Critical Accounting Policies. The following discussion provides management’s assessment of financial results and material changes in financial position for the Company. This discussion is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The Company’s significant accounting policies relate to investments, agent receivables, deferred policy acquisition costs, deferred tax assets, claim reserves, future policy benefit reserves, reinsurance and statutory accounting practices. These policies are discussed below under “Financial Condition” and in Notes 2 and 10 to the Company’s consolidated financial statements at Item 8. The application of these accounting policies requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities and expenses in the Company’s consolidated financial statements. Such estimates and judgments are based on historical experience, changes in laws and regulations, observance of industry trends and various information received from third parties. While the estimates and judgments associated with the application of these accounting policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported consolidated financial statement amounts are appropriate in the circumstances. For a better understanding of this analysis, reference should be made to Item 1 - “Business” and to Item 8 - “Financial Statements and Supplementary Data”. Certain reclassifications of prior years’ amounts have been made to conform with the 2002 presentation.
Fee and service results decreased ($2.1) million for 2002 compared to 2001 principally due to the impact of the extended economic downturn on the Company’s printing and telemarketing subsidiaries. These subsidiaries have been impacted by a reduction in the number of customers as well as reduced order volume from current customers and have also experienced reduced profit margins.
In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Insurance Subsidiaries’ policy benefit reserves, each Insurance Subsidiary relies primarily upon its own benefit payment history and upon information developed in conjunction with actuarial consultants and industry data. Persistency rates have a direct impact upon policy benefit reserves because the determinations for this reserve are, in part, a function of the number of policies in force and expected to remain in force to maturity. If persistency is higher or lower than expected, future policyholder benefits will also be higher or lower because of the different than expected number of policies in force, and the policy benefit reserves will be increased or decreased accordingly.
In March 2000, the FASB issued FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25” (“FIN 44”). The Company adopted FIN 44 on a prospective basis effective July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company’s results of operations, liquidity or financial position.
Investment securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 2002 and 2001 had a par value totaling $20.9 million and $26.4 million, respectively, and market value totaling $23.1 million and $26.9 million, respectively. At December 31, 2002 and 2001, the Company had pledged short-term investments totaling $2.6 million in connection with its receivables financing program (see Note 6).
Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. During 2002 and 2001, Ascent issued $1.5 million and $987,000, respectively, in additional notes for payment or interest in kind, which increased the note payable balance at December 31, 2002 to approximately $13.5 million. The CSFB Credit Agreement provides for a facility fee of $1.5 million which is payable upon maturity or upon a change in control, as defined. This facility fee is being accrued as additional interest payable over the term of the loan.
Combined statutory loss $ (2,677 ) $ (12,725 ) $ (16,956 )
The following table summarizes information about the stock options outstanding at December 31, 2002: