The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes included in Part II-Item 8 of this report. Certain information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements that involve risks and uncertainties. See “Forward Looking Statements” included in this report. Our actual results may differ materially from the results discussed in the forward-looking statements because of various factors, including those discussed above and elsewhere herein.
commissions paid by insurance companies on the placement of P&C and employee benefits products;
Other costs of doing business include travel, meals and entertainment, building occupancy costs, such as lease expense and related office expenses, legal and other professional services and insurance. Significant non-operating costs include amortization of intangible assets as a result of our history of acquisitions and interest cost on our debt balances.
Since October 2004, the insurance industry has been under a significant level of scrutiny by various regulatory bodies, including state Attorneys General and the departments of insurance for various states, with respect to industry practices, including contingent compensation arrangements. We have received subpoenas from the Office of the Attorney General of the State of Connecticut, the Office of the Attorney General of the State of New York and the Florida Attorney General’s Office requesting documents and seeking information as part of their industry-wide investigations relating to pricing and placement of insurance. We believe the investigations center upon, among other items, alleged non-disclosure of contingent compensation arrangements and other allegedly unlawful business practices. We have cooperated fully with these requests and intend to continue to cooperate with regulators as they refine, prioritize and/or expand the areas of inquiry in their subpoenas and information requests.
Following the allegations of bid rigging and price fixing in the lawsuit filed by the Office of the Attorney General of the State of New York against Marsh and McLennan Companies, Inc., we retained outside counsel, Akin Gump Strauss Hauer & Feld, LLP (“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 the review will not only address the areas that the regulators are examining, but will also help evaluate where we can make additional operational or business practice changes or improvements.
These insurance carriers have, in certain cases, also agreed to pay substantial sums, change their business practices and support future legislative efforts to ban the payment and receipt of contingent commissions. Although we have chosen to make certain business practice changes consistent with some of the arrangements entered into by other carriers, we have not paid any amounts to government authorities and also have not discontinued accepting contingent commissions. Additionally, although market or other external forces may ultimately cause our contingent commission agreements to cease or be substantially limited and/or restructured, during the twelve months ended December 31, 2006, we received substantially all of our contingent commissions payable under the agreements in place during 2005. Furthermore, many of our carriers, with whom we have historically had contingent arrangements, have entered into contingent commission agreements for 2007 in
a form and structure generally consistent with prior agreements. To the extent any of these carriers have ceased or substantially restructured their contingent commission agreements, these carriers have tendered new agreements providing for supplemental commission opportunities in lieu of prior contingent commissions. Our revenues and income from continuing operations from contingent and override commissions were approximately $26.1 million, $25.8 million and $19.0 million for 2006, 2005 and 2004, respectively.
Industry Class Action 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 and state breach of fiduciary duty and unjust enrichment laws. The amended complaint seeks class certification, treble damages for the alleged injury suffered by the putative plaintiff class and other damages. We were also named as a defendant in “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. In April 2005, we were served in another copycat class action lawsuit, captioned Palm Tree Computers Systems, Inc. et al. 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 and later removed to the United States District Court for the Middle District of Florida, Orlando Division, Case No. 6:05-CV-422-2ZKRS. A similar copycat class action complaint captioned Bensley Construction, Inc. v. Marsh & McLennan Companies, Inc. et al., No. ESCV2005-0277 (Essex Superior Court, Massachusetts) was served upon us in May 2005. This action was removed to the United States District Court for the District of Massachusetts. Like the Opticare complaint, these complaints contain no particularized allegations of wrongdoing on our part. In February 2005, the Judicial Panel on Multidistrict Litigation transferred the actions then pending to the United States District Court for the District of New Jersey for coordinated or consolidated pretrial proceedings. Subsequently, the Judicial Panel on Multidistrict Litigation also transferred the Palm Tree and Bensley lawsuits to the same court for the same purposes. Recently, the plaintiff in Bensley withdrew its claims.
