The Company owns, through Citizens Security, a three-story, 63,000 square foot office building in suburban Louisville, Kentucky completed in 1988. The Company and its Subsidiaries occupy about 31% of the building for their headquarters and home offices. The Company leases the remaining space to tenants under leases of various duration. Market conditions for this property are generally favorable and, in management's opinion, the property is adequately covered by insurance. Currently, the Company's policy is not to invest in additional real estate or real estate mortgages, although a change in such policy would not require a vote of security holders. In addition, the Company's current bank lending agreement precludes investment in additional real estate and in mortgages with a loan-to-appraised-value ratio of more than 75%.
The Company repurchased 29,987, 41,400 and 9,000 shares of its common stock during 2002, 2001, and 2000 respectively, at average prices of $4.65, $9.58 and $11.58 per share, respectively.
Investment in Debt and Equity Securities. The Company holds debt and equity interests in a variety of companies, many of which are seeking to exploit recent technology advancements. The majority of these are publicly traded and many have experienced volatile market prices. We periodically evaluate whether the declines in fair value of our investments are other-than-temporary. These evaluations involve significant judgment. Our evaluation consists of a review of qualitative and quantitative factors, including analysis of the company's competitive position in its markets, deterioration in the financial condition of
the issuer, downgrades of the security by a rating agency, and other publicly available issuer-specific news or general market conditions. Declines in fair values of securities deemed to be other-than-temporary are included in net income as realized investment losses. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.
Policy Liabilities and Policy Intangible Assets. Establishing policy liabilities and related intangible assets, including deferred acquisition costs and the value of acquired insurance, for the Company's long-duration insurance contracts requires making many assumptions, including policyholder persistency, mortality rates, investment yields, discretionary benefit increases, new business pricing, and operating expense levels. The Company evaluates historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial estimates and judgment are required. Accordingly, if actual experience emerges differently from that assumed, material financial statement adjustments could be required.
Assets. At December 31, 2002, the Company's available-for-sale fixed maturities had a fair value of $103,953,815 and amortized cost of $101,161,174. The Company's fixed maturities portfolio increased approximately 33% during 2002 and 5% during 2001, on an amortized cost basis. These increases are primarily attributable to Preneed Life sales growth. Shown below is a distribution by rating category of the Company's fixed maturities portfolio as of December 31, 2002.
1 Net of write-downs on bonds whose decline in value is believed to be other-than-temporary 2 Fair values as of December 31, 2002 were obtained primarily from Interactive Data Corporation.
The Company believes it has a well diversified portfolio and has no plans to adjust its non-investment grade portfolio significantly, unless necessary to satisfy requirements of state regulators or rating agencies. The Company purchases non-investment grade bonds to obtain higher yields or convertible features and attempts to reduce credit risk by portfolio diversification. Non-investment grade securities comprised 5.1% and 6.7% of the fixed maturities portfolio, on an amortized cost basis at December 31, 2002 and 2001, respectively. During 2002, the Company recognized approximately $501,000 of impairment losses on fixed maturities, with the majority of these related to the airline and telecommunication industries. The Company is monitoring its fixed maturity portfolio and, although it has no specific projections, if the overall economy does not improve, additional impairments could occur during 2003.
Shown below are the Company's four largest holdings in non-investment grade bonds by a single issuer as of December 31, 2002.
Liabilities. A comparison of total policy liabilities as of December 31, 2002, 2001 and 2000 is shown below. Approximately 87% of the 2002 total consists of insurance policy benefit reserves while policyholder deposit liabilities represent 13% of the total.
Year Ended December 31 2002 2001 2000 ------------------------ ---------------- --------------- ---------------- Home Service Life $ 33,970,723 $ 32,609,959 $ 31,543,557 Broker Life 45,054,589 44,414,974 44,631,499 Preneed Life 38,971,203 27,512,646 23,094,830 Dental 524,249 565,119 610,111 Other Health 2,194,869 2,137,079 2,143,247 ------------------------ ---------------- --------------- ---------------- Total $120,715,633 $107,239,777 $102,023,244 ------------------------ ---------------- --------------- ----------------
Year Ended December 31, 2002 Total Annuity and Universal Other Life - -------------------------------- --------------- --------------- --------------- Beginning Balance $15,917,731 $ 9,907,941 $ 6,009,790 Deposits 741,863 168,084 573,779 Withdrawals (1,698,063) (781,182) (916,881) Interest Credited 781,762 510,239 271,523 - -------------------------------- --------------- --------------- --------------- Ending Balance $15,743,293 $ 9,805,082 $ 5,938,211 - -------------------------------- --------------- --------------- ---------------
The 114% increase in Preneed Life premium during 2002 and the 111% increase during 2001 resulted from intensified marketing efforts aimed at defining the Company as a committed participant in this market, successfully negotiating competitive third-party marketing agreements, implementing various product enhancements, and positive referrals from customers who comment favorably on the Company's organization and customer service. However, as described above, in early 2003, the Company modified certain policy benefits and commissions which may reduce future premium production.
