In connection with its review of segment reporting, the Company’s management concluded that a reevaluation of the application of certain impairment testing provisions of Statement 142 was appropriate. On February 21, 2007, the Company announced that it was restating previously filed financial statements to reflect a non-cash intangible asset impairment charge, primarily related to goodwill, of $45.0 million, or $31.9 million net of income taxes, for the year ended December 31, 2003. The Company has restated the consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 and its unaudited quarterly results for those years and 2006. All applicable information contained in this report gives effect to these restatements. Consequently, reliance should not be placed upon the financial statements for the above mentioned periods that have been filed with or furnished to the SEC or included in previous announcements. For further information concerning the background of the restatements and the specific adjustments made on an annual basis, see Item 6 - Selected Financial Data and “Note B-Restatements of Previously Issued Consolidated Financial Statements” of Notes to Consolidated Financial Statements included in Item 8.
Net income for the year ended December 31, 2006 increased 54.9% from $56.2 million, or $1.55 per share, to $87.0 million, or $2.39 per share. Net income for 2005 included a regulatory charge, net of tax, of $26.3 million, or $0.73 per share, related to the Company’s settlement with the Attorney General of the State of Connecticut. The settlement provided for a $30.0 million national fund for distribution to HRH’s clients who elected to participate in the fund. The regulatory charge also included related legal and administrative costs and estimated costs for related pending regulatory matters. For more information on this charge, see “Note N-Regulatory Charge and Related Matters” of Notes to Consolidated Financial Statements. Net income for 2005 also included a severance charge, net of tax, of $0.8
The Company has historically generated sufficient funds internally to finance capital expenditures. Cash expenditures for the acquisition of property and equipment were $5.7 million, $9.2 million and $8.8 million for 2006, 2005 and 2004, respectively. Cash outlays related to the purchase of insurance agencies amounted to $60.0 million, $23.8 million and $65.8 million in 2006, 2005 and 2004, respectively. Cash outlays for such insurance agency acquisitions have been funded through operations and long-term borrowings. In addition, a portion of the purchase price of such acquisitions may be paid through common stock and/or deferred cash and common stock payments; see “Note L-Acquisitions” of Notes to Consolidated Financial Statements for additional discussion. Cash proceeds from the sales of certain offices, insurance accounts and other assets totaled $11.0 million, $7.7 million and $11.8 million in 2006, 2005 and 2004, respectively.
(1) Long-term debt includes estimated interest payments related to long-term debt and interest rate swaps that have been designated as cash flow hedges under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As of December 31, 2006, the Company had variable rate debt of $229.9 million with a rate of 6.9%. The Company estimated interest payments for variable rate debt using the effective interest rates as of December 31, 2006. As of December 31, 2006, the Company had interest rate swaps with a total notional amount of $100.0 million.
The change in value of the interest rate swaps is reported as a component of the Company’s OCI and reclassified into interest expense in the same period or periods during which the hedged transaction affects earnings. Derivative instruments are carried at fair value on the balance sheet in the applicable line item, other non-current assets.
The current liability portion of this charge as of December 31, 2006 and 2005 is $15.2 million and $8.2 million, respectively, and is included in accrued expenses. The remaining liability is included in other long-term liabilities.