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 market conditions and the changing interest rate environment; population growth rates and demographic patterns; the interruption, deterioration, or termination of our relationships with the insurance carriers who provide our products or the agents who market and sell them; the ability to develop and market new products to keep up with the evolving industry in which we operate; increased governmental regulation, especially regulations affecting insurance, reinsurance, and holding companies; the ability to attract and retain talented and productive personnel; the ability to effectively fund our working capital requirements; the risk of substantial litigation or insurance claims; and other factors referred to in Management's Discussion and Analysis of Financial Condition and Results of Operations.
In December 2004, the NAIC approved amendments to the NAIC's model Producer Licensing Act. Under the model Act, producers, like Legacy Marketing's Producers, who have been appointed by an insurer as its agent and do not receive compensation from a customer will not be required to disclose the amount of compensation received from the insurer. However, they must disclose to the customer prior to the sale of insurance to the customer that they will be receiving compensation from the insurer, or that the producer represents the insurer and may provide services to the customer for the insurer. One state has adopted a regulation based on the model Act and others are considering similar regulations or legislation. In addition, the NAIC has held a hearing to consider additional regulation and may in the future propose additional measures affecting producers.
Our core business consists of selling fixed annuity products, on behalf of amendments to the insurance carriers, through a network of approximately 24,400 Producers. If the amendments to the model Act, or similar or additional regulations, were to be adopted in states that we conduct business, the Producers would have to disclose to potential purchasers of fixed annuity products, compensation they may receive from Legacy Marketing or the insurance carriers. They may also have to disclose that the Producer represents the insurance carriers and may provide services to the customer on behalf of the carriers. We are unable to predict which states will adopt the amendments to the model Act and whether other new initiatives may affect our business and the demand for the fixed annuity products marketed by Legacy Marketing. It is possible, however, that enactment of the amendments to the model Act, or similar or additional regulations, could have a material adverse effect on the insurance industry in general or on our financial condition and results of operations.
There are no significant management judgments associated with reporting these revenues. When a policyholder remits a premium payment with an accurate and completed application for an insurance policy, the policy is considered inforce and Legacy Marketing recognizes marketing allowances and commission income. Legacy Marketing's carriers grant policyholders a contractual right to terminate the insurance contract ten to thirty days after a policy is placed inforce. This return period varies depending on the carrier, the type of policy and the jurisdiction in which the policy is sold. Legacy Marketing gathers historical product return data that does not vary significantly from quarter to quarter, and has historically been predictive of future events. Returns are estimated using this data and have been reflected in the Consolidated Financial Statements. Legacy Marketing recognizes administrative fees on a per transaction basis as services are performed, with the amount of the fee depending on the type of policy and type of service.
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. Management believes it is more likely than not that the deferred tax assets after valuation allowance will be realized.
Legacy Marketing's product sales were also negatively affected by Transamerica and Legacy Marketing deciding to discontinue the marketing of Transamerica products that were marketed exclusively by Legacy Marketing, effective May 3, 2004. The discontinued products accounted for approximately 24% and 25% of our total consolidated revenue for the years ended December 31, 2004 and 2003. Revenue derived from sales and administration of Transamerica products decreased $8.5 million in 2004 compared to 2003. Legacy Marketing continues to administer the discontinued products and to accept additional premium payments, subject to applicable additional deposit rules for these products.
Legacy Marketing also experienced a decrease in sales of fixed annuity products issued by Investors Insurance in 2004. We believe the decrease was primarily attributable to a downgrade in the A.M. Best credit rating of Investors Insurance from an A- rating to a B++ rating in September 2003. Revenue derived from sales and administration of Investors Insurance products decreased $5.3 million in 2004 compared to 2003.
Legacy Marketing also performs administrative services for products issued by John Hancock and IL Annuity.
Legacy Marketing's expenses decreased $16.5 million (29%) in 2004 compared to 2003 primarily due to decreased selling, general and administrative expenses and decreased other expenses. Selling, general and administrative expenses decreased $14.9 million (30%) primarily due to decreased sales promotion and support expenses, compensation, professional fees, and stationery and supplies. Sales promotion and support expenses decreased primarily due to decreased Producer-related bonuses and incentive trip expenses, and decreased sales support expenses resulting from decreased sales. Compensation decreased primarily due to decreased headcount, reduction in temporary help, reduced employee overtime and decreased incentive-based compensation as a result of a decline in sales and operating results. Professional fees decreased primarily due to decreased consulting fees and reduced legal expenses. Stationery and supplies decreased primarily due to a decline in sales. Other expenses decreased $2.0 million (53%) due to decreased losses on write-offs of fixed assets, primarily as a result of the write-off of $1.1 million in software costs in 2003, and decreased leased equipment costs.
