1
EXHIBIT 13
Portions of 1995 Annual Report to Shareholders
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
[CHART 1: Net Income (in millions) by year:]
1990 - $ 5.8
1991 - $ 5.9
1992 - $ 2.6
1993 - $ 8.1
1994 - $13.5
1995 - $14.8
[CHART 2: Pre-tax Margin as a Percent of Revenue, by year:]
1990 - 11.7%
1991 - 12.7%
1992 - 9.1%
1993 - 13.3%
1994 - 20.3%
1995 - 21.9%
In April of 1993, Poe & Associates, Inc., headquartered in Tampa, Florida, and
Brown & Brown, Inc., headquartered in Daytona Beach, Florida, combined to form
Poe & Brown, Inc. (the "Company"). Since that time, the Company's operating
results have steadily improved. The Company achieved pre-tax income from
operations of $23,329,000 in 1995, compared to $20,586,000 in 1994 and
$13,047,000 in 1993. Pre-tax income, as a percentage of total revenues, was
21.9% in 1995, 20.3% in 1994 and 13.3% in 1993. This trend is primarily the
result of the Company's achievement of revenue growth and operating efficiency
improvements.
The Company's revenues are comprised principally of commissions
paid by insurance companies, fees paid directly by clients and investment
income. Commission revenues generally represent a percentage of the premium
paid by the insured and are materially affected by fluctuations in both premium
rate levels charged by insurance underwriters and the volume of premiums
written by such underwriters. These premium rates are established by insurance
companies based upon many factors, none of which are controlled by the Company.
Beginning in 1986 and continuing through 1995, revenues have been adversely
influenced by a consistent decline in premium rates resulting from intense
competition among property and casualty insurers for expanding market share.
Among other factors, this condition of prevailing decline in premium rates,
commonly referred to as a "soft market," has generally resulted in flat to
reduced commissions on renewal business. Although some forecasts predict
premium increases, the probability of overall rate increases in 1996 is
unpredictable.
Revenues are further impacted by the development of new and existing
proprietary programs, fluctuations in insurable exposure units and the volume
of business from new and existing clients and changes in general economic and
competitive conditions. For example, stagnant rates of inflation in recent
years have generally limited the increase in insurable exposure units such as
property values, sales and payroll levels. Conversely, the increasing trend in
litigation settlements and awards has caused some clients to seek higher levels
of insurance coverage. Still, the Company's revenues continue to grow through
acquisitions, new business initiatives and development of new products, markets
and services. Effective March 1, 1995, the Company acquired Insurance West by
merger. This merger has been accounted for as a pooling-of-interests and,
accordingly, the Company's consolidated financial statements have been restated
for all prior periods. Also during 1995, the Company acquired four general
insurance agencies, an insurance brokerage firm and several books of business
(customer accounts) which were accounted for as purchases.
Contingent commissions may be paid to the Company by insurance carriers
based upon the volume and profitability of the business placed with
18 Poe & Brown, Inc. 1995 Annual Report
3
[CHART 1: Revenue Per Employee (in thousands), by year:]
1990 - $ 75.1
1991 - $ 79.5
1992 - $ 82.4
1993 - $ 97.6
1994 - $102.3
1995 - $102.8
[CHART 2: Employees at Year End, by year:]
1990 - 1,100
1991 - 1,073
1992 - 1,111
1993 - 1,002
1994 - 993
1995 - 1,035
such carriers by the Company, and are generally received in the first
quarter of each year. In each of the last three years, contingent commissions
have represented less than 3.5% of total revenues.
Fee revenues are generated primarily by the Service Division of the
Company, which offers administration and benefit consulting services primarily
in the workers' compensation and employee benefit self-insurance markets.
Florida's legislative reform of workers' compensation insurance, as well as
certain market factors, have resulted in increased competition in this service
sector. In response to this increased competition, the Company has offered
value-added services that enabled it to increase 1995 fee revenues over those
recognized in 1994. For the past three years, service fee revenues have ranged
from 9.9% to 11.1% of total commissions and fees.
Investment income consists primarily of interest earnings on premiums
and advance premiums collected and not immediately remitted to insurance
carriers, with such funds being held in a fiduciary capacity. Investment income
also includes gains and losses realized from the sale of investments, although
in 1995 such sales were minimal and realized gains and losses were immaterial.
In 1994, investment income included a $2,185,000 realized gain from the sale of
a portion of the Company's investment in Rock-Tenn Company ("Rock-Tenn"). The
Company's policy is to invest its available funds in high-quality, fixed-income
investment securities.
In 1995, total expenses represented 78.1% of total revenues, compared to
79.7% in 1994 and 86.7% in 1993. This improving trend is primarily attributable
to continuing operational efficiencies realized from recent mergers and
acquisitions, expense initiatives resulting in lower employee benefit costs and
reductions of interest expense due to significant repayments of debt.
The Company anticipates that results of operations for 1996 will
continue to be influenced by these competitive and economic conditions.
The following discussion and analysis regarding results of operations and
liquidity and capital resources should be considered in conjunction with the
accompanying consolidated financial statements and related notes.
Results of Operations for the years ended December 31, 1995, 1994 and 1993
COMMISSIONS AND FEES
Commissions and fees increased 6% in 1995, 2% in 1994 and 7% in 1993. Excluding
the effect of acquisitions, commissions and fees increased 3% in 1995 and 4% in
1993. Acquisition activity in 1994 did not have a material impact on
commissions and fees. The 1995 results reflect an increase in commissions for
each of the Company's operating divisions, mainly through new business growth.
In general, property and casualty insurance premium prices remained flat in
1995; however, there were some continued increases in premium rates for coastal
properties as a result of recent hurricanes in Florida. In addition, certain
segments and industries had some increases in insurable exposure units during
1995. Both of these factors, along with the record level of new business,
contributed to the increase in the 1995 Retail Division revenues.
