Canadian revenue grew 9% to $132.3 million, or 30% of consolidated revenue, in 2005 as a result of organic growth and strengthening of the Canadian dollar against the U.S. dollar. Canadian brokerages posted organic growth of 11%, of which seven percentage points reflected a stronger Canadian dollar. Dispositions net of acquisitions lowered revenue by $3.4 million, reflecting the sale of certain assets and revenue acquired in prior years. In addition, Canadian operations benefited from an increase in contingent commissions and volume overrides, which grew 41% in 2005.
We estimate other non-cash stock based compensation expense for 2006 through 2011 will be:
Intangible asset amortization increased 53% to $8.4 million in 2005 as a result of the acquisition of Talbot on July 1, 2004.
Of the $68.7 million in new revenue we reported, $53.8 million, or 78% reflected growth through acquisition, while $14.9 million, or 22% resulted from organic growth. By comparison, acquired revenue added $40.0 million, or 60% of 2003’s sales growth, while organic growth contributed $26.4 million, or 40% of our revenue increases. Organic growth results include the impact of foreign exchange rate changes between the U.S. and Canadian dollars. In 2004, the rise of the Canadian dollar versus the U.S. dollar contributed three percentage points of our 5% organic growth rate in revenue.
We prepare our financial statements in accordance with Canadian GAAP. Our significant accounting polices are more fully described in Note 2 to our audited consolidated financial statements. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require our management to make significant estimates and judgments; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts and policies, our observance of trends in the insurance industry, information provided by our clients and information provided by outside sources, as appropriate, and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. Our critical accounting policies include the recognition of commission income, the allocation of the purchase price of an acquisition, the measurement of goodwill and other intangibles and related impairment evaluation, the valuation of stock-based compensation, the measurement of income tax liabilities and recoverability of future tax assets, and the measurement of contingent liabilities and self-insured liabilities. Management has reviewed these critical accounting policies and related disclosures with our independent auditor and the Audit Committee of our Board of Directors. These policies are discussed below.
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company is entitled to contingent commissions and volume overrides from insurance companies which are recorded in the period in which amounts can be reasonably estimated, which is usually when the amounts are received. Other revenue primarily includes investment income, policy service fees and income earned related to the financing of client premiums. Investment income is recorded when earned. Policy service fees are recorded on the effective date of the policy, at which time the service has been provided. Income earned related to the financing of client premiums is recorded when known.
Property and equipment are stated at cost less accumulated depreciation and amortization Depreciation is recorded based on the estimated economic useful lives of the related assets as follows: for computer equipment on a straight-line basis from 3 to 5 years or on a 30% declining balance method; for furniture, fixtures, and office equipment on a straight-line basis from 5 to 7 years or on a 20% declining balance method. Leasehold improvements are amortized on the straight-line method over the term of the related lease. Upon sale or retirement, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is reflected in earnings. If the carrying value of property and equipment is identified as impaired, it is written down to its fair value.
The Company has fully cooperated with the attorney general and department of insurance inquiries. While it is not possible to predict the outcome of these investigations, if contingent compensation agreements were to be restricted or no longer permitted, the Company’s financial condition, results of operation and liquidity may be materially adversely affected.
In connection with the 2002 acquisition of Hooper Hayes and Associates, Inc., now a part of HUB California, the Company issued 196,000 shares (the “Retractable Shares”) that were deposited in escrow subject to release over a period of three years upon the satisfaction of certain performance targets. As of December 31, 2005, 196,000 shares had been released from escrow.
Certain property and equipment have been pledged as collateral in amounts not less than the outstanding balance of these loans at December 31, 2005 and 2004, respectively.
There were no stock options issued in 2005 and 2004. The fair value of the stock options granted in 2003 was approximately $1.2 million (weighted average exercise price was $13.79 per share). The aggregate fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for the options issued in 2003:
method for options, restricted share units and the Talbot contingently issuable shares. Earnings per common share are calculated as follows:
A valuation allowance in the amount of $602 has been established related to certain non-deductible book reserves in the U.S. The Company does not believe that these losses and reserves will be realized.
approximately $80 million in cash as well as an earnout in cash and common shares of the Company based on future performance. The earnout will be at least $3 million.