The Company adopted Statement 123 (R) on January 1, 2006, using the modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123 (R) that remain unvested on January 1, 2006. As a result, no compensation cost was recognized in connection with stock options that vested prior to 2006. Stock compensation accounting is discussed more fully in Notes 2 and 7 to the financial statements included in this annual report.
While goodwill is not amortized, it is subject to periodic reviews for impairment (at least annually, or more frequently if impairment indicators arise). We review goodwill for impairment periodically and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Such impairment reviews are performed at the entity level with respect to goodwill, as we have one reporting unit. Under those circumstances, if the fair value were less than the carrying amount of the entity, further analysis would be required to determine whether or not a loss would need to be charged against current period earnings. No indicators of impairment were noticed in our December 31, 2006 impairment review. The determination of fair value and the impairment are based on a combination of a market valuation based on a comparison with similar public companies (guideline company method) and a discounted cash flow analysis, which includes making various judgmental assumptions, including assumptions about future cash flows, growth rates and discount rates. The use of different estimates or assumptions could produce different results. During the fourth quarter of 2005, the Company experienced declining revenues from life insurance sales and a drop in the market price of its common stock. Our annual impairment review was conducted as of December 31, 2005, and it was determined that an
General and Administrative. General and administrative expenses decreased 6%, or $234,000, in 2006 to a total of $3.5 million. Lower legal fees and insurance costs more than offset the new expense for stock option compensation.
Depreciation and amortization. Depreciation and amortization decreased $120,000 in 2006 when compared to 2005. Amortization costs related to the life insurance renewals acquired in 2004 declines each year in anticipation of policy lapses that will result in steadily declining revenue from these renewal contracts.
with a phone sales capability. Sales of life insurance at our website declined $2.2 million, as we directed a significant portion of our advertising in 2005 toward supporting the phone sales center. An increase in renewal commission of $200,000 accounted for the remainder of the increase in life insurance commissions. This increase in revenue was achieved despite a drop in the number of life insurance policies sold to 16,845 in 2005 from 17,485 in 2004, a decrease of 4%, as our average total commission per policy sold increased. Commissions from health insurance decreased 41% in 2005, as we discontinued brokerage sales for health insurance during the first quarter of 2005, and are now outsourcing this business to third parties. As a result, total health insurance policies sold decreased 90% to 315 in 2005 from 3,236 in 2004. Fees from the sale of internet leads for lines of insurance other than life increased 24% to $2 million in 2005, resulting from higher revenue from the sale of auto insurance traffic as well as new revenue from the sale of health insurance traffic.
Selling and Marketing. Selling and marketing expenses decreased $325,000, or 5%, in 2005 when compared with 2004, to a total of $6.5 million. We intentionally decreased our advertising spending during the second and third quarters of 2005, as we found that we were generating more telephone leads than our agents could efficiently handle. Selling and marketing expenses have dropped to 38% of revenue in 2005, compared with 43% of revenue in 2004.
General and Administrative. General and administrative expenses increased 20%, or $617,000, in 2005 to a total of $3.8 million. Increases in legal and accounting fees, as well as higher insurance costs and an increase in property taxes resulting from owning the Life Quotes building for a full year in 2005 accounted for this increase.
Depreciation and amortization. Depreciation and amortization decreased $306,000 in 2005 when compared to 2004. Full year depreciation on the Life Quotes building and fixed assets, along with amortization of intangibles acquired in the Life Quotes acquisition, resulted in an increase of $240,000 in this category. However, results for 2004 included amortization charges of $438,000 related to intangible assets acquired in the 2001 acquisition of selected assets of Insurance News Network. Those intangible assets were fully amortized in 2004, so there were no similar charges in 2005.
Interest income, net was $276,000 in 2005 compared to $138,000 in 2004. The components of interest income are as follows:
During 2005, there were no sales of securities, so there were no realized gains or losses. In 2004, there were realized losses of $45,000.
We had no income tax credit for 2005 and 2004 due to valuation allowances provided against net deferred tax assets.
We currently expect that our cash and fixed maturity investments of $8.2 million at December 31, 2006 will be sufficient to meet our anticipated cash requirements for at least the next 12 months. The timing and amounts of our working capital expenditures are difficult to predict, and if they vary materially, we may require additional financing. If we require additional equity financing, it may be dilutive to our stockholders and the equity securities issued in a subsequent offering may have rights or privileges senior to our common stock. If debt financing is available, it may require additional restrictive covenants with respect to dividends, raising capital and other financial and operational matters, which could impact or restrict our operations. If we cannot obtain adequate financing on acceptable terms, we may be required to reduce the scope of our marketing or operations, which could harm our business, results of operations and our financial condition.
Cash used for financing activities in 2006 and 2005 totaled $63,000 and $21,000, respectively, and consisted of the repurchase of shares of our common stock. Cash provided by financing activities in 2004 totaled $12.7 million, consisting primarily of the sale of common stock to fund the Life Quotes acquisition. The Company also borrowed and later repaid $6.5 million in connection with the acquisition.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2006.