primarily due to a $2.9 million impairment charge for internal use software recorded in 2005. Excluding the $2.9 million impairment charge for internal use software, Legacy Marketing’s expenses decreased $800,000 (2%) in 2006 compared to 2005 primarily due to decreased selling, general and administrative expenses and other expenses. Selling, general and administrative expenses decreased $506,000 (2%) primarily due to decreased compensation and benefits, partially offset by higher sales promotion and support costs. Compensation and benefits decreased primarily due to decreased employee headcount, and sales promotion and support increased in 2006 primarily as the result of increased sales incentive costs. We had a benefit from income taxes of approximately $2.7 million in 2006 resulting from a settlement of prior years’ tax matters. In addition, Legacy Marketing has established a valuation allowance related primarily to its federal and state deferred tax assets, which increased $3.0 million in 2006.
On January 25, 2007, prospectdigital LLC ("prospectdigital"), an indirect wholly owned subsidiary of Regan Holding Corp., sold certain of its assets, which primarily included fixed assets and other miscellaneous operating assets, to PD Holdings LLC ("PD Holdings"). In addition, PD Holdings agreed to assume certain liabilities of prospectdigital. The action was taken in a continuing effort to reduce our operating expenses, as prospectdigital continued to sustain losses through the date of sale.
Lynda Pitts, Chief Executive Officer, and R. Preston Pitts, President, Chief Operating Officer and Chief Financial Officer of Regan Holding Corp., are the primary owners of PD Holdings. In connection with the sale, we also entered into a service agreement with PD Holdings, pursuant to which subsidiaries of Regan Holding Corp. provide certain administrative services to PD Holdings, for a fee equal to the cost of the services provided.
Prospectdigital is being reported as a discontinued operation for the twelve months ended December 31, 2007 and 2006. We incurred a $189,000 loss on the sale of prospectdigital’s assets.
Our cash used in operating activities during 2006 was primarily the result of our net loss, gains on trading securities and a non-cash decrease in income taxes payable resulting from a settlement of prior years’ tax matters. These decreases in cash were partially offset by such non-cash items as depreciation and also due to sales of trading securities and a decrease in prepaid expenses.
In April 2004, we completed construction of our office building in Rome, Georgia, financing it with a $2.9 million variable interest rate note indexed to 30-day LIBOR plus 1.9%. The note is payable over ten years in monthly installments of principal, amortized on the basis of a 20-year term, and interest. At the end of the ten years, we must pay the balance of the principal due on the note. The outstanding balance of the note as of December 31, 2007, was $2.6 million. To manage interest expense, we entered into an interest rate swap agreement with a notional amount equal to the principal balance of the note, which modifies its interest expense from a variable rate to a fixed rate. The April 2004 swap agreement involves the exchange of interest obligations from April 2004 through April 2014 whereby we pay a fixed rate of 6.8% in exchange for a variable rate indexed to 30-day LIBOR plus 1.9%.
Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Pitts, Chief Executive Officer of the Company and Chairman of our Board of Directors, upon the death of Mrs. Pitts, we would have the option (but not the obligation) to purchase from Mrs. Pitts’ estate all shares of common stock that were owned by Mrs. Pitts 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 Mrs. Pitts, her heirs would have the option (but not the obligation) to sell their inherited shares to us. The purchase price to be paid by us shall be equal to 125% of the fair market value of the shares. As of December 31, 2007, we believe that 125% of the fair market value of the shares owned by Mrs. Pitts was equal to $562,000. We have purchased life insurance coverage for the purpose of funding this potential obligation upon Mrs. Pitts’ death.
We used $6.2 million, $4.5 million and $5.6 million of cash in operations in 2007, 2006 and 2005. We also incurred consolidated net losses of $9.1 million, $6.3 million and $13.7 million in 2007, 2006 and 2005. If our consolidated net losses continue, a cash shortfall could occur. To address this issue, during 2006 and 2007, we lowered our cost structure by reducing our employee headcount. In January 2007, we exited the prospectdigital business and disposed of its assets. This action eliminated approximately $1.2 million of annual cash use. We have also restructured a portion of our debt, which enabled us to defer our obligation to begin making scheduled principal payments until March 2008 and improved our liquidity by allowing us to leverage certain assets the use of which was previously restricted by the debt agreement. We have completed the sale of Legacy Financial’s registered representatives and customer accounts, and we received $1 million of cash proceeds from that sale on September 28, 2007. We are using the cash proceeds from this sale to settle outstanding Legacy Financial matters, and the remaining funds will be available for general corporate purposes once the transition process is complete.