The Company has not been actively marketing Other Health coverages for several years. However, in response to agent requests, certain cancer and disability protection products have been updated and promoted. Pricing, underwriting, and claims experience on these products are closely monitored.
Segment Earnings. The 2002 loss before income tax and the cumulative effect of a change in accounting principle was $3,329,000 compared to a loss of $7,984,000 in 2001 and income of $448,000 in 2000. Pretax profit (loss) is shown below for the Company's five business segments, along with total realized investment gains and interest expense.
and increased expenses. During 2002, the Company accepted a significant amount of single-premium business, which generally has higher than average mortality rates. In addition, significant management and marketing resources were devoted to this business. To improve profitability, annual benefit growth rates were reduced twice during 2002, and in early 2003, certain commission rates were reduced and agent contracts revised to encourage production of the more profitable multi-pay products. The 2001 Preneed Life loss improved approximately $563,000 from the prior year while premium increased approximately 111%. This volume growth leveraged fixed costs and improved per-policy profitability. Although the Company is optimistic about improving profitability in this highly competitive market, if adverse profitability trends continue, several options are available. These options, including further lowering discretionary annual benefit increases and adjusting premiums and commissions on new business, could further adversely impact the Company's ability to compete for new business.
Year Ended December 31 2002 2001 2000 - ---------------------------- ---------------- --------------- ----------------- Premium $8,182,483 $7,988,620 $7,892,356 Claims and Reserves $5,634,940 $5,551,624 $5,369,742 Contribution Margin $1,560,208 $1,465,017 $1,516,948 Claim Ratio 68.9% 69.5% 68.0%
The overall Dental contribution margin increased slightly during 2002 due to improved claim levels. The 2001 contribution margin decrease resulted from somewhat higher claims. Also, beginning in 2001 the Company began encountering more competition as additional insurers are expanding in the Dental market and Dental providers are continuing to provide higher levels of care to patients. The Company is continuing its ongoing efforts to maintain profitability in this line by reconfiguring products to provide adequate margins for the various dental procedures, utilizing a third-party company to provide expert assistance with ongoing adjudication of claims, and continuing its program of aggressive renewal underwriting and re-rating. The Company has not devoted significant marketing effort towards its Other Health products in recent years. However, during 2002, a significant increase in disability claims occurred, with a concentration in New Jersey. The Company has strengthened underwriting practices in this area and has taken steps towards filing for a rate increase on its disability products. In addition, during 2001 the Company implemented significant rate increases on certain older blocks of Other Health business.
The small life insurance company deduction allows the Life Insurance Subsidiaries to reduce their taxable income by 60% before computing their current provisions for regular or alternative minimum tax. However, for purposes of computing deferred income tax liabilities under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", the Company is precluded from assuming the small life insurance company deduction will be available in the future. Accordingly, by disallowing this deduction, SFAS No. 109 significantly increases the deferred taxes on the Life Insurance Subsidiaries' temporary differences. Thus, when a significant increase or decrease occurs in the Company's net temporary differences, the related deferred tax is computed using the 34% federal tax rate, whereas tax may actually be paid on these net liabilities (when realized) at a rate potentially as low as 17% (the alternative minimum tax rate after application of the allowable small life insurance company deduction). The Company's gross deferred federal income tax liabilities and assets are more fully discussed in Note 7 of the Notes to Consolidated Financial Statements. All deferred tax assets of the Company are realizable by offset against existing deferred tax liabilities or by carryback to recapture prior years' taxes paid on operating income and capital gains. The deferred tax assets are offset, to some extent, by valuation allowances related to the Company and to the Life Insurance Subsidiaries. Due to the impact of the small life insurance company deduction, the Life Insurance Subsidiaries record a valuation allowance to reduce deferred tax assets (associated with temporary differences) to their expected benefit rate of approximately 17%, rather than 34%. The Company's valuation allowance is designed to reduce deferred tax assets to their estimated ultimate realization value.
Due to losses during the past three years and the adverse impact of the low interest rate environment on operating results, during 2002 the Company borrowed $2,000,000 from its Chairman to strengthen the statutory capital position of its principal insurance subsidiary. The Company also has $5,779,168 of commercial bank debt outstanding, with scheduled repayments due through 2007. During 2002, the Company did not comply with a loan covenant (debt to earnings ratio) on this debt and received a waiver of such violation through December 31, 2002. However, since the Company is not assured of meeting this covenant throughout 2003, the full balance of $5,779,168 can be considered payable within one year. Although the Company does not expect the full balance to be called during 2003, it believes such an obligation could be met through a refinancing arrangement or sale of selected assets or a block of insurance business. Regarding the currently scheduled debt repayments, the Company believes its available funds will be adequate to service 2003 debt obligations and, with other available assets, will probably be adequate to service debt obligations through 2004. In addition, the Company's Chairman has expressed potential willingness to loan the Company an additional $3,000,000 if necessary, which could service debt obligations through the majority of 2006. Additional information regarding debt obligations is included in Note 5 of the Notes to Consolidated Financial Statements.
The Company generated approximately $16,554,000 and $6,394,000 of cash flow from operations during 2002 and 2001, respectively, while using $467,000 of cash from operations in 2000. The 2002 and 2001 increases are principally attributable to growth of Preneed Life premium collections. The 2000 decrease is principally attributable to Federal income tax deposits required early in the year.
The Company is subject to various market risks. However, the most significant such risks relate to fluctuations in prices of equity securities and interest rates. Although the Company experienced negative total returns on its equity portfolio during the past three years, historically these returns have been very favorable and the Company has successfully managed the risk of equity security price fluctuations over many years. As described above, the Company does not anticipate that investment markets will continue to deteriorate at the rate encountered during the past three years. The Company and its investment advisory firm, SMC Advisors, Inc., devote significant attention to the equity markets and reposition the Company's portfolio upon detection of adverse risk trends associated with individual securities or overall markets. SMC Advisors, Inc. also manages market risks associated with investments in option securities, as described in Note 3 of the Notes to Consolidated Financial Statements. The fair
Interest expense on the Company's debt varies quarterly and is therefore also subject to interest rate risk. For its commercial bank debt, the Company elects the lower of the prime lending rate or the one-month LIBOR rate plus 2.75%. For its related party debt, the interest rate is the higher of 6% or the commercial bank prime lending rate plus 1%. At December 31, 2002, the weighted average rate on the Company's $7,779,168 of borrowings was 4.64%. The Company believes its current liquidity position and profitability levels are adequate to guard against this interest rate risk.
Cash flow testing projects cash inflows from assets and cash outflows for liabilities in various assumed economic and yield curve scenarios. This is a dynamic process, whereby the performance of the assets and liabilities is directly related to the scenario assumptions. (An example would involve the credited interest rate on annuity products and how such rates vary depending upon projected earnings rates, which are based upon asset performance under a particular economic scenario.)
|X| the market value of the Company's investments, including stock market performance and prevailing interest rate levels (see the Cash Flow and Liquidity section of this Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations); |X| customer and agent response to new products, distribution channels and marketing initiatives, including exposure to unrecoverable advanced commissions; |X| mortality, morbidity, lapse rates, and other factors which may affect the profitability of the Company's insurance products; |X| regulatory changes or actions, including those relating to regulation of insurance products and insurance companies (see the State Insurance Regulation section of Item 1 - Business); |X| ratings assigned to the Company and its subsidiaries by independent rating organizations which the Company believes are important to the sale of its products; |X| general economic conditions and increasing competition which may affect the Company's ability to sell its products; |X| the Company's ability to achieve anticipated levels of operating efficiencies and meet cash requirements based upon projected liquidity sources; |X| unanticipated adverse litigation outcomes (see Item 3 - Legal Proceedings); and |X| changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of the Company's products.
