Exhibit 99.1
Report of Independent Accountants
To the Members of
prospectdigital, LLC
(a development stage company)
Petaluma, California:
In our opinion, the accompanying statement of financial position and the related
statements of operations, of members' equity, and of cash flows present fairly,
in all material respects, the financial position of prospectdigital, LLC (a
development stage company) at December 31, 2001, and the results of its
operations and its cash flows for the year then ended 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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 audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
October 2, 2002
prospectdigital, LLC (a development stage company)
Statement of Financial Position
December 31, December 31,
2001 2000
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents $ 8,388 $ 411,358
Prepaid expenses 3,210 7,500
----------- -----------
Total current assets 11,598 418,858
Fixed assets, net 715,196 932,791
Intangible assets, net 225,000 360,000
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Total non current assets 940,196 1,292,791
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Total assets $ 951,794 $ 1,711,649
=========== ===========
Liabilities and members' equity
Accounts payable and accrued liabilities $ 58,104 $ 94,402
Accounts payable and accrued liabilities to related parties 441,259 96,922
Loans payable to related party 1,458,157
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Total current liabilities 1,957,520 191,324
Loans payable to related party 1,100,000
----------- -----------
Total liabilities 1,957,520 1,291,324
Members' equity
Contributed capital 1,207,500 1,207,500
Deficit accumulated during development stage (2,213,226) (787,175)
----------- -----------
Total members' equity (1,005,726) 420,325
----------- -----------
Total liabilities and members' equity $ 951,794 $ 1,711,649
=========== ===========
See notes to financial statements.
prospectdigital, LLC (a development stage company)
Statement of Operations
For the year ended From inception From inception
December 31, (May 5, 2000) to (May 5, 2000) to
2001 December 31, 2000 December 31, 2001
------------------ ----------------- -----------------
(Unaudited) (Unaudited)
Revenue $ 10,407 $ 10,407
Expenses
Selling, general and administrative 1,133,433 $ 705,111 1,838,544
Depreciation and amortization 213,116 41,924 255,040
----------- --------- -----------
Total expenses 1,346,549 747,035 2,093,584
----------- --------- -----------
Operating loss (1,336,142) (747,035) (2,083,177)
----------- --------- -----------
Other income (loss)
Other income 5,428 13,782 19,210
Interest expense on loans from related party 95,337 53,922 149,259
----------- --------- -----------
Total other income (loss), net (89,909) (40,140) (130,049)
----------- --------- -----------
Net loss $(1,426,051) $(787,175) $(2,213,226)
=========== ========= ===========
See notes to financial statements.
prospectdigital, LLC (a development stage company)
Statement of Members' Equity
Deficit accumulated
Contributed during development
capital stage Total
----------- ----------- -----------
Balance at inception - May 5, 2000 $ -- $ --
Members' cash contributions, May 2000 407,500 407,500
Members' non-cash contributions, May 2000 800,000 800,000
Net loss -- $ (787,175) (787,175)
----------- ----------- -----------
Balance December 31, 2000 (Unaudited) 1,207,500 (787,175) 420,325
Net loss (1,426,051) (1,426,051)
----------- ----------- -----------
Balance December 31, 2001 $ 1,207,500 $(2,213,226) $(1,005,726)
=========== =========== ===========
See notes to financial statements.
prospectdigital, LLC (a development stage company)
Statement of Cash Flows
For the year ended From inception From inception
December 31, (May 5, 2000) to (May 5, 2000) to
2001 December 31, 2000 December 31, 2001
------------------ ----------------- -----------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(1,426,051) $ (787,175) $(2,213,226)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 213,116 41,924 255,040
Loss on impairment of fixed assets and intangible assets 377,000 377,000
Prepaid expenses 4,290 (7,500) (3,210)
Accounts payable and accrued liabilities 308,039 191,324 499,363
----------- ----------- -----------
Net cash used by operating activities (523,606) (561,427) (1,085,033)
----------- ----------- -----------
Cash flows used by investing activities:
Acquisition of fixed assets (67,146) (31,513) (98,659)
Website development costs (170,375) (503,202) (673,577)
----------- ----------- -----------
Net cash used by investing activities (237,521) (534,715) (772,236)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from loans from related party 358,157 1,100,000 1,458,157
Capital contributions 407,500 407,500
----------- ----------- -----------
Net cash provided by financing activities 358,157 1,507,500 1,865,657
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (402,970) 411,358 8,388
Cash and cash equivalents, beginning of period 411,358
----------- ----------- -----------
Cash and cash equivalents, end of period $ 8,388 $ 411,358 $ 8,388
=========== =========== ===========
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
prospectdigital, LLC
(Unaudited as to 2000 information)
1. Organization and Summary of Significant Accounting Policies
a. Organization
Prospectdigital, LLC (the "Company") organized in May 2000, provides an
on-line marketing service to brokers selling annuities and life insurance
throughout the United States. To date the Company has had nominal revenue and
used its capital to develop software to support its business and incur operating
expenses.
The Company is owned by three members who each own a 33 1/3% equity
interest, Imagent Online, LLC, JMB ("Celerit") and FIG. The partners contributed
the following consideration; Imagent Online, LLC, $402,500 in cash; Celerit,
future software services valued at $400,000 and $2,500 cash; FIG, intellectual
property valued at $400,000 and $2,500 cash. The value of the Celerit and FIG
capital contributions was determined by an independent valuation.
The operating activities of the Company are directed by a management committee,
this committee has five members. Imagent Online, LLC, can appoint three
committee members, FIG and Celerit can each appoint one committee member. Four
committee members must approve a decision; however, three committee members can
cause the Company to cease any activity. In August 2001, Celerit declared
bankruptcy and as a result the Company reorganized the management committee and
rescinded Celerit's voting rights.
