You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II,
and “Financial Statements and Supplementary Data” and accompanying notes in Part II, Item 8 of this report. We derived the financial information as of December 31, 2005 and 2004 and for each of the years ended December 31, 2005, 2004 and 2003 from our audited financial statements and the related notes included in Part II, Item 8 of this report. Financial information as of December 31, 2003, 2002 and 2001 and for the years ended December 31, 2002 and 2001 was derived from audited financial statements and related notes that are not included in this filing. In 2005, 2004 and 2003 we acquired the assets or stock of 10, 4 and 6 businesses, respectively. As a result, the financial data for each of the five years set forth below are not directly comparable. On February 1, 2005, we acquired Summit Global Partners (“SGP”), the largest acquisition in the Company’s history. Please read Note 2, “Acquisitions” to our consolidated financial statements included in Part II, Item 8 of this report.
(a) All prior years’ amounts have been reclassified to reflect the impact of discontinued operations.
Also in 2005, we recorded acquisition integration expense of $8.6 million, which related primarily to the restructuring of certain SGP sales professionals’ and executives’ employment agreements in the amount of $8.1 million. In exchange for cash and/or restricted stock consideration, existing employment agreements were amended to conform to our standard compensation structure for sales professionals and regional executives. The $8.1 million in consideration to the SGP individuals was not included in purchase price for accounting purposes.
fit with our core business strategy. In June 2005, we approved a plan to sell or otherwise dispose of two additional operations in the Insurance Brokerage segment that exhibited significant earnings volatility or that did not fit with our core business strategy, one of which was acquired in the first quarter of 2005 in the SGP acquisition. As a result of these actions, we classified these entities as discontinued operations. See Note 17, “Discontinued Operations” in the Notes to Consolidated Financial Statements for details.
commissions paid by insurance companies on the placement of P&C and employee benefits insurance;
respect to industry practices, including contingent compensation arrangements. Along with a number of other insurance brokers, 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 have also received an Investigative Demand from the Department of Justice of the State of North Carolina seeking similar information. The investigations center upon, among other items, allegations of bid rigging, tying arrangements and other fraudulent or unlawful business practices. We have cooperated fully with these requests and will continue to cooperate with regulators as they refine, prioritize and/or expand the areas of inquiry in their subpoenas and information requests.
In addition to the state Attorney General investigations described above, a number of state departments of insurance have begun inquiries into compensation practices of brokers, agents and insurers as they affect consumers in their respective states. We have received and responded, or are in the process of responding, to inquiries from insurance regulators in several states.
The resolution of these matters may harm our business and/or lead to a decrease in or elimination of contingent commissions and override commissions, which would have a material adverse impact on our consolidated financial results. Due to the uncertainties involved, management cannot reasonably estimate a range of possible loss.
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
On August 1, 2005, in the multidistrict litigation pending in the United States District Court for the District of New Jersey, the plaintiffs filed a First Consolidated Amended Commercial Class Action Complaint and a First Consolidated 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 and unjust enrichment. The Consolidated MDL Complaints, like the predecessor complaints, focus the allegations of fact upon defendants other than ourselves. We have moved to dismiss the Consolidated MDL Complaints. None of the plaintiffs in any of the actions has set forth the amounts being sought in the particular actions.
We believe we have substantial defenses to the claims made in these class action proceedings, intend to defend ourselves vigorously and have not recorded a loss contingency for any of these lawsuits, as we believe the probability of exposure to a loss is remote at this time.
Near North Insurance Litigation (“Near North”). In October 2002, a group of affiliated plaintiffs, who are our competitors in the insurance brokerage and risk management business, filed a complaint in the Chancery Court of the Circuit Court of Cook County, Illinois, against us and two of our Illinois-based and one of our California-based officers/employees who previously worked for one of the plaintiffs, various other third-party individuals and an insurance brokerage. Plaintiffs’ complaint seeks from all defendants unspecified compensatory damages and punitive damages related to claims for, among other things, tortious interference with client relationships, violation of state trade secrets laws and civil conspiracy. We, our officers and employees asserted various defenses to this action, and our insurance carriers are involved in the defense of the litigation. In March 2003, our California-based officer was dismissed from the litigation. In November 2003, the Illinois court dismissed all of the claims asserted against us and our officers and employees for failing to meet Illinois pleading requirements and the court gave plaintiffs an additional opportunity to attempt to meet those requirements. In December 2003, plaintiffs filed a third amended complaint and in February 2004, we filed another motion to dismiss all claims asserted against us and our officers and employees based on several grounds, including the grounds previously accepted by the court. On October 1, 2004, the Illinois court again dismissed all of the claims asserted against us and our officers and employees. A hearing was held before the Illinois court on October 15, 2004, at which the judge ruled that the plaintiffs could not seek to re-plead certain claims against us. However, as to certain remaining claims, the judge granted leave to file a fourth amended pleading against us and our officers and employees.