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000......................30
We have audited the accompanying consolidated balance sheets of Citizens Financial Corporation and subsidiaries at December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens Financial Corporation and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Nature of Operations. The Company engages primarily in the business of life insurance, annuities and accident and health insurance through Citizens Security and United Liberty ("the Life Insurance Subsidiaries"). The Life Insurance Subsidiaries offer life, fixed-rate annuity and accident and health insurance products to individuals and groups through independent agents. Citizens Insurance was acquired during 1999 (see Note 2) and is licensed as a property and casualty insurer in four states. The Company is planning to offer home service fire and casualty insurance coverage; however, Citizens Insurance currently has no business inforce. Corporate Realty manages the Company's real estate along with two other properties affiliated with the Company's Chairman.
The individual life insurance products currently offered by the Life Insurance Subsidiaries consist of traditional whole life insurance and universal life insurance policies. Citizens Security also sells group life and accidental death and dismemberment policies. The fixed-rate annuity products offered by Citizens Security consist of flexible premium deferred annuities, life policy annuity riders, and single premium deferred annuities. Citizens Security's individual accident and health insurance products provide coverage for monthly income during periods of hospitalization, scheduled reimbursement for specific hospital and surgical expenses and cancer treatments, and lump sum payments for accidental death or dismemberment, while the group accident and health products provide coverage for short and long-term disability, income protection and dental procedures.
Citizens Security is licensed to sell products in the District of Columbia and 20 states primarily located in the South and Southeast. United Liberty is licensed to sell products in 23 states primarily located in the South, Midwest, and West. United Liberty's ongoing sales efforts are focused primarily in nine states where Citizens Security is not licensed.
We periodically evaluate whether the declines in fair value of our investments are other-than-temporary. Our evaluation consists of a review of qualitative and quantitative factors, including analysis of the company's competitive position in its markets, deterioration in the financial condition of the issuer, downgrades of the security by a rating agency, and other publicly available issuer-specific news or general market conditions. For investments in companies with no quoted market price, we consider similar qualitative and quantitative factors and also take into account the cost of the investment, the type of investment, subsequent purchases of the same or similar investments, the current financial position and operating results of the company invested in, and such other factors as may be relevant. Declines in fair values of securities deemed to be other-than-temporary are included in net income as realized investment losses. Determining what constitutes an other-than-temporary decline involves
significant judgment. Declines in fair value below cost not considered other-than-temporary in the current period could be considered other-than-temporary in a future period and reduce earnings to the extent of the write-down.
Value of insurance acquired is recorded for the estimated value assigned to the insurance in force of the purchased subsidiaries at the dates of acquisition. The assigned value is amortized over the expected remaining life of the insurance in force using methods consistent with that used for amortization of policy acquisition costs (as described under Premiums, Benefits and Expenses). At December 31, 2002, accumulated amortization was $5,678,772 ($5,118,467 at December 31, 2001).
Benefit Reserves and Policyholder Deposits. Traditional life and accident and health insurance products include those contracts with fixed and guaranteed premiums and benefits and consist principally of whole-life and term insurance policies, limited-payment life insurance policies and certain annuities with life contingencies. Reserves on such policies are based on assumed investment yields which range from 6% to 7%. Reserves on traditional life and accident and health insurance products are determined using the net level premium method based on future investment yields, mortality, withdrawals, and other assumptions, including dividends on participating policies. Such assumptions are based on past experience and include provisions for possible unfavorable deviation.
Benefit reserves and policyholder contract deposits on universal life, other interest-sensitive life products and investment-type products are determined using the retrospective deposit method and consist of policy account balances, before deducting surrender charges, which accrue to the benefit of the policyholder.
Participating insurance business constituted approximately 6% of ordinary life insurance inforce at December 31, 2002, 2001 and 2000, and 1%, 4%, and 4% of annualized ordinary life premium inforce at December 31, 2002, 2001, and 2000, respectively. Participating dividends are determined at the discretion of the Board of Directors.
Revenues for universal life and investment-type products consist of investment income and policy charges for the cost of insurance, policy initiation, administrative surrender fees and investment income. Expenses include interest
credited to policy account balances, incurred administrative expenses and benefit payments in excess of policy account balances. Deferred policy acquisition costs related to universal life and investment-type products are amortized in relation to the incidence of expected gross profits over the life of the policies. Expected gross profits are reviewed at each reporting period, and to the extent actual experience varies from that previously assumed, the effects of such variances are recorded in the current period.
Federal Income Taxes. The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined for tax reporting purposes.
Earnings Per Share. Basic earnings per share amounts are based on the weighted average number of common shares outstanding during the year.
On July 7, 2000, the Company acquired, through an assumption reinsurance agreement, 100% of the inforce business of National Affiliated Investors Life Insurance Company ("NAIL") for a net cash purchase price of approximately $355,000. The acquisition was coordinated through the National Organization of Life and Health Guaranty Associations. The acquired business consisted primarily of individual life insurance with policy reserves and annual premium of approximately $3,500,000 and $300,000, respectively.
The annual change in net unrealized investment appreciation or depreciation, at December 31, 2002, 2001 and 2000, and the amount of net realized investment gain or loss included in net income for the respective years then ended are shown below. The 2002 change in net unrealized appreciation for fixed maturities shown below is after recognizing the January 1, 2001 pretax transition adjustment of approximately $471,532, as described in Note 16.
The amortized cost and fair value of investments in fixed maturities at December 31, 2002, by contractual maturity are shown below. Expected maturities for investments in fixed maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations, sometimes without prepayment penalties.
Investment management services are provided by a firm affiliated with certain board members and shareholders of the Company - see Note 15 - Related Party Transactions.
Pursuant to requirements of certain state insurance departments, the Company has investments with a carrying value of $52,701,872, at December 31, 2002, placed on deposit at various financial institutions which are restricted from withdrawal without prior regulatory approval.
The value of insurance acquired is an asset which represents the present value of future profits on business acquired, using interest rates of 6.6% to 9%. Balances outstanding relate primarily to the purchase of United Liberty and two additional companies which have been merged into Citizens Security (Integrity National Life Insurance Company and Old South Life Insurance Company) along with the NAIL total of $355,360 added during 2000. An analysis of the value of insurance acquired for the years ended December 31, 2002, 2001 and 2000 is as follows:
December 31 2002 2001 - --------------------------------------------- ----------------- ---------------- Commercial bank, due 2007 $ 5,779,168 $ 7,095,834 Related party, due 2007 2,000,000 --- - --------------------------------------------- ----------------- ---------------- Total $7,779,168 $7,095,834 - --------------------------------------------- ----------------- ----------------
The Company's outstanding commercial bank borrowings relate primarily to various insurance company acquisitions. Interest is payable quarterly at the lower of the bank's prime lending rate or the one month LIBOR rate plus 2.75%. Scheduled principal installments are due as follows: 2003 and 2004 - $1,316,667; 2005 and 2006 - $1,416,666; and 2007 - $312,502. However, the loan agreement for the bank notes contains covenants regarding asset acquisitions, shareholder equity and dividends, and maintenance of a debt to earnings ratio. Due to losses incurred during 2002, the Company did not meet one of the covenants (debt to earnings ratio), although the lender has waived this covenant violation through December 31, 2002. Since the Company is not assured of meeting this covenant throughout 2003, the full loan balance of $5,779,168 can be considered payable within one year. Although the Company does not expect the full balance to be called during 2003, it believes such an obligation could be met through a refinancing arrangement or sale of selected assets or a block of insurance business. The Company has pledged the issued and outstanding common and preferred stock of Citizens Security as collateral for the commercial bank notes.
Cash paid for interest on debt was $412,719, $635,594, and $771,095 during 2002, 2001 and 2000, respectively.
The following table sets forth the computation of earnings (losses) per share. No dividends were paid or accrued for 2002, 2001, or 2000.
December 31 2002 2001 2000 - ------------------------------------- -------------- ------------- ------------- Current tax expense (benefit) $(344,000) $(3,013,000) $1,755,000 Deferred tax expense (benefit) (413,000) 923,000 (1,545,000) - ------------------------------------- -------------- ------------- ------------- Income tax expense (benefit) $(757,000) $(2,090,000) $ 210,000 - ------------------------------------- -------------- ------------- -------------
Tax expense includes a current state and local income tax provision (benefit) of $(36,000), $(230,000), and $350,000 in 2002, 2001, and 2000 respectively. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined for tax reporting purposes.