19 Poe & Brown, Inc. 1995 Annual Report
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[CHART 1: Interest Expense as a Percentage of Revenue, by year:]
1990 - 1.9%
1991 - 2.3%
1992 - 2.3%
1993 - 1.8%
1994 - 1.3%
1995 - 0.8%
[CHART 2: Operating Expense as a Percentage of Revenue, by year:]
1990 - 27.0%
1991 - 25.6%
1992 - 27.5%
1993 - 26.5%
1994 - 22.5%
1995 - 21.6%
INVESTMENT INCOME
Investment income decreased to $3,733,000 in 1995 compared to $5,126,000 in
1994. The 1994 results included a $2,185,000 gain from the sale of
approximately 23% of the Company's investment in the common stock of Rock-Tenn.
This sale was in conjunction with an initial public offering by Rock-Tenn of
its common stock. The Company continues to own 509,064 shares of common stock
of Rock-Tenn and has no current plans to sell these shares. Excluding this
gain, investment income in 1995 increased by $792,000, or 27%, primarily due
to increased available funds and the implementation of a consolidated cash
management program which has resulted in improved earnings on cash and cash
equivalents.
OTHER INCOME
Other income consists primarily of gains and losses from the sale and
disposition of assets. During 1995, gains on the sale of customer accounts were
$590,000, compared to $411,000 in 1994 and $864,000 in 1993.
EMPLOYEE COMPENSATION & BENEFITS
Employee compensation and benefits increased 5% in 1995, remained constant in
1994 and increased less than 3% in 1993. Excluding acquisitions, employee
compensation and benefits increased 1% in 1995, remained constant in 1994 and
decreased less than 1% in 1993. Employee compensation and benefits, as a
percentage of total revenue, remained constant in 1995 and 1994 at 52%, down
from 54% in 1993. As of December 31, 1995, the Company had 1,035 full-time
equivalent employees, compared to 993 at the beginning of the year. The
increase in personnel in 1995 is primarily related to acquisitions. The 1995
increase in compensation and employee benefits of $2,519,000 is primarily
attributable to the addition of personnel through acquisitions, additional
commission expense as a result of the increased commission and fee revenues,
and additional expense due to the acceleration of vesting of benefits under
certain terminated deferred compensation arrangements effective July 1, 1995.
OTHER OPERATING EXPENSES
Other operating expenses remained constant in 1995, compared to a decrease of
12% in 1994, as compared to 1993. Excluding acquisitions, operating expenses
decreased 3% in 1995 and 12% in 1994. The 1994 decrease is primarily
attributable to approximately $2,500,000 of non-recurring merger and
combination costs related to the Poe & Associates merger with Brown &
Brown, incurred in 1993, and subsequent improvements in operational
efficiencies that resulted in decreases to most other operating expenses.
INTEREST AND AMORTIZATION
Interest and amortization decreased $580,000 and $553,000, or 10% and 9%, in
1995 and 1994, respectively, due primarily to a reduction in outstanding debt.
20 Poe & Brown, Inc. 1995 Annual Report
5
INCOME TAXES
The effective rate on income from operations was 36.6% in 1995, 34.3% in 1994
and 37.8% in 1993. The lower effective tax rates in 1995 and 1994 are
primarily due to the effect of recording a $451,000 and a $700,000 reduction,
respectively, to the general tax reserves, as a result of reaching a settlement
agreement with the Internal Revenue Service ("Service") on the Service's
outstanding examination issues (see below for detailed discussion of this
adjustment).
In 1992, the Service completed examinations of the Company's
federal income tax returns for tax years 1988, 1989 and 1990. As a result of
these examinations, the Service issued Reports of Proposed Adjustments
asserting income tax deficiencies which, by including interest and state income
taxes for the periods examined and the Company's estimates of similar
adjustments for subsequent periods through December 31, 1993, would have
totaled $6,100,000. The disputed items related primarily to the deductibility
of amortization of purchased customer accounts of approximately $5,107,000 and
of non-compete agreements of approximately $993,000. In addition, the Service's
report included a dispute regarding the time at which the Company's payments
made, pursuant to certain indemnity agreements, would be deductible for tax
reporting purposes.
During 1994 and 1995, the Company reached settlement agreements with the
Service with respect to all of the disputed items. In 1994, a partial
settlement was reached. Payments made under this partial settlement
resulted in a $400,000 reduction to the previously established tax reserves.
During 1994, after considering this reduction, the Company reduced the
remaining general tax reserves by $700,000. This decrease was recorded as a
reduction to the 1994 income tax provision.
In March of 1995, the Company reached an agreement with the Service on all
remaining items. This agreement resulted in payments that reduced the reserve
by approximately $349,000. After considering these reductions, the Company
recorded a $451,000 reduction in the general tax reserve, which was recorded as
a reduction to the 1995 income tax provision.
Liquidity and Capital Resources
The Company's cash and cash equivalents of $28,350,000 at December 31, 1995
increased $5,165,000 from the December 31, 1994 balance of $23,185,000. During
1995, primary sources of cash were $21,208,000 from operating activities,
$1,469,000 from sales of fixed assets and customer accounts and $106,000 from
the exercise of stock options and issuances of common stock. Cash was used
during 1995 primarily for payments on long-term debt of $2,132,000, additions to
fixed assets of $5,321,000, purchases of investments of $1,208,000,
acquisitions of businesses of $6,005,000 and payments of dividends of
$4,149,000.
The Company's cash and cash equivalents of $23,185,000 at December 31,
1994 decreased $3,947,000 from the December 31, 1993 balance of $27,132,000.
During 1994, primary sources of cash were $10,396,000 from operating activities,
$2,346,000 from sales of investments and $1,687,000 from the exercise of stock
options and issuances of common stock. Cash was used during 1994 primarily for
payments on long-term debt of $12,004,000 and payments of dividends of
$3,542,000.
The Company's cash and cash equivalents of $27,132,000 at December 31,
1993 increased
21 Poe & Brown, Inc. 1995 Annual Report
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$8,326,000 from the December 31, 1992 balance of $18,806,000. During 1993,
primary sources of cash were $20,709,000 from operating activities, $427,000
from the sale of fixed assets and customer accounts and $3,833,000 from bank
borrowings. Cash was used during 1993 primarily for payments required under
acquisition-related contingency agreements and for purchases of fixed assets
totaling $3,935,000, repayment of long-term debt of $11,090,000 and payments of
dividends of $2,971,000.
