The results of our operations are generally affected by the conditions that affect other companies that market annuity and life insurance products, and third-party administrators of those products. These conditions are increased competition, changes in the regulatory and legislative environments, and changes in general economic and investment conditions.
Legacy Marketing has entered into marketing and administrative agreements with four insurance carriers, discussed above. Under the terms of the marketing agreements, Legacy Marketing is responsible for appointing producers who have contracted with Legacy Marketing to sell fixed annuity and life insurance products to the general public. In exchange for these services, the insurance carriers pay Legacy Marketing commissions and marketing allowances when policy premium is applied to policyholders' insurance policies. Legacy Marketing's application of premium payments to policyholders' insurance policies allows us to recognize revenue.
There are no significant management judgements associated with reporting these revenues. We have recorded adjustments for returns based on actual experience known before the issuance of the financial statements. Historically, there have been no material adjustments for bad debts related to these revenue streams.
Legacy Marketing markets and administers fixed annuity and life insurance products on behalf of four insurance carriers. The agreements with two of these carriers generated a significant portion of our total consolidated revenue:
Although Legacy Marketing markets and administers several products on behalf of the insurance carriers, our consolidated revenues are derived primarily from sales and administration of two particular annuity product series:
Year ended December 31, 2001 2000 - ----------------------- ---- ---- SelectMark(SM) series (sold on behalf of Transamerica) 69% 50% VisionMark(SM) series (sold on behalf of IL Annuity) 20% 28%
In December 2001, Legacy Marketing began phasing out marketing of IL Annuity products. The phaseout will be completed by March 31, 2002, depending on the product line. Legacy Marketing currently intends to continue to administer IL Annuity products after the phaseout period.
Legacy Marketing expenses increased $3.8 million (9%) primarily attributable to increases in selling, general and administrative expenses, depreciation and amortization. The increase in selling, general and administrative expenses of $2.2 million (6%) is primarily due to increases in compensation, partially offset by decreases in professional fees. Depreciation and amortization expense increased $1.2 million primarily related to a higher internal use software balance. During 2001, Legacy Marketing determined that certain investment securities had other-than-temporary declines in fair value below cost. As a result, Legacy Marketing recorded impairment losses of $642,000, and the individual securities were written down to a new cost basis.
Effective January 1, 2000, we changed our revenue recognition policy in order to comply with SEC Staff Accounting Bulletin No. 101 with respect to a production premium deficiency requirement under one of Legacy Marketing's marketing agreements. This change is reflected in the statement of operations as a cumulative effect of accounting change of $226,000, net of taxes of $149,000, during the year ended December 31, 2000.
Legacy Financial's major source of revenue is commission income, which is generated through sales of variable life and annuity products, mutual funds, and debt and equity securities. Levels of commission income are directly related to the volume of sales of such products. Legacy Financial revenue decreased $854,000 (31%) primarily attributable to decreases in the volume of sales by Legacy Financial's distribution network of registered representatives.
Legacy Financial revenue increased $1.1 million (62%) primarily due to increases in sales.
Regan Holding Corp. recorded net losses of $825,000 in 2001, compared to net income of $613,000 during 2000, primarily due to recognition of non-operating losses and decreased operating revenue, partially offset by decreased expenses.
Year ended December 31, 2000 compared with year ended December 31, 1999
During 2000, Regan Holding Corp. recorded non-operating income of $3.4 million primarily due to a gain of $3.6 million recognized upon the sale of an office building and two parcels of land, as discussed above. During 1999, Regan Holding Corp. incurred non-operating losses of $95,000.
Year ended December 31, 2001 compared with year ended December 31, 2000
We purchased Values Financial Network, Inc. in December 2000. During 2001, Values Financial Network incurred net losses of $1.2 million, compared to net losses of $86,000 during 2000, primarily due to expenses incurred during the entity's start-up phase. Minimal losses are expected in 2002 and we expect Values Financial Network to be profitable thereafter.
Imagent recorded net losses of $660,000 during 2001, compared to net losses of $581,000 during 2000, primarily due to increased equity investment losses from Imagent's investment in prospectdigital, LLC. In January 2002, we purchased all the remaining outstanding stock of prospectdigital. Minimal losses are expected in 2002 and we expect Imagent to be profitable thereafter.
Imagent was formed in 2000 and recorded net losses of $581,000, primarily due to equity investment losses related to its investment in prospectdigital.
We require cash for the following purposes: (i) to fund operating expenses, which consist primarily of selling, general and administrative expenses; (ii) to purchase fixed assets, primarily internal use software and computer hardware, in order to increase operational efficiency; (iii) to fund continued product development and strategic acquisitions; and (iv) as a reserve to cover possible redemptions of certain shares of our common
stock, which are redeemable at the option of the shareholders. Our primary source of cash is cash flows from operating activities.
