The Company leases its principal corporate office in Briarcliff Manor, New York, and its operating unit offices in various states. Information regarding lease commitments is set forth in Note 11-“Lease Commitments” to our Consolidated Financial Statements included in Part II, Item 8 of this report. The disclosure set forth in Note 11-“Lease Commitments” is incorporated herein by reference.
commissions paid by insurance companies on the placement of property & casualty (P&C) and Employee Benefits insurance;
fees paid directly by clients and other third-parties for employee benefit-related services (which we refer to as Health & Welfare when combined with Employee Benefits); and
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. Since these investigations and inquiries are ongoing, we cannot predict the effect that any investigation of any regulatory authority related to alleged anti-competitive practices in the insurance industry or to compensation arrangements, including contingent commissions between insurers and brokers, generally will have on the industry or our business.
On March 4, 2005, Aon Corporation announced that it had reached a comprehensive agreement with five agencies in three states to settle investigations relating to contingent commissions and other business practices. Parties involved in the settlement included the Attorneys General of New York, Illinois and Connecticut as well as the insurance departments of New York and Illinois. Elements of the agreement included: (1) creation of a $190 million restitutionary fund for eligible Aon clients; (2) commitment to new business practices that include heightened disclosure of compensation and elimination of certain questionable practices; and (3) establishment of a compliance committee of the board of directors.
Approximately 57.5% of our consolidated revenues in 2004 related to P&C business.
Insurance premium pricing within the commercial P&C insurance industry has historically been cyclical, based on the underwriting capacity of the insurance industry and economic conditions. From 1987 through 1999, the commercial P&C insurance industry was generally in a “soft market,” which is an insurance market
EBITDA, which is income (loss) from continuing operations plus interest expense, income tax expense, depreciation and amortization of intangibles;
EBITDA Margin, which we define as EBITDA as a percentage of total revenues; and
Cash earnings per share, which we define as income from continuing operations adjusted for expenses related to integration efforts, the margin improvement plan and other charges, plus amortization of intangible assets on a diluted per share basis.
Our business strategy is to achieve at least 15% growth in cash earnings per share each year. As a means to accomplish this goal, we focus on generating organic growth in revenues, creating efficiencies in our operations and making disciplined and accretive acquisitions.
consistent and aggressive sales management, including recruitment of new sales professionals;
maintaining a balanced mix of P&C and Health & Welfare revenues to mitigate the impact of fluctuations in market cycles.
Our EBITDA margins are currently the lowest of our peers. We currently benchmark all expense categories and work with operating company management to develop and implement remediation plans for business units performing below our standards. 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. 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 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 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.
Our quarterly revenues and EBITDA may be volatile. This is attributable to the following:
a significant percentage of commissions and fees in our Specialized Benefits Services segment is typically earned and recorded in the fourth quarter;
Quarterly fluctuations in revenues and EBITDA make our performance less predictable than our peers who have less 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 negotiating alternative commission schedules with insurance companies on products that have historically paid most commissions in the first policy year, 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 requires 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/or 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.
We record commission income on premiums billed and collected directly by insurance companies (“direct bill”) and contingent commissions when we receive data from the insurance companies that allow us to reasonably determine these amounts. We are able to reasonably determine these amounts when we receive payment, notification of the amount due from the insurance companies or the insurance policy detail from the insurance companies. We receive contingent commissions from insurance companies 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. Please refer to “Insurance Industry Investigations and Related Developments,” above. We received revenues from contingent commissions of $19.0 million, $17.7 million and $14.7 million for the years ended December 31, 2004, 2003 and 2002, respectively.
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 recorded in current liabilities 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. The allowance for bad debts on Insurance Brokerage business was $2.5 million and $2.0 million at December 31, 2004 and 2003, respectively. The balance of the allowance for estimated policy cancellations recorded in current liabilities on insurance brokerage business was $869 and zero at December 31, 2004 and 2003, respectively. 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.
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 EBITDA, and present value techniques. Reviews for triggering events are performed at the operating company level, one level below the segments, and require the use of management’s judgment. Other long-lived assets are evaluated at the operating company level, one level below our 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 discounted cash flows 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. Frequently, acquisitions have provisions for a reduction in consideration if the acquired company does not meet targeted financial results. Additionally, the acquisitions frequently have provisions for contingent additional consideration if the acquired company achieves financial targets. Additional or reduced consideration related to acquisition contingency provisions is reflected as an adjustment to goodwill when the contingency is resolved.