The Company's working capital ratio was 1.13 to 1.0, 1.10 to 1.0 and 1.03
to 1.0 as of December 31, 1995, 1994 and 1993, respectively. The increase in
the ratio at December 31, 1995 was primarily the result of higher net cash
flows from operations.
In 1993, the Company entered into a long-term credit facility with a
national banking institution that consisted of two secured term loans
aggregating $7,500,000 that carried interest at the LIBOR rate plus 2%. These
bank term loans were used to replace approximately $3,750,000 of 8.5% notes
held by an insurance company and to fund acquisition contingency payments
finalized in 1993. As of December 31, 1993, all acquisition contingency
agreements had been finalized. This debt was fully retired during 1994.
The Company has had available an unsecured line of credit with a national
banking institution totaling $3,500,000 since 1991, but that line of credit was
reduced to $2,000,000 in conjunction with the credit facility referred to
above. During 1994, in connection with the repayment of the long-term credit
facility referred to above, the $2,000,000 line of credit was terminated.
In November 1994, the Company entered into a revolving credit facility
with a national banking association that provides for borrowings of up to
$10,000,000. On borrowings under this facility of less than $1,000,000, the
interest rate is the higher of the prime rate or the federal funds rate plus
.50%. On borrowings under this facility equal to or in excess of $1,000,000,
the interest rate is LIBOR plus .50% to 1.25%, depending on certain financial
ratios. A commitment fee is assessed in the amount of .25% per annum on the
unused balance. The facility expires in November 1997. No borrowings were
outstanding against this line of credit as of December 31, 1995. Borrowings
would be secured by substantially all of the assets of the Company, subject to
existing or permitted liens.
The Company has a credit agreement with a major insurance company under
which $6,000,000 (the maximum amount available for borrowings) was outstanding
at December 31, 1995, at an interest rate equal to the prime rate plus 1%. The
amount available under this facility decreases by $1,000,000 each August,
through the year 2001, when it will expire.
The Company believes that its existing cash, cash equivalents, short-term
investment portfolio, funds generated from operations and the availability of
the bank line of credit will be sufficient to satisfy its normal financial
needs through at least the end of 1996.
22 Poe & Brown, Inc. 1995 Annual Report
7
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------
(in thousands, except per share data) 1995 1994 1993
- ----------------------------------------------------------------------------------------
REVENUES
Commissions and fees $101,998 $95,852 $94,420
Investment income 3,733 5,126 2,061
Other income 634 602 1,340
-------- ------- -------
Total revenues 106,365 101,580 97,821
-------- ------- -------
EXPENSES
Employee compensation and benefits 55,073 52,554 52,699
Other operating expenses 22,951 22,848 25,930
Interest and amortization 5,012 5,592 6,145
-------- ------- -------
Total expenses 83,036 80,994 84,774
-------- ------- -------
Income before income taxes 23,329 20,586 13,047
Income taxes 8,530 7,067 4,929
-------- ------- -------
Net income $14,799 $13,519 $8,118
======== ======= =======
Net income per share $1.70 $1.56 $0.95
======== ======= =======
Weighted average number of shares outstanding 8,699 8,670 8,571
======== ======= =======
See notes to consolidated financial statements.
23 Poe & Brown, Inc. 1995 Annual Report
8
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
(in thousands, except per share data) 1995 1994
- -----------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 28,350 $ 23,185
Short-term investments 1,308 787
Premiums, commissions and fees receivable, less allowance
for doubtful accounts of $100 at 1995 and $69 at 1994 56,553 56,784
Other current assets 6,336 6,779
-------- -------
Total current assets 92,547 87,535
Fixed assets, net 10,412 8,330
Intangibles, net 36,613 32,973
Investments 8,473 9,274
Other assets 3,076 2,868
-------- --------
Total assets $151,121 $140,980
======== ========
LIABILITIES
Premiums payable to insurance companies $ 64,588 $ 63,195
Premium deposits and credits due customers 6,070 6,970
Accounts payable and accrued expenses 9,417 8,302
Current portion of long-term debt 1,768 1,434
-------- --------
Total current liabilities 81,843 79,901
Long-term debt 7,023 7,430
Deferred income taxes 1,502 3,778
Other liabilities 6,341 5,765
-------- --------
Total liabilities 96,709 96,874
-------- --------
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share; authorized 18,000 shares;
issued 8,682 shares at 1995 and 8,635 shares at 1994 868 864
Additional paid-in capital 2,614 2,241
Retained earnings 46,094 35,660
Net unrealized appreciation of available-for-sale securities,
net of tax effect of $3,027 at 1995 and $3,344 at 1994 4,836 5,341
-------- --------
Total shareholders' equity 54,412 44,106
-------- --------
Total liabilities and shareholders' equity $151,121 $140,980
======== ========
See notes to consolidated financial statements.
24 Poe & Brown, Inc. 1995 Annual Report
9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL NET UNREALIZED TREASURY STOCK
PAID-IN RETAINED APPRECIATION
(in thousands, except per share data) SHARES AMOUNT CAPITAL EARNINGS (DEPRECIATION) SHARES AMOUNT TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1993 8,539 $ 854 $1,125 $20,736 $ - 161 $(1,483) $21,232
Net income 8,118 8,118
Issued for stock option plans
and employee stock purchase plans 11 1 13 (116) 677 691
Tax benefit from sale of option
shares by employees 176 176
Cash dividends paid ($.40 per share) (2,971) (2,971)
----- ----- ------ ------- --------- ---- ------- -------
BALANCE, DECEMBER 31, 1993 8,550 855 1,314 25,883 - 45 (806) 27,246
Net income 13,519 13,519
Issued for stock option plans
and employee stock purchase plans 85 9 872 (45) 806 1,687
Tax benefit from sale of option
shares by employees 55 55
Cumulative effect of change in
accounting principle (see Note 1) 23 23
Net increase in unrealized appreciation
of available-for-sale securities 5,318 5,318
Partnership distributions for
Insurance West (200) (200)
Cash dividends paid ($.42 per share) (3,542) (3,542)
----- ----- ------ ------ --------- ---- ------- ------
BALANCE, DECEMBER 31, 1994 8,635 864 2,241 35,660 5,341 - - 44,106
Net income 14,799 14,799
Acquired and issued for stock
option plans and employee stock
purchase plans 47 4 318 (216) 106
Tax benefit from sale of option
shares by employees 55 55
Net decrease in unrealized appreciation
of available-for-sale securities (505) (505)
Cash dividends paid ($.48 per share) (4,149) (4,149)
------ ---- ------ ------- --------- ---- ------- ------
BALANCE, DECEMBER 31, 1995 8,682 $868 $2,614 $46,094 $ 4,836 - $ - $54,412
====== ==== ====== ======= ========= ==== ======= =======
See notes to consolidated financial statements.
