[Cover]
(An abstract photograph of a swinging metal kinetic ball depicting
momentum)
Hilb, Rogal and Hamilton Company 1997 Annual Report
Our Business:
Hilb, Rogal and Hamilton Company serves as an intermediary between
our clients-who are traditionally the middle market businesses of
the nation-and insurance companies that underwrite client risks.
With more than 60 agencies, Hilb, Rogal and Hamilton Company is
able to assist clients in managing their risks in areas such as
property and casualty, employee benefits and other areas of
specialized exposure. Revenues are derived primarily from
commissions received from insurance companies with whom client risk
is placed. Support services related to risk transfer transactions
are an additional revenue source. As an industry leader, the
Company expands its business by developing new clients, providing
additional services to current clients and maintaining a well-
focused merger and acquisition strategy.
Contents:
4 LETTER TO SHAREHOLDERS
8 MASS + FORCE + ACCELERATION + TRAJECTORY
17 SELECTED FINANCIAL DATA
18 MANAGEMENT'S DISCUSSION AND ANALYSIS
20 CONSOLIDATED BALANCE SHEET
21 STATEMENT OF CONSOLIDATED INCOME
22 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
23 STATEMENT OF CONSOLIDATED CASH FLOWS
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30 REPORT OF ERNST & YOUNG LLP
31 BOARD OF DIRECTORS AND OFFICERS
32 AGENCY LOCATIONS
(BAR GRAPH REFLECTING THE FOLLOWING FINANCIAL INFORMATION)
Basic Net Income Per Share
Year In Dollars
- ---------------------------
1997 .98
1996 .84
1995 .82
1994 .77
1993 .57
(BAR GRAPH REFLECTING THE FOLLOWING FINANCIAL INFORMATION)
Basic Operating Cash Flow Per Share
Year In Dollars
- ---------------------------
1997 1.87
1996 1.65
1995 1.49
1994 1.40
1993 1.24
(BAR GRAPH REFLECTING THE FOLLOWING FINANCIAL INFORMATION)
Total Revenues
Year In Millions of Dollars
- ---------------------------------------
1997 173.7
1996 158.2
1995 148.1
1994 140.8
1993 141.7
(BAR GRAPH REFLECTING THE FOLLOWING FINANCIAL INFORMATION)
Net Income
Year In Millions of Dollars
- ---------------------------------------
1997 12.8
1996 11.4
1995 11.8
1994 11.4
1993 8.3
(An abstract photograph of a kinetic metal ball with an overlay of
the words Mass + Force + Acceleration + Trajectory = Momentum)
(Abstract photograph with the word Momentum centered on the page)
Remember how momentum felt when you were a child? It felt
like sitting on your bicycle at the top of a big hill,
struggling to push the pedals to get the bike moving
forward. You started off slowly, then picked up speed-the
wheels moving faster and faster, the wind rushing in your
face-as the bike took on a life of its own and raced
effortlessly down the slope. And as you hung on to the
handlebars and guided the bicycle down the hill to your
final destination, you knew that nothing could stop you.
It felt exhilarating. It felt empowering.
That's how 1997 felt at Hilb, Rogal and Hamilton Company.
[Photograph of Andrew L. Rogal, President and Chief Executive Officer]
To our shareholders:
1997 was a tremendous year for Hilb, Rogal and Hamilton
Company. We created value for our shareholders and
strengthened our competitive position in the marketplace.
Perhaps even more exciting, we generated real momentum in
1997; momentum that will enable us to continue the
exciting pace of change that has so positively impacted
our business.
Our stock price rose from $13.25 per share at
December 31, 1996 to $19.3125 at December 31, 1997-a 46%
increase. This represented the second highest increase in
our industry and marked our stock's highest level since
the fourth quarter of 1989. Our market capitalization
rose from $176.5 million at December 31, 1996 to $247.5
million at December 31, 1997, representing the creation
of over $70.0 million in value to our shareholders.
Basic earnings per share increased by more than 16%,
from $.84 per share in 1996 to $.98 per share in 1997.
Operating cash flow (net income plus amortization and
depreciation) was $24.5 million in 1997, 10% higher than
the 1996 level. Basic operating cash flow per share,
calculated under the same method used for net income per
share, was $1.87 in 1997, a 13% increase over $1.65 in
1996. Operating cash flow is a relevant measure of
financial performance for shareholders because it measures
the Company's ability to support growth through
acquisitions, repurchase stock and pay dividends. The
Company is using its powerful operating cash flow in a
disciplined fashion to build long-term shareholder value.
Operating cash flow, however, is not a substitute for net
income per share.
In addition, our offices reported core commission
growth of over 3%, which is strong considering the
difficult market conditions in our industry. Total
revenues increased from $158.2 million in 1996 to $173.7
million in 1997. We also continued our stock buyback
program, purchasing 700,000 shares in 1997. This reduced
our number of shares outstanding to 12,813,023 at
December 31, 1997.
How We Gained Momentum
The momentum we gained in 1997 was largely due to
the Company's new focus on operating in ways that
create greater value. This focus served as the filter for
all that we did last year and drove every aspect of our
business. Yet, there were several specific factors which
I believe contributed to our growth and success.
The Strategic Plan. In May 1997, the Board of
Directors approved our Strategic Plan for the Company.
The goals of this plan are: to become the premier
domestic middle market insurance and risk services
intermediary; to double earnings within three to five
years; and to continue to cultivate a corporate culture
which focuses on the creation of value through
commitments to employees, excellence and communication.
The Strategic Plan gave our Company a defined course
to follow and set us in motion toward meeting these
goals. It united our leadership and our employees and now
serves as the basis for all we strive to do as a
business.
A Redefined Operating Structure. We have always
believed in the strength of our people. Now we have given
them an operating platform that's equally strong. The
completion of our regionalization strategy made us
stronger, providing our operating units a better way to
compete with both public national and private regional
firms while also making us more attractive to insurance
carriers.
With an eye toward creating greater value, in 1997
we began the process of rationalizing our operations
along two core business groups: cost-based business and
value-based business. In our cost-based business-i.e.,
small commercial lines-we began focusing on providing
effective and efficient delivery of service to achieve a
cost-competitive advantage. In our value-based business
- -such as middle market commercial lines, employee benefits
and association programs-we committed ourselves to
offering clients significant industry and product
expertise while maintaining a high level of personal
service and client intimacy. This realignment of our core
business will fuel continued increases in our Company's
revenue growth.
Strategic Mergers and Acquisitions. In 1997, we
completed our transition from a revenue-based acquisition
program to a specialty/expertise-based program. The
existing program is focused on acquisitions which fit
into the Strategic and Regional Plans and entities which
provide a specialty or product expertise that can be
exported throughout the Company. During 1997, the Company
consummated six acquisitions.
This new approach to acquisitions also applied to
divestitures. Throughout the year, the Company divested
itself of offices which were consistent underperformers
- -or whose businesses or locations no longer matched our
Strategic Plan-in order to maximize the return on core
assets and our value to shareholders. During 1997, the
Company divested of four such offices.
An Empowered Team. New leadership was put into place
at all levels of the organization and a new spirit
of enthusiasm swept across our ranks. The Company renewed
its dedication to its employees and committed itself to
nurturing its work culture based upon excellence and
communication. Through our Strategic Plan, shared values
were created and embraced by everyone in the Company.
Our Regional Directors began aggressively
implementing the Strategic Plan and our people responded
with astounding energy. New incentive programs were
developed to reward these individuals and their
outstanding efforts directly contributed to our bottom
line.
A Consolidating Industry. Dramatic changes
occurred within our industry in the last year. Mergers
took several of our competitors off the playing field, as
the larger brokers continued to focus on national and
global accounts. Because these larger players view small
and middle market accounts as commodity business,
we gained an important competitive advantage in the
marketplace. Our value-based approach to these accounts
made us more attractive to middle market clients in 1997.
We are now positioned to become a dominant player in the
middle market.