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 10-“Income Taxes” to our Consolidated Financial Statements included in Part II, Item 8 of this report.
At December 31, 2004, our current DTAs total $10.3 million, and our non-current DTLs total $15.8 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.
Prior to the fourth quarter of 2003, we carried a valuation allowance for our net DTA based on our history of net losses and the resulting uncertainty as to whether we would generate enough taxable income in the future to utilize our DTA. In the fourth quarter of 2003, based on five consecutive quarters of profitability, our improved financial condition following our IPO, restructuring our credit facility and on forecasted future results, management determined that it is more likely than not that our DTA will be realized in future periods, with the exception of DTA related to state NOL and tax credit carry-forwards, so we reversed the valuation allowance
resulting in a deferred income tax benefit of $8.1 million in 2003. In the event of adverse developments in our projections of taxable income, or if our estimates and assumptions were to change, management might be required to reach a different conclusion about the realization of our DTA and re-establish a valuation allowance through a charge to earnings.
A reconciliation of organic revenue to total revenues in accordance with GAAP.
We define EBITDA as income from continuing operations plus interest expense, income tax expense, depreciation expense and amortization expense. We present EBITDA because we believe that it is a relevant and useful indicator of operating profitability. Management believes that EBITDA is relevant owing to our leveraged approach to our capital structure and resulting significant amount of interest expense, and our accounting for all acquisitions using the purchase method of accounting and resulting significant amount of amortization of intangible assets. EBITDA margin (EBITDA as a percentage of revenues) is presented because management believes that it is a relevant and useful indicator of operating efficiency. We use EBITDA and EBITDA margin in budgeting, evaluating operating company performance and in operating company incentive plans. We define Organic Revenue 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 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 understand that analysts and investors regularly rely on non-GAAP financial measures, such as EBITDA and EBITDA Margin, to provide a financial measure by which to compare a company’s assessment of its operating profitability against that of its peers. Additionally, investors use Organic Revenue to provide a financial measure by which to compare a company’s internally generated (as opposed to acquired) revenue to that of its peers. EBITDA and EBITDA Margin may be helpful in reflecting our operating performance in a manner that may not otherwise be apparent when relying solely on GAAP financial measures, because EBITDA and EBITDA Margin eliminate from earnings financial items that have less bearing on our operating performance. Organic Revenue may be helpful by eliminating the impact of acquired revenue from internally generated revenues. These financial measures should not be considered as an alternative to other financial measures determined in accordance with GAAP.
Revenues. Revenues increased $61.7 million, or 17.8%, to $407.2 million for 2004, from $345.5 million for 2003. Of the $61.7 million in revenue growth, $53.2 million was due to acquisitions, net of disposed businesses, and $8.5 million, or 2.5%, was due to organic growth. 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. Contingent commissions were $19.0 million ($17.3 million excluding the impact of acquisitions) for 2004, compared to $17.7 million for 2003.
Income From Continuing Operations. Income from Continuing Operations increased $23.2 million, or 224.0%, to $33.6 million in 2003 from $10.4 million in 2002, due to (i) a reduction in Compensation and Employee Benefits Expenses principally due to the expenses attributable to our integration efforts and other charges in 2002, (ii) continued improvement in performance in our Insurance Brokerage segment, (iii) the reduction in interest expense principally due to the restructuring of our credit facility and lower borrowings in 2003, (iv) the net increase in income tax benefit due to the reversal of the valuation allowance on our net deferred tax asset in 2003, and (v) the positive impact of acquisitions, partially offset by (vi) a $7.7 million gain recorded in the third quarter of 2002 related to our pre-IPO capital structure. The effective tax rate from continuing operations in 2003 was (18.1)% compared to (5.2)% in 2002. The decrease in the effective tax rate and corresponding increased benefit in 2003 resulted from the reversal of the deferred tax asset valuation allowance, offset by the impact of state income taxes.
individual and group health, life and disability insurance, which we refer to as Employee Benefits insurance; and
For the year ended December 31, 2004, no segment had any material dependence on a single client or group of similar clients.