The Company is in its planning stages for its eventual day to day business and
has generated nominal revenues from its planned operations. Accordingly, the
Company is defined as a development stage company in accordance with Statement
of Financial Accounting Standards No. 7, Accounting and Reporting by Development
Stage Enterprises. The Company began operations on May 5, 2000. As the Company
has incurred losses to date, Regan Holding Corp., Imagent Online, LLC's parent
company, has committed to provide sufficient funding for the Company to remain a
going concern at least through October 31, 2003.
b. Basis of Presentation
The financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates.
c. Revenue Recognition
Revenue is recognized when persuasive evidence of a contract exists,
subscription services provided are complete, the fee is fixed or determinable
and collection of the resulting receivable is reasonably assured. Subscription
services are provided on a month-to-month basis. Up-front fees are amortized
over the expected customer life.
d. Cash and Cash Equivalents
Cash and cash equivalents include marketable securities with an original
maturity of ninety days or less at the date of purchase.
e. Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation and
amortization. The Company capitalizes consulting fees and salaries and benefits
for employees who are directly associated with the development of the website.
Upon project completion, these costs are amortized over the estimated useful
life of the website on the straight-line basis.
Depreciation and amortization are computed using the straight-line method
over the estimated useful life of each type of asset, as follows:
Website development costs 5 Years
Property and equipment 5 Years
f. Intangible Assets
The intangible assets result from one of the member's initial capital
contribution and are being amortized on the straight-line basis over 5 years.
Intangible assets were $225,000 and $360,000 as of December 31, 2001 and
December 31, 2000 net of accumulated amortization of $80,000 in 2001, $40,000 in
2000 and in 2001, $55,000 of the impairment adjustment discussed below.
g. Impairment of Long-Lived Assets
The Company reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable. The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the useful life is
warranted. As a result of continuing to incur operating losses and nonpayment of
the note payable to Imagent Online, LLC, in 2001 the Company recorded an
impairment charge of $377,000 related to its website and intangible assets. The
charge is included in selling, general and administrative services. The fair
value of the intangible assets was based upon the price that Celerit and FIG
sold their equity interests in the Company for in January 2002. The fair value
of the website development costs was based on an analysis of replacement cost.
h. Fair value of financial instruments
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, accounts payable and accrued liabilities approximate
their fair values due to their short maturities. The carrying value of loan
payable approximates fair value due to the variable nature of the interest
rates. The carrying value of the line of credit approximates fair value as it is
due on demand.
i. Accounting pronouncements to be adopted subsequent to December 31, 2001
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and
Intangible Assets, which supercedes Accounting Principles Board ("APB") Opinion
No. 17, Intangible Assets. SFAS 142 eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition for goodwill and intangible assets. The
provisions of SFAS 142 are applicable on January 1, 2002. However, goodwill and
intangible assets acquired after June 30, 2001 are subject immediately to SFAS
142. The Company's management has not yet determined the impact implementation
of SFAS 142 will have on its results of operations or financial position.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 establishes a single accounting model,
based on the framework established in SFAS 121, for long-lived assets to be
disposed of by sale. It retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of the impairment of long-lived assets to be
disposed of by sale. SFAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company's management
has not yet determined the impact implementation of SFAS 144 will have on its
results of operations or financial position.
2. Fixed Assets
December 31, December 31,
2001 2000
--------- ---------
(Unaudited)
Website development costs $ 751,577 $ 903,202
Property and equipment 98,659 31,513
--------- ---------
850,236 934,715
Accumulated depreciation and amortization (135,040) (1,924)
--------- ---------
Total $ 715,196 $ 932,791
========= =========
3. Loans Payable to Related Party
Imagent Online, LLC loaned $1.1 million to the Company in 2000. The
Company's assets collateralize the loan. The loan bears interest equal to the
prime rate. In 2001, Imagent Online, LLC extended a $400,000 line of credit to
the Company. The line of credit bears interest at 8.0%. As of December 31, 2001
the Company had drawn $358,000 from the line of credit. Loan payments to Imagent
Online, LLC were scheduled to begin on June 30, 2001; however, in accordance
with the purchase transaction consummated in January 2002 (see note 6) the
Company will begin repaying these loans when the Company becomes profitable. At
December 31, 2001, the loan has been classified as a current liability because
it is due on demand. Interest payable to Imagent Online, LLC, which is included
in accounts payable and accrued liabilities to related parties on the balance
sheet, was $149,000 and $54,000 at December 31, 2001 and 2000.
4. Certain Relationships and Related Transactions
During part of 2001, Legacy Marketing Group, an affiliate of Imagent
Online, LLC, provided customer and management services and office space. The
monthly base fees for these services were $6,000 and $11,000. At the end of
2001, no payments had been made pursuant to this arrangement and the Company
owed Legacy Marketing Group $132,000. As of December 31, 2001 and 2000 the
Company owed Celerit $160,000 and $43,000 for consulting and other services
provided by Celerit during 2001 and 2000. During 2001 and 2000 the Company paid
$155,000 and $638,000 to Celerit for various consulting and other services. Most
of the consulting services were capitalized as website development costs.
5. Commitments and Contingencies
From time to time the Company may be involved in various claims and legal
proceedings arising in the ordinary course of business. The Company is unaware
of any such claims at this time.
6. Subsequent Events
In January 2002, Imagent Online, LLC purchased the remaining 67% of the
Company. The Company is now a wholly owned subsidiary of Imagent Online, LLC.