The following is a reconciliation of income tax expense at the federal statutory rate, to the tax at the Company's effective income tax rate:
December 31 2002 2001 2000 - --------------------------------- -------------- --------------- --------------- Tax at the statutory rate $ (1,132,000) $ (2,714,700) $ 152,400 Change in valuation allowance 314,000 (358,500) 585,800 Small life deduction 106,000 1,141,100 (276,300) State and local income tax (36,000) (165,200) 233,600 Surtax exemption and other (2,000) 24,000 (446,100) Dividend exclusion (7,000) (16,700) (39,400) - --------------------------------- -------------- --------------- --------------- Tax at the effective rate $ (757,000) $ (2,090,000) $ 210,000 - --------------------------------- -------------- --------------- ---------------
Under the tax law in effect prior to 1984, a portion of income of Citizens Security was not taxed when earned. It was accumulated in a tax account known as policyholders' surplus. Under the provisions of the Deficit Reduction Act of 1984, policyholders' surplus accounts were frozen at their December 31, 1983 balance of $859,000 for Citizens Security on a merged basis. Distributions from the policyholders' surplus would be subject to income tax. At December 31, 2002, Citizens Security could have paid additional dividends of approximately $22,400,000 before paying tax on any part of its policyholders' surplus accounts. No provision has been made for the related deferred income taxes which total $292,000, based on current tax rates as of December 31, 2002.
Principal differences between SAP and GAAP include: a) costs of acquiring new policies are generally deferred and amortized for GAAP; b) value of insurance inforce acquired is established as an asset for GAAP; c) benefit reserves are calculated using more realistic investment, mortality and withdrawal assumptions for GAAP; d) the change in SAP deferred income taxes associated with timing differences is recorded directly to equity rather than as a component of net
The Company evaluates performance based on several factors, of which the primary financial measure is segment profit. Segment profit represents pretax earnings, determined in accordance with the accounting policies described in Note 1, except net realized investment gains and interest expense are excluded. A significant portion of the Company's realized investment gains and losses are generated from investments in equity securities.
Depreciation and amortization amounts below consist of amortization of the value of insurance acquired, deferred policy acquisition costs and goodwill, along with depreciation expense.
December 31 2002 2001 2000 - -------------------------------------- ------------- ------------- ------------- Depreciation and Amortization: Home Service Life $ 750,811 $ 873,529 $ 723,255 Broker Life 482,049 678,446 506,016 Preneed Life 983,848 779,199 350,758 Dental 61,480 68,866 61,286 Other Health 40,650 41,939 45,888 - -------------------------------------- ------------- ------------- ------------- Segment Totals $ 2,318,838 $ 2,441,979 $ 1,687,203 - -------------------------------------- ------------- ------------- -------------
Below is selected consolidated quarterly financial data for each of the two years ended December 31, 2002.
Pretax Income Net Earnings 2001 Revisions Income Tax Benefit Income per Share - -------------------- ------------- ------------- ------------- ----------------- First quarter $ 137,701 $ 2,000 $ 139,701 $ 0.08 Second quarter $ 180,022 $ 27,000 $ 207,022 $ 0.11 Third quarter $ 159,011 $ 24,000 $ 183,011 $ 0.10
The fair values of financial instruments, and the methods used in estimating these values, are as follows:
Short-Term Investments: The carrying amount of short-term investments approximates their fair value. At December 31, 2002 and 2001, the fair value of short-term investments was $632,381 and $652,192, respectively.
Notes Payable: The carrying amounts of notes payable approximate their fair values. At December 31, 2002 and 2001, the fair value of notes payable was $7,779,168 and $7,095,834, respectively.
The Company has a 401(k) savings plan for its full-time employees. The Company contributes matching contributions at the discretion of its Board of Directors. Company expense associated with this plan totaled $61,037, $57,532, and $46,353 in 2002, 2001 and 2000, respectively.
Effective January 1, 2001, the Company adopted Financial Accounting Standards Board Statement ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138. This statement requires that all derivatives be recognized as either assets or liabilities in the balance sheet at their fair value, and sets forth the manner in which gains or losses thereon are to be recorded. The treatment of such gains or losses is dependent upon the type of exposure, if any, for which the derivative is designated as a hedge. Currently, the Company has not designated any derivatives as hedges. Adoption of SFAS No. 133 resulted in a January 1, 2001 transition adjustment that reduced net income and increased accumulated other comprehensive income in 2001 by approximately $311,000. This adjustment consisted of a pretax total of $471,000 less a $160,000 tax benefit.
Below is a proforma illustration of earnings adjusted to exclude goodwill amortization recorded during 2001 and 2000.