Effective January 1, 2004, we integrated our core benefits operation and part of our executive and professional benefits operation with our Northeast insurance brokerage operation in an effort to gain operating efficiency and further promote cross-sales of their products with other brokerage products. Accordingly, we moved a part of our executive and professional benefits and all of our core benefits operations from the Specialized Benefits Services segment into the Insurance Brokerage segment. Prior period segment information was reclassified to reflect the change in the organizational structure.
accordance with GAAP. Because not all companies calculate these non-GAAP measures in the same fashion, these measures, as presented, are not likely to be comparable to other similarly titled measures of other companies.
The Insurance Brokerage segment results reflect the following margin improvement plan, integration efforts and other charges: $9.1 million, zero and $4.6 million in 2004, 2003 and 2002, respectively.
Revenues in the Insurance Brokerage segment increased $54.4 million, or 16.7%, to $381.2 million in 2004 from $326.8 million in 2003, and increased $23.8 million, or 7.9%, to $326.8 million in 2003 from $303.0 million in 2002. In 2004 and 2003, revenues were positively impacted by approximately $47.7 million and $11.0 million, respectively, due to acquisitions. There were no businesses acquired in 2002. Organic Revenue Growth in 2004 and 2003 was 2.1% and 4.2%, respectively, comprised of new business written and the positive impact of market conditions, partially offset by the impact of lost and non-recurring business. 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. Contingent commissions were $1.3 million and $3.0 million greater in 2004 and 2003, respectively, than in the prior year. P&C revenues represented 57.5%, 58.9% and 56.0% of our total consolidated revenues in 2004, 2003 and 2002, respectively, and Employee Benefits revenues represented 36.1%, 35.7% and 38.3% of our total consolidated revenues in 2004, 2003 and 2002, respectively.
EBITDA in the Insurance Brokerage segment increased $2.0 million or 2.1% to $92.9 million in 2004 from $90.9 million in 2003, and increased $17.3 million or 23.6% to $90.9 million in 2003 from $73.6 million in 2002. EBITDA Margin in the Insurance Brokerage segment was 24.4%, 27.8% and 24.3% in 2004, 2003 and 2002, respectively. The increase in EBITDA in 2004 is primarily attributable to acquisitions, offset by $9.1 million in expenses related to our margin improvement plan and integration efforts and declining profitability due to an adverse premium rate environment. The increase in EBITDA in 2003 is attributable to: (i) a decrease in Compensation and Employee Benefits Expenses as a percent of revenues, due to an improvement in performance in our operations and positive effects of our integration efforts; (ii) the positive impact of increased contingent commissions; (iii) the accretive impact of acquisitions; and (iv) the integration efforts and other charges of $4.6 million taken in 2002.
Income From Continuing Operations Before Income Taxes in the Insurance Brokerage segment was $63.0 million, $61.8 million and $42.4 million for the years ended December 31, 2004, 2003 and 2002, respectively. The increases in 2004 and 2003 were due to the reasons noted above along with the reduction in interest expense due to lower debt balances in 2003.
EBITDA in the Specialized Benefits Services segment increased $4.7 million, or 354.8%, to $6.0 million in 2004 from $1.3 million in 2003, and decreased $1.5 million, or 53.6%, to $1.3 million in 2003 from $2.8 million in 2002. EBITDA Margin in the Specialized Benefits Services segment was 23.4%, 7.3% and 16.0% in 2004, 2003 and 2002, respectively. EBITDA and EBITDA Margin in the Specialized Benefits Services segment increased in 2004 primarily due to the positive impact of acquisitions and to organic growth of revenues. The decrease in EBITDA and EBITDA Margin in 2003, compared to 2002, was due primarily to product sales mix and timing of core enrollment sales.