On October 17, 2007, we entered into an agreement and strategic alliance with a subsidiary of Perot Systems Corporation, whereby we agreed to transfer our third party administration services function and the employees who provide these services to Perot Systems in exchange for Perot Systems’ assumption of such administrative service functions. As part of this transaction, we entered into a lease with Perot Systems whereby Perot Systems will lease our offices in Rome, Georgia, for a ten-year term at an initial rental price of $8.00 per square foot (a lease amount of approximately $300,000 per year). These initiatives have allowed us to lower our costs and increase efficiencies and to focus on higher value added activities.
On March 14, 2008, we entered into an agreement (the “Sale Agreement”) with Freehold Capital Advisors Ltd (“Freehold”), whereby we agreed to sell our facility in Rome GA to Freehold for $3.6 million. The closing is subject to a 60-day inspection period, during which time Freehold may make on-site investigations to determine whether the property is suitable for its purposes. Freehold has the right, at any time during the inspection period, to terminate the Sale Agreement. The closing date of this transaction will be on or before 30 days after the expiration of the inspection period. If the closing does not occur by July 11, 2008 either party may terminate the Sale Agreement upon written notice. A portion of the proceeds from the sale of the building will be used to repay the mortgage of $2.6 million on the property. In addition, the interest swap agreement related to the mortgage will be terminated.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (the “FSP”). The FSP amends SFAS No. 157 to delay the effective date of Statement 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). For items within its scope, the FSP defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Adoption of SFAS No. 157 will not have a material effect on our results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for us beginning January 1, 2009. The Company is currently evaluating the potential impact of the adoption of SFAS 141R on our financial position, results of operations or cash flows.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Regan Holding Corp. and its subsidiaries as of December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule as of and for the years ended December 31, 2007 and 2006, when considered in relation to the consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As of December 31, 2007, Legacy Marketing had marketing agreements with American National Insurance Company (“American National”), Investors Insurance Corporation (“Investors Insurance”), Transamerica Life Insurance and Annuity Company (“Transamerica”), Americom Life & Annuity Insurance Company (“Americom”), Washington National Insurance Company (“Washington National”) and John Hancock Variable Life Insurance Company (“John Hancock”) (collectively, the “carriers”). The marketing agreements grant Legacy Marketing the exclusive right to market certain fixed annuity and life insurance products issued by the carriers (the “policies”). In addition, Legacy Marketing is responsible for appointing independent insurance producers, who contract with Legacy Marketing to sell policies, with the applicable carrier. For providing these services, the carriers pay Legacy Marketing commissions and marketing allowances.
The carrying values of the Company’s financial instruments, including cash equivalents, trading investments, accounts receivable, accounts payable, accrued liabilities and notes payable approximate their market values based on their relatively short-term nature or comparable market information available at the respective balance sheet dates.
Cash and cash equivalents include marketable securities with an original maturity or remaining maturity of ninety days or less at the time of purchase.
The preliminary project stage is completed and therefore the project is in the application development stage; and
Management authorizes and commits to funding a software project and it is probable that the project will be completed and the software will be used to perform the function desired.
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payments” (“SFAS 123R”) which addresses the accounting for stock-based payment transactions whereby an entity receives employee services in exchange for equity instruments, including stock options. SFAS 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and instead generally requires that such transactions be accounted for using a fair-value based method. Prior to January 1, 2006, the Company used the minimum value method in estimating the value of employee option grants as allowed by SFAS 123, amended by SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. Accordingly, the Company has elected the prospective transition method as permitted under SFAS 123R, and prior periods have not been restated to reflect the impact of SFAS 123R. The prospective transition method requires that stock-based compensation expense be recorded for all new stock options that are ultimately expected to vest as the requisite service is rendered beginning on January 1, 2006. The Company issues new shares of common stock upon the exercise of stock options.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Adoption of SFAS No. 159 will not have a material effect on our results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Adoption of SFAS No. 160 is not expected to have a material effect on our results of operations and financial condition.
On May 31, 2007, Regan Holding and two of its subsidiaries, Legacy Financial and Legacy Advisory Services Inc., entered into an agreement with Multi-Financial Securities Corporation whereby Legacy Financial transferred its registered representatives and customer accounts to Multi-Financial Securities Corporation. Under the agreement, on September 28, 2007, Multi-Financial Securities Corporation paid Legacy Financial Services $1 million (11.5%) of the aggregate gross dealer concessions earned at Legacy Financial Services between May 1, 2006, and April 30, 2007, by those transferred representatives who were, as of the measurement date (as defined in the agreement), registered with Multi-Financial Securities Corporation and in good standing with the FINRA . In addition, on each of the first four anniversary dates of the measurement date, subject to certain conditions, Multi-Financial Securities Corporation is obligated to pay Legacy Financial Services an amount representing up to four and a half percent (4.5%) of each transferred representative’s aggregate gross dealer concessions earned with Multi-Financial Securities Corporation during the one year period prior to such anniversary date.