Plaintiffs filed a fourth amended complaint which we believe failed to state any amended claims against us, and we filed a motion to dismiss that complaint. On September 5, 2005, the court dismissed all claims against us with prejudice. Near North will be able to appeal from this dismissal after a final appealable order is entered by the court. We continue to believe that the plaintiffs’ allegations against us are without merit.
The storms which occurred in the third quarter of 2005 in the Gulf Coast and Florida make it likely that premium rates for property in catastrophe-prone geographic areas will increase in the near term. However, through the remainder of 2005 we did not see a material positive impact to our revenues attributable to increasing premiums due to the storm losses. It is also possible that rates for Florida-based risks, one of the few markets not significantly affected by the soft market, will continue to increase. It is not possible to predict the ultimate effect, if any, of these catastrophic storms on the broader P&C market; however, if the soft market slows, or we see rates increase in some or most lines of coverage, our P&C insurance brokerage revenues may be positively impacted.
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, we believe that 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 spending by some of our corporate clients has led to benefit cut-backs and lower expenditures on consulting and other fee-based services. Our employee benefits business is most affected by employment levels and by the strength of the economy. Factors such as a tight labor market may 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 may increase 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 reflected in our Health & Welfare revenues as employers continued to mitigate medical cost increases.
Cash earnings per share, which we define as income from continuing operations plus amortization of intangible assets on a diluted per share basis. (In 2005 and 2004, cash earnings per share was adjusted for expenses related to acquisition integration efforts, the margin improvement plan and other charges.)
You should not consider these financial measures as alternatives to other financial measures determined in accordance with accounting principles generally accepted in the United States of America, which we refer to as GAAP, or as alternatives to cash flows from operating activities, investing activities or financing activities, or as a measure of liquidity. In addition, please note that because not all companies calculate these financial measures similarly, the presentation of these measures in this report is not necessarily comparable to those of other companies.
We believe that growing revenues must start with keeping our existing clients. We emphasize client service and account retention in our company best practices. Additionally, within our client base, we have identified
what we call stewardship accounts. Stewardship accounts are generally our larger accounts and in total comprise approximately one third of our total revenues. Each account has an annual stewardship plan, which includes periodic client meetings, timely pre-renewal procedures and an annual meeting with an executive client advocate.
We believe that our sales management model is among the most disciplined in our industry. Sales management begins with each sales professional’s annual plan, which considers renewing business and expectations of new and lost accounts. Sales professionals are required to use a sales force automation system to track their sales activity, including sold business and prospecting activity. Each sales professional’s activity is reviewed not less than bi-weekly by local management in formal sales meetings and monthly by Corporate management.
We are focused on increasing margins by restructuring the mix of incentive versus guaranteed compensation, consolidating office space and back-office processes, standardizing our sales professionals’ compensation formula, implementing best practices in operations, leveraging our purchasing power and lowering the cost of our information technology through the consolidation of data centers. We benchmark all expense categories and work with operating company management to develop and implement remediation plans for business units performing below our standards. Additionally, we continue to capitalize on opportunities to leverage our corporate and other fixed costs across a greater revenue base by acquiring “fold-in” and other accretive businesses within our current geographic footprint.
In most acquisitions, we issue a combination of cash, seller notes and/or common stock. We also frequently structure our acquisition agreements to include purchase price payments contingent upon reaching specified financial targets, commonly referred to as earn-outs, which are paid in a combination of cash, seller notes and common stock and are treated as adjustments to purchase price when the contingency is resolved. Additionally, many of our acquisitions have provisions for reduced consideration based on the failure to meet certain financial targets. All acquisitions greater than $5.0 million in aggregate purchase price require approval of our Board of Directors and, if greater than $1.5 million in aggregate purchase price, also require that we give notice to our bank lenders. Please read Note 2, “Acquisitions” to our Consolidated Financial Statements included in Part II, Item 8 of this report for more information on acquisitions.