Legacy Marketing recognized investment income of $524,000 in 2004 compared to $409,000 in 2003. This increase was primarily due to higher realized gains on sales of investment securities during 2004.
During 2003, Legacy Marketing's net income totaled $7.2 million, compared to net income of $1.6 million during 2002. This increase of $5.6 million is primarily due to increased revenues, partially offset by increased expenses and decreased investment income in 2003 compared to 2002.
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.
Legacy Marketing recognized investment income of $409,000 in 2003 compared to $638,000 in 2002. This decrease was primarily due to lower realized gains on sales of investment securities during 2003.
Legacy Financial incurred net losses of $441,000 during 2004, compared to net losses of $683,000 during 2003. The reduction in net loss was primarily due to increased revenue.
As a result of some stock options expiring unexercised in 2004, Legacy Financial established a valuation allowance of $83,000 for the deferred tax assets associated with unexercised stock options issued to Legacy Financial representatives.
Legacy Financial has incurred cumulative losses since its inception in 1995. We have committed to make sufficient contributions to support Legacy Financial's operations through February 2006.
When we purchased VFN in 2000, part of the purchase price was allocated to goodwill. Before January 1, 2002, we amortized the goodwill on a straight-line basis over 10 years, which was its estimated useful life. Pursuant to Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is required to be applied for all fiscal years starting after December 15, 2001, we ceased amortizing goodwill on January 1, 2002. As required by SFAS 142, we perform an annual goodwill impairment test. The impairment test of SFAS 142 requires us to measure fair value of the reporting unit. We established fair value by preparing a forecast of the discounted value of future cash flows expected to be derived from VFN.
When we purchased VFN in 2000, among the assets acquired were long-lived assets comprising a website, which incorporates sales lead management, investment screening and asset allocation functionalities, and copyrights related to two books. These assets were recorded at fair value, as determined by an independent appraisal. In connection with the updated measurement of the fair value of the VFN asset group as discussed above, we recorded a long-lived asset impairment loss of $394,000 during 2003, included in Other expenses.
Values Financial Network, Inc. incurred net losses of $1.0 million during 2003, compared to net losses of $520,000 during 2002. The increased losses were due to goodwill, intangibles, and long-lived asset impairment losses during 2003, discussed above. Revenues increased $23,000 (329%) during 2003 compared to 2002 primarily due to rental income from a tenant who began subleasing office space from VFN in the second quarter of 2003. Expenses, excluding the impairment losses, were relatively unchanged during 2003 compared to 2002.
In 2000, we purchased, through Imagent Online, a 33.3% ownership interest in a development stage company named Prospectdigital LLC ("Prospectdigital") for $403,000.
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. 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 financing activities was $2.2 million in 2004 compared to net cash used in financing activities of $1.6 million in 2003. The change was primarily due to proceeds from our construction loan and mortgage loan to finance the new building in Rome, Georgia, and proceeds from exercise of stock options.
We used $4.4 million of cash in our operations and incurred consolidated net losses of $7.5 million during the year ended December 31, 2004. If our consolidated net losses continue, or if requests to repurchase redeemable common stock increase significantly, a cash shortfall could ultimately occur. We believe that existing cash balances, together with anticipated cash flow from operations, will provide sufficient funding for the foreseeable future. In addition, we do not anticipate having significant capital purchases in 2005. However, in the event that a cash shortfall occurs, we believe 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 addition, Legacy Marketing discontinued marketing life insurance products issued by American National effective during the first quarter of 2003. These products accounted for a nominal amount of revenue during each of the years ending December 31, 2004, 2003, and 2002. Legacy Marketing will continue to administer American National life insurance products, including acceptance of renewal premium.
During the second quarter of 2003, American National, which sets the crediting rates for the American National products marketed by Legacy Marketing, reduced the crediting rates of several such annuity products marketed by Legacy Marketing. In addition, American National lowered the commission rates that it pays 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. Sales and administration of these products declined from $11.6 million during the first six months of 2003 to $6.2 million during the second half of 2003, a 47% decline. In addition, sales and administration of these products declined from $26.3 million in 2003 to $9.2 million in 2004. Legacy Marketing developed the BenchMark Reliance (SM) annuity product during 2003 and expects to develop new annuity products with American National that may result in increased sales for Legacy Marketing in the long term.
