We are a distributor of insurance and financial products and services primarily to small and mid-sized business clients.
We also receive contingent commissions, which are incremental compensation for achieving specified loss experience and/or account retention and premium volume goals set by the insurance companies for the business we place with them. Contingent commissions are recorded on the earlier of receipt of cash or when we receive data from the insurance companies that allows us to reasonably determine the amount. Please refer to further discussion below under “Insurance Industry Investigations and Related Developments.” Fee-based revenues related to employee benefits services are generally billed and recorded as services are rendered and may vary with factors such as the client’s headcount or assets under management.
We have two operating segments-Insurance Brokerage and Specialized Benefits Services-and a third administrative segment-Corporate. In 2004, approximately 93.6% of our revenues were derived from our Insurance Brokerage segment. Within this segment, approximately 61.4% related to P&C insurance and 38.6% to Health and Welfare. Approximately 6.3% of our revenues in 2004 were derived from our Specialized Benefits Services segment from benefits enrollment and communication services and workplace marketing. All of Specialized Benefits Services revenue is considered Health & Welfare. Our Corporate segment accounted for less than 0.1% of our revenues in 2004.
The majority of our operating expenses relate to compensation and employee benefits, which amounted to approximately 58.3% of consolidated revenues in 2004. We refer to the balance of our operating expenses as other operating expenses, which includes selling-related expenses, rent, communication expenses and other items. Other operating expenses were approximately 24.6% of consolidated revenues in 2004.
(“Akin Gump”), to render legal advice in connection with an internal review of our operations. Since that time, Akin Gump has assisted us in responding to the subpoenas and inquiries described above. In connection with this internal review, Akin Gump has interviewed more than 90 of our employees, including corporate management, and is continuing its review of documents. We are continuing to review our business and expect that our review will not only address the area that the regulators are examining, but will also help us evaluate where we can make additional operational or business practice changes or improvements.
On October 28, 2004, we announced that recent developments in the insurance industry had caused management to conclude that contingent commission arrangements, as presently known within the industry, may ultimately not continue in their present form and that we intend to conduct our future affairs with that assumption in mind. Since our October 2004 announcement, we have received, and are continuing to receive, contingent commissions under our arrangements in place for 2004. Additionally, our carriers with whom we have historically had contingent arrangements have tendered, or based upon present information intend to tender, their 2005 contingent commission agreements in a form and structure generally consistent with our prior agreements. While we are not able to predict whether regulatory, market or other external forces will ultimately cause contingent commission arrangements to cease or be substantively restructured, we expect to receive contingent commissions for arrangements established in 2005. Our revenues and income from continuing operations before income taxes from contingent commissions were $19.0 million, $17.7 million and $14.7 million for 2004, 2003 and 2002, respectively.
Opticare Health Systems Litigation. We have been named as one of more than 30 insurance company and insurance brokerage defendants in an amended complaint filed in the United States District Court Southern District of New York in a putative class action lawsuit captioned Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al (Civil Action No. CV 06954 (DC)). The amended complaint focuses on the payment of contingent commissions by insurers to insurance brokers who sell their insurance and alleged “bid rigging” in the setting of insurance premium levels. The amended complaint purports to allege violations of numerous laws including the Racketeer Influenced and Corrupt Organizations (RICO) and federal restraint of trade statutes, state restraint of trade, unfair and deceptive practices statutes, breach of fiduciary duty and unjust enrichment. The amended complaint seeks class certification, treble damages for the alleged injury suffered by the putative plaintiff class and other damages. We are also a defendant in two recently-filed “copycat” or tag-along lawsuits in the United States District Court for the Northern District of Illinois: Lewis v. Marsh & McLennan Companies, Inc., et al., 04 C 7847 and Preuss v. Marsh & McLennan Companies, Inc., et al., 04 C 7853. Like the Opticare complaint, these complaints contain no particularized allegations of wrongdoing by us. In February 2005, the Judicial Panel on Multidistrict Litigation of the Federal Courts transferred these actions to the United States District Court for the District of New Jersey for coordinated or consolidated pretrial proceedings. We have been informed that the Company has also been named as a defendant in another “copy cat” class action lawsuit, captioned Palm Tree Computers Systems, Inc et ano v. Ace, USA et al and filed in the Circuit Court for the Eighteenth Judicial Circuit in and for Seminole County, Florida Civil Division, Class Representation, No. 05-CA-373-16-W, that this action has been removed to the United States District Court for the Middle District of Florida, Orlando Division, Case No. 6:05-CV-422-2ZKRS, and that a request has been made that it also be transferred to United States District Court for the District of New Jersey for coordinated or consolidated pretrial proceedings. We have not yet been served in this action. We intend to defend ourselves vigorously against the claims made in these actions.