We centrally manage our target acquisitions 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.
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 within our existing geographic footprint of operations to maximize efficiencies and continue to build-out the balanced revenue mix of P&C and employee benefits business; however, we will consider strategic opportunities in new geographies if they are compelling.
On September 1, 2005, we acquired Richard B. Cross & Associates, Inc. (“CRO”), a retail employee benefits operation. The aggregate preliminary purchase price of approximately $13.8 million, consisting of a cash down-payment of $11.7 million and debt issued of $2.1 million, was allocated primarily to goodwill and intangible assets. There is also a potential for contingent consideration based upon specific growth incentives and identified revenues through December 31, 2008. This acquisition is included in the Insurance Brokerage segment.
Six additional acquisitions were completed during 2005, none of which had acquired assets greater than $5.0 million. The total aggregate preliminary purchase price of approximately $12.0 million, consisting of cash of $10.3 million, an obligation on one acquisition to pay minimum additional future consideration of $1.5 million and shares of our common stock valued at $0.2 million, was allocated primarily to goodwill and intangible assets. In substantially all of the acquisitions, there is a contingent consideration portion based primarily upon retained revenues. Five of the acquisitions are included in our Insurance Brokerage segment and the sixth acquisition is included in our Specialized Benefits Services segment.
Quarterly fluctuations in revenues and Operating Income make our performance less predictable due to our life insurance, core benefits and specialized benefits services revenues. The timing of certain aspects of our revenue stream, particularly in the Specialized Benefits Services segment, makes comparisons of any period of
less than a full year difficult. We have implemented various strategies to reduce the impact of seasonal and uneven revenue streams, such as diversification of our business model for enrollment business to generate more revenue in the first three quarters of the year and divesting significantly volatile non-core business. We continue to focus on strategies that will provide a more predictable revenue stream; however, we cannot predict if we will be successful in these efforts or if market or other changes will result in a similar or greater level of unpredictability.
Our consolidated financial statements are prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Some of our accounting policies require management’s judgment to estimate values of assets, liabilities, revenues or expenses. In addition, it may require significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, to determine the most appropriate accounting treatment. We believe the following significant accounting estimates and policies are material to our financial condition or results of operations and are subject to a higher degree of subjectivity and/or complexity. We continually evaluate our estimates, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. If actual performance should differ from historical experience or if our assumptions were to change, it may materially impact our financial condition and results of operations.
As reported in our Form 10-Q for the quarterly periods ended September 30, 2004, June 30, 2005 and September 30, 2005, as part of our review of internal controls in compliance with Sarbanes-Oxley Section 404, we determined the need to enhance field office and corporate controls over our receivables (and related producer compensation expense) recorded for revenue on policies billed directly by insurance companies, or direct bill receivables. Beginning in the third quarter of 2004, we implemented a new system called Captiva, which allows us to calculate and record the receivable and revenue and the related compensation payable and expense for each commercial lines P&C direct bill policy at the time it is effective. As a result of this process, we have obtained additional information which management has utilized to adjust its estimate of the direct bill receivable and related compensation payable. For the year ended December 31, 2005, the effect of the change in estimate was a decrease to our direct bill revenues of $6.7 million and a decrease in the related producer compensation expenses of $0.6 million. As of December 31, 2005, we have completed our migration to the improved estimation methodology for direct bill and do not expect any further material adjustments.
We maintain allowances for bad debts and estimated policy cancellations on our Insurance Brokerage business 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
Future events could cause management to conclude that impairment of our goodwill or other intangible assets exists, which may have a material adverse effect on our financial position or results of operations.
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 pursued 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 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. Except as otherwise discussed in “Insurance Industry Investigations and Other Developments,” 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 Other Developments” above.
Certain amounts have been reclassified and presented in all periods as discontinued operations to reflect the decisions in 2005 and 2004 to sell seven operations that either exhibited significant earnings volatility or that did not fit with our core business strategy. Please read Note 17, “Discontinued Operations” to our Consolidated Financial Statements included in Part II, Item 8 of this report.
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 year-over-year growth in revenues related to the success or failure of our ability to execute on our sales and client retention strategies. These financial measures should not be considered as an alternative to other financial measures determined in accordance with GAAP.