During the third quarter of 2003, Legacy Marketing discontinued the marketing of the AssureMark (SM) fixed annuity product series issued by John Hancock. As a result, sales of annuity products on behalf of John Hancock decreased during the remainder of 2003. Revenues from sales of John Hancock products decreased $1.5 million in 2004 compared to 2003, and $1.9 million in 2003 compared to 2002.
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 sells and administers annuity products on behalf of Investors Insurance.
The marketing agreement with American National expires on November 15, 2007, and the administrative agreement with American National expires on February 15, 2008. Both agreements may be renewed by mutual agreement for successive one-year terms. The agreements may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause. The marketing and administrative agreements with Transamerica and John Hancock do not have fixed terms but may be terminated by either party upon twelve months prior written notice without cause, and may be terminated by either party immediately for cause.
If we fail to attract and retain key personnel, our business, operating results, and financial condition could be diminished.
Our growth is, and for the foreseeable future will continue to be, dependent on Legacy Marketing's ability to design, market and administer fixed annuity products. The ability of Legacy Marketing to successfully perform these services could be affected by many factors, including:
We may be unable to effectively fund our working capital requirements, which could have a material adverse effect on our operating results and earnings.
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 $91 billion in 2004. Legacy Marketing had a 1% market share of the 2004 fixed annuity sales in the United States based on Legacy Marketing's $800 million of inforce premiums placed in 2004 as a percentage of the $91 billion of annuities sold in the United States during 2004. 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 and other resources than we do which allow them to respond more quickly than us under certain circumstances. Some of Legacy Marketing's competitors are insurance companies that only sell their own annuity products. Legacy Marketing, however, sells annuity products issued by several different insurance carriers. Legacy Marketing, therefore, has the flexibility to develop and sell a wide variety of annuity products by using its established relationships with its current insurance carrier partners or by approaching new insurance carriers to form relationships whereby Legacy Marketing develops new annuity products to sell. This flexibility allows Legacy Marketing to simultaneously leverage the resources of several insurance carriers and eliminates Legacy Marketing's dependence on any one source for annuity products. Legacy Marketing is not aware of any significant new means of competition, products or services that its 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 Legacy Marketing with competitive challenges. There can be no assurance that Legacy Marketing will be able to compete successfully. In addition, Legacy Marketing's business model relies on Wholesaler distribution networks to effectively market its 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, Legacy Marketing has been reasonably successful in expanding and maintaining its current Wholesaler distribution network. Due to competition among insurance companies and insurance marketing organizations for successful Wholesalers, there can be no assurance that Legacy Marketing will be able to retain some or all of its Wholesaler distribution networks.
On October 29, 2004, the California Attorney General's Office announced the launch of a formal investigation into possible anti-trust violations and fraud by insurance companies and brokers, including bid rigging and other anti-competitive conduct in the insurance industry. Other state authorities have announced similar investigations. In addition, California Insurance Commissioner John Garamendi has released for public review a proposed new set of regulations addressing broker conduct. As currently drafted, the proposed regulations would, among other things, impose penalties on brokers who fail to disclose all material facts surrounding their receipt or potential receipt of income from a third party flowing from a transaction on behalf of a client.
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 Legacy Financial could harm its 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 Legacy Marketing markets. 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 Legacy Marketing markets 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.
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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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.
Through its wholly-owned broker-dealer subsidiary, Legacy Financial, the Company sells variable annuity and life insurance products, mutual funds and debt and equity securities. Legacy Financial has entered into sales agreements with investment companies that give it the non-exclusive right to sell investment products on behalf of those companies. Sales of investment products are conducted through Legacy Financial's network of independent registered representatives.
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 or remaining maturity of ninety days or less at the time of purchase.
Goodwill and Other Intangible assets were acquired in the Company's purchase of Values Financial Network, Inc. in 2000 and Prospectdigital, LLC in 2002. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over 10 years, which is its estimated useful life. Pursuant to Statement of Financial Accounting 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.