25 Poe & Brown, Inc. 1995 Annual Report
10
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
(in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $14,799 $13,519 $8,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,487 6,398 7,030
Provision for doubtful accounts 31 19 562
Deferred income taxes (2,191) (1,173) 499
Net gains on sales of investments, fixed assets and
customer accounts (537) (2,231) (864)
Premiums, commissions and fees receivable decrease (increase) 200 (2,374) 1,982
Other assets decrease (increase) 235 (2,439) 805
Premiums payable to insurance companies increase (decrease) 1,393 (3,951) 4,657
Premium deposits and credits due customers (decrease) increase (900) 1,919 (471)
Accounts payable and accrued expenses increase (decrease) 1,115 (683) (2,821)
Other liabilities increase 576 1,392 1,212
-------- ------- -------
Net cash provided by operating activities 21,208 10,396 20,709
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to fixed assets (5,321) (2,400) (1,815)
Payments for businesses acquired, net of cash acquired (6,005) (1,382) (2,120)
Proceeds from sales of fixed assets and customer accounts 1,469 1,337 427
Purchases of investments (1,208) (187) (93)
Proceeds from sales of investments 642 2,346 709
Other investing activities, net - (53) (130)
------- ------- -------
Net cash used in investing activities (10,423) (339) (3,022)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (2,132) (12,004) (11,090)
Proceeds from long-term debt 500 - 3,833
Exercise of stock options, issuances of stock and treasury stock sales 106 1,687 691
Tax benefit from sale of option shares by employees 55 55 176
Partnership distributions - (200) -
Cash dividends paid (4,149) (3,542) (2,971)
------- ------- -------
Net cash used in financing activities (5,620) (14,004) (9,361)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 5,165 (3,947) 8,326
Cash and cash equivalents at beginning of period 23,185 27,132 18,806
-------- ------- -------
Cash and cash equivalents at end of period $28,350 $23,185 $27,132
======== ======= =======
See notes to consolidated financial statements.
26 Poe & Brown, Inc. 1995 Annual Report
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
NATURE OF OPERATIONS Poe & Brown, Inc. (the "Company") is a diversified
insurance brokerage and agency that markets and sells primarily property and
casualty insurance products and services to its clients. The Company's business
is divided into four divisions: the Retail Division, which markets and sells a
broad range of insurance products to commercial, professional and individual
clients; the National Programs Division, which develops and markets proprietary
professional liability, property, casualty and life and health insurance
programs to members of various professional and trade groups through
independent agencies; the Service Division, which provides insurance-related
services, such as third-party administration and consultation for workers'
compensation and employee benefit self-insurance markets; and the Brokerage
Division, which markets and sells excess and surplus commercial insurance
primarily through independent agents and brokers.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of Poe & Brown, Inc. and its subsidiaries.
All significant intercompany account balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION Commissions relating to the brokerage and agency
activity, whereby the Company has primary responsibility for the collection of
premiums from insureds, are generally recognized as of the latter of the
effective date of the insurance policy or the date billed to the customer.
Commissions to be received directly from insurance companies are generally
recognized when determined. Subsequent commission adjustments, such as policy
endorsements, are recognized upon notification from the insurance companies.
Commission revenues are reported net of sub-broker commissions. Contingent
commissions from insurance companies are recognized when received. Fee income
is recognized as services are rendered.
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 reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS Cash and cash equivalents principally consist of
demand deposits with financial institutions and highly liquid investments
having maturities of three months or less when purchased. Premiums received
from insureds, but not yet remitted to insurance carriers, are held in cash and
cash equivalents in a fiduciary capacity.
PREMIUMS, COMMISSIONS AND FEES RECEIVABLE In its capacity as an insurance
broker or agent, the Company typically collects premiums from insureds and,
after deducting its authorized commission, remits the premiums to the
appropriate
27 Poe & Brown, Inc. 1995 Annual Report
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance companies. In other circumstances, the insurance companies collect
the premiums directly from the insureds and remit the applicable commissions to
the Company. Accordingly, as reported in the Consolidated Balance Sheets,
"premiums" are receivable from insureds and "commissions" are receivable from
insurance companies. "Fees" are receivable primarily from customers of the
Service Division.
INVESTMENTS Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under these rules, the Company's
marketable equity security investments have been classified as
"available-for-sale" and are reported at estimated fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. 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.
Nonmarketable equity securities and certificates of deposit having
maturities of more than three months when purchased are reported at cost,
adjusted for other-than-temporary market value declines.
Application of SFAS No. 115 resulted in net unrealized gains reported
in shareholders' equity of $4,836,000 in 1995 and $5,341,000 in 1994, net of
deferred income taxes of $3,027,000 and $3,344,000, respectively. The adoption
of this Statement resulted in an increase of $23,000 to shareholders' equity
as of January 1, 1994, net of $15,000 in deferred taxes.
As of January 1, 1994, the Company owned 659,064 shares of common stock of
Rock-Tenn Company ("Rock-Tenn") with an aggregate cost of $565,000. As of that
date, the common stock of Rock-Tenn was not publicly traded and, therefore, had
no readily determinable market value. However, on March 3, 1994, the common
stock of Rock-Tenn was registered with the Securities and Exchange Commission
and began trading on the Nasdaq over-the-counter securities market at the
initial public offering price of $16.50 per share. As part of the initial
public offering of Rock-Tenn's common stock, the Company sold 150,000 shares of
its investment in this stock and reported a net after-tax gain of $1,342,000 in
the first quarter of 1994. The remaining 509,064 shares of Rock-Tenn common
stock held by the Company have been classified as non-current,
available-for-sale securities as of December 31, 1995 and 1994. The Company has
no current plans to sell these shares.