We believe that many analysts and investors regularly rely on non-GAAP financial measures to provide a financial measure by which to compare a company’s assessment of its operating profitability against that of its peers. We believe that investors use organic revenue growth (decline) to provide a financial measure by which to compare a company’s internally generated (as opposed to acquired) revenue to that of its peers. Organic revenue growth (decline) may be helpful because it eliminates the impact of acquired revenue from total revenues. This financial measure should not be considered as an alternative to other financial measures determined in accordance with GAAP.
Compensation and Employee Benefits Expenses. For 2005, the increase was primarily due to the effect of acquisitions and to an increase in variable compensation of $7.0 million due to improved operating results. As a percentage of revenues, compensation and employee benefits expenses were 57.1% and 56.7% for 2005 and 2004, respectively.
Total expenses. The increase in total expenses was due to the items noted above and, primarily, to an increase in acquisition integration expense of $8.3 million, an increase in amortization expense of $7.5 million due to the impact of recent acquisitions, an increase in interest expense of $6.5 million due to greater borrowings at higher interest rates, partially offset by a decrease in margin improvement plan expense of $4.2 million.
Revenues. Of the $62.2 million in revenue growth, $53.2 million was due to acquisitions, net of disposed businesses, and $9.0 million was due to organic growth (including contingents, interest and other income). Organic revenue growth in 2004 was negatively affected by the softening rate environment for P&C insurance products and a decline in contingent and other income net of acquired business.
Other Operating Expenses. For 2004, the increase was primarily due to the effect of acquisitions. Additionally, for 2004, we incurred a net increase of $2.6 million in costs related to the implementation of Sarbanes-Oxley Section 404 procedures and a net increase of $0.7 million related to legal fees and costs related to various insurance industry investigations over the comparable period in 2003. As a percentage of revenues, other operating expenses were 23.1% for 2004, compared to 22.1% for 2003.
Income From Continuing Operations. Comparisons of 2004 to 2003 are negatively affected by the fact that in 2004 we recorded a provision for income taxes at an approximate 44.1% effective rate; whereas in 2003, the reversal of a valuation allowance in the deferred tax assets resulted in an income tax benefit of $5.0 million. The increase in income tax expense for 2004 over the same period in 2003 was $17.7 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.
respectively. Market conditions include the effect on our commission revenues due to the impact of premium rate changes and changes in our clients’ underlying exposure base. In 2005 and 2004, market conditions were soft in the P&C market, leading to organic revenue declines in that line of business. However, the market for employee benefits, which typically runs in a counter cycle to P&C, was strong, significantly offsetting the decline in P&C revenues. Also affecting organic revenue growth in 2005 was the $5.3 million adjustment related to direct bill. P&C net commissions and fees represented 55.0%, 56.7% and 58.5% of our total consolidated net commissions and fees in 2005, 2004 and 2003, respectively, and employee benefits net commissions and fees represented 35.9%, 36.5% and 36.3% of our total consolidated net commissions and fees in 2005, 2004 and 2003, respectively.
Income from continuing operations before income taxes in the Insurance Brokerage segment was $70.2 million, $63.2 million and $62.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. The increases in 2005 and 2004 were due to the reasons noted above.
The increase in total expenses in 2005, compared to 2004, is primarily due to acquisitions and to organic growth of revenues. The increase in total expenses in 2004, compared to 2003, was due primarily to product sales
mix and the timing of core enrollment sales. As a percentage of revenues, total expenses were 83.7%, 85.9% and 101.9% in 2005, 2004 and 2003, respectively. The decrease in total expenses as a percentage of revenues in 2005, compared to 2004, was primarily due to the positive impact of acquisitions, particularly our acquisition of the worksite marketing business owned by Century Business Services, Inc. (“CBIZ”) in the third quarter of 2005. CBIZ’s revenue stream is seasonal, contributing significantly to our revenues and income from continuing operations in the fourth quarter. The decrease in total expenses as a percentage of revenues in 2004, compared to 2003, was primarily due to product sales mix and timing of core enrollment sales.
Loss from continuing operations before income taxes in the Corporate segment was $46.5 million, $38.1 million and $33.0 million in 2005, 2004 and 2003, respectively. The increases in 2005 are primarily attributable to the items noted above.
While we are always focused on increasing margins, the 2004/2005 margin improvement plan was unique in its magnitude and that it principally addressed legacy issues from prior acquisitions. Similar future expenses are likely to be prospective and related to new acquisitions and will be captured as integration costs. While there can be no guarantee, we do not expect another margin improvement plan initiative similar in scope to the 2004/2005 plan. However, changes in economic circumstances, such as the loss of material revenues, could cause us to have to incur material similar expenses.