Moving Toward the Future
The momentum we generated in 1997 has placed
us in a position of strength in 1998 and we are poised to
capitalize upon the many opportunities which have been
created. Clearly, the steps we took in the last year that
contributed to our success will continue to positively
impact us in the future. We will maintain our strategy of
specialty/expertise-based acquisitions and will continue
our policy of divesting underperforming assets. We will
also continue our aggressive stock buyback program as a
strategy to create greater shareholder value.
The speed of change in our Company has been dramatic
and these changes have greatly accelerated our growth.
But many changes remain to be made as we seek to ensure
outstanding service to our clients and disciplined control
of the Company's expenses.
More change will be necessary to complete the
realignment of our Company on a line-of-business basis.
Likewise, more changes will take place to maintain the
sound financial management of the Company. Our financial
organization has been restructured to include regional
controllers. And, as part of our effort to increase value
for shareholders, we will slow the growth of our
dividend, using those dollars to return more value for
shareholders through acquisitions and stock repurchases.
All of these efforts will be driven by our Strategic Plan
and our ongoing commitment to creating value in all that
we do.
In closing, I'd like to thank the people of HRH for
their hard work and dedication throughout 1997. Our
Company's greatest asset has always been its people.
Working together-and moving in the same direction, with
the same focus-our people have unleashed a
powerful energy that will sustain our Company for
years to come.
Our goal is to become the premier domestic middle
market insurance and risk services intermediary through
the superb implementation of the Strategic Plan. That
goal is now within our reach, and we have the talent, the
will and the momentum needed to carry us there. On behalf
of everyone at Hilb, Rogal and Hamilton Company, I thank
you for your continued support. We look forward to
bringing you even stronger results in the years to come.
Sincerely,
Andrew L. Rogal
President and Chief Executive Officer
Mass(mas)-n.
1. The quantity of matter that an object contains; a measure
of an object's potential for acceleration.
2. A grouping of individual parts or elements that
compose a unified body.
(An abstract photograph of a kinetic metal ball depicting mass)
"We have always believed in the strength of
our people. Now we have given them an operating
platform that's equally strong."
As the direct liaison between our Company and the clients
we serve, the employees of Hilb, Rogal and Hamilton
Company are our most important resource. Now we are
giving our employees even greater opportunities. HRH has
made a special commitment to providing employees the
tools they need to be more successful. Through our
empowered operating structure, increased training and
development, improved communications and special
incentive programs tied to performance, the employees of
HRH will be able to create greater value for the Company
and its shareholders.
Behind the scenes, HRH's human resources department is
making great strides towards acquiring and retaining top
talent for our Company. Our goal is to keep HRH employee-
sensitive and family-friendly, even as we grow in size.
New benefit packages and other programs are being
implemented to keep current employees happy and
productive, while new employees are being oriented to the
Company more quickly and efficiently.
Force(fo^rs) - n.
1. Vector quantity that, when applied to an object, leads
to acceleration.
2. A power that causes an object to change direction.
(An abstract photograph of a kinetic metal ball catapulting a
smaller kinetic metal ball into the air)
"Working together-and moving in the same
direction, with the same focus-our people have
unleashed a powerful energy."
New leadership throughout the Company has been the
driving force behind many of the positive changes that
have taken place at HRH. Our strong regional units are
led by aggressive individuals who are seeking to achieve
higher levels of success than ever before. With the
complete support of employees who have found enthusiasm
and motivation in the new operating structure, the
Company has begun moving forward in new and significant
ways.
Changes have also occurred in the Corporate Office that
are driving improvements in the Company. Timothy J.
Korman was appointed Executive Vice President of Finance
and Administration, while Carolyn Jones was named Senior
Vice President, Chief Financial Officer and Treasurer. Our
financial organization was further strengthened with the
appointments of Vincent P. Howley to Vice President of
Agency Financial Operations and Robert W. Blanton, Jr. to
Assistant Vice President and Controller. Henry C. Kramer
was appointed Vice President of Human Resources and
Robert J. Hilb was promoted to Vice President responsible
for corporate risk management. These new leaders are
committed to building an operationally-strong, financially-
sound organization.
Acceleration (ak-sel`e-ra shen) - n.
1. The rate at which an object changes velocity with respect to
time.
2. The act of accelerating.
(An abstract photograph of a kinetic metal ball depicting
acceleration.)
"The speed of change in our Company
has been dramatic-and these changes
have greatly accelerated our growth."
Hilb, Rogal and Hamilton Company has become one of the
largest insurance and risk services intermediaries in the
nation-operating more than 60 offices in the United States
and Canada. But changes in our industry have created an even
greater opportunity for HRH. Consolidation has left fewer
players in the middle market field, as the newly-consolidated
intermediaries turn their attention to national and global accounts.
The establishment of regional operating units allows our
Company to compete successfully for middle market
companies in need of risk management services. Our size
allows us to provide more value to clients in the middle
market by sharing specialties and expertise from other
offices throughout the Company. This high level of service
allows us to compete successfully with both public
national and private regional firms. These advantages,
combined with shrinking competition in the field, position
us to become dominant in the middle market-a position we
are confident we can achieve.
Trajectory (tra-jek'te-re) - n.
1. The path that an object follows as it moves through space.
2. A chosen course or a course taken.
(An abstract photograph of a kinetic metal ball hitting its target)
"The Strategic Plan gave our Company
a defined course to follow and set us in motion
toward meeting these goals."
The development and implementation of a new Strategic
Plan was a critical step in our Company's growth. Through
the successful implementation of this Plan, we believe
that Hilb, Rogal and Hamilton Company can double earnings
within three to five years, while becoming the premier
independent, domestic middle market insurance and risk
services intermediary. To reach this goal, the Company
will continue to cultivate a corporate culture which
focuses on the creation of value through commitments to
employees, excellence and communication.
The Strategic Plan specifically requires a commitment to
improving our distribution system by increasing our range
of services; to achieving an increase in core commissions
and fees through internal growth and strategically-
focused acquisitions; to enhancing the creation of a
performance oriented culture through compensation and
incentive programs; to improving communications within
the Company and to continuing the identification and
elimination of non-productive costs. We are firmly
committed to following this Plan-and are confident it will
succeed.
data
+
analysis
+
notes
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operations
Selected Financial Data
Year Ended December 31 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Statement of Consolidated Income Data:1
Commissions and fees $168,558 $153,968 $141,555 $132,914 $137,662
Investment and other income2 5,151 4,275 6,592 7,895 3,994
-------- -------- -------- -------- --------
Total revenues 173,709 158,243 148,147 140,809 141,656
Compensation and employee benefits 96,240 88,406 82,761 78,311 82,470
Other operating expenses 45,477 41,951 38,264 35,976 37,774
Amortization of intangibles 8,110 7,596 6,966 6,436 6,581
Interest expense 2,037 1,245 559 812 1,270
Pooling-of-interests expense - - - 488 503
-------- -------- -------- -------- --------
Total expenses 151,864 139,198 128,550 122,023 128,598
Income before income taxes 21,845 19,045 19,597 18,786 13,058
Income taxes 9,055 7,639 7,768 7,394 4,765
-------- -------- -------- -------- --------
Net income $ 12,790 $ 11,406 $ 11,829 $ 11,392 $ 8,293
======== ======== ======== ======== ========
Net income per Common Share:3
Basic $ 0.98 $ 0.84 $ 0.82 $ 0.77 $ 0.57
======== ======== ======== ======== ========
Diluted $ 0.97 $ 0.84 $ 0.82 $ 0.77 $ 0.57
======== ======== ======== ======== ========
Weighted average number of shares
outstanding:
Basic 13,099 13,500 14,470 14,778 14,459
======== ======== ======== ======== ========
Diluted 13,215 13,526 14,480 14,785 14,538
======== ======== ======== ======== ========
Dividends paid per Common Share $ 0.62 $ 0.605 $ 0.57 $ 0.50 $ 0.45
Consolidated Balance Sheet Data:
Intangible assets, net $ 82,170 $ 80,006 $ 60,854 $ 48,729 $ 49,454
Total assets 181,607 181,475 163,249 158,895 160,922
Long-term debt, less current portion 32,458 27,196 11,750 3,173 7,249
Other long-term liabilities 9,537 9,870 7,514 2,144 2,889
Total shareholders' equity 51,339 55,298 56,646 66,430 64,157
1. See Note K of Notes to Consolidated Financial
Statements for information regarding business purchase
transactions which impact the comparability of this
information. In addition, during the years ended December
31, 1994 and 1993, the Company consummated four and six
purchase acquisitions, respectively.