On August 1, 2005, in the multidistrict litigation pending in the United States District Court for the District of New Jersey (the “Court”), the plaintiffs filed a First Consolidated Amended Commercial Class Action Complaint and a First Consolidated Amended Employee Benefits Class Action Complaint (the “Consolidated MDL Complaints”) that purport to allege claims against us based upon RICO, federal and state antitrust laws, breach of fiduciary duty and aiding and abetting breaches of fiduciary duty and unjust enrichment. The Consolidated MDL Complaints, like the predecessor complaints, focus the allegations of fact upon defendants other than us. We have moved to dismiss the Consolidated MDL Complaints and have also opposed plaintiffs’ motions for class certification. Recently, in response to the Court’s directive that the plaintiffs further substantiate their claims in writing, the plaintiffs submitted more particularized allegations against the various defendants. None of the plaintiffs in any of the actions has set forth the amounts being sought in the particular actions. Two of the defendant groups have entered into settlement agreements with the plaintiffs, one of which has been approved by the Court and the other remains subject to Court approval.
In general, net written premiums in the P&C insurance market demonstrate a resistance to price volatility, as most small and mid-sized businesses maintain budgets for their insurance coverage purchases. As a result, during periods of declining premium rates, insurance buyers tend to reduce deductibles, increase their limits of coverage and purchase new coverage, resulting in relatively consistent premiums from year to year. During periods of increasing premium rates, customers generally try to maintain their overall insurance cost by reducing coverage, self-insuring some risks and maintaining higher deductibles. During the period from 2000 to 2005, total commercial P&C insurance premium volume on a dollar basis in the United States increased every year by an average of 7.8%, according to AM Best. Insurance brokerage firms that focus on small to mid-sized businesses have historically grown revenues at a higher rate than the four largest insurance brokers due to their ability to increase market share and the fact that their compensation is principally commission based and thus tends to increase with premium levels.
The storms which occurred in the third quarter of 2005 in the Gulf Coast and Florida created devastating losses for the insurance industry. This resulted in rising premium rates for property in catastrophe-prone geographic areas. Specifically, the market hardened for property in Florida and the Gulf Coast regions. There are also capacity issues, such as the ability for some clients to purchase wind coverage, leaving some of our clients unable to purchase the limits of insurance that they had in the past. 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, thereby negatively impacting our revenues. Our revenues attributable to these existing clients may continue below pre-2005 levels until they return to their previous coverage and deductibles.
Demand for employee benefits products and services is largely driven by employment levels in the economy. Pricing for these products and services is also driven by medical cost inflation. During the period from 2001 to 2005, total health insurance net premium volume on a dollar basis in the United States increased every year by an average of 7.0% according to AM Best. Over the years, the design and implementation of employee benefits programs have become significantly more sophisticated. For example, competition for executives, legislation affecting employee compensation and retirement planning have required businesses to offer new and creative programs to attract and retain talent. As businesses continue to struggle with pension deficits, healthcare costs and the constantly changing regulatory environment, demand is growing for brokers and consultants who can navigate the evolving landscape and mitigate the burdens of medical cost inflation and
The primary financial measures that we use to evaluate our performance are:
Cross-Selling. We believe we have a competitive advantage over other brokerage firms as a result of our balanced mix of products, which enables us to serve as a single source for a business customer’s insurance needs. We believe cross-selling enables us to increase Organic Revenue growth and improve client retention. Our culture, organizational structure and sales force incentives have been developed to motivate our sales professionals to cross-sell our broad range of products and services.
We expect to realize continued improvement in operating margins through the standardization of operations and practices throughout our organization. We establish target expense ratios for all of our regional operations and manage the size of these operations to optimize cost structure. Within our retail brokerage operations, we have organized each office into a consistent departmental structure, with each department accountable for its profit and loss. We share comparative efficiency metrics across the company with department leaders and have created incentives for management by tying their compensation to margin improvement. At the corporate level, we also continue to implement technology improvements and automation to further reduce administrative costs.
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 description of other significant accounting policies.