The Company recognized a $1 million gain on the transfer of Legacy Financial’s registered representatives and customer accounts to Multi-Financial Securities Corporation in 2007, and as a result Legacy Financial had net income of $133,000 for the twelve months ended December 31, 2007. Legacy Financial incurred losses of $660,000 for the twelve months ended December 31, 2006. Legacy Financial’s results are being reported as discontinued operations. On the Company’s consolidated balance sheet, Legacy Financial’s assets of $380,000 as of December 31, 2007, and $592,000 as of December 31, 2006, are included in prepaid expenses and other current assets, and Legacy Financial’s liabilities of $210,000 as of December 31, 2007, and $748,000 as of December 31, 2006, are included in accounts payable and accrued liabilities.
Prospectdigital is being reported as a discontinued operation for the twelve months ended December 31, 2007 and 2006. Prospectdigital incurred a $189,000 loss on the sale of it’s assets.
In January 2006, the Company decided to discontinue the operations of Values Financial Network (“VFN”). The Company incurred insignificant costs in connection with exiting the operations.
Pursuant to the terms of the Amended Agreement, beginning April 1, 2008, Legacy Marketing Group will be required to make quarterly principal payments on the Term Loan equal to a percentage of the outstanding principal balance of the Term Loan as of June 30, 2007, as follows: 3.75% of the balance for the first four payments, 5.0% of the balance for the next twelve payments and 6.25% of the balance for the final four payments. The quarterly principal payments will be reduced, in order of maturity, by any optional prepayments by Legacy Marketing Group or prepayments resulting from prepayment events specified in the Amended Agreement. Additionally, beginning September 30, 2008, Legacy Marketing Group will be required to semi-annually prepay the Term Loan on March 31 and September 30 in an amount equal to fifty percent of the Company’s excess cash flow (as defined in the Amended Agreement) for the immediately preceding six month periods ended December 31 and June 30, subject to certain conditions specified in the Amended Agreement. Interest on the unpaid principal balance of the Term Loan is currently payable on a monthly basis and accrues at the LIBOR-based rate (as defined in the Credit Agreement) plus 3.5%, which was 8.10% as of December 31, 2007. The principal balance and accrued interest on the Term Loan is payable in full by December 31, 2012.
The Term Loan is primarily secured by Regan Holding Corp.’s bank and securities accounts, equipment and investment property, and Legacy Marketing Group’s obligations are currently guaranteed by Regan Holding Corp., Legacy Advisory Services, Inc., Imagent Online LLC and certain shareholders of Regan Holding Corp. In addition, Legacy Marketing Group is required to comply with other financial and non-financial covenants specified in the Credit Agreement. In the event of default under the Credit Agreement, the entire balance of the Term Loan would become immediately payable.
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 typically 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 $0, $2,000, and $0 during the years ended December 31, 2007, 2006, and 2005. As of December 31, 2007 and 2006, employee contributions and Company matching contributions, including cumulative investment gains, totaled $547,000 and $570,000.
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 2% to 5% of amounts deferred, depending on the level of annual commissions earned. During the years ended December 31, 2007, 2006, and 2005, matching contributions related to the producer commission deferral plan were $1,000, $2,000, and $8,000. Producer contributions and Company matching contributions, including cumulative investment gains, totaled $7.4 million and $7.5 million as of December 31, 2007 and 2006. The liability to the employee or producer is credited or charged based on the performance of the investment option selected by the participant.
The Company leases office and warehouse premises and certain office equipment under non-cancelable operating leases. Related rent expense of $1.3 million, $1.3 million, and $298,000 is included in occupancy costs for the years ended December 31, 2007, 2006, and 2005. Total rentals for leases of equipment included in equipment expense were $653,000, $747,000, and $727,000 for the years ended December 31, 2007, 2006, and 2005.
Pursuant to the terms of our Amended and Restated Shareholder's Agreement with Lynda L. Pitts, Chief Executive Officer of the Company and Chairman of the Company’s Board of Directors, upon the death of Mrs. Pitts, the Company would have the option (but not the obligation) to purchase from Mrs. Pitts’ estate all shares of common stock that were owned by Mrs. Pitts 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 Mrs. Pitts, 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, 2007, the Company believes that 125% of the fair market value of the shares owned by Mrs. Pitts was equal to $562,000. The Company has purchased life insurance coverage for the purpose of funding this potential obligation upon Mrs. Pitts’ death.