2. During 1997, 1996, 1995, 1994 and 1993, the Company
sold certain insurance accounts and other assets
resulting in gains of approximately $2,475,000,
$1,856,000, $3,337,000, $5,044,000 and $1,735,000,
respectively.
3. The net income per share amounts prior to 1997 have
been restated as required to comply with Statement of
Financial Accounting Standards No. 128, "Earnings Per
Share" (Statement No. 128). For further discussion of net
income per share and the impact of Statement No. 128, see
Note A and Note J of Notes to Consolidated Financial
Statements.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The income of an insurance agency business such as
the Company is principally derived from commissions
earned, which are generally percentages of premiums
placed with insurance underwriters. Premium pricing
within the insurance underwriting industry has been
cyclical and has displayed a high degree of volatility
based on prevailing economic and competitive conditions.
Decreases in premium rates result directly in revenue
decreases to the Company. Since 1987, the property and
casualty insurance industry has been in a "soft market,"
during which the underwriting capacity of insurance
companies expanded, stimulating an increase in
competition and a decrease in premium rates and related
commissions and fees. The effect of the softness in rates
on the Company's revenues has been offset by the
Company's acquisitions and new business programs.
Management cannot predict the timing or extent of premium
pricing changes due to market conditions or their effects
on the Company's operations in the future, but believes
that the "soft market" conditions will continue into
1998.
Results of Operations
Total revenues for 1997 were $173.7 million, an
increase of $15.5 million or 9.8% over 1996. For 1996,
total revenues were $158.2 million, an increase of $10.1
million or 6.8% from 1995.
Commissions and fees for 1997 were $168.6 million,
or 9.5% higher than 1996. Approximately $18.3 million of
commissions and fees were derived from purchase
acquisitions of new insurance agencies. These increases
were offset by decreases of $7.1 million from the sale of
certain offices and accounts in 1997 and 1996. Core
commissions and fees from continuing operations increased
3.1%.
Commissions and fees for 1996 were $154.0 million,
or 8.8% higher than 1995. Approximately $14.7 million of
commissions and fees were derived from purchase
acquisitions of new insurance agencies. These increases
were offset by decreases of $2.2 million from the sale of
certain offices and accounts in 1996 and 1995.
Investment and other income increased by $0.9
million in 1997 and decreased by $2.3 million in 1996.
These amounts include gains of $2.5 million, $1.9 million
and $3.3 million in 1997, 1996 and 1995, respectively,
from the sale of certain offices, insurance accounts and
other assets.
Total operating expenses for 1997 were $151.9
million, an increase of $12.7 million or 9.1% from 1996.
For 1996, total operating expenses were $139.2 million,
an increase of $10.6 million or 8.3% from 1995.
Compensation and employee benefits costs for 1997
were $96.2 million, an increase of $7.8 million or 8.9%
from 1996. Increases include approximately $9.3 million
related to purchase acquisitions and increases of $1.7
million in incentive compensation related to improved
operating results offset by decreases of $3.0 million
related to offices sold in 1997 and 1996. Compensation
and employee benefits costs for 1996 were $88.4 million,
an increase of $5.6 million or 6.8% from 1995. Increases
include approximately $7.1 million related to purchase
acquisitions offset by decreases of $1.1 million related
to offices sold in 1996 and 1995.
Other operating expenses for 1997 were $45.5
million, or 8.4% higher than 1996. Increases relate
primarily to purchase acquisitions and consulting fees
totaling $1.0 million associated with the Company's
strategic plan offset in part by the sale of
certain offices in 1997 and 1996.
Other operating expenses for 1996 were $42.0
million, or 9.6% higher than 1995. Increases relate
primarily to purchase acquisitions offset in part by the
sale of certain offices in 1996 and 1995.
Amortization expense primarily reflects the
amortization of expiration rights, an intangible asset
acquired in the purchase of insurance agencies. Amortization
expense increased by $0.5 million or 6.8% in 1997 and by $0.6
million or 9.0% in 1996 which is attributable to purchase
acquisitions consummated during 1997, 1996 and 1995
offset by decreases from amounts which became fully
amortized or were sold in those years.
The effective tax rates for the Company were 41.5%
in 1997, 40.1% in 1996 and 39.6% in 1995. An analysis of
the effective income tax rates is presented in "Note
G-Income Taxes" of Notes to Consolidated Financial
Statements.
Over the last three years, inflationary pressure has
been relatively modest and did not have a significant effect
on the Company's operations.
Liquidity and Capital Resources
Net cash provided by operations totaled $21.0
million, $16.6 million and $16.2 million for the years
ended December 31, 1997, 1996 and 1995, respectively, and
is primarily dependent upon the timing of the collection
of insurance premiums from clients and payment of those
premiums to the appropriate insurance underwriters.
The Company has historically generated sufficient
funds internally to finance capital expenditures for
personal property and equipment. Cash expenditures for
the acquisition of property and equipment were $2.1
million, $5.1 million and $4.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The
timing and extent of the purchase of investments is
dependent upon cash needs and yields on alternate
investments and cash equivalents. In addition, during
1997 and 1996, total investments decreased by $2.4
million and $4.2 million, respectively, as the Company
utilized these funds for the repurchase of Common Stock
of the Company and the acquisition of insurance agencies.
Cash expenditures for the purchase of insurance agencies
accounted for under the purchase method of accounting
amounted to $9.3 million, $9.7 million and $6.5 million
in the years ended December 31, 1997, 1996 and 1995,
respectively. Cash expenditures for such insurance agency
acquisitions have been funded primarily through
operations and from long-term borrowings. In addition, a
portion of the purchase price in such acquisitions may be
paid through Common Stock and deferred cash payments.
Cash proceeds from the sale of certain offices, insurance
accounts and other assets totaled $6.5 million, $2.5
million and $3.5 million in the years ended December 31,
1997, 1996 and 1995, respectively. The Company did not
have any material capital expenditure commitments as of
December 31, 1997.
Financing activities utilized cash of $16.0 million,
$6.0 million and $22.1 million for the years ended
December 31, 1997, 1996 and 1995, respectively, as the
Company made scheduled debt payments and annually paid
its dividend. In addition, during 1997, 1996 and 1995,
the Company repurchased 700,000, 801,700 and 1,336,820,
respectively, shares of its Common Stock under a stock
repurchase program. The Company is currently authorized
to purchase an additional 723,000 shares and anticipates
that it will continue to repurchase shares in 1998. The
Company has a bank credit agreement for $30.0 million
under loans due in 2002. At December 31, 1997, there were
loans of $30.0 million outstanding under this agreement.
The Company had a current ratio (current assets to
current liabilities) of 0.87 to 1.00 as of December 31,
1997. Shareholders' equity of $51.3 million at December
31, 1997, decreased from $55.3 million at December 31,
1996, and the debt to equity ratio of 0.63 to 1.00 at
December 31, 1997 increased from the last year-end ratio
of 0.49 to 1.00 due to the aforementioned purchase of
Common Stock of the Company and an increase in borrowings
to $30.0 million under the bank agreement used for
insurance agency acquisitions and the repurchase of
Common Stock.
The Company believes that cash generated from
operations, together with proceeds from borrowings, will
provide sufficient funds to meet the Company's short and
long-term funding needs.
Impact of Year 2000
Many existing computer programs use only two digits
to identify a year in the date field. These programs were
designed and developed without considering the impact of
the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous
results by or in the year 2000. The potential costs and
uncertainties to companies in addressing this issue (the
Year 2000 Issue) will depend on a number of factors,
including their software and hardware and the nature of
their industries. Companies must also coordinate with
other entities with which they electronically interact,
including suppliers, clients, creditors and financial
service organizations.