We maintain an allowance for bad debts and estimated policy cancellations based on our premiums, commissions and fees receivable and historical cancellation trends. The policy cancellations component represents a reserve against receivables for future reversals of commission revenue on insurance policies in force at year-end and is established through a charge to revenues, while the bad debt component is established through a charge to other operating expenses. The allowances are determined based on estimates and assumptions using historical data to project future experience, and, in the case of bad debts, a specific identification of questionable items. We periodically review the adequacy of the allowances and make adjustments as necessary. Future additions to the allowances may be necessary based on changes in the trend of write-offs or cancellations which could increase due to changes in economic conditions and/or our clients’ financial condition, which may have a negative impact on our results of operations. The allowance for bad debts and policy cancellations, including the cancellation allowance for enrollment revenue above, was $9.7 million and $7.3 million at December 31, 2006 and 2005, respectively, due to growth in our revenues and receivables, an acquisition in the benefits enrollment business and to one significant reserve on the accounts receivable in one of our locations.
We assess the recoverability of our goodwill and other long-lived assets at least once a year or as required based on triggering events. A triggering event is a change in business circumstances that indicates that the carrying value of the assets may not be recoverable. The carrying value of goodwill is evaluated at the segment level using an analysis to determine the fair value of the segment using both market valuation data, such as recent transaction multiples of revenue or profit and present value of future cash flow techniques. Reviews for triggering events and impairment of other long-lived assets are performed at the operating company level, one level below the segments, which is our determination of the lowest level of meaningful cash flows. Reviews for triggering events require the use of management’s judgment. Upon identification of a triggering event, we perform further analysis using cash flow projections or other market valuation data to determine if the carrying value of an asset is impaired. Both methods require substantial judgment. If, as a result of an impairment review, we find that the carrying value of an asset is in excess of the fair value, we would be required to take a charge against current earnings.
All of our acquisitions have been accounted for using the purchase method, and the net assets and results of operations of the acquired companies were included in our financial statements on their respective acquisition dates. Acquisitions may have provisions for contingent additional consideration if the acquired company achieves financial targets and, conversely, some acquisitions have provisions for a reduction in consideration if the acquired company does not meet targeted financial results. Additional or reduced consideration related to acquisition contingency provisions is reflected as an adjustment to goodwill and/or other long-lived assets when the contingency is resolved.
We follow a consistent methodology based on an estimate of discounted future cash flows derived from acquired client 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 based on historical attrition. Non-compete agreements and restrictive covenants are typically valued at an estimate of fair value using assumptions and projections assuming that no non-compete agreement exists and that the covenanters actively pursue our clients or employees. Non-compete agreements and restrictive covenants are amortized on a straight-line basis over the terms of the agreements, which generally 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 results of operations. Goodwill is not subject to amortization.
Determining the consolidated provision for income tax expense, deferred tax assets and liabilities and any related valuation allowance involves judgment. GAAP requires deferred tax assets and liabilities (“DTAs” and “DTLs,” respectively) to be recognized for the estimated future tax effects attributed to temporary differences and carry-forwards based on provisions of the enacted tax law. The effects of future changes in tax laws or rates are not anticipated. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the financial statements. For example, we have a DTA because the tax bases of our accrued liabilities are smaller than their book bases. Similarly, we have a DTL because the book basis of our goodwill exceeds its tax basis. Carry-forwards primarily include items such as net operating losses (“NOLs”), which can be carried forward subject to certain limitations. A summary of the significant DTAs and DTLs relating to our temporary differences and carry-forwards is included in Note 9, “Income Taxes” to our Consolidated Financial Statements included in Part II, Item 8 of this report.
At December 31, 2006, our current DTAs totaled $11.7 million, and our non-current DTLs totaled $25.8 million. We are required to reduce DTAs (but not DTLs) by a valuation allowance to the extent that, based on the weight of available evidence, it is “more likely than not” (i.e., a likelihood of more than 50%) that any DTAs will not be realized. Recognition of a valuation allowance would decrease reported earnings on a dollar-for-dollar basis in the year in which any such recognition was to occur. The determination of whether a valuation allowance is appropriate requires the exercise of management’s judgment. In making this judgment, management is required to weigh the positive and negative evidence as to the likelihood that the DTAs will be realized.
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.
During 2006, we acquired six insurance agencies and 14 books of business, primarily expiration rights, for expected aggregate consideration of $229.6 million, including estimated contingent payments.