FIXED ASSETS Fixed assets are stated at cost. Expenditures for improvements
are capitalized and expenditures for maintenance and repairs are charged to
operations as incurred. Upon sale or retirement, the cost and related
accumulated depreciation and amortization are removed from the accounts and the
resulting gain or loss, if any, is reflected in income. Depreciation has been
provided using principally the straight-line method over the estimated useful
lives of the related assets, which range from three to ten years. Leasehold
improvements are amortized on the straight-line method over the term of the
related leases.
28 Poe & Brown, Inc. 1995 Annual Report
13
INTANGIBLES Intangible assets are stated at cost less accumulated
amortization and principally represent purchased customer accounts, non-compete
agreements, purchased contract agreements and the excess of costs over the
fair value of identifiable net assets acquired (goodwill). Purchased customer
accounts, non-compete agreements and purchased contract agreements are being
amortized on a straight-line basis over the related estimated lives and
contract periods, which range from four to 15 years. Goodwill is being
amortized on a straight-line basis for periods ranging from 15 to 40 years.
Purchased customer accounts are records and files obtained from acquired
businesses that contain information on insurance policies and the related
insured parties that is essential to policy renewals.
The carrying value of intangibles, corresponding with each agency
division comprising the Company, is periodically reviewed by management to
determine if the facts and circumstances suggest that they may be impaired. In
the insurance brokerage and agency industry, it is common for agencies or
customer accounts to be acquired at a price determined as a multiple of the
corresponding revenues. Accordingly, the Company assesses the carrying value of
its intangibles by comparison to a reasonable multiple applied to corresponding
revenues and considers the operating cash flow generated by the corresponding
agency division. Any impairment identified through this assessment may require
that the carrying value of related intangibles be adjusted.
INCOME TAXES The Company files a consolidated federal income tax return.
Deferred income taxes are provided for in the consolidated financial statements
and relate principally to expenses charged to income for financial reporting
purposes in one period and deducted for income tax purposes in other periods,
unrealized appreciation of available-for-sale securities and basis differences
of intangible assets.
NET INCOME PER SHARE Net income per share is based on the weighted average
number of shares outstanding, adjusted for the dilutive effect of stock
options, which is the same on both a primary and fully-diluted basis.
Note 2 - Mergers
On April 28, 1993, Poe & Associates, Inc. ("Poe") issued 3,013,975 shares of
its common stock in exchange for all of the outstanding common stock of Brown &
Brown, Inc. ("Brown"), a closely-held general insurance agency headquartered in
Daytona Beach, Florida. Subsequent to that transaction, the Company's name was
changed to Poe & Brown, Inc.
On November 11, 1993, the Company issued 124,736 shares of its common
stock in exchange for all of the outstanding common stock of Arch-Holmes
Insurance, Inc. ("Arch-Holmes"), a closely-held general insurance agency
headquartered in Hollywood, Florida.
Each of these transactions was accounted for as a pooling-of-interests
and, accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the mergers to include the results of
operations, financial positions and cash flows of Brown and Arch-Holmes. To
conform to Poe's year end, the fiscal year ends for Brown and Arch-Holmes were
changed to December 31, effective on each of the respective merger dates.
29 Poe & Brown, Inc. 1995 Annual Report
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the 1993 individual company operating results
of Poe, Brown and Arch-Holmes. Amounts pertaining to Brown and Arch-Holmes for
1993 reflect their respective operating results up to their dates of merger.
-----------------------------------------------
(in thousands) POE BROWN ARCH-HOLMES COMBINED
---------------------------------------------------------------------
1993
Revenues $ 81,099 $ 13,488 $ 1,265 $ 95,852
Net income (loss) 7,012 1,145 (39) 8,118
======== ======== ======= ========
Effective March 1, 1995, the Company issued 146,300 shares of its common stock
in exchange for all of the partnership interest in Insurance West, a Phoenix,
Arizona general insurance agency. The merger has been accounted for as a
pooling-of-interests and, accordingly, the Company's consolidated financial
statements have been restated for all periods prior to the merger to include
the results of operations, financial positions and cash flows of Insurance
West. The individual company operating results of Insurance West prior to the
date of the merger are not material to the Company's consolidated operating
results.
Note 3 - Acquisitions
During 1995, the Company acquired four general insurance agencies, an insurance
brokerage firm and several books of business (customer accounts) which were
accounted for as purchases. The total cost of these acquisitions was
$7,250,000, including $5,715,000 of cash payments and notes payable of
$1,535,000. The excess of the total purchase price over the fair value of net
tangible assets acquired of approximately $7,225,000 was assigned to purchased
customer accounts, goodwill and other intangible assets.
During 1994, the Company acquired the assets of three insurance agencies
for an aggregate cost of $656,000. Substantially all of this cost was assigned
to purchased customer accounts, non-compete agreements and goodwill. The
Company had no acquisitions during 1993 accounted for as purchases.
Additional or return consideration resulting from acquisition contingency
provisions are recorded as adjustments to intangibles when they occur. Certain
contingency payments relating to these acquisitions were finalized in 1993,
resulting in a net increase to the original combined purchase price of
$5,893,000. The results of operations of the acquired companies have been
included in the consolidated financial statements from their respective
acquisition dates. Pro forma results of operations of the Company for the
years ended December 31, 1995 and 1994, including 1995 and 1994 acquisitions as
though they occurred on January 1, 1995 and 1994, respectively, were not
materially different from the results of operations as reported.