Between 1990 and 1992, the Company issued Series A and Series B redeemable common stock to certain shareholders. The Company is obligated to repurchase the redeemable common stock at the current fair market value. Because there is no active trading market for the Company’s stock that would establish market value, the Company’s Board of Directors approved a redemption value for Series A redeemable common stock of $0.04 per share and $0.06 per share, and a redemption value for Series B redeemable common stock of $0.04 and $0.05 per share, as of December 31, 2007 and 2006, based on the stock valuation prepared by management. The Company is currently unable to redeem its redeemable common stock due to restrictions in the California corporations law.
The Company recorded redeemable common stock reduction of $0, $165,000 and $871,000 related to Series A redeemable common stock for the years ended December 31, 2007, 2006 and 2005.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will, or will not, be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Due to cumulative losses in recent years, management established a valuation allowance of $13.2 million as of December 31, 2007. This represents a net increase in the valuation allowance on deferred tax assets of $3.4 million and $3.1 million in 2007 and 2006.
The income tax provision (benefit) in 2007, 2006 and 2005 differed from the amounts computed by applying the statutory federal income tax rate of 34% to pretax loss as a result of the following:
Cash provided by or used in operating activities generally follows the trend in the Company’s revenue and operating results. Cash used in operating activities was $6.2 million, $4.5 million and $5.6 million in 2007, 2006 and 2005, respectively. The Company also incurred consolidated net losses of $9.1 million, $6.3 million and $13.7 million in 2007, 2006 and 2005, respectively. If the Company’s consolidated net losses continue, a cash shortfall could occur. To address this issue, during 2006 and 2007, the Company lowered its cost structure by reducing its employee headcount. In January 2007, the Company exited the prospectdigital business and disposed of its assets. This action eliminated approximately $1.2 million of annual cash use.
On October 17, 2007, Legacy Marketing entered into an agreement and strategic alliance with a subsidiary of Perot Systems, whereby Legacy Marketing agreed to transfer its third party administration services function and the employees who provide these services to Perot Systems in exchange for Perot Systems’ assumption of such administrative service functions. As part of this transaction, the Company entered into a lease with Perot Systems whereby Perot Systems leases the offices in Rome, Georgia, for a ten-year term at an initial rental price of $8.00 per square foot (a lease amount of approximately $300,000 per year).
In 2007, Legacy Marketing sold and administered its products primarily on behalf of three unaffiliated insurance carriers: Washington National, American National, and Transamerica. The agreements with those carriers generated a significant portion of the Company’s total consolidated revenue:
Legacy Marketing’s revenues are derived primarily from sales and administration of the following fixed annuity product series:
Effective October 17, 2007, Legacy Marketing entered into an agreement and strategic alliance with a subsidiary of Perot Systems, whereby Legacy Marketing agreed to transfer its third party administration services function and the employees who provide these services to Perot Systems in exchange for Perot Systems’ assumption of such administrative service functions. Perot Systems will also become the exclusive provider of administrative services for Legacy Marketing’s future portfolio of annuity products. Pursuant to this arrangement, the Company had a $311,000 receivable from Perot Systems at December 31, 2007. In the twelve months ended December 31, 2007 and 2006, Legacy Marketing received approximately $5.3 million and $7.4 million in gross revenue under the administrative agreements with carriers. The termination of administrative agreements does not affect the commissions earned by Legacy Marketing on additional premium received or assets under management with respect to the underlying insurance contracts.
On March 14, 2008, the Company entered into an agreement (the “Sale Agreement”) with Freehold Capital Advisors Ltd (“Freehold”), whereby the Company agreed to sell its facility in Rome GA to Freehold for $3.6 million. The closing is subject to a 60-day inspection period, during which time Freehold may make on-site investigations to determine whether the property is suitable for its purposes. Freehold has the right, at any time during the inspection period, to terminate the Sale Agreement. The closing date of this transaction will be on or before 30 days after the expiration of the inspection period. If the closing does not occur by July 11, 2008 either party may terminate the Sale Agreement upon written notice. A portion of the proceeds from the sale of the building will be used to repay the mortgage of $2.6 million on the property. In addition, the interest swap agreement related to the mortgage will be terminated.
A special committee of the Board of Directors of the Company comprising the independent directors, Ute Scott-Smith, J. Daniel Speight, Jr and Donald Ratajczak, approved the amount of consideration. In connection with the committee’s deliberations the Company obtained a fairness opinion from an independent third party stating that the total value of the transaction to the Company was within an acceptable range of estimated fair values of the future trail commission cash flows. A portion of the proceeds was used to pay the $6 million note payable to Washington National Insurance Company and interest accrued thereon. The remainder of the proceeds is available for general corporate purposes.