The Company has examined the Year 2000 Issue and the
potential costs and consequences to the Company in
addressing this issue. The Company is also communicating
with third parties with which it does business to
coordinate further action with respect to the Year 2000
Issue. The project is estimated to be completed not later
than December 31, 1998, which is prior to any anticipated
impact on its operating systems. As a result, management
believes that the Year 2000 Issue will not have a
material impact on the Company's results of operations
and that the cost of the Company addressing the issue is
not a material event or uncertainty.
The costs of the project and the date on which the
Company believes it will complete the Year 2000
modifications are based on management's estimates, which
were derived utilizing numerous assumptions of future
events, including the continued availability of certain
resources and other factors. However, there can be no
guarantee that these estimates will be realized and
actual results could differ materially from those
anticipated.
Forward-Looking Statements
When used in this annual report, in Form 10-K or
other filings by the Company with the Securities and
Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral
statements made with the approval of an authorized
Company executive officer, the words or phrases "would
be," "will allow," "expects to," "will continue," "is
anticipated," "estimate," "project" or similar
expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
While forward-looking statements are provided to
assist in the understanding of the Company's anticipated
future financial performance, the Company cautions
readers not to place undue reliance on any forward-
looking statements, which speak only as of the date made.
Forward-looking statements are subject to significant
risks and uncertainties, many of which are beyond the
Company's control. Although the Company believes that the
assumptions underlying its forward-looking statements are
reasonable, any of the assumptions could prove to be
inaccurate. Actual results may differ materially from
those contained in or implied by such forward-looking
statements for a variety of reasons. Risk factors and
uncertainties that might cause such a difference include,
but are not limited to the following: the Company's
commission revenues are highly dependent on premiums
charged by insurers, which are subject to fluctuation; the
property and casualty insurance industry continues to
experience a prolonged "soft market" despite high losses;
continued low interest rates will reduce income earned on
invested funds; the insurance brokerage and service
businesses are extremely competitive with a number of
competitors being substantially larger than the Company;
the alternative insurance market continues to grow; the
Company's revenues vary significantly from quarter to
quarter as a result of the timing of policy renewals and
the net effect of new and lost business production; and
the general level of economic activity can have a
substantial impact on the Company's renewal business. The
Company's ability to grow has been enhanced through
acquisitions, which may or may not be available on
acceptable terms in the future and which, if consummated,
may or may not be advantageous to the Company.
The Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events
or circumstances after the date of such statements.
Consolidated Balance Sheet
December 31 1997 1996
- -------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including $7,645,000 and
$11,260,000, respectively, of restricted funds $ 22,314,860 $ 19,774,374
Investments 3,892,533 5,088,020
Receivables:
Premiums, less allowance for doubtful accounts
of $2,299,000 and $2,445,000, respectively 41,292,489 41,453,677
Other 5,720,513 6,122,612
------------ ------------
47,013,002 47,576,289
Prepaid expenses and other current assets 3,612,523 3,816,819
------------ ------------
TOTAL CURRENT ASSETS 76,832,918 76,255,502
INVESTMENTS 5,030,000 6,185,686
PROPERTY AND EQUIPMENT, NET 11,762,080 16,092,075
INTANGIBLE ASSETS
Expiration rights 75,193,075 76,402,292
Goodwill 33,411,145 32,718,982
Noncompetition agreements 11,636,847 11,421,278
------------ ------------
120,241,067 120,542,552
Less accumulated amortization 38,071,304 40,536,482
------------ ------------
82,169,763 80,006,070
OTHER ASSETS 5,811,797 2,936,014
------------ ------------
$181,606,558 $181,475,347
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $ 67,520,370 $ 66,527,381
Accounts payable and accrued expenses 10,925,646 11,401,805
Premium deposits and credits due customers 7,752,502 8,837,483
Current portion of long-term debt 2,074,788 2,345,059
------------ ------------
TOTAL CURRENT LIABILITIES 88,273,306 89,111,728
LONG-TERM DEBT 32,457,882 27,195,571
OTHER LONG-TERM LIABILITIES 9,536,771 9,869,777
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized 50,000,000
shares;outstanding 12,813,023 and 13,320,577 shares,
respectively 16,540,461 25,266,279
Retained earnings 34,798,138 30,031,992
------------ ------------
51,338,599 55,298,271
------------ ------------
$181,606,558 $181,475,347
============ ============
See notes to consolidated financial statements.
Statement of Consolidated Income
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------
Revenues
Commissions and fees $168,558,411 $153,967,914 $141,555,188
Investment and other income 5,150,469 4,275,186 6,591,850
------------ ------------ ------------
173,708,880 158,243,100 148,147,038
Operating expenses
Compensation and employee benefits 96,239,782 88,406,342 82,760,664
Other operating expenses 45,476,904 41,950,933 38,264,085
Amortization of intangibles 8,110,010 7,596,274 6,965,947
Interest expense 2,037,338 1,244,729 559,654
------------ ------------ ------------
151,864,034 139,198,278 128,550,350
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 21,844,846 19,044,822 19,596,688
Income Taxes 9,054,995 7,638,431 7,767,778
------------ ------------ ------------
NET INCOME $ 12,789,851 $ 11,406,391 $ 11,828,910
============ ============ ============
NET INCOME PER COMMON SHARE:
BASIC $ 0.98 $ 0.84 $ 0.82
============ ============ ============
DILUTED $ 0.97 $ 0.84 $ 0.82
============ ============ ============
See notes to consolidated financial statements.
Statement of Consolidated Shareholders' Equity
Common Retained
Stock Earnings
- -------------------------------------------------------------------------
Balance at January 1, 1995 $43,426,295 $23,003,861
Issuance of 318,326 shares of Common Stock 3,817,746
Purchase of 1,336,820 shares of Common Stock (17,389,044)
Payment of dividends ($.57 per share) (8,209,877)
Other 48,903 119,096
Net income 11,828,910
------------ ------------
Balance at December 31, 1995 29,903,900 26,741,990
Issuance of 462,170 shares of Common Stock 6,251,661
Purchase of 801,700 shares of Common Stock (10,845,095)
Payment of dividends ($.605 per share) (8,116,389)
Other (44,187)
Net income 11,406,391
------------ ------------
Balance at December 31, 1996 25,266,279 30,031,992
Issuance of 192,446 shares of Common Stock 2,895,697
Purchase of 700,000 shares of Common Stock (11,338,557)
Payment of dividends ($.62 per share) (8,023,705)
Other (282,958)
Net income 12,789,851
------------ ------------
Balance at December 31, 1997 $16,540,461 $34,798,138
============ ============
See notes to consolidated financial statements.
Statement of Consolidated Cash Flows
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $12,789,851 $11,406,391 $11,828,910
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of intangible assets 8,110,010 7,596,274 6,965,947
Depreciation and amortization 3,557,298 3,259,452 2,790,772
----------- ----------- -----------
Net income plus amortization and depreciation 24,457,159 22,262,117 21,585,629
Provision for losses on receivables 383,670 1,276,258 1,500,231
Provision for deferred income taxes (397,674) (816,246) 44,119
Gain on sale of assets (2,474,894) (1,856,443) (3,337,219)
Changes in operating assets and
liabilities net of effects from
insurance agency acquisitions and dispositions:
(Increase) decrease in accounts receivable 3,784,756 (1,405,660) 513,907
(Increase) decrease in prepaid expenses 197,802 (1,649,239) (768,431)
Decrease in premiums payable to
insurance companies (2,115,712) (4,241,464) (1,156,960)
Increase (decrease) in premium
deposits and credits due customers (1,197,195) 774,857 (784,471)
Increase (decrease) in accounts
payable and accrued expenses (1,178,335) 224,046 (1,639,586)
Other operating activities (475,547) 2,077,498 230,569
----------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,984,030 16,645,724 16,187,788
INVESTING ACTIVITIES
Purchase of held-to-maturity investments (3,549,631) (7,339,705) (7,399,402)
Purchase of available-for-sale investments - (260,000) -
Proceeds from maturities and calls of held-to-
maturity investments 5,640,804 7,866,672 24,546,279
Proceeds from sale of available-for-sale investments 260,000 3,914,000 -
Purchase of property and equipment (2,135,837) (5,051,253) (4,007,468)
Purchase of insurance agencies, net of cash acquired (9,309,760) (9,722,979) (6,540,948)
Proceeds from sale of assets 6,546,661 2,461,177 3,515,102
Other investing activities 115,892 222,231 216,173
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,431,871) (7,909,857) 10,329,736
FINANCING ACTIVITIES
Proceeds from long-term debt 7,750,668 30,861,966 32,522,950
Principal payments on long-term debt (5,329,866) (18,024,341) (29,194,326)
Repurchase of Common Stock (11,338,557) (10,845,095) (17,389,044)
Dividends (8,023,705) (8,116,389) (8,209,877)
Other financing activities 929,787 141,660 158,347
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (16,011,673) (5,982,199) (22,111,950)
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,540,486 2,753,668 4,405,574
Cash and cash equivalents at beginning of year 19,774,374 17,020,706 12,615,132
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $22,314,860 $19,774,374 $17,020,706
============ ============ ============
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
December 31, 1997
Hilb, Rogal and Hamilton Company (the Company), a
Virginia corporation, operates as a network of insurance
agencies with offices located in 16 states and five
Canadian provinces. Its principal activity is the
performance of retail insurance services which involves
placing property and casualty and life and health
insurance with insurers on behalf of commercial clients
in a variety of industries and individual clients.