30 Poe & Brown, Inc. 1995 Annual Report
15
Note 4 - Investments
Investments at December 31 consisted of the following:
1995
CARRYING VALUE
---------------------------
(in thousands) CURRENT NON-CURRENT
- -------------------------------------------------------------------------------------------------
Available-for-sale marketable equity securities $ 287 $ 8,272
Nonmarketable equity securities and certificates of deposit 1,021 201
------- -------
Total investments $ 1,308 $ 8,473
======= =======
1994
CARRYING VALUE
---------------------------
(in thousands) CURRENT NON-CURRENT
- -------------------------------------------------------------------------------------------------
Available-for-sale marketable equity securities $ 317 $ 9,163
Nonmarketable equity securities and certificates of deposit 470 111
------- -------
Total investments $ 787 $ 9,274
======= =======
Available-for-sale securities at December 31 consisted of the following:
-------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
(in thousands) COST GAINS LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------------------
Marketable Equity Securities:
1995 $ 732 $ 7,855 $ 28 $ 8,559
1994 $ 795 $ 8,739 $ 54 $ 9,480
====== ======= ===== =======
Proceeds from sales of available-for-sale securities totaled $329,000 in 1995,
resulting in gross realized gains and losses of $42,000 and $41,000
respectively. In 1994, the Company's proceeds from sales of available-for-sale
securities totaled $2,314,000, from which $2,185,000 of gross gains were
realized.
Cash, cash equivalents, investments, premiums and commissions receivable,
premiums payable to insurance companies, premium deposits and credits
due customers, accounts payable and accrued expenses and long-term debt
are considered financial instruments. The carrying amount for each of these
items at December 31, 1995 approximates its fair value.
31 Poe & Brown, Inc. 1995 Annual Report
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Fixed Assets
Fixed assets at December 31 are summarized as follows:
---------------------
(in thousands) 1995 1994
- --------------------------------------------------------------------------
Furniture, fixtures and equipment $ 20,153 $ 17,180
Land, buildings and improvements 672 1,349
Leasehold improvements 644 1,564
-------- --------
$ 21,469 $ 20,093
Less accumulated depreciation and amortization 11,057 11,763
-------- --------
$ 10,412 $ 8,330
======== ========
Depreciation and amortization expense amounted to $2,352,000 in 1995,
$2,132,000 in 1994 and $2,650,000 in 1993.
Note 6 - Intangibles
Intangibles at December 31 were comprised of the following:
--------------------
(in thousands) 1995 1994
- -------------------------------------------------------------------------
Purchased customer accounts $ 32,244 $ 26,999
Non-compete agreements 10,996 9,706
Goodwill 20,358 19,431
Purchased contract agreements 1,102 789
-------- --------
64,700 56,925
Less accumulated amortization 28,087 23,952
-------- --------
$ 36,613 $ 32,973
======== ========
Amortization expense amounted to $4,135,000 in 1995, $4,266,000 in 1994 and
$4,380,000 in 1993.
32 Poe & Brown, Inc. 1995 Annual Report
17
Note 7 - Long-Term Debt
Long-term debt at December 31 consisted of the following:
-------------------
(in thousands) 1995 1994
- ------------------------------------------------------------------------
Long-term credit agreement $ 6,000 $ 7,000
Notes payable from treasury stock purchases 1,422 1,662
Acquisition notes payable 1,350 -
Other notes payable 19 202
------- -------
8,791 8,864
Less current portion 1,768 1,434
------- -------
Long-term debt $ 7,023 $ 7,430
======= =======
In 1991, the Company entered into a long-term credit agreement with a
major insurance company that made available $10,000,000 at an interest rate
equal to the prime rate plus 1% (9.5% at December 31, 1995). The amount of
available credit decreases by $1 million each August through the year 2001, when
it will expire. This credit agreement requires the Company to maintain certain
financial ratios and comply with certain other covenants.
In November 1994, the Company entered into a revolving credit facility
with a national banking association that provides for borrowings of up to
$10,000,000. On borrowings under this facility of less than $1,000,000, the
interest rate is the higher of the prime rate or the federal funds rate plus
.50%. On borrowings under this facility equal to or in excess of $1,000,000, the
interest rate is LIBOR plus .50% to 1.25%, depending on certain financial
ratios. A commitment fee is assessed in the amount of .25% per annum on the
unused balance. The facility expires in November 1997. No borrowings were
outstanding against this line of credit as of December 31, 1995 and 1994.
Borrowings would be secured by substantially all of the assets of the Company,
subject to existing or permitted liens.
Treasury stock notes payable are due to various individuals for the
redemption of Brown & Brown, Inc. stock. These notes bear no interest and have
maturities ranging from calendar years ending 1997 to 2001. These notes have
been discounted at effective yields ranging from 8.5% to 9.2% for presentation
in the consolidated financial statements.
Acquisition notes payable represents debt incurred to former owners of
certain agencies acquired in 1995. These notes, including future contingent
payments, are payable in monthly and annual installments through 1998, including
interest ranging from 5% to 6%.
Maturities of long-term debt for succeeding years are $1,768,000 in
1996, $1,810,000 in 1997, $1,564,000 in 1998, $1,254,000 in 1999, $1,257,000 in
2000 and a total of $1,138,000 thereafter.
Interest expense included in the consolidated statements of income was
$877,000 in 1995, $1,326,000 in 1994 and $1,765,000 in 1993.
33 Poe & Brown, Inc. 1995 Annual Report
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and Contingencies
The Company leases facilities and certain items of office equipment under
noncancelable operating lease arrangements expiring on various dates through
2005. These occupancy leases generally contain renewal options and escalation
clauses based on increases in the lessors' operating expenses and other charges.
The Company anticipates that most of these leases will be renewed or replaced
upon expiration. At December 31, 1995, the aggregate future minimum lease
payments under all noncancelable lease agreements are as follows:
YEAR ENDING DECEMBER 31, (in thousands)
- ----------------------------------------------------------
1996 $ 3,633
1997 3,573
1998 3,346
1999 3,330
2000 2,997
Thereafter (2001-2005) 8,258
--------
Total minimum future lease payments $ 25,137
========
Rental expense in 1995, 1994 and 1993 for operating leases totaled $4,785,000,
$4,269,000 and $4,594,000, respectively.
The Company is not a party to any legal proceedings other than various
claims and lawsuits arising in the normal course of business. Management of the
Company does not believe that any such claims or lawsuits will have a material
effect on the Company's financial condition or results of operations.