On July 12, 2006, we acquired Frank Siddons Insurance (“Siddons”), a P&C insurance operation. The aggregate preliminary purchase price of approximately $2.5 million, consisting entirely of cash, was allocated primarily to other intangible assets. This acquisition is included in the Insurance Brokerage segment.
On September 1, 2006, we acquired Leader Associates (“Leader”), a P&C insurance operation. The aggregate preliminary purchase price of $20.4 million, consisting entirely of cash, was allocated primarily to goodwill and other intangible assets. This acquisition is included in the Insurance Brokerage segment.
On November 7, 2006, we acquired Kibble & Prentice Holding Company (“Kibble”), a P&C insurance and employee benefits operation. The aggregate preliminary purchase price of approximately $88.2 million, consisting entirely of cash, was allocated primary to goodwill and other intangible assets. This acquisition is included in the Insurance Brokerage segment.
On February 3, 2005, we acquired Summit Global Partners, a P&C insurance and employee benefit operation. The aggregate preliminary purchase price of approximately $119.9 million, consisting of cash of $65.2 million, shares of our common stock valued at $26.5 million and assumed liabilities of $28.2 million, was allocated primarily to goodwill and other intangible assets.
The following table summarizes expenses related to integration efforts and the margin improvement plan for each of the three years ended December 31, 2006, 2005 and 2004:
Comparisons of 2006, 2005 and 2004 are affected by adjustments to revenues and related compensation expense in 2006 and 2005 for a change in estimation methodology of direct bill commissions. For the year ended December 31, 2006, we recorded an adjustment that decreased revenues by $1.9 million. For the year ended December 31, 2005, we recorded an adjustment that decreased revenues by $6.7 million and decreased related compensation expense by $0.6 million. Also, for the year ended December 31, 2006, we recorded a $2.5 million downward adjustment to direct bill accounts receivable in the Specialized Benefits Services segment related to a revision of estimated policy cancellation trends.
We define Organic Revenue growth (decline) as the period-to-period change in revenues, excluding 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 divesture. We present Organic Revenue growth (decline) and believe it is relevant because it allows us to discern the year-over-year change in revenues related to the success or failure of our ability to execute on our sales and client retention strategies. This financial measure should not be considered as an alternative to other financial measures determined in accordance with GAAP.
Revenues. Of the $43.3 million in revenue growth, $39.7 million was due to acquisitions, net of disposed businesses, and $3.6 million was due to Organic Revenue growth (including contingents, interest and other income). Organic Revenue growth in 2006 was negatively affected by sales professional turnover and the resulting impact on client retention, the soft rate environment for many P&C insurance products, the fourth quarter adjustments to revenues and direct bill receivables and a decline in contingents and overrides. Organic Revenue growth in 2006 was positively impacted by other income and the prior year direct bill adjustments.
Income From Continuing Operations. Comparisons of 2006 to 2005 are primarily affected by the expense and revenue variances noted above.
Compensation and Employee Benefits Expenses. For 2005, the increase of $61.8 million was primarily due to the effect of acquisitions and an increase in incentive compensation expense based on favorable operating results for the year. As a percentage of revenues, compensation and employee benefits expenses were 57.1% and 56.7% for 2005 and 2004, respectively.
individual and group health, life and disability insurance, which we refer to as employee benefits products;
Comparisons of 2006, 2005 and 2004 are affected by adjustments to revenues and related compensation expense in 2006 and 2005 for a change in estimation methodology for direct bill commissions. For the year ended December 31, 2006, we recorded an adjustment that decreased revenues by $1.9 million. For the year ended December 31, 2005, we recorded an adjustment that decreased revenues by $5.3 million and decreased related compensation expense by $0.6 million.
The $19.9 million increase in total expenses in 2006, compared to 2005, is primarily attributable to acquisitions, a $3.6 million increase in amortization expense due to acquisitions, a $3.2 million impairment charge and a $2.2 million increase in stock-based compensation due to option expense. The expense increases were mitigated by a decrease of $13.7 million in margin improvement plan and acquisition integration expenses in 2006. The $79.2 million increase in total expenses in 2005, compared to 2004, is primarily attributable to acquisitions and a net increase in expenses related to our margin improvement plan and acquisition integration of $6.0 million. As a percentage of revenues, total expenses were 81.9%, 84.9% and 83.2% in 2006, 2005 and 2004, respectively. The decrease in total expenses as a percentage of revenues in 2006, compared to 2005, was primarily due to the net decrease in expenses related to our margin improvement plan and to integration efforts. The increase in total expenses as a percentage of revenues in 2005, compared to 2004, was primarily due to the increase in margin improvement plan expenses and integration efforts.