Note A-Significant Accounting Policies
Principles of Consolidation: The accompanying
financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the amounts
reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenues: Commission income as well as the related
premiums receivable from customers and premiums payable
to insurance companies are recorded as of the effective
date of insurance coverage or the billing date, whichever
is later. Premium adjustments, including policy
cancellations, are recorded as they occur. Contingent
commissions and commissions on premiums billed and
collected directly by insurance companies are recorded as
revenue when received. Fees for services rendered are
recorded as earned. These policies are in accordance with
predominant industry practice.
Cash Equivalents: The Company considers all highly
liquid investments with a maturity of three months or
less at the date of acquisition to be cash equivalents.
The carrying amounts reported on the balance sheet
approximate the fair values.
Investments: Management determines the appropriate
classification of debt securities at the time of purchase
and reevaluates such designation at each balance sheet
date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, which is
adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in
investment income. Interest and dividends are included in
investment income. Realized gains and losses, and
declines in value judged to be other than temporary are
included in investment income.
Marketable debt securities not classified as held-to-
maturity are classified as available-for-sale. Available-
for-sale securities are carried at fair value. Amortized
cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to
maturity. Such amortization is included in investment
income. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale
securities are included in investment income. The cost of
securities sold is based on the specific identification
method. Interest and dividends on securities classified
as available-for-sale are included in investment income.
Property and Equipment: Property and equipment are
stated on the basis of cost. Depreciation is computed by
the straight-line method over estimated useful lives (30
to 33 years for buildings, 3 to 7 years for equipment).
Leasehold improvements are generally amortized using a
straight-line method over the term of the related lease.
Intangible Assets: Intangible assets arising from
acquisitions accounted for as purchases principally
represent expiration rights, the excess of costs over the
fair value of net assets acquired and noncompetition
agreements. The cost of such assets is being amortized
principally on a straight-line basis over periods ranging
up to 20 years for expiration rights, 15 to 40 years for
the excess of costs over the fair value of net assets
acquired and 3 to 20 years for noncompetition agreements.
Effective January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of." Adoption of this
statement did not have a material impact on the Company's
financial position or results of operations.
Accounting for Stock-Based Compensation: In October
1995, the Financial Accounting Standards Board (the FASB)
issued Statement No. 123, "Accounting for Stock-Based
Compensation" (Statement No. 123). The statement defines
a fair value based method of accounting for employee
stock options. Companies may, however, elect to adopt
this new accounting rule through a pro forma disclosure
option, while continuing to use the intrinsic value based
method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25).
The Company has elected to continue to follow APB
No. 25 and related interpretations in accounting for its
employee stock options. In addition, the effect of
applying Statement No. 123's fair value method to the
Company's employee stock options does not result in net
income and net income per share that are materially
different from amounts reported. Accordingly, the pro
forma disclosures required by Statement No. 123 have not been
included in the footnotes to the financial statements.
Fair Value of Financial Instruments: The carrying
amounts reported in the balance sheet for cash and cash
equivalents, receivables, premiums payable to insurance
companies, accounts payable and accrued expenses and long-
term debt approximate those assets and liabilities' fair
values. Fair values for investment securities are based
on quoted market prices and are disclosed in Note B. Fair
value for interest rate swaps are based on a discounted
cash flow method.
Interest Rate Swaps: The Company enters into
interest rate swap agreements to modify the interest
characteristics of its outstanding debt. Each interest
rate swap agreement is designated with all or a portion
of the principal balance and term of a specific debt
obligation. These agreements involve the exchange of
amounts based on variable interest rates for amounts
based on fixed interest rates over the life of the
agreement without an exchange of the notional amount upon
which the payments are based. The differential to be paid
or received as interest rates change is accrued and
recognized as an adjustment of interest expense related
to the debt (the accrual accounting method).
The related amount payable to or receivable from
counterparties is included in other liabilities or assets. The fair
value of the swap agreements and changes in the fair
value as a result of changes in market interest rates are
not recognized in the financial statements.
Gains and losses on terminations of interest rate
swap agreements are deferred as an adjustment to the
carrying amount of the outstanding debt and amortized as an
adjustment to interest expense related to the debt over the
remaining term of the original contract life of the terminated swap
agreement. In the event of the early extinguishment of a
designated debt obligation, any realized or unrealized
gain or loss from the swap would be recognized in income
coincident with the extinguishment gain or loss.
Income Taxes: The Company (except for its Canadian
subsidiary) files a consolidated federal income tax
return. Deferred taxes result from temporary differences
between the reporting for income tax and financial
statement purposes primarily related to bad debt expense,
depreciation expense, basis differences in intangible
assets, deferred compensation arrangements and the
recognition of net operating loss carryforwards from
pooled entities.
Net Income Per Share: In 1997, the FASB issued
Statement No. 128, "Earnings Per Share" (Statement No.
128). Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to
Statement No. 128 requirements.
Accounting Pronouncements: In 1997, the FASB issued
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (Statement No. 130)
effective for years beginning after December 15, 1997.
The new rules require companies to display items of other
comprehensive income either below the total for net
income, in a separate statement of comprehensive income,
or in a statement of changes in shareholders' equity, and
disclose the accumulated balance of other comprehensive
income separately from retained earnings and additional
paid-in capital in the equity section of the balance
sheet.
The Company will adopt the provisions of Statement
No. 130 during the first quarter of 1998. The adoption of
Statement No. 130 will not materially affect the
Company's results of operations or financial position.
Note B-Investments
The following is a summary of held-to-maturity and
available-for-sale investments included in current and
long-term assets on the consolidated balance sheet:
Held-to-Maturity Investments
----------------------------
Gross Gross
December 31, 1997 Cost Unrealized Gains Unrealized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government agencies $ 1,000,000 $ 1,000,000
Obligations of states and political subdivisions 5,840,000 $75,000 $1,000 5,914,000
Certificates of deposit and other 2,083,000 2,083,000
-----------------------------------------------------------------
$ 8,923,000 $75,000 $1,000 $ 8,997,000
=================================================================
Held-to-Maturity Investments
----------------------------
Gross Gross
December 31, 1996 Cost Unrealized Gains Unrealized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------
Obligations of U.S. government agencies $ 1,500,000 $3,000 $ 1,497,000
Obligations of states and political subdivisions 7,795,000 $75,000 1,000 7,869,000
Certificates of deposit and other 1,719,000 1,719,000
------------------------------------------------------------------
$ 11,014,000 $75,000 $4,000 $ 11,085,000
==================================================================
Available-for-Sale Investments
------------------------------
Gross Gross
December 31, 1996 Cost Unrealized Gains Unrealized Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 260,000 $ - $ - $ 260,000
==================================================================
The amortized cost and fair value of held-to-
maturity investments at December 31, 1997, by contractual
maturity, are as follows. Actual maturities may differ
from contractual maturities because the issuers of the
securities may have the right to prepay obligations
without prepayment penalties.