Note 9 - Income Taxes
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes." The cumulative effect of adopting Statement No. 109 as of January 1,
1993 was to increase net income by $119,000.
At December 31, 1995, the Company had net operating loss carryforwards
of $850,000 for income tax reporting purposes that expire in the years 1996
through 2002. These carryforwards were derived from agency acquisitions by the
Company beginning in 1985. For financial reporting purposes, a valuation
allowance of $38,000 has been recognized to offset the deferred tax assets
related to these carryforwards.
34 Poe & Brown, Inc. 1995 Annual Report
19
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the corresponding amounts used for income tax reporting
purposes. Significant components of the Company's deferred tax liabilities and
assets as of December 31, were as follows:
------------------------------
(in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets $ 577 $ 444
Net unrealized appreciation of available-for-sale securities 3,027 3,344
Installment sales 204 296
Prepaid insurance and pension 769 666
Intangible assets 32 628
General tax reserves - 800
Other - 239
------- -------
Total deferred tax liabilities 4,609 6,417
------- -------
Deferred tax assets:
Deferred compensation 1,269 1,062
Accruals and reserves 1,376 1,250
Net operating loss carryforwards 327 327
Other 173 38
Valuation allowance for deferred tax assets (38) (38)
------- -------
Total deferred tax assets 3,107 2,639
------- -------
Net deferred tax liabilities $ 1,502 $ 3,778
======= =======
Significant components of the provision (benefit) for income taxes are as
follows:
---------------------------------------------------
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 9,374 $ 7,237 $ 3,728
State 1,347 1,003 702
-------- -------- --------
Total current provision 10,721 8,240 4,430
-------- -------- --------
Deferred:
Federal (2,037) (1,076) 419
State (154) (97) 80
-------- -------- --------
Total deferred (benefit) provision (2,191) (1,173) 499
-------- -------- --------
Total tax provision $ 8,530 $ 7,067 $ 4,929
======== ======== ========
35 Poe & Brown, Inc. 1995 Annual Report
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the differences between the effective tax
rate and the federal statutory tax rate is as follows:
--------------------------
1995 1994 1993
- ---------------------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 34.2%
State income taxes, net of federal
income tax benefit 3.5 2.8 3.6
Interest exempt from taxation
and dividend exclusion (0.4) (0.3) (0.3)
Non-deductible goodwill amortization 0.7 0.7 1.2
Internal Revenue Service examination (1.9) (3.4) -
Other, net (0.3) (0.5) (0.9)
----- ----- -----
Effective tax rate 36.6% 34.3% 37.8%
===== ===== =====
Income taxes payable as of December 31, 1995 were $425,000 and are
reported as a component of accounts payable and accrued expenses. Income taxes
receivable as of December 31, 1994 were $894,000 and were reported as a
component of other current assets.
In 1992, the Internal Revenue Service ("Service") completed
examinations of the Company's federal income tax returns for tax years 1988,
1989 and 1990. As a result of its examinations, the Service issued Reports of
Proposed Adjustments, asserting income tax deficiencies which, by including
interest and state income taxes for the periods examined and the Company's
estimates of similar tax adjustments for subsequent periods through December 31,
1993, would total $6,100,000. The disputed issues related primarily to the
deductibility of amortization of purchased customer accounts of approximately
$5,107,000 and of non-compete agreements of approximately $993,000. In
addition, the Service's report included a dispute regarding the timing at
which the Company's payments made, pursuant to certain indemnity agreements,
would be deductible for tax reporting purposes.
During 1994, the Company reached a settlement with the Service with
respect to certain of the disputed amortization items and the indemnity
agreement payment issue. This settlement reduced the total remaining asserted
income tax deficiencies to approximately $2,800,000. Based on this settlement
and review of the remaining unsettled items, the Company reduced its general
income tax reserves to $800,000, which was sufficient to cover its ultimate
liability resulting from the settlement of the remaining items. Accordingly,
after taking into consideration a $400,000 reduction of the reserve resulting
from payments under the partial settlement agreement, during 1994 the Company
recorded a $700,000 adjustment to decrease the originally established reserves
of $1,900,000. This decrease was recorded as a reduction to the current income
tax provision.
36 Poe & Brown, Inc. 1995 Annual Report
21
In March of 1995, the Company reached a settlement with the Service on
all remaining items. The settlement resulted in payments of approximately
$349,000 that reduced the recorded reserve. With all disputed items settled,
the Company recorded a $451,000 reduction in the general tax reserve, which is
recorded as a reduction to the 1995 income tax provision.
Note 10 - Employee Benefit Plans
The Company maintains a defined benefit pension plan covering substantially
all previous Poe & Associates, Inc. employees with one or more years of
service. The benefits are based on years of service and compensation during
the period of employment. Annual contributions are made in conformity with
minimum funding requirements and maximum deductible limitations. On April 1,
1995, the defined benefit pension plan was amended to freeze the accrual of
further benefits. The impact of this amendment on the defined benefit pension
plan's liabilities was not material.
The plan's funded status and amounts recognized in the Company's
consolidated balance sheets are as follows:
DECEMBER 31,
-----------------------------
(in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits
of $2,322 in 1995 and $3,642 in 1994 $ (2,326) $ (3,793)
========== ==========
Projected benefit obligations for service rendered to date $ (2,326) $ (3,808)
Plan assets at fair value, principally consisting of a group
annuity contract 2,237 3,787
---------- ----------
Excess (deficit) of plan assets over (under) projected
benefit obligations (89) (21)
Unrecognized net excess of plan assets under previously
accrued but unfunded pension costs, to be amortized 255 583
---------- ----------
Net prepaid pension costs $ 166 $ 562
========== ==========
The following assumptions were used in determining the actuarial present value
of the benefit obligations and pension costs:
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------
Discount rate 7.5% 7.5% 7.5%
Long-term rate for compensation increase 3.5% 3.5% 3.5%
Long-term rate of return on plan assets 8.0% 8.0% 8.0%
------- ------ ------
37 Poe & Brown, Inc. 1995 Annual Report
22
Pension costs included in the Company's consolidated statements of income are
comprised of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
(in thousands) 1995 1994 1993
----------------------------------------------------------------------
Service cost $ 63 $ 91 $ 221
Interest cost 215 304 232
Actual return on assets (318) 113 (284)
Net amortization and deferral 166 (407) (39)
------- ------- -------
Net pension cost $ 126 $ 101 $ 130
======= ======= =======
During 1994, the defined benefit pension plan was converted to a cash balance
plan. The impact of this change on the plan costs and plan liabilities was not
material.