Income from continuing operations before income taxes in the Insurance Brokerage segment was $91.3 million, $70.2 million and $63.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. The increases in 2006 and 2005 were due to the reasons noted above.
Comparisons of 2006, 2005 and 2004 are affected by a $1.4 million adjustment to revenues in 2005 for the change in estimation methodology for direct bill commissions. Additionally, in 2006, we adjusted the direct bill receivable and revenues downward by $2.5 million for a change in the estimate of our insurance policy cancellation rate on two large enrollment cases.
(Loss) gain from continuing operations before income taxes in the Specialized Benefit Services segment was $(0.6) million, $7.1 million and $3.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. The variances in 2006 and 2005 were primarily due to the reasons noted above.
The $6.3 million increase in Corporate expenses in 2006, as compared to 2005, was primarily attributable to an increase in interest expense of $5.8 million, an increase in early extinguishment of debt of $2.1 million and an increase in non-cash stock-based compensation of $1.8 million, somewhat offset by a decrease in expenses related to insurance industry investigations, Sarbanes-Oxley 404 compliance and corporate move costs of $3.8 million. The $9.7 million increase in Corporate expenses in 2005, as compared to 2004, was primarily attributable to an increase in interest expense of $6.6 million and an increase in compensation expense of $4.2 million ($2.1 million related to incentive compensation due to better operating performance), offset by a decrease in margin improvement plan expense of $1.8 million and a net decrease in expenses related to insurance industry investigations, Sarbanes-Oxley 404 compliance and corporate move costs of $0.8 million. As a percentage of total consolidated revenues, net Corporate expenses were 9.9%, 9.5% and 9.5% in 2006, 2005 and 2004, respectively.
Loss from continuing operations before income taxes in the Corporate segment was $54.1 million, $46.5 million and $38.1 million in 2006, 2005 and 2004, respectively. The increase in 2006 is primarily attributable to the items noted above.
Liquidity: Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, capital expenditures, debt service, acquisitions, other commitments and contractual obligations. We consider our liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.
We believe that our projected cash flows generated from operations, cash and cash equivalents on hand of $36.7 million and our availability under our revolving credit facility of $23.8 million as of December 31, 2006, should be sufficient to fund our estimated $13.3 million in debt principal repayments, our working capital needs, acquisitions and budgeted $7.9 million in capital expenditures through at least December 31, 2007. Our liquidity thereafter will depend on our financial results, results of operations, acquisition activity and future available sources of additional equity or debt financing. 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 “Risk Factors” in Part I, Item 1A of this report.
Historical Cash Flows: Cash and cash equivalents at year-end increased (decreased) $9.4 million, $24.4 million and $(42.7) million in 2006, 2005 and 2004, respectively. Net cash provided by continuing operating activities totaled $67.3 million, $61.1 million and $44.4 million for the years ended December 31, 2006, 2005 and 2004, respectively, and is principally dependent upon our results of operations and the timing of collection of premiums receivable and payments of premiums payable. Cash provided by operating activities in 2006 was negatively affected by the repayment of liabilities existing at December 31, 2005 related to our margin improvement plan, as well as a continued shift to direct bill business. Net cash provided by (used in) discontinued operating activities was $2.1 million, $(5.6) million and $(0.4) million for the years ended December 31, 2006, 2005 and 2004, respectively.
Net cash used in continuing investing activities totaled $199.2 million, $141.8 million and $96.9 million for the years ended December 31, 2006, 2005 and 2004, respectively, which principally reflects acquisition activities and, to a lesser extent, capital expenditures. Cash expenditures for acquisitions amounted to $194.7 million, $129.5 million and $89.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. Capital expenditures were $11.4 million, $10.9 million and $11.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. The net effect of cash provided by (used in) discontinued investing activities was $6.2 million and $(0.1) million for the years ended December 31, 2005 and 2004, respectively. There were no cash flows from discontinued investing activities in 2006.