In 1998, Regan Holding Corp. entered into an agreement with Lynda L. Regan, Chief Executive Officer and Chairman of the Board of Directors. Under the terms of this agreement, in the event of the death of Ms. Regan, we are obligated to repurchase from Ms. Regan's estate all of the shares of our common stock that were owned by Ms. Regan at the time of her death or that were transferred by her to one or more trusts prior to her death. The purchase price to be paid by us shall be equal to 125% of the fair market value of the shares. The purchase price was equal to $27.9 million at December 31, 2001. We have purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this obligation in the event of Ms. Regan's death.
Legacy Marketing has entered into marketing agreements with American National Insurance Company ("American National"), IL Annuity and Insurance Company ("IL Annuity"), Transamerica Life Insurance and Annuity Company ("Transamerica"), and John Hancock Variable Life Insurance Company ("John Hancock"), (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. The highest producing producers are referred to as wholesalers. For providing these services, the carriers pay Legacy Marketing commissions and marketing allowances when policy premium is applied to policyholders' insurance policies.
Legacy Marketing also entered into administrative agreements with the carriers pursuant to which Legacy Marketing provides clerical, administrative, and accounting services with respect to the policies. These services include billing, collecting and remitting premium for the policies. For providing these services, the carriers pay Legacy Marketing per transaction, the amount of the fee depends on the type of policy and type of service.
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Regan Holding Corp. and its subsidiaries after elimination of intercompany accounts and transactions.
Marketing allowances and commissions are recognized when policy premium is applied to policyholders' insurance policies. Administrative fees are recognized on a per transaction basis as services are performed.
Effective January 1, 2000, the Company changed its revenue recognition policy in order to comply with SEC Staff Accounting Bulletin No. 101 with respect to a production premium deficiency requirement under one of its marketing agreements. This change is reflected in the statement of operations as a cumulative effect of accounting change of $226,000, net of taxes of $149,000, during the year ended December 31, 2000. The change in accounting principle would not have a material effect on the statement of operations if adopted in 1999.
The Company's investments are classified as available-for-sale and are carried at fair value. Unrealized gains and losses, net of the related tax effect, are reported as a separate component of shareholders' equity.
All investments are periodically reviewed to determine if declines in fair value below cost are other-than-temporary. Significant and sustained decreases in quoted market prices, a series of historical and projected operating losses by the investee or other factors are considered as part of the review. If the decline in fair value has been determined to be other-than-temporary, an impairment loss is recorded in Investment income and the individual security is written down to a new cost basis.
Computer hardware and purchased software 3-5 years Internal use software development costs 3-5 years Leasehold improvements 2-10 years Furniture and equipment 5 years Building 20-40 years
Intangible assets comprise purchased intangible assets and goodwill resulting from the Company's acquisition of Values Financial Network, Inc., and are amortized on a straight-line basis ranging from 5 to 10 years, depending on the estimated useful life of each asset.
The Company provides deferred taxes based on the enacted tax rates in effect on the dates temporary differences between the book and the tax bases of assets and liabilities reverse.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and amends APB Opinion No. 30, Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business. SFAS 144 revises the accounting for the measurement of long-lived assets to be disposed of by sale and clarifies implementation issues for discontinued operations. SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company's management anticipates that the implementation of SFAS 144 will not have a material effect on its consolidated results of operations or financial position.
During 2001, the Company determined that certain investment securities had other-than-temporary declines in fair value below cost. As a result, the Company recorded impairment losses of $642,000, and the individual securities were written down to a new cost basis.
In connection with a real estate sale during 2000, the Company assigned its rights to cash consideration of $5.8 million to a qualified exchange intermediary in order to defer the taxes for the gain on sale. During 2001, the Company purchased the office building which houses its headquarters for approximately $10.6 million. In conjunction with the acquisition in 2001, the Company paid a portion of the purchase price by applying the proceeds from the note receivable from the intermediary.
December 31, ----------------------------- 2001 2000 ------------ ------------ Computer hardware and purchased software $ 7,340,000 $ 5,986,000 Internal use software development costs 10,996,000 7,434,000 Leasehold improvements 1,260,000 1,394,000 Furniture and equipment 3,174,000 2,905,000 Building 7,780,000 -- Land 2,689,000 102,000 ------------ ------------ 33,239,000 17,821,000 Accumulated depreciation and amortization (9,192,000) (5,453,000) ------------ ------------ Total $ 24,047,000 $ 12,368,000 ============ ============
In January 2002, the Company purchased all the remaining outstanding stock of prospectdigital for $225,000 in cash. Under the terms of the purchase agreement, prospectdigital remained liable for payment of the $1.5 million indebtedness, plus accrued interest, to the Company. After the amounts are repaid, the Company must pay up to $475,000 in future profits to the former co-owners.