Cost Fair Value
- ---------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Investments
Due in one year $ 3,893,000 $ 3,905,000
Due after one year
through five years 5,030,000 5,092,000
------------------------------
$ 8,923,000 $ 8,997,000
==============================
Note C-Property and Equipment
Property and equipment consists of the following:
1997 1996
- -------------------------------------------------------------------------------
Furniture and equipment $27,880,000 $27,589,000
Buildings and land 3,835,000 7,666,000
Leasehold improvements 1,887,000 1,986,000
--------------------------
33,602,000 37,241,000
Less accumulated depreciation and amortization 21,840,000 21,149,000
--------------------------
$11,762,000 $16,092,000
==========================
Note D-Long-Term Debt
1997 1996
----------------------------
Notes payable to banks,
interest currently at 6.42% $30,000,000 $23,000,000
Installment notes payable
incurred in acquisitions
of insurance agencies, 4.9%
to 10.0%, due in various
installments, to 1999 4,123,000 3,846,000
Mortgage notes payable,
paid in full during 1997 - 2,156,000
Installment notes payable,
6.0% to 8.5%, due in various
installments, to 2003 410,000 539,000
--------------------------
34,533,000 29,541,000
Less current portion 2,075,000 2,345,000
--------------------------
$32,458,000 $27,196,000
==========================
Maturities of long-term debt for the four years
ending after December 31, 1998 are $1,509,000 in 1999;
$821,000 in 2000; $48,000 in 2001; and $30,048,000 in
2002.
Interest paid was $3,437,000, $1,232,000 and
$733,000 in 1997, 1996 and 1995, respectively.
The Company entered into a credit agreement with two
banks that allows for borrowings of up to $30,000,000
under loans due in 2002, which bear interest at variable
rates. At December 31, 1997, $30,000,000 was borrowed
under this agreement. This credit agreement contains,
among other provisions, requirements for maintaining
certain financial ratios.
The Company entered into an interest rate swap
agreement effective December 19, 1997 to manage interest
rate exposure on its long-term debt. The swap agreement
is a contract to exchange floating rate for fixed rate
interest payments periodically over the life of the
agreement without the exchange of the underlying notional
amount of $7,500,000. The notional amounts of interest
rate agreements are used to measure interest to be paid
or received and do not represent the amount of exposure
to credit loss. The credit risk to the Company would be
the counterparty's inability to pay the differential in
the fixed rate and variable rate in a rising interest
rate environment. The Company is exposed to market risk
from changes in interest rates.
The differential paid or received on the interest
rate per the agreement is recognized as an adjustment to
interest expense. Under the Company's interest rate swap
agreement, the Company contracted with the counterparty
to exchange the difference between the Company's fixed
pay rate of 6.52% and the counterparty's variable pay
rate of LIBOR plus 0.575%. At December 31, 1997, the
variable rate was approximately 6.54%. The contract
expires December 19, 2002.
Effective January 21, 1998, the Company entered into
an interest rate swap agreement similar to the agreement
described above with an underlying notional amount of
$7,500,000. The contract expires on January 21, 2003.
Note E-Retirement Plans
The Hilb, Rogal and Hamilton Company Profit Sharing
Savings Plan (the Profit Sharing Plan) covers
substantially all employees of the Company and its
subsidiaries. The Profit Sharing Plan, which may be
amended or terminated by the Company at any time,
provides that the Company shall contribute to a trust
fund such amounts as the Board of Directors shall
determine subject to certain earnings restrictions as
defined in the Profit Sharing Plan.
Prior to merger with the Company, certain of the
merged companies had a separate profit sharing, ESOP or
benefit plan. These plans were terminated or frozen at
the time of merger with the Company.
The total expense under these plans for 1997, 1996
and 1995 was approximately $3,120,000, $2,680,000 and
$2,075,000, respectively.
The Company has a Supplemental Executive Retirement
Plan (the SERP), which is a defined benefit plan under
which the Company will pay supplemental pension benefits
to key executives in addition to amounts received under
the Profit Sharing Plan. Such benefits will be paid from
Company assets.
The following table sets forth the SERP's funded
status and amounts recognized in the Company's
consolidated balance sheet:
1997 1996
---------------------------
Actuarial present value of:
Vested benefits $(2,038,000) $(1,923,000)
Nonvested benefits (190,000) (226,000)
---------------------------
Accumulated benefit obligation (2,228,000) (2,149,000)
Effect of anticipated future
compensation levels (915,000) (827,000)
---------------------------
Projected benefit obligation (3,143,000) (2,976,000)
Plan assets at fair value - -
---------------------------
Excess of projected benefit
obligation over assets (3,143,000) (2,976,000)
Unrecognized prior
service costs 1,795,000 1,921,000
Unrecognized net (gain) loss (45,000) 38,000
---------------------------
Accrued SERP expense (1,393,000) (1,017,000)
Adjustment to recognize
minimum liability (835,000) (1,132,000)
---------------------------
Pension liability recognized in
consolidated balance sheet $(2,228,000) $(2,149,000)
===========================
The expense for the SERP includes the following
components:
1997 1996 1995
------------------------------
Service cost $188,000 $182,000 $159,000
Interest cost 229,000 223,000 175,000
Amortization of
prior service cost 126,000 135,000 126,000
----------------------------
$543,000 $540,000 $460,000
============================
Significant assumptions used in determining
obligations and the related expense for the SERP include
a weighted average discount rate of 7.5% and 8.0% in 1997
and 1996, respectively, and an assumed rate of increase
in future compensation of 4.0% in both years.
Note F-Other Postretirement Benefit Plans
The Company sponsors postretirement benefit plans
that provide medical and life insurance benefits to
retirees. Employees who retire after age 55 with 10 years
of service are eligible to participate. The plans are
contributory for substantially all participants, with
retiree contributions adjusted annually and the health
care plan contains other cost sharing features such as
deductibles and coinsurance. The accounting for the
health care plan anticipates future cost sharing changes
to the written plan that are consistent with the
Company's expressed intent to increase retiree
contributions annually in accordance with increases in
health care costs. The Company's policy is to fund the
cost of these benefits when actual claims are incurred.
The following table sets forth the plans' combined
funded status reconciled with the amount shown in the Company's
consolidated balance sheet:
1997 1996
-------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(896,000) $(1,050,000)
Active plan participants - -
----------------------------
Total (896,000) (1,050,000)
Plan assets at fair value - -
----------------------------
Accumulated postretirement
benefit obligation in
excess of plan assets (896,000) (1,050,000)
Unrecognized net gain (704,000) (909,000)
Unrecognized transition
benefit cost 991,000 1,149,000
----------------------------
Accrued postretirement
benefit liability $(609,000) $ (810,000)
============================
Net periodic postretirement benefit cost includes
the following components:
1997 1996 1995
- ---------------------------------------------------------------------------
Interest cost $ 80,000 $ 82,000 $ 104,000
Amortization of
transition obligation
over 14 years 115,000 115,000 115,000
Amortization of
prior gain (79,000) (67,000) (29,000)
----------------------------------------
$ 116,000 $ 130,000 $ 190,000
========================================
For measurement purposes, a 7.20% and a 7.85% annual
rate of increase in the per capita cost of covered health
care benefits was assumed for 1998 and 1997,
respectively; the rate was assumed to decrease gradually
to 6.15% in 2021 and remain at that level thereafter. The
health care cost trend rate assumption has an effect on
the amounts. For example, increasing the assumed health
care cost trend rates by one percentage point in each
year would increase the accumulated postretirement
benefit obligation for the medical plan as of December
31, 1997 and 1996 by $87,000 and $97,000, respectively,
and the net periodic postretirement benefit cost for 1997
by $8,000.
The weighted average discount rate used in
determining the accumulated postretirement benefit
obligation was 7.5% and 8.0% at December 31, 1997 and
1996, respectively.