Revenues at the Corporate segment represent interest income. Net Corporate expenses were $29.5 million, $19.1 million and $14.9 million in 2004, 2003 and 2002, respectively. As a percentage of total consolidated revenues, net Corporate expenses were 7.2%, 5.5% and 4.6% in 2004, 2003 and 2002, respectively. In 2004, we recorded $3.6 million in expenses related to our margin improvement plan and integration efforts. Additionally, in 2004, we recorded $2.1 million in expense related to the Corporate office move, $3.2 million in fees related to Sarbanes-Oxley Section 404 compliance and $0.7 million related to legal fees and costs related to various insurance industry investigations. In 2003, we recorded $2.3 million in expense related to the corporate office move and $0.6 million related to Sarbanes-Oxley Section 404 compliance. The increase in net Corporate expenses in 2004 was primarily due to the expenses recorded in connection with the margin improvement plan and integration efforts and to increased costs related to Sarbanes-Oxley Section 404 compliance and various insurance industry investigations. The increase in net Corporate expenses in 2003 was primarily due to: (i) the $7.1 million gain in 2002 from the change in value of redeemable common stock warrants and stock appreciation rights related to our pre-IPO capital structure; (ii) the move and Sarbanes-Oxley-related expenses in 2003, noted above; (iii) the increase in costs generally associated with being a public company, offset primarily by; (iv) the integration efforts and other charges in 2002; (v) the expense on the value of stock options exchanged for stock appreciation rights in 2002; and (vi) the expense on the grant of restricted stock in 2002.
After the consummation of our IPO, we exchanged all our outstanding SARs for stock options or stock under our 2002 Equity Incentive Plan. On November 27, 2002, all SAR holders agreed to exchange their SARs for stock options and the number of options that each individual employee was entitled to receive and the option exercise price was known. The historical accounting treatment of SARs was finalized and all SARs tendered in the exchange were cancelled. In accordance with GAAP, the SAR program existing prior to our IPO was accounted for as a fixed plan, and compensation expense was measured by the difference between the quoted market price and the price, if any, to be paid by the employee. The corresponding accrual for SAR-related compensation expense was reversed and offset compensation expense that was recognized upon the conversion to a stock option. Our stock price did not increase significantly prior to the consummation of the exchange of SARs for options; therefore the financial statement impact of the transaction in which the SARs were ultimately exchanged for stock options was a $1.3 million expense, which was recorded in the fourth quarter of 2002. Upon the consummation of the exchange of all SARs for options or stock, no further expense was recognized under our 2002 Equity Incentive Plan in connection with the exchange.
Our Board of Directors adopted, and a requisite majority of our stockholders approved, a new 2002 Equity Incentive Plan that became effective and replaced the Long-Term Incentive Plan upon the consummation of our IPO. The 2002 Equity Incentive Plan reserves up to 10,270,000 shares of our common stock for issuance to directors, executive officers, employees and non-employee contributors. Awards may consist of options, SARs, restricted shares, dividend equivalents or other share-based awards and are granted to eligible participants under the plan.
In the second quarter of 2004, we granted 152,748 shares of restricted stock to various corporate and operating company management. The shares vest 25% per year over four years. The fair value of the shares on the grant date was $2.2 million. The restricted stock grant was recorded as unearned compensation in stockholders’ equity and is being charged to compensation expense on a straight-line basis over the vesting period. We recognized compensation expense related to the grant of $0.4 million in 2004.
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
On October 25, 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 the credit facility. In connection with the debt repayment, we wrote-off $1.9 million in deferred financing costs in the fourth quarter of 2002.
Cash and cash equivalents at year-end (decreased) increased $(42.8) million, $27.2 million and $(11.7) million for the years ended December 31, 2004, 2003 and 2002, respectively. Net cash provided by operating activities totaled $44.3 million, $39.2 million and $33.4 million for the years ended December 31, 2004, 2003 and 2002, respectively, and is principally dependent upon our results of operations and the timing of collection of
Net cash used in investing activities totaled $98.1 million, $23.2 million and $3.6 million for the years ended December 31, 2004, 2003 and 2002, respectively, which principally reflects acquisition activities and capital expenditures. Included in the net cash provided by investing activities for the year ended December 31, 2002 is $18.2 million in proceeds from the sale of USIA. Please read “Discontinued Operations” below. Cash expenditures for acquisitions amounted to $89.0 million, $18.2 million and $5.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. We made no acquisitions in 2002. The $5.7 million for the year ended December 31, 2002, reflects the payment of additional purchase price and retention-based acquisition payments. Cash expenditures for property and equipment amounted to $11.1 million, $8.1 million and $6.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. The net effect of investments in discontinued operations was $(1.2) million, $(2.1) million and $(9.3) million for the years ended December 31, 2004, 2003 and 2002, respectively.