In 2000, the Company paid $3.7 million for the purchase of Values Financial Network assets. Among the assets acquired were 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. Payments in excess of the identifiable assets were recorded as goodwill and are being amortized on a straight-line basis over ten years. Goodwill and copyrights have been reflected as intangible assets in the consolidated balance sheet at December 31, 2001 and 2000. Total accumulated amortization of intangible assets was $180,000 and $- at December 31, 2001 and 2000. Results of Values Financial Network's operations have been included in the consolidated results of operations since the date of acquisition.
In 2000, the Company obtained loan advances of $2.5 million from its investment broker. The loans bore interest at 1/2% above the Call Rate, as published in The Wall Street Journal, and were collateralized by the Company's investment portfolio. As of December 31, 2000, approximately $2.3 million remained payable under this arrangement. This loan was fully paid in 2001.
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 $55,000, $48,000, and $53,000 during the years ended December 31, 2001, 2000, and 1999. As of December 31, 2001 and 2000, employee contributions and Company matching contributions, including accumulated investment losses, totaled $575,000 and $393,000.
The Company also sponsors a non-qualified tax deferred compensation plan under which producers who earn a minimum of $100,000 may defer, on a pre-tax basis, up to 50% of annual commissions. In addition, the Company will match producer contributions for those producers who earn over $250,000 in annual commissions at rates ranging from 1% to 5% of amounts deferred, depending on the level of annual commissions earned. During the years ended December 31, 2001, 2000, and 1999, matching contributions related to the producer commission deferral plan were $36,000, $32,000, and $56,000. As of December 31, 2001 and 2000, producer contributions and Company matching contributions, including accumulated investment losses, totaled $3.8 million and $2.6 million.
The Company leases office and warehouse premises and certain office equipment under non-cancelable operating leases. Related rent expense of $1.6 million, $1.5 million, and $876,000 is included in occupancy costs for the years ended December 31, 2001, 2000, and 1999. Total rentals for leases of equipment included in equipment expense were $922,000, $802,000, and $417,000 for the years ended December 31, 2001, 2000, and 1999.
In 1998, the Company entered into a Shareholder's Agreement with Lynda L. Regan, Chief Executive Officer of the Company and Chairman of the Company's Board of Directors. Under the terms of this agreement, in the event of the death of Ms. Regan, the Company shall repurchase from Ms. Regan's estate all shares of common stock that were owned by Ms. Regan at the time of her death, or were transferred by her to one or more trusts prior to her death. The purchase price to be paid by the Company shall be equal to 125% of the fair market value of the shares. The purchase price was equal to $27.9 million at December 31, 2001. The Company has purchased two life insurance policies with a combined face amount of $29 million for the purpose of funding this obligation in the event of Ms. Regan's death.
As part of the Company's agreements with certain of its insurance producers, the Company may, under certain circumstances, be obligated to offer to purchase the business of the producers. At December 31, 2001, there were no outstanding commitments by the Company relating to such obligations.
The Company recorded redeemable common stock accretion of $397,000 and $495,000 related to Series A redeemable common stock for the years ended December 31, 2001 and 2000. The carrying value of Series B redeemable common stock is greater than the redemption value, and has not been accreted.
Outstanding at December 31, 2000 13,376,000 $ 1.28 Granted 2,976,000 $ 1.62 Exercised -- $ -- Forfeited (788,000) $ 1.25
The following table summarizes information about stock options outstanding at December 31, 2001 under both plans:
The provisions for income taxes differ from the provisions computed by applying the statutory federal income tax rate (34%) to income before taxes, as follows:
As of December 31, 2001, the Company has state net operating loss carryforwards of $10.2 million including $4.9 million and $4.3 million which expire on December 31, 2010 and 2011. The Company also has, for state income tax purposes, $304,000 in alternative minimum tax credits which can be used to reduce income taxes in subsequent years to the extent regular tax exceeds tentative minimum tax. The credits have no expiration date.
The diluted earnings per share calculation for the years ended December 31, 2001 and 2000 excludes antidilutive stock options of 3.3 million and 6.8 million.
2001 2000 1999 ---- ---- ---- SelectMarkSM series (sold on behalf of Transamerica) 69% 50% 11% VisionMarkSM series (sold on behalf of IL Annuity) 20% 28% 73%
Legacy Marketing began phasing out marketing of IL Annuity products in December 2001. The phaseout will be completed by March 31, 2002, depending on the product line.