Note G-Income Taxes
The components of income taxes shown in the
statement of consolidated income are as follows:
1997 1996 1995
- ---------------------------------------------------------------------------
Current
Federal $7,401,000 $6,481,000 $6,232,000
State 1,438,000 1,305,000 1,268,000
Foreign 614,000 668,000 224,000
-----------------------------------------
9,453,000 8,454,000 7,724,000
Deferred
Federal (247,000) (639,000) 76,000
State (46,000) (73,000) 14,000
Foreign (105,000) (104,000) (46,000)
-----------------------------------------
(398,000) (816,000) 44,000
-----------------------------------------
$9,055,000 $7,638,000 $7,768,000
=========================================
The effective income tax rate varied from the
statutory federal income tax rate as follows:
1997 1996 1995
- ---------------------------------------------------------------------------
Statutory federal income
tax rate 35.0% 35.0% 35.0%
Tax exempt investment
income (0.8) (1.4) (2.1)
State income taxes,
net of federal tax benefit 4.2 4.5 4.2
Other 3.1 2.0 2.5
-----------------------------------------
Effective income tax rate 41.5% 40.1% 39.6%
=========================================
Income taxes paid were $9,646,000, $10,128,000 and
$8,428,000 in 1997, 1996 and 1995, respectively.
Income before income taxes from Canadian operations
was $900,000, $1,168,000 and $317,000 in 1997, 1996 and
1995, respectively.
Deferred income taxes reflect the tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and
assets on the consolidated balance sheet are as
follows:
1997 1996
- ---------------------------------------------------------------
Deferred tax liabilities:
Intangible assets $6,015,000 $6,483,000
Other-net 1,129,000 661,000
---------------------------
Total deferred tax liabilities 7,144,000 7,144,000
Deferred tax assets:
Deferred compensation 917,000 844,000
Bad debts 870,000 925,000
Other 833,000 751,000
---------------------------
Total deferred tax assets 2,620,000 2,520,000
---------------------------
Net deferred tax liabilities $4,524,000 $4,624,000
===========================
In 1997, the Company reached a final agreement with
the Internal Revenue Service (the IRS) which resolved all
issues arising from the IRS's audit of the Company's
income tax returns for the seven years ended December 31,
1994. Since the agreement related to deductions claimed
in connection with intangible assets acquired by the
Company, the additional tax that resulted from the
agreement, including current payments and an increase in
deferred tax liabilities of $2,626,000 and $1,500,000,
respectively, has been recorded as an increase in
goodwill of $4,126,000 on the December 31, 1996 balance
sheet. The settlement will not have a significant impact
on the Company's future earnings.
Note H-Leases
The Company and its subsidiaries have noncancellable
lease contracts for office space, equipment and automobiles
which expire at various dates through the year 2008 and
generally include escalation clauses for increases in
lessors' operating expenses and increased real estate
taxes.
Future minimum rental payments required under such
operating leases are summarized as follows:
1998 $ 6,341,000
1999 5,327,000
2000 4,045,000
2001 2,637,000
2002 1,790,000
Thereafter 2,217,000
-----------
$22,357,000
===========
Rental expense for all operating leases amounted to
$7,276,000 in 1997, $6,845,000 in 1996 and $6,712,000 in
1995. Included in rental expense for 1997, 1996 and 1995
is approximately $386,000, $313,000 and $435,000,
respectively, which was paid to employees or related
parties.
Note I-Shareholders' Equity
The Company has adopted and the shareholders have
approved the 1986 Incentive Stock Option Plan and the
Hilb, Rogal and Hamilton Company 1989 Stock Plan, which
provide for the granting of options to purchase up to an
aggregate of approximately 1,765,000 and 1,843,000 shares
of Common Stock as of December 31, 1997 and 1996,
respectively. The number of shares available for grant
may increase or decrease with the respective changes in
the number of shares of Common Stock outstanding. Stock
options granted have seven to ten year terms and vest and
become fully exercisable at various periods up to five years.
Stock option activity under the plan was as follows:
Weighted
Average
Shares Exercise Price
- ------------------------------------------------------------
Outstanding at January 1, 1995 869,575 $13.39
Granted 25,000 12.17
Exercised 600 12.75
Expired 87,250 13.10
---------
Outstanding at December 31, 1995 806,725 13.38
Granted 72,900 13.00
Exercised 3,600 10.40
Expired 132,700 13.21
---------
Outstanding at December 31, 1996 743,325 13.39
Granted 528,190 15.97
Exercised 78,052 12.19
Expired 87,000 13.42
---------
Outstanding at December 31, 1997 1,106,463 14.70
=========
Exercisable at December 31, 1997 514,935 13.56
The options outstanding at December 31, 1997 have
exercise prices that range from $10.00 to $18.20. The
weighted average contractual life of these options is six
years.
There were 466,000 and 978,000 shares available for
future grant under these plans as of December 31, 1997
and 1996, respectively.
No compensation expense is recognized in operations
for 1997, 1996 or 1995.
Note J-Net Income per Share
The following table sets forth the computation of
basic and diluted net income per share:
1997 1996 1995
- -------------------------------------------------------------------------------------
Numerator for basic and dilutive
net income per share -net income $12,789,851 $11,406,391 $11,828,910
=========================================
Denominator
Weighted average shares 13,069,453 13,493,255 14,470,407
Effect of guaranteed future shares
to be issued in connection
with an agency acquisition 29,764 7,075 -
-----------------------------------------
Denominator for basic net income per share 13,099,217 13,500,330 14,470,407
Effect of dilutive securities:
Employee stock options 101,280 25,451 9,989
Contingent stock - acquisition 14,222 - -
-----------------------------------------
Dilutive potential common shares 115,502 25,451 9,989
-----------------------------------------
Denominator for diluted net income
per share -adjusted weighted
average shares and assumed conversions 13,214,719 13,525,781 14,480,396
=========================================
Net Income Per Common Share:
Basic $ 0.98 $ 0.84 $ 0.82
=========================================
Diluted $ 0.97 $ 0.84 $ 0.82
=========================================
Note K-Acquisitions
During 1997, the Company acquired certain assets and
liabilities of six insurance agencies for $9,426,000
($6,333,000 in cash, $2,393,000 in guaranteed future
payments and 53,555 shares of Common Stock) in purchase
accounting transactions. Assets acquired include
expiration rights of $7,082,000, noncompetition
agreements of $1,151,000 and goodwill of $1,310,000. The
combined purchase price may be increased by approximately
$1,490,000 in 1998, $1,490,000 in 1999 and $1,490,000 in
2000 based upon commissions or net profits realized.
During 1996, the Company acquired certain assets and
liabilities of 15 insurance agencies for $16,189,000
($7,343,000 in cash, $2,736,000 in guaranteed future
payments and 451,610 shares of Common Stock) in purchase
accounting transactions. Assets acquired include
expiration rights of $13,565,000, noncompetition
agreements of $2,820,000 and goodwill of $2,717,000. The
combined purchase price was increased by approximately
$3,392,000 in 1997 and may be increased by approximately
$4,675,000 in 1998, $1,354,000 in 1999, $127,000 in 2000
and $37,000 in 2001 based upon commissions or net profits
realized.
During 1995, the Company acquired certain assets and
liabilities of 14 insurance agencies for $13,097,000
($7,303,000 in cash, $1,914,000 in guaranteed future
payments and 317,726 shares of Common Stock) in purchase
accounting transactions. Assets acquired include
expiration rights of $9,616,000, noncompetition
agreements of $395,000 and goodwill of $7,278,000. The
combined purchase price was increased by approximately
$2,174,000 in 1997 and $1,748,000 in 1996 and may be
increased by approximately $690,000 in 1998 and $358,000
in 1999 based upon commissions or net profits realized.
The above purchase acquisitions have been included
in the Company's consolidated financial statements from
their respective acquisition dates.
The pro forma unaudited results of operations for
the years ended December 31, 1997 and 1996, assuming the
above 1997 and 1996 purchase acquisitions had occurred as
of January 1, 1996, are as follows:
1997 1996
- --------------------------------------------------------------
Revenues $176,072,000 $177,054,000
Net Income 12,970,000 11,458,000
Net Income Per
Common Share:
Basic 0.99 0.84
Diluted 0.98 0.84
Note L-Sale of Assets
During 1997, 1996 and 1995, the Company sold certain
insurance accounts and other assets resulting in gains of
approximately $2,475,000, $1,856,000 and $3,337,000,
respectively. These amounts are included in other
revenues in the statement of consolidated income.