Net cash provided by continuing financing activities totaled $139.3 million, $106.5 million and $11.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. On March 24, 2006, we entered into a new $285.0 million senior secured credit facility. The credit facility is structured as follows: a $75.0 million revolving credit facility maturing in 2011, and a $210.0 million term loan. Both the term loan and the revolving credit facility have an “accordion” feature, which allows us to expand our borrowings under each up to $310.0 million and $100.0 million, respectively, without lender approval. On October 16, 2006, we borrowed $50.0 million of the $100.0 million of term loan debt available through the accordion feature and then on November 6, 2006, we borrowed the remaining $50.0 million. The proceeds were used to repay borrowings (but not reduce commitments) outstanding under the revolving credit facility and to fund the Kibble acquisition. In 2005, we increased our existing term loan resulting in gross proceeds of $90.0 million. We also raised $36.2 million from the sale of our common stock as a result of the settlement of the remaining portion of our forward sale agreements where we issued 2,244,000 shares of our common stock, along with stock options and employee stock purchase plan transactions. In addition, we made payments of $22.5 million for debt and repaid the $5.0 million outstanding at December 31, 2004 on our revolving credit facility. During 2004 we borrowed 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 1,781,000 shares of our common stock, along with stock options and employee stock purchase plan transactions. During 2006, 2005 and 2004, we repurchased common stock on the open market at a cost of $2.9 million, $4.0 million and $3.9 million, respectively. Net cash used in discontinued financing activities was $2.1 million and $0.8 million for the years ended December 31, 2005 and 2004, respectively. There were no cash flows from discontinued financing activities in 2006.
Income from continuing operations was $20.6 million, $18.0 million and $16.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. Based on 56,871,057, 55,963,311 and 48,242,035 weighted-average basic shares outstanding, income per share from continuing operations on a basic basis was $0.36, $0.32 and $0.33 for 2006, 2005 and 2004, respectively. Based on 57,839,194, 56,639,930 and 49,126,642 weighted-average diluted shares outstanding for the periods, income per share from continuing operations on a diluted basis was $0.36, $0.32 and $0.33 for 2006, 2005 and 2004, respectively.
We consummated our acquisition of SGP on February 3, 2005. Pursuant to the terms of the registration rights provisions of the Merger Agreement, we have on file with the SEC an effective 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 SGP acquisition.
On May 10, 2004, we announced that our Board of Directors authorized a limited stock repurchase plan. Using only proceeds, and any related tax benefit amounts from the exercise of stock options and warrants, we may, at our discretion, repurchase shares on the open market or in private transactions in order to help offset dilution from our equity compensation plans and previously issued warrants to purchase our common stock. The amount and timing of repurchases will be based upon the number of shares of our common stock which may be issued from time to time upon the exercise of stock options and warrants, market conditions and other factors. During 2006 we purchased 207,601 shares of our common stock on the open market under the limited stock repurchase plan at an aggregate cost of $2.9 million.
On March 24, 2006, we entered into a new $285.0 million senior secured credit facility, which replaced our prior credit facility in place since August 2003. The credit facility is structured as follows: a $75.0 million revolving credit facility maturing in 2011 and a $210.0 million term loan. Both the term loan and the revolving credit facility have an “accordion” feature, which allows us to expand our borrowings under each up to $310.0 million and $100.0 million, respectively, without lender approval. On October 16, 2006, we borrowed $50.0 million of the $100.0 million of term loan debt available through the accordion feature and on November 6, 2006, we borrowed the remaining $50.0 million. The proceeds were used to repay borrowings (but not reduce commitments) outstanding under our revolving credit facility and to fund the Kibble acquisition. The term loan is paid quarterly in installments of $0.8 million. The last quarterly installment of $295.0 million is due on March 24, 2011, the maturity date of the term loan. The proceeds from borrowings under the new credit facility were drawn to repay all amounts under the previously existing credit facility. We recorded approximately $2.6 million in fees and expenses related to the new credit facility, which have been capitalized and are being recorded to interest expense over the term of the credit facility. Additionally, in connection with this transaction, we expensed as an early retirement of debt $2.1 million in remaining capitalized financing costs from our previous credit facility.