characterized by a period of declining premium rates, which negatively affected commissions earned by insurance brokers. Years of underwriting losses for insurance companies, combined with the downward turn in the equity markets and interest rates, caused insurers to increase premium rates starting in mid- to late 2000, creating what we call a “hard market.” A hard market is an insurance market characterized by a period of rising premium rates which, absent other changes, positively affects commissions earned by insurance brokers. Additionally, the insurance industry was affected by the events of September 11, 2001, resulting in the largest insurance loss in America’s history, which accelerated increases in premium rates for particular lines of commercial P&C insurance. In response to rising premiums, some of our customers increased their deductibles and/or reduced their insurance coverage in order to reduce the impact of the premium increases. These trends negatively impacted our revenues. The hard market, for many lines of insurance, began to slow in the second half of 2002. In the second half of 2003, premiums in most P&C lines of insurance began to flatten or decrease, with some, such as property, by as much as 20%. In 2004, the soft market persisted, negatively affecting brokers’ revenue. The competitive pricing dynamic is consistent throughout all account sizes and most geographic regions. We are not able to predict whether the soft market will continue; however, if it does, our P&C insurance brokerage revenues may continue to be negatively impacted.
Approximately 42.4% of our consolidated revenues in 2004 related to Health & Welfare business.
Premium rates in the health insurance industry have generally realized a consistent upward trend due to increasing health care delivery costs. From 2000 to 2003, however, the upward trend in health care insurance premiums was somewhat offset by the impact of the economic downturn and its resulting negative impact on business and employment levels at our customers. Additionally, reduced discretionary spending by our corporate clients has led to benefit cut-backs and lower expenditures on consulting and other fee-based services. Decreases in balances of assets invested within our clients’ retirement benefit plans and on new investments into those plans, on which we are paid commissions, have negatively impacted our retirement services business. Our Health & Welfare business is most affected by employment levels and by the strength of the economy. Factors such as a tight labor market increase employers’ spending on benefits; high employment increases the numbers of lives covered within the benefit plans that we broker; and a strong stock market increases both existing assets under management and new investments. In 2003, we saw the signs of an improving economy, although we did not see the benefits of sustained growing labor ranks or increased spending on benefits as employers continued to mitigate medical cost increases. The economy in 2004 was generally flat with the exception of positive growth in employment, which, in the second half of 2004, drove strong growth in our Health & Welfare revenues. Employers, however, are still struggling with double digit medical inflation, resulting in continued benefit reductions and cost-shifting to employees. This unfavorable dynamic for the benefits brokerage business has led to greater opportunity, however, in our workplace marketing business, which is aided by the trend to defined contribution health-care where employees direct their benefit dollars to purchase voluntary benefits a la carte. While we cannot predict whether the economy will improve or if employment and spending on employee benefits will increase, if they do, then our Health & Welfare revenue may be positively impacted.
Organic Revenue, which excludes the current period’s total revenues attributable to acquisitions and the prior period’s total revenues from divested businesses during the twelve months following acquisition or divestiture;
We strongly urge investors or potential investors in our stock to review the calculation of EBITDA and EBITDA Margin and Organic Revenue and the related reconciliation to GAAP financial measures in “Results of Operations” below.
We believe that internally generated growth is more valuable than acquired growth. Our strategy for achieving organic growth includes:
cross-selling across all of our major product categories within our business segments;
We monitor and manage to a number of different operating statistics including, but not limited to, sales pipeline by producer, cross-selling within our 400 largest accounts, client retention rates and revenue mix by operating company. All of these metrics are tracked and reported monthly and form the basis of our agenda, among other items, for our monthly operations meetings with each of our business unit executive management teams.
In the fourth quarter of 2004, we announced that our Board of Directors had approved a margin improvement plan in order to reduce ongoing operating expenses. As a result of this action, we recorded expense of $12.4 million related to employee severance and related benefits for 28 employees of $3.4 million, facilities closures of $3.4 million, the modification of 34 sales professionals’ agreements of $2.9 million and service contract termination fees of $2.7 million.