The following table illustrates the effect on net income (loss) and income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation:
The Company had no available for sale investments at December 31, 2004. The cost and fair value of investment securities at December 31, 2003 were as follows:
December 31, ------------------------------ 2004 2003 ------------ ------------ Computer hardware and purchased software $ 10,465,000 $ 8,075,000 Internal use software development costs 18,560,000 15,742,000 Leasehold improvements 1,361,000 1,361,000 Furniture and equipment 3,213,000 3,108,000 Building 10,884,000 9,446,000 Land 3,092,000 2,718,000 ------------ ------------ 47,575,000 40,450,000 Accumulated depreciation and amortization (19,900,000) (16,172,000) ------------ ------------ Total $ 27,675,000 $ 24,278,000 ============ ============
During 2003, the Company completed its evaluation of an internal use software project that it initially licensed in 1998 with the intent to modify and customize the licensed software prior to deployment. The Company began this project intending to replace its administration system after the vendor of its existing administration system required the Company to migrate from the existing
system to an alternative platform. In late 2002, the Company learned from its vendor that it might be able to retain its 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, the Company's vendor concluded that the Company could continue to use its existing system for an extended period. The Company has completed a rigorous evaluation of its Company-wide technological needs, which included an assessment of the viability of the existing system. As a result of this assessment the Company concluded that it would use both systems and in the fourth quarter of 2003 the Company recorded a write-off of $1.1 million associated with the abandoned components of the software costs.
When the Company purchased the assets of VFN in 2000, part of the purchase price was for goodwill. Before January 1, 2002, the Company amortized the goodwill on a straight-line basis over 10 years, which was its estimated useful life. Pursuant to Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," the Company ceased amortizing goodwill on January 1, 2002. 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.
During the second quarter of 2004, due to the failure of VFN to produce revenues as projected, particularly in the corporate arena, management decided to cease actively marketing to the corporate market. As a result, management lowered its expectations for future sales. This event met the criteria of a "triggering event" for testing the recoverability of long-lived assets as required by Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets". Accordingly, the Company compared the carrying amount of VFN's long-lived assets to the projected sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. Based on the fact that the sum of the undiscounted cash flows exceeded VFN's assets, the Company concluded no impairment had occurred to the long-lived assets.
As a result of performing the impairment tests required under SFAS 144, the Company was then required under the provisions of SFAS 142 to perform a goodwill impairment test using the revised cash flows forecast discounted at an appropriate cost of capital. The results of this test indicated that the Company's goodwill was not recoverable. Accordingly, the Company recorded a goodwill impairment loss on the remaining goodwill balance of $679,000 during the second quarter of 2004.
December 31, ----------------------------------------------------- 2004 2003 ------------------------ --------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization --------- ------------ --------- ------------ Copyrights $ 203,000 $(174,000) $ 203,000 $(145,000) Software license 223,000 (130,000) 223,000 (85,000) --------- --------- --------- --------- Total $ 426,000 $(304,000) $ 426,000 $(230,000) ========= ========= ========= =========
On July 1, 2002, the Company entered into a Purchase Option Agreement with SCOR Life U.S. Re Insurance Company ("SCOR"), a 100% owner of the outstanding capital stock of Investors Insurance. Pursuant to the terms of the agreement, SCOR has granted the Company the right to purchase the outstanding capital stock of Investors Insurance in exchange for annual option fees. The Company has paid annual option fees totaling $2,975,000 as of December 31, 2004. The Company has the right to exercise the option at any time prior to the expiration date on June 30, 2005. If the Company elects to exercise the option, it must complete the purchase transaction within two years of exercising the option. Upon completion of a purchase transaction, the option fees will be included in the purchase price. If the option expires unused, the fees paid will be expensed. Before expiration, the Company can request a refund of fees paid in the event that the financial rating of Investors Insurance declines as defined in an agreement. As of December 31, 2004, the Investors Insurance rating has declined to a level where the Company can request such a refund.
December 31, ---------------------------- 2004 2003 ----------- ----------- Accrued compensation $ 1,952,000 $ 3,351,000 Accrued sales bonus 95,000 2,022,000 Accrued sales convention costs 112,000 1,381,000 Commissions payable 381,000 832,000 Payable to insurance carrier 237,000 345,000 Accounts payable 391,000 548,000 Accrued production premium deficiency 2,000 206,000 Miscellaneous accrued expenses 2,073,000 2,105,000 ----------- ----------- Total $ 5,243,000 $10,790,000 =========== ===========
The Company sponsors a qualified defined contribution 401(k) plan, which is available to all employees. The 401(k) plan allows employees to defer, on a pre-tax basis, up to 15% of their annual compensation as contributions to the 401(k) plan, subject to a maximum of $13,000. The Company matches 50% of each employee's contributions, up to 6% of their annual compensation, subject to a maximum of $6,000. The Company's matching contributions were $311,000, $405,000, and $434,000 for the years ended December 31, 2004, 2003, and 2002.