In February 2004, we filed a $300.0 million universal shelf registration statement on Form S-3 which was declared effective by the SEC in March 2004. The universal shelf registration statement covers offerings of our common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock or debt securities, stock purchase contracts, stock purchase units or any combination of such securities. The timing, structure and nature of any funds raised under this shelf registration statement, as well as the use of such funds, are at the discretion of our management and Board of Directors.
In April 2004, we completed a follow-on public offering under the universal shelf registration statement of 11,229,578 shares of our common stock at a public offering price of $14.72 per common share. Of those shares, 4,025,000 shares were sold by us via forward sale agreements and 7,204,578 shares were sold by various selling shareholders. On December 29, 2004, we settled a portion of our forward sale agreement by issuing 1,781,000 shares of our common stock in exchange for proceeds of $25.0 million. We used $20.0 million of the proceeds to repay borrowings under our revolving credit facility. On January 30, 2005, we settled the remaining portion of our forward sale agreement by issuing 2,244,000 shares in exchange for proceeds of approximately $31.5 million. Please read Note 20-“Subsequent Events,” to our Consolidated Financial Statements in Part II, Item 8 of this report.
On December 20, 2004, we announced that our Board of Directors authorized an expanded stock repurchase program that permits us to purchase our shares of common stock up to certain limits set forth within our credit facility. We had the capacity under the credit facility to purchase up to approximately $11.0 million in 2004. In 2005, we can purchase up to $9.7 million of our common stock under our credit facility.
On March 26, 2004, we executed a first amendment to the credit facility, providing for a 0.5% reduction to the applicable term loan interest rate effective April 1, 2004, and paid an amendment fee to Banc of America Securities LLC and J.P. Morgan Securities Inc., the joint lead arrangers. As amended, borrowings under the term loan bear interest, at our option, at either a base rate plus 1.5% per annum or the Eurodollar rate plus 2.5% per annum. The base rate and the Eurodollar rate are effectively the Prime Rate and the London Interbank Offering Rate for the applicable period, respectively. The interest rate on the term loan was 4.63% and 4.13% at December 31, 2004 and 2003 respectively.
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, 2004 we had $1.8 million outstanding under letters of credit, which reduced the availability of our revolving credit facility to $23.2 million as of that date.
On January 11, 2005, we received approval from our lending institutions for a second amendment to our credit facility, which allowed for a $90.0 million increase to our existing term loan, a waiver of certain covenant limitations to allow for the acquisition of Summit and an amendment of certain other covenants in our credit agreement. See Note 20-“Subsequent Events” to our Consolidated Financial Statements in Part II, Item 8 of this report.
As of December 31, 2004, we were in compliance with the covenants in our credit facility. The significant financial covenants of our new credit facility were as follows:
The table below summarizes our contractual obligations as of December 31, 2004:
At December 31, 2004 our other debt of $23.1 million consisted primarily of notes payable issued in conjunction with acquisitions. Some of these notes payable may be subject to reduction based on future
Substantially all of our office space is leased under an operating lease structure. Many of these leases have options permitting renewals for additional periods and provisions for escalations based on an inflation index.
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, 2004, we estimate the future significant contingent purchase price payments to be between $7.4 million and $12.0 million. These payments would 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. Approximately $2.6 million of the future contingent purchase price payments have measurement dates of December 31, 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.
Pursuant to a Marketing and Distribution Agreement dated November 7, 2002 (the “Agreement”) between ourselves and Minnesota Life Insurance Company (MLI), the parties agreed to perform specific services in connection with our creation of a nationwide wealth management distribution system. Among other things, we were required to hire and train sales professionals, build-out the back-office of our broker dealer subsidiary to support wealth management and life insurance sales and service, and create a website. MLI, for its part, was to provide us with access to competitive products, product education and development fees to fund the creation of the wealth management distribution system. In the fourth quarter of 2004, both parties mutually agreed to terminate the Agreement and we paid MLI $2.4 million in exchange for mutual releases from the service obligations in the Agreement. We recorded this payment as an expense in the fourth quarter in other operating expenses and included it in the margin improvement plan under service contract terminations. Please read “Integration Efforts, Margin Improvement Plan and Other Charges” above.
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 two letters of credit totaling $1.8 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 letters of credit referred to automatically renew 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.
On December 20, 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 these actions, we recorded a $9.5