We centrally manage our acquisition pipeline from the point of initial contact through the process of integration within our operations. We only consider transactions that are accretive to our cash earnings per share, and sellers generally must take a portion of their purchase price in our common stock. All acquisitions are subject to a due diligence process, including an introduction to our culture and business strategy, the seller’s commitment to both our sales and client service model and to a post-acquisition integration plan. Currently, we are looking to expand only within our current geographic footprint of operations to maximize efficiencies and continue to build-out the balanced revenue mix of P&C and Health & Welfare business.
In 2004, we completed two acquisitions of retail insurance brokers in our Insurance Brokerage segment and two acquisitions of workplace benefits companies in our Specialized Benefits Services segment. In the first full year of ownership, these acquisitions are expected to add in excess of $70.5 million in revenues, $20.6 million in EBITDA and $4.5 million in net income in accordance with GAAP.
On April 1, 2004, we acquired Bertholon-Rowland Corporation, an Insurance Brokerage operation. The aggregate preliminary purchase price of approximately $44.6 million, consisting of cash of $31.0 million, shares of our common stock valued at $9.4 million and assumed liabilities of $4.2 million, was allocated primarily to goodwill and other intangible assets.
On May 1, 2004, we acquired Dodge, Warren & Peters Insurance Services, Inc., an Insurance Brokerage operation. The aggregate preliminary purchase price of approximately $38.6 million, consisting of cash of $16.6 million, shares of our common stock and restricted stock units valued at $15.3 million and assumed liabilities of $6.7 million, was allocated primarily to goodwill and other intangible assets.
On July 1, 2004, we acquired Future Planning Associates, Inc., a Specialized Benefits Services operation. The aggregate preliminary purchase price of approximately $30.6 million, consisting of cash of $19.7 million, shares of our common stock valued at $3.1 million and notes issued and net assumed liabilities of $7.8 million, was allocated primarily to goodwill and other intangible assets. We drew down an additional $20.0 million on our revolving credit facility to fund the cash portion of the purchase price.
the impact of variations or timing in recording contingent commissions in our Insurance Brokerage segment, primarily in the first and second quarters.
We record premiums and commissions receivable from clients, net of sub-broker commissions, premiums payable to insurance companies and the related commission income, on the later of the effective date of the policy or the billing date, net of an allowance for estimated policy cancellations. We record installment premiums and related commission income periodically as billed. Commissions earned from the placement of individual and corporate-owned life and individual disability insurance are calculated as a percentage of corresponding premiums over the duration or term of the underlying policies. Traditionally, the majority of the commission revenue on these life and individual products, as well as on other traditional voluntary benefit products, is recorded in the first year the insurance is placed, with the commission income recorded in renewal years being relatively insignificant.
We record fees for consulting and administrative services as billed over the period in which services are rendered.
We record fees and/or commissions related to benefit enrollment services when earned. We consider the earnings cycle complete when we have substantially completed our obligations under the service contract, we can reasonably estimate the revenue earned and when there is no significant collection risk. At the completion of an enrollment we record an estimate of first year fee and/or commission income less an estimate of policy cancellations. The allowance for policy cancellations on benefit enrollment services is established through a charge to revenue and receivables and was $2.3 million and $1.4 million at December 31, 2004 and 2003, respectively.
In December 2004, we announced that our Board of Directors had approved plans to sell three operations in our Insurance Brokerage and Specialized Benefits Services segments that either exhibit significant earnings volatility or do not fit with our core business strategy. As a result of this action, we recorded a $9.5 million pre-tax impairment charge on the goodwill and other intangible assets of one of these operations.
We follow a consistent methodology based on an estimate of discounted future cash flows derived from acquired clients’ lists and attrition rates to estimate the fair value of the expiration rights and other intangible assets at the date of acquisition. For acquisitions in excess of $5.0 million in purchase price, we obtain an independent appraisal of the fair value of intangible assets acquired. Expiration rights are amortized on a straight-line basis over their estimated lives of five to ten years (with ten years used in most cases), based on historical attrition that has generally been consistent year over year. Non-compete agreements and restrictive covenants are typically valued at their stated contractual amount and are amortized on a straight-line basis over the terms of the agreements, which range from four to seven years. Both the allocation of purchase price and estimation of useful lives require management’s judgment. If historical fact patterns were to change, such as the rate of attrition of acquired client accounts, we may be required to allocate more purchase price to goodwill or accelerate the amortization of expiration rights, which may have a material impact on our financial position or results of operations. Goodwill is not subject to amortization.