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 $23,000, $32,000, and $59,000 during the years ended December 31, 2004, 2003, and 2002. As of December 31, 2004 and 2003, employee contributions and Company matching contributions, including cumulative investment gains, totaled $788,000 and $610,000.
In September 2004, Legacy Marketing Group initiated a sales incentive program for its independent insurance producers, which granted bonuses to the producers based upon their achievement of predetermined monthly sales targets. The Company recorded expense of $392,000 during the year ended December 31, 2004 related to this program, of which $297,000 was paid as of December 31, 2004. The amounts expensed are included in selling, general and administrative expenses.
During 2003, Legacy Marketing Group initiated a sales incentive program for its top independent insurance producers ("Wholesalers"). This program offered bonuses to Wholesalers based primarily on their achievement of predetermined annual sales targets. Bonuses were paid to qualifying Wholesalers during the first quarter of 2004. The Company recorded expense of $2.0 million during the year ended December 31, 2003 related to the sales incentive program. These amounts are included in selling, general and administrative expenses.
The Company leases office and warehouse premises and certain office equipment under non-cancelable operating leases. Related rent expense of $329,000, $531,000, and $585,000 is included in occupancy costs for the years ended December 31, 2004, 2003, and 2002. Total rentals for leases of equipment included in equipment expense were $674,000, $1.0 million, and $1.1 million for the years ended December 31, 2004, 2003, and 2002.
The Company is involved in various claims and legal proceedings arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on 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.
The Company recorded redeemable common stock accretion of ($512,000), $34,000 and $26,000 related to Series A redeemable common stock for the years ended December 31, 2004, 2003 and 2002. The carrying value of Series B redeemable common stock is greater than the redemption value and has not been accreted.
except for incentive stock options granted to shareholders who own 10% or more of the Company's outstanding stock, where the exercise price equals 110% of the estimated fair value. Both plans are administered by committees, which are appointed by the Company's Board of Directors.
There were no shares of Series A common stock awarded to non-employees during 2004, 2003 and 2002.
Total Weighted Average Shares Exercise Price -------------- ------------- Outstanding at December 31, 2001 15,564,000 $ 1.35 Granted 1,153,000 $ 1.68 Exercised -- $ -- Forfeited (768,000) $ 1.22
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, ------------------------------------------ 2004 2003 2002 ----------- ----------- ----------- Current income taxes: Federal $(3,341,000) $ 3,311,000 $ 76,000 State (36,000) 944,000 24,000 ----------- ----------- ----------- Total current (3,377,000) 4,255,000 100,000
Deferred income taxes: Federal 2,172,000 (696,000) (170,000) State 862,000 (168,000) 36,000 ----------- ----------- ----------- Total deferred 3,034,000 (864,000) (134,000) ----------- ----------- -----------
Income tax (benefit) expense $ (343,000) $ 3,391,000 $ (34,000) =========== =========== ===========
The provisions for (benefits from) income taxes differ from the provisions for (benefits from) computed by applying the statutory federal income tax rate (34%) to income before taxes, as follows:
As of December 31, 2004, the Company has federal and state net operating loss carryforwards of $173,000 and $17.4 million, respectively, that are expected to be utilized in the future. $173,000 of the federal net operating losses will expire on December 31, 2024 and $4.9 million of the state net operating losses begin to expire on December 31, 2012. State tax valuation allowances of $921,000, net of federal taxes, have been provided for a portion of the state net operating loss carryforward.
The Company has identified its reportable segments based on its method of internal reporting and segregates its business into five primary reportable segments: Legacy Marketing, Legacy Financial, Imagent Online, Values Financial Network, and Other. Intersegment transactions are eliminated in consolidation. The Legacy Marketing business segment includes the results of selling and administering fixed annuity and life insurance products and general corporate expenses not allocated to the Company's other segments.
Our audits of the consolidated financial statements referred to in our report dated March 29, 2005 also included an audit of the financial schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.