Revenues, expenses and assets of these operations were
not material to the consolidated financial statements.
Note M-Commitments and Contingencies
Included in cash and cash equivalents and premium
deposits and credits due customers are approximately
$1,496,000 and $1,798,000 of funds held in escrow at
December 31, 1997 and 1996, respectively. In addition,
premiums collected from insureds but not yet remitted to
insurance carriers are restricted as to use by laws in
certain states in which the Company operates. The amount
of cash and cash equivalents so restricted was
approximately $6,149,000 and $9,462,000 at December 31,
1997 and 1996, respectively.
There are in the normal course of business various
outstanding commitments and contingent liabilities.
Management does not anticipate material losses as a
result of such matters.
The Company is generally involved in routine
insurance policy related litigation. Several suits have
been brought against the Company involving settlement of
various insurance matters where customers are seeking
both punitive and compensatory damages. Management, upon
the advice of counsel, is of the opinion that such suits
are substantially without merit, that valid defenses
exist and that such litigation will not have a material
effect on the consolidated financial statements.
Note N-Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results
of operations for the years ended December 31, 1997 and
1996:
Three Months Ended1
(in thousands, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------------
1997
Total Revenues $47,913 $44,323 $41,850 $39,623
Net Income 5,407 3,537 2,566 1,280
Net Income Per Common Share:2
Basic 0.41 0.27 0.20 0.10
Diluted 0.40 0.27 0.19 0.10
1996
Total Revenues $43,076 $37,936 $38,315 $38,916
Net Income 5,162 2,674 2,241 1,329
Net Income Per Common Share:2
Basic 0.38 0.20 0.17 0.10
Diluted 0.38 0.20 0.17 0.10
1. Quarterly financial information is affected by
seasonal variations. The timing of contingent
commissions, policy renewals and acquisitions may cause
revenues, expenses and net income to vary significantly
from quarter to quarter.
2. The 1996 and first three quarters of 1997 net income
per share amounts have been restated to comply with
Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Hilb, Rogal and Hamilton Company
We have audited the accompanying consolidated
balance sheet of Hilb, Rogal and Hamilton Company and
subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements.
An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of Hilb, Rogal and
Hamilton Company and subsidiaries at December 31, 1997
and 1996, and the consolidated results of their
operations and their cash flows for each of the three
years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
February 11, 1998
Board of Directors & Officers
Board of Directors
Robert H. Hilb (1) (2) (3) (4)
Chairman
Hilb, Rogal and Hamilton Company
Glen Allen, Virginia
Andrew L. Rogal (1)
President and Chief Executive Officer
Hilb, Rogal and Hamilton Company
Glen Allen, Virginia
Theodore L. Chandler, Jr. (1)(2)(3)
Attorney
Williams, Mullen, Christian & Dobbins
Richmond, Virginia
J.S.M. French (2)(3)(4)
President
Dunn Investment Company
Birmingham, Alabama
Thomas H. O'Brien (2)(3)(4)
Chairman and Chief Executive Officer
PNC Bank Corp.
Pittsburgh, Pennsylvania
Robert S. Ukrop (1)(4)
President and Chief Operating Officer
Ukrop's Super Markets, Inc.
Richmond, Virginia
Philip J. Faccenda (2)
Vice President and General Counsel, Emeritus
University of Notre Dame
Notre Dame, Indiana
Norwood H. Davis, Jr. (3)
Chairman of the Board and Chief Executive Officer
Trigon Healthcare, Inc.
Richmond, Virginia
(1) Executive Committee Member
(2) Compensation Committee Member
(3) Audit Committee Member
(4) Nominating Committee Member
Officers
Robert H. Hilb
Chairman
Andrew L. Rogal
President and Chief Executive Officer
Timothy J. Korman
Executive Vice President - Finance and Administration
John C. Adams, Jr.
Executive Vice President
Dianne F. Fox
Senior Vice President and Secretary
Carolyn Jones
Senior Vice President, Chief Financial Officer and Treasurer
Walter L. Smith
Vice President, General Counsel and Assistant Secretary
Vincent P. Howley
Vice President - Agency Financial Operations
Henry C. Kramer
Vice President - Human Resources
Robert J. Hilb
Vice President
Robert W. Blanton, Jr.
Assistant Vice President and Controller
Valerie C. Elwood
Assistant Vice President
Agency Locations
UNITED STATES
Alabama/Georgia Region
Alabama
Birmingham
Fort Payne*
Mobile*
Georgia
Atlanta
Gainesville
St. Simons Island
Savannah
Florida Region
Daytona Beach
Fort Lauderdale
Fort Myers
Gainesville
Orlando
Tampa
Illinois
Moline
Chicago*
Mid-Atlantic Region
Connecticut
New Haven (2 locations)
Middletown*
Old Saybrook*
Maryland
Baltimore
Rockville
Pennsylvania
Pittsburgh
New York, New York*
Virginia
Richmond
Norfolk*
New York
Buffalo
Rochester*
Syracuse*
Northern California Region
Fresno
Bakersfield*
Dinuba*
Redwood City
Newport Beach*
Charlotte,
North Carolina*
San Rafael
Sacramento*
Santa Rosa*
Truckee*
Vallejo*
Oklahoma/Texas Region
Oklahoma
Oklahoma City
Tulsa*
Texas
Amarillo
Hereford*
Corpus Christi
Dallas
Abilene*
Houston
McAllen
Victoria
Cuero*
Edna*
Southwest Region
Arizona
Phoenix
Flagstaff*
Mesa*
Tucson*
California
Ontario
Palm Desert
Colorado
Denver
Michigan
Grand Rapids
Port Huron
Richmond*
CANADA
Edmonton, Alberta
Montreal, Quebec
Toronto, Ontario
Winnipeg, Manitoba
Vancouver, British Columbia
*Denotes Branch Offices
GENERAL INFORMATION
Form 10-K
Any shareholder wishing to obtain a copy of the Company's Form
10-K for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission may do so without charge by
writing to the Secretary at the corporate address.
Annual Meeting
The Company's Annual Meeting of Shareholders will be held on
May 5, 1998 at 10:00 A.M. at Crestar Bank, 919 East Main Street,
Richmond, Virginia.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 756-3353
www.chasemellon.com
Shareholder Inquiries
Communications regarding dividends, lost stock certificates, change
of address, etc. should be directed to ChaseMellon Shareholder
Services. Other inquiries should be directed to the Secretary
at the corporate address.
Outside Counsel
Williams, Mullen, Christian & Dobbins
Richmond, Virginia
Independent Auditors
Ernst & Young LLP
Richmond, Virginia
Corporate Headquarters
4235 Innslake Drive
P.O. Box 1220
Glen Allen, Virginia 23060-1220
(804) 747-6500
(804) 747-6046 fax
www.hrh.com
Shareholders
The Company's Common Stock has been publicly traded since July 15, 1987.
It is traded on the New York Stock Exchange under the symbol "HRH."
As of December 31, 1997, there were 626 holders of record of the
Company's Common Stock.
Market Price of Common Stock
High and low stock prices and dividends per share for the indicated
quarters were:
Cash
Sales Price Dividends
Quarter Ended High Low Declared
- ---------------------------------------------------------
1996
March 31 $14.00 $12.63 $.15
June 30 14.00 12.63 .15
September 30 13.75 11.38 .15
December 31 14.00 12.13 .155
1997
March 31 $13.88 $12.50 $.155
June 30 17.25 13.50 .155
September 30 18.69 15.75 .155
December 31 19.63 17.56 .155
(Back cover)
(Picture of Hilb, Rogal and Hamilton's Corporate Logo)
Hilb, Rogal and Hamilton Company
4235 Innslake Drive
P.O. Box 1220
Glen Allen, Virginia 23060-1220
804.747.6500
804.747.6046 fax