We are subject to various claims, lawsuits and proceedings that arise in the normal course of business. We do not believe we are a party to any claims, lawsuits or legal proceedings that will have a material adverse effect on our reported financial position and results of operations. We have accrued a liability in accordance with GAAP for our best estimate of the probable cost of the resolution of those claims where our liability is probable and can be reasonably estimated. This estimate has been developed in consultation with internal and external counsel that is handling our defense in these matters and is based upon a combination of litigation and settlement strategies. The establishment of reserves for claims and litigation requires management’s judgment. To the extent additional information arises or our strategies change, it is possible that our estimate of our accrued liability in these matters may change, which could have a material adverse effect on our financial position and results of operations for any particular quarterly or annual period. Please read Note 15-“Contingencies” to our Consolidated Financial Statements included in Part II, Item 8 of this report and Management Overview-“Insurance Industry Investigations and Related Developments” above.
Our credit facility requires us to maintain financial covenants, which we set with our lenders, based on our estimates of future operating results at that time. Future operating results and continued compliance with our debt covenants cannot be assured and our lenders’ actions are not controllable by us. Currently, based on our projections of future operating results, we do not expect to violate any such covenants. If our projections of future operating results are not achieved, resulting in a violation of our financial covenants for which our lenders do not provide a waiver or amendment, we could experience a material adverse effect on our reported financial position and results of operations for any particular quarterly or annual period.
Please read Note 1-“Nature of Operations and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part II, Item 8 of this report for a discussion on the impact of the adoption of new accounting pronouncements.
Certain amounts have been reclassified and presented in all periods as discontinued operations to reflect the decision announced in the fourth quarter of 2004 to sell three operations that either exhibit significant earnings volatility or that do not fit with our core business strategy.
Compensation and Employee Benefits. Compensation and Employee Benefits increased $41.4 million, or 21.1%, to $237.3 million in 2004, from $195.9 million in 2003. For 2004, the increase was primarily due to the effect of acquisitions and $6.6 million of expenses related to the fourth quarter 2004 margin improvement plan and integration efforts, partially offset by a favorable variance in bonus expense based on unfavorable operating results for the year. As a percentage of revenues, Compensation and Employee Benefits was 58.3% and 56.7% for 2004 and 2003, respectively.
Income From Continuing Operations. Income from Continuing Operations decreased $17.5 million or 52.1% to $16.1 million for 2004, from $33.6 million for 2003. Comparisons of 2004 to 2003 are negatively affected by the fact that in 2004 we recorded a provision for income taxes at an approximate 43.7% effective rate; whereas in 2003, the reversal of a valuation allowance in the deferred tax assets resulted in an income tax benefit of $5.1 million. The increase in income tax expense for 2004 over the same period in 2003 was $17.6 million, which was somewhat offset by lower interest and depreciation expense, an expense of $4.0 million for the early extinguishment of debt in 2003 and income from continuing operations generated by our higher revenue base in 2004. Contingent commissions contributed approximately $19.0 million and $17.7 million to income from continuing operations for 2004 and 2003, respectively.
Revenues. Revenues increased $24.1 million, or 7.5%, to $345.5 million in 2003 from $321.4 million in 2002. In 2003, Organic Revenue Growth was 4.1%, comprised of new business written, the positive impact of higher premium rates on renewal commissions and increased contingent commissions of $3.0 million in our Insurance Brokerage segment, partially offset by the impact of lost and non-recurring business. The impact of acquisitions contributed approximately $11.0 million and zero to revenues in 2003 and 2002, respectively.
Other Operating Expenses. Other Operating Expenses increased $9.2 million, or 13.8%, to $76.5 million in 2003 from $67.3 million in 2002. The increase is primarily attributable to (i) $2.9 million in expenses related to the move of our corporate offices from San Francisco to New York and for consulting fees related to Sarbanes-Oxley Section 404 compliance preparation, (ii) the increase in costs generally associated with being a public company and (iii) $1.6 million of other operating expense attributable to the impact of businesses acquired in 2003, partially offset by (iv) integration efforts and other charges of $1.6 million in 2002, compared to zero in 2003. As a percentage of revenues, Other Operating Expenses were 22.1% in 2003 compared to 20.9% in 2002.