In August 2003, we completed a $155.0 million senior secured credit facility, further described below under “Liquidity and Capital Resources-Long-Term Debt.” The proceeds from borrowings under the credit facility 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 are currently in the process of refinancing and restructuring our credit facility. If we are successful, we will be required to write off any deferred financing costs related to our current term loan. At December 31, 2005, the balance in deferred financing costs was $2.3 million
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. Prior to our IPO, we relied on our ability to generate cash flows from our financing activities, such as the issuance of debt and equity, to supplement our cash flows from operations which were insufficient to fund our business operations. Following our IPO, we substantially reduced our long-term debt, but still lacked sufficient cash flows from operations to fund our foreseeable required debt payments. In 2003 we entered into a new credit facility, as further described below, and now consider our liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.
When considering our liquidity, it is important to note that we hold cash in a fiduciary capacity as a result of premiums received from clients that have not yet been paid to insurance carriers. The fiduciary cash is recorded as an asset on our balance sheet with a corresponding liability, net of commissions, to insurance carriers. We earn interest on these funds during the time between receipt of the cash and payment to insurance carriers. In some states, fiduciary cash must be kept in separate bank accounts subject to specific guidelines, which generally emphasize capital preservation and liquidity, and is not available to service debt or for other corporate purposes. Insurance brokerage transactions typically generate large cash flows, and the timing of such cash flows can significantly affect the net cash balances held at month end. Additionally, the seasonality of some of our businesses, particularly in the Specialized Benefits Services segment, can create period-to-period fluctuations in our cash flows.
Our 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. 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, 2005, availability under the revolving credit facility was $28.8 million having been reduced by $1.2 million for an outstanding letter of credit.
Net cash used in continuing investing activities totaled $141.8 million, $96.9 million and $21.0 million for the years ended December 31, 2005, 2004 and 2003, respectively, which principally reflects acquisition activities and capital expenditures. Cash expenditures for acquisitions amounted to $129.5 million, $89.0 million and $18.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Capital expenditures amounted to $10.9 million, $11.1 million and $8.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. The net effect of cash provided by (used in) discontinued investing activities was $6.2 million, $(0.1) million and $(0.1) million for the years ended December 31, 2005, 2004 and 2003, respectively.
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 2005 and 2004 we paid $4.6 million and $8.3 million, respectively, for state and federal income taxes.
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. In the third quarter of 2005, we received a waiver from our lending institutions related to the sale of stock of one subsidiary classified in discontinued operations. As of December 31, 2005 we were in compliance with all such covenants.
We maintain ratings on our counterparty credit and bank loan with Standard & Poor’s, Moody’s Investors Services and FitchRatings. Standard & Poor’s has assigned us a BB- rating (with a negative outlook), Fitch a BB- rating and Moody’s Investors Services has rated us a B1.
As of December 31, 2005, we were in compliance with the covenants in our credit facility. The significant financial covenants of our credit facility were as follows:
Of our $236.5 million in long-term debt at December 31, 2005, $215.0 million was subject to variable interest rates, most of which is eligible to be prepaid. The variable interest rate payment projections in the table above assume that interest rates stay fixed at the December 31, 2005 rates and that we do not prepay any long-term debt with variable interest rates.
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, 2005, we estimate the future significant contingent purchase price payments to be between $20.2 million and $35.5 million. These payments will be payable in a combination of cash, common stock and debt. These amounts primarily 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 $5.4 million of contingent purchase price payments in 2005. 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.
Some of our common stockholders have various put rights that are exercisable upon specific events. Please read Note 7, “Redeemable Securities” to our Consolidated Financial Statements included in Part II, Item 8 of this report.
We have one letter of credit totaling $1.2 million established as collateral for our workers’ compensation insurance program. Letters of credit which are outstanding reduce the borrowing availability under our revolving credit facility. The letter of credit referred to automatically renews annually on the anniversary date of issuance with a final expiration five business days prior to August 11, 2007, the maturity date of our revolving credit facility. Such off-balance sheet commitments are historically immaterial and we do not anticipate an increase in their importance to us in terms of liquidity or other benefits.
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 $(10.2) million, $(7.8) million and $1.7 million for the years ended December 31, 2005, 2004 and 2003, respectively. The net loss for the years ended December 31, 2005 and 2004 include pre-tax impairment charges of $5.8 million and $9.5 million, respectively.