The Company has an Employee Stock Purchase Plan, under which all eligible
employees may subscribe to purchase shares of the Company's common stock at 85%
of the lesser of the market value of such shares at the beginning or the end of
the subscription period. Payment is made through payroll deductions, not to
exceed 10% of base pay, over the 12-month subscription period. The common
shares are issued at the end of the purchase period. During 1995, the
shareholders approved the authorization of 150,000 additional shares of common
stock to be used for issuance under this program. Accordingly, at
December 31, 1995, a total of 115,534 shares were authorized and reserved for
future issuance relating to this program.
The Company has a Deferred Savings and Profit Sharing Plan (401(k)) covering
substantially all employees with one year of service. Under this plan, the
Company makes contributions equal to that of the participants', subject to a
maximum of 2.5% of a participant's salary. Further, the Company provides for a
discretionary profit sharing contribution for all eligible employees. The
Company's contributions to the plan totaled $1,334,000 in 1995, $1,208,000 in
1994 and $1,085,000 in 1993.
38 Poe & Brown, Inc. 1995 Annual Report
23
Note 11 - Stock Option Plans
The Company has adopted stock option plans which provide for the granting to
key employees options to purchase shares of its common stock. The following
schedule summarizes the transactions from 1993 through 1995 pertaining to these
plans:
-----------------------------------------
NUMBER OF PER SHARE
OPTION SHARES OPTION PRICE RANGE
- --------------------------------------------------------------------------
Outstanding, January 1, 1993 299,640 $6.00 - $14.75
Exercised (129,462) 6.00 - 9.45
Canceled (9,936) 7.60
-------- -----------------------
Outstanding, December 31, 1993 160,242 6.00 - 14.75
Exercised (65,173) 6.00 - 14.75
Canceled (8,689) 7.60 - 14.75
-------- -----------------------
Outstanding, December 31, 1994 86,380 7.60
Exercised (60,399) 7.60
Canceled (10,601) 7.60
-------- -----------------------
Outstanding December 31, 1995 15,380 $7.60
======== =======================
All options outstanding as of December 31, 1995 are exercisable. At December
31, 1995, a total of 285,745 shares of common stock were reserved for future
issuance relating to these plans.
Note 12 - Supplemental Disclosures of Cash Flow Information
The Company's significant non-cash investing and financing activities and cash
payments for interest and income taxes are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
(in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation)
of available-for-sale securities net of tax
effect of ($317) for 1995 and $3,344
for 1994 $ (505) $5,341 $ -
Notes payable issued for purchased
customer accounts 1,535 - 3,862
Notes received on the sale of fixed assets
and customer accounts - 266 1,532
Cash paid during the year for:
Interest 896 1,462 1,944
Income taxes 9,107 9,597 3,978
====== ====== =====
39 Poe & Brown, Inc. 1995 Annual Report
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Business Concentrations
Substantially all of the Company's premiums receivable from customers and
premiums payable to insurance companies arise from policies sold on behalf of
insurance companies. The Company, as broker and agent, typically collects
premiums, retains its commission and remits the balance to the insurance
companies. A significant portion of business written by the Company is for
customers located in Florida. Accordingly, the occurrence of adverse economic
conditions or an adverse regulatory climate in Florida could have a material
adverse effect on the Company's business, although no such conditions have
been encountered in the past.
For the years ended December 31, 1995 and 1994, approximately 24% and
22%, respectively, of the Company's revenues were from insurance policies
underwritten by one insurance company. Should this carrier seek to terminate
its arrangement with the Company, the Company believes alternative insurance
companies are available to underwrite the business, although some additional
expenses and loss of market share would at least initially result. No other
insurance company accounts for as much as five percent of the Company's
revenues.
Note 14 - Reinsurance Indemnity
Whiting National Insurance Company ("Whiting"), the Company's risk-bearing
subsidiary, ceased underwriting operations in early 1985 and, in 1988, entered
into liquidation by the New York State Insurance Department ("Department").
Since then, the handling of Whiting's affairs has been the responsibility of
the Department.
In 1979, the Company agreed to indemnify a ceding insurer, should Whiting
fail to perform under a reinsurance contract. As a result, the Company is
directly responsible for the management and adjudication of claims outstanding
under that indemnification contract. The Company has historically estimated
that certain recoveries related to the indemnity were available to it from the
Whiting liquidation. While none of the underlying facts or operations of law
as to the Company's rights or creditor priority had changed, the liquidation
activities proceeded more slowly than anticipated, making realization of those
recoveries uncertain. As a result, in 1992, those estimated recoveries were
written off and reserves associated with the underlying indemnity obligation
were bolstered because of adverse loss developments. Reserves are revised based
on developments to date, the Company's estimates of the outcome of this matter
and its experience of contesting and settling claims related to this matter. As
the scope of the liability or recovery becomes better defined, there may be
changes in the estimates of future costs or recoveries. Management of the
Company does not believe that any such changes will have a material effect on
the Company's financial condition or results of operations.
40 Poe & Brown, Inc. 1995 Annual Report
25
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
of Poe & Brown, Inc.
We have audited the accompanying consolidated balance sheet of Poe & Brown,
Inc. and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Poe & Brown, Inc. and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Arthur Anderson LLP
Orlando, Florida
January 29, 1996
To the Board of Directors
of Poe & Brown, Inc.
We have audited the accompanying consolidated balance sheet of Poe & Brown,
Inc. and subsidiaries as of December 31, 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1994. 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 audits 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 Poe & Brown,
Inc. and subsidiaries at December 31, 1994, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Tampa, Florida
January 28, 1995, except for the last paragraph of Note 2,
as to which the date is March 1, 1995.
41 Poe & Brown, Inc. 1995 Annual Report