We have three reporting segments: Insurance Brokerage, Specialized Benefits Services and Corporate.
general and specialty property and casualty insurance, which we refer to as P&C insurance;
corporate management, acquisition processes, sales management, human resources, legal, capital planning, financial and reporting support.
We evaluate segment performance based on Revenues, Organic Revenue, EBITDA and EBITDA Margin. Organic Revenue, EBITDA and EBITDA Margin are not substitutes for other financial measures determined in
The Specialized Benefits Services segment results reflect the following margin improvement plan, integration efforts and other charges: zero, zero and $1.1 million in 2004, 2003 and 2002, respectively.
Specialized Benefits Services revenues increased $7.5 million, or 41.1%, to $25.7 million in 2004 from $18.2 million in 2003, and increased $0.4 million, or 2.2%, to $18.2 million in 2003 from $17.8 million in 2002. The increase in revenues in 2004 is attributable to acquisitions and organic revenue growth of $5.4 million and $2.1 million, respectively. The increase in revenues in 2003 was due to organic revenue growth. Organic revenue growth was 11.3% and 2.2% in 2004 and 2003, respectively. Specialized Benefits Services revenues represented 6.3%, 5.3% and 5.5% of our total consolidated revenues in 2004, 2003 and 2002, respectively.
Income From Continuing Operations Before Income Taxes in the Specialized Benefit Services segment was $3.6 million, ($0.3) million and $1.6 million for the years ended December 31, 2004, 2003 and 2002, respectively. The increase in 2004 and the decrease in 2003 was primarily due to the reasons noted above.
Loss From Continuing Operations Before Income Taxes in the Corporate segment was $38.1 million, $33.0 million and $34.2 million in 2004, 2003 and 2002, respectively. The increase in 2004 is primarily attributable to the expenses recorded in connection with the margin improvement plan and integration efforts, Sarbanes-Oxley Section 404 compliance and various insurance industry investigations, offset by $4.0 million in expense in 2003 related to the early extinguishment of debt. The decrease in 2003 is primarily attributable to a $6.0 million decrease in interest expense in 2003, the result of lower borrowings and more favorable interest rates, combined with the reasons noted above.
We recorded $0.3 and $0.4 million in 2004 and 2003, respectively, for severance costs related to the move of the corporate offices from San Francisco to New York.
Upon completion of the majority of our acquisitions, we undertook initiatives to determine the following: (i) positions within the organization that could be eliminated without resulting in loss of revenues or detriment to service; (ii) sales professionals contracts that should be renegotiated because they were in excess of our standard compensation practices; and (iii) accretive benefits that could be derived from the early termination of lease commitments. Upon completion of the analysis we reduced the number of our employees by 32 during the first quarter of 2002 and such persons were given various levels of severance depending on their length of service with us. This process resulted in severance charges of $3.6 million in the first quarter of 2002. In addition, in the first quarter of 2002 we renegotiated the compensation arrangements of some of our sales professionals whose compensation arrangements were in excess of our standard compensation practices. The renegotiation of these contracts resulted in an expense of $1.8 million in the first quarter of 2002.
In January 2002, Bernard H. Mizel retired as our chairman and chief executive officer and we recorded a charge of $2.8 million related to the retirement.
In December 2001, we entered into a service agreement with Ceridian Corporation. The agreement stipulated that Ceridian Corporation will provide administrative services to our customers and us. In March 2002, the original service agreement was amended due to our announcement to sell USIA. Please read “Discontinued Operations” below for further information. The amendment eliminated USIA as a party to the service agreement, which resulted in the accrual of a $1.0 million amendment fee in the first quarter of 2002.
See Note 20-“Subsequent Events” to our Consolidated Financial Statements in Part II, Item 8 of this report.
In 1995, we adopted a Long-Term Incentive Plan to provide a means to attract, retain and motivate employees. As part of the Long-Term Incentive Plan we issued stock appreciation rights (“SARs”). SARs generally vest over a five-year period, although accelerated vesting is possible under specified circumstances. Upon exercise of a SAR, the holder generally is entitled to receive, in cash, the excess of the fair market value per share of our common stock on the date of exercise over the grant price of the SAR. The valuation of SARs is based on the estimated fair value of a share of our common stock. In accordance with GAAP, compensation expense, or a reduction of compensation expense, for SARs is recorded over the vesting period based on the change in fair value from grant date to each balance sheet date. Please read Note 8-“Employee Benefit Plans” to our Consolidated Financial Statements included in Part II, Item 8 of this report. We recorded a net reduction in SAR-related compensation expense of $3.0 million in 2002, resulting from a reduction in the fair market value of our common stock.