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 0.75% to 1.25% per annum, or the Eurodollar rate plus an applicable margin, ranging from 1.75% to 2.25% per annum, based on our total leverage ratio as defined in the credit facility at the time of borrowing. Borrowings under the term loan bear interest, at our option, at either a base rate plus an applicable margin, ranging from 1.00% to 1.25% per annum, or the Eurodollar rate plus an applicable margin, ranging from 2.00% to 2.25% per annum, based on our total leverage ratio as defined in the credit facility at the time of borrowing. The base rate and the Eurodollar rate are effectively the Prime Rate and the London Interbank Offering Rate, respectively. There is also a commitment fee on the unused portion of the revolving credit facility of from 0.375% to 0.500% per annum, based on our total leverage ratio as defined in the credit facility. The revolving credit facility may be used for acquisition financing and general corporate purposes. At December 31, 2006, we had $50.0 million of loans outstanding and $1.2 million outstanding for a letter of credit with remaining availability under the revolving credit facility for additional borrowings of $23.8 million.
The credit facility contains various limitations, including limitations on our ability to pay dividends, buy-back our common stock and make other distributions to stockholders, borrowings and acquisitions. The credit facility also contains various financial covenants that must be met, including those with respect to fixed charges coverage and limitations on consolidated debt, net worth and capital expenditures. Failure to comply with the covenants may result in an acceleration of the borrowings outstanding under the facility. All of the stock of our subsidiaries and certain other identified assets are pledged as collateral to secure the credit facility. Additionally, each subsidiary guarantees our obligations under the credit facility. As of December 31, 2006 we were in compliance with all such covenants.
The weighted-average interest rate on our term loan was 7.44% for the year ended December 31, 2006 and 5.80% and 4.07% for the years ended December 31, 2005 and 2004, respectively, under our prior credit facility. The average interest rate on our term loan was 7.68% at December 31, 2006 and 6.74% at December 31, 2005 under our prior credit facility. The weighted-average interest rate on our revolver loans was 7.81% for the year ended December 31, 2006 and 5.92% and 5.28% for the years ended December 31, 2005 and 2004, respectively, under our prior credit facility.
We maintain ratings on our counterparty credit and bank loan with Standard & Poor’s and Moody’s Investors Services. Standard & Poor’s has assigned us a BB- rating (with a negative outlook) and Moody’s Investors Services has rated us a B1.
As of December 31, 2006, we were in compliance with the covenants in our credit facility. The significant financial covenants of our credit facility were as follows:
The table above does not include contingent payables, as the amount and timing of payments cannot be determined, which are described below.
At December 31, 2006 our other debt and capital lease obligations of $22.5 million consisted primarily of notes payable issued in conjunction with acquisitions. Some of these notes payable may be subject to reduction based on future performance of the respective acquired company to which each of these issuances related. At December 31, 2006, our capital lease obligations of approximately $1.8 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.
Of our $367.5 million in long-term debt at December 31, 2006, $360.1 million was subject to variable interest rates, most of which is eligible to be prepaid. The variable interest rate payment projections of $109.9 million in the table above assume that interest rates stay fixed at the December 31, 2006 rates and that we do not prepay any such debt.
We have structured our acquisition agreements to include contingent purchase price payments to be treated as adjustments to purchase price and capitalized when the contingency is resolved. At December 31, 2006, we estimate the future significant contingent purchase price payments to be between $53.4 million and $68.1 million. These payments will be payable primarily in cash. These amounts relate to acquisitions and will be reflected on our financial statements as a liability and additional purchase price when the contingency is resolved. We made approximately $12.2 million of contingent purchase price payments in 2006. Please read “Acquisition Strategy” above and Note 2, “Acquisitions” in our notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
We routinely enter into employment agreements with management and other key employees. Some of these contracts may provide for severance benefits in the event that we terminate the employment relationship without cause. Severance costs are expensed as incurred.