Upon the consummation of our IPO, approximately 104,000 shares of restricted stock, which were fully vested, were granted to nine executive officers. A $1.0 million expense was recorded for the value of the grant of restricted stock during the fourth quarter of 2002.
In the fourth quarter of 2004, we granted 295,196 shares of restricted stock to 27 sales professionals as partial consideration for the amendment of their compensation agreements in connection with the margin improvement plan. The shares vest 20% per year over five years. The fair value of the shares on the grant date was $3.4 million. We also issued 15,000 shares of restricted stock to one employee, valued at $0.2 million, under the same terms as the sales professionals’ grants. The restricted stock grants were recorded as unearned compensation in stockholders’ equity and are being charged to compensation expense on a straight-line basis over the vesting period. No compensation expense related to these grants was recorded in 2004.
In March 1996, we issued warrants to purchase 0.7 million shares of common stock issued at an exercise price of $11.125 per share. Holders of the Redeemable Common Stock Warrants, issued in conjunction with a 1996 senior subordinated debt offering that was repaid in 1999, agreed to terminate the put rights associated with the Redeemable Common Stock Warrants concurrent with the consummation of our IPO. The aggregate value of the warrants was $4.3 million and was reported as Redeemable Common Stock warrants on our balance sheet prior to the consummation of our IPO. The change in value of the warrants, which was recorded as a change in value of redeemable common stock warrants in our statements of operations, was $(4.1) million for 2002.
were drawn, in part, to repay all amounts under our previously existing credit facility. As a result of repaying the previously existing credit facility, we recorded an expense of $4.0 million as early extinguishment of debt to reflect the prepayment penalty and the write-off of remaining deferred financing costs in the third quarter of 2003.
We believe that cash and cash equivalents on hand of $2.9 million and our availability under our revolving credit facility of $23.2 million as of December 31, 2004, together with cash flows generated from operations, should be sufficient to fund our estimated $11.6 million in debt principal repayments, working capital needs, acquisitions and budgeted $10.9 million in capital expenditures through December 31, 2005. Our liquidity thereafter will depend on our financial results and results of operations and future available sources of additional equity or debt financing. Our revolving credit facility provides us with availability of up to $30.0 million, all of which is available for general corporate purposes, including acquisitions. As of December 31, 2004, letters of credit in the amount of $1.8 million were outstanding under our revolving credit facility. Our future operating performance and ability to service our debt will be subject to economic conditions and to financial, business and other factors, many of which are beyond our control. Please read our “Risks Related to Our Business” in Part I, Item 1 of this report.
Working capital decreased by $37.8 million to $32.8 million at December 31, 2004, compared to $70.6 million at December 31, 2003, principally due to the use of cash for acquisitions in the second half of 2004, current liabilities assumed in 2004 acquisitions and the net cash proceeds received from the new credit facility in 2003.
Net cash provided by (used in) financing activities totaled $11.1 million, $11.2 million and $(41.5) million for the years ended December 31, 2004, 2003 and 2002, respectively. In 2004 we made payments of $43.9 million for debt, $0.5 million for debt issuance costs and $3.9 million to reacquire our common stock under our share repurchase program. During 2004 we drew down a net of $5.0 million on our revolving credit facility ($29.0 million drawn and $24.0 million repaid). We also raised $29.7 million from the issuance of our common stock as a result of a forward sale agreement, by issuing 1.8 million shares of our common stock, along with stock options and employee purchase plan transactions. In 2003, we refinanced our credit facility resulting in gross proceeds from the issuance of debt of $125.0 million and costs paid of $3.8 million. With the proceeds, we paid down our previously existing revolver and term loan of $70.9 million and $27.3 million, respectively, and other acquisition-related debt of $5.0 million. In the first quarter of 2002, we received $2.5 million from the issuance of our preferred stock to Sovereign Bancorp. In the second quarter of 2002, we used $16.3 million of the proceeds from the sale of USIA to reduce our term loan. In the fourth quarter of 2002, we completed our IPO of 9.0 million shares at a price of $10 per share. The cash proceeds of the offering after the underwriting discount were $83.7 million. After deducting offering expenses of $5.3 million, $78.4 million was used to pay down our indebtedness under our previous credit facility.
Income from continuing operations was $16.1 million, $33.6 million and $10.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. Based on approximately 49.1 million, 46.0 million and 8.8 million shares outstanding at those dates, income (loss) per share from continuing operations on a basic basis was $0.33 for 2004, $0.74 for 2003 and $(0.93) for 2002. Income (loss) per share from continuing operations on a diluted basis was $0.33 for 2004, $0.73 for 2003 and $(0.93) for 2002.
At December 31, 2003, we had $23.8 million of net operating loss carry-forwards for federal tax purposes that we utilized fully by the third quarter of 2004, becoming a full taxpayer for both federal and state income taxes. Our ability to use these net operating loss carry-forwards to offset future taxable income, if any, may be subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. The provisions of Section 382 are triggered by specific ownership changes of our stock. We do not believe Section 382 will limit us in utilizing our net operating loss carry-forwards in 2004 and have not assumed any such limitation in our tax provision. However, if limited, the unused portion may then be carried forward to future years. In 2004 and 2003 we paid $8.3 million and $3.4 million, respectively, for state and federal income taxes.
We consummated our acquisition of Summit on February 3, 2005. Pursuant to the terms of the registration rights provisions of the Merger Agreement, we are required to prepare and file with the SEC, not later than ninety (90) days following the consummation of the merger, a registration statement to permit the public offering and resale under the Securities Act of 1933 on a continuous basis shares of our common stock held by the beneficiaries of the merger.
The revolving credit facility is available for loans denominated in U.S. dollars and for letters of credit. Borrowings under the revolving credit facility bear interest, at our option, at either a base rate plus an applicable margin ranging from 1.5% to 2.5% per annum or the Eurodollar rate plus an applicable margin ranging from 2.5% to 3.5% per annum, depending on our credit ratings as determined by Standard & Poor’s and Moody’s Investors Service credit rating services at the time of borrowing. Borrowings under the term loan bear interest, at our option, at a base rate plus 2.0% per annum or the Eurodollar rate plus 3.0% per annum. The base rate and the Eurodollar rate are effectively the Prime Rate and the London Interbank Offering Rate, respectively. Additionally, there is a commitment fee on the unused portion of the revolving credit facility of 0.5% per annum. The revolving credit facility may be used for acquisition financing and general corporate purposes. At December 31, 2004, availability under the revolving credit facility was $23.2 million.
On July 24, 2003, Standard & Poor’s raised the counterparty credit and bank loan rating on us to “BB-” from “B+.” On August 12, 2003, Moody’s Investors Service assigned a “B1” rating to our new credit facility with a stable outlook. On November 1, 2004, Standard & Poor’s placed our ratings on credit watch with negative implications, primarily due to a subpoena we received from the New York Attorney General and related industry announcements.
(a) As defined in our credit facility. Adjusted Pro Forma EBITDA is our actual trailing twelve months EBITDA adjusted to reflect the full year impact of businesses acquired or sold.
performance of the acquired company. At December 31, 2004, our capital lease obligations of $4.8 million related to purchases of furniture and equipment. In the past, we have used external financing to fund a portion of such purchases and plan on continuing to do so in the future.
million pre-tax impairment charge on the goodwill and other intangible assets of one of these operations. The historical results of operations for these entities have been reflected in our financial statements as discontinued operations in accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” To date, in the first quarter of 2005, we consummated the sale of two operations and are in active negotiations with potential buyers for the sale of the third operation.
In the latter part of 2001, we completed a strategic and financial review of our company and concluded that USIA, a third-party administrator, was no longer core to our mission, vision or strategy. Consequently, in January 2002, we announced our intention to sell USIA and subsequently sold the business in April 2002. The cash proceeds from the disposition of USIA were used to repay a portion of our bank borrowings, seller notes associated with the business and related transaction expenses. USIA is reflected in our financial statements as a discontinued operation.
The assets, liabilities and results of operations for these discontinued operations have been disaggregated in our financial statements. Discontinued operations had net (losses) income of $(7.8) million, $1.9 million and $(13.2) million for the years ended December 31, 2004, 2003 and 2002, respectively. The net loss for the years ended December 31, 2004 and 2002 includes a $9.5 million pre-tax impairment charge and a $7.2 million pre-tax loss on the sale of USIA, respectively.