Exhibit 13
[HRH LOGO]
HILB, ROGAL AND HAMILTON COMPANY
4235 INNSLAKE DRIVE
P.O. BOX 1220
GLEN ALLEN, VA 23060-1220
TEL 804-747-6500
WWW.HRH.COM
[HRH LOGO]
PORTRAITS OF PERFORMANCE
HILB, ROGAL
AND HAMILTON
COMPANY
ANNUAL REPORT
2000
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 80 offices in the United
States, 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
disciplined merger and acquisition strategy.
2 FINANCIAL HIGHLIGHTS
3 HRH LOCATIONS
4 TO OUR SHAREHOLDERS
7 OPPORTUNITIES FOR SUSTAINED GROWTH
18 BOARD OF DIRECTORS
19 FINANCIAL PERFORMANCE
HRH PORTRAITS of PERFORMANCE
[PHOTOS]
Our financial performance in 2000 represents strategic plans for the year
fulfilled and long-term efforts rewarded. At HRH, we never forget that our
successes now and in the future could not be achieved without the dedication,
commitment and passion of our employees. We'd like to introduce you to some of
these outstanding individuals. They represent Portraits of Performance that are
truly exceptional and touch all aspects of their lives - in work and out. For it
is their performance and the performance of their HRH colleagues, applied to our
policies and practices, that bring us closer each day to achieving the HRH goal
of being the very best.
1
FINANCIAL Highlights
- ------------------------------------------------------
SELECTED FINANCIAL DATA
Hilb, Rogal and Hamilton Company and Subsidiaries
(in thousands except per share amounts)
- ------------------------------------------------------
2000 1999
- ------------------------------------------------------
Total Revenues $262,119 $227,226
- ------------------------------------------------------
Net Income $ 21,802 $ 19,486
- ------------------------------------------------------
Net Income Per Share:
Basic $ 1.66 $ 1.51
- ------------------------------------------------------
Diluted $ 1.54 $ 1.44
- ------------------------------------------------------
Dividends Per Share $ .675 $ .655
- ------------------------------------------------------
Total Assets $353,371 $317,981
- ------------------------------------------------------
Total Shareholders' Equity $ 88,222 $ 71,176
- ------------------------------------------------------
OPERATING NET INCOME(1) PER SHARE in dollars
- ----------------------------------------------------------
96 97 98 99 00
- ----------------------------------------------------------
0.76 0.86 1.05 1.29 1.52
- ----------------------------------------------------------
(1) Net income before accounting change, gains and an integration charge.
OPERATING CASH FLOW(2) PER SHARE in dollars
- ----------------------------------------------------------
96 97 98 99 00
- ----------------------------------------------------------
1.56 1.74 1.96 2.37 2.70
- ----------------------------------------------------------
(2) Operating net income plus amortization and depreciation.
TOTAL REVENUE in millions of dollars
- ----------------------------------------------------------
96 97 98 99 00
- ----------------------------------------------------------
153.0 168.4 175.4 227.2 262.1
- ----------------------------------------------------------
2
HRH PORTRAITS OF PERFORMANCE
HRH LOCATIONS
[GRAPHIC OF MAP]
o AGENCY LOCATIONS o HRH HEADQUARTERS
o WEST REGION o CENTRAL REGION o SOUTHEAST REGION
o MID-ATLANTIC REGION o NORTHEAST REGION
3
HRH PORTRAITS of PERFORMANCE
TO our SHAREHOLDERS
The year 2000 was an excellent one for HRH, highlighted by strong financial
performance, major strides towards improving productivity and efficiency, and
accelerated acquisition activity. In addition, we launched a new distribution
channel through a strategic alliance with a major bank. Overall, the year's
achievements were worthy of a firm that aspires to be the premier domestic
middle-market insurance intermediary.
Risk management for mid-sized companies in 2000 was characterized by rising
premiums and greater underwriter selectivity for renewals, heightening the need
for trusted advice and responsive service. As in the past, HRH's risk management
expertise, knowledge of each client's risk profile, and relationships with
qualified carriers enabled us to deliver the right solutions.
We are pleased to report that HRH met its financial goals for 2000, while
continuing to invest in new products and services. Improvements in productivity
and efficiency arising from our Best Practices initiative enhanced our growth
and profitability and our ability to provide products and services to our
clients. Total revenues increased 15 percent, principally reflecting internal
growth and added revenues from the American Phoenix acquisition, completed in
May 1999. Commissions and fees, excluding the effect of acquisitions and
divestitures, rose 5.5 percent. Pre-tax earnings, excluding an accounting
change, non-recurring gains and an integration charge, rose 26 percent,
benefiting from the productivity gains. Net income, before the accounting
change, increased 14 percent to $22.1 million, or $1.56 per share, from $19.5
million, or $1.44 per share in 1999. Operating net income, which excludes gains
and an integration charge, increased 25 percent to $21.6 million, or $1.52 per
share, from $17.3 million, or $1.29 per share the prior year. Operating cash
flow (operating net income plus amortization and depreciation) was $39.2
million, or $2.70 per share.
Talented, motivated people are the key to success for most service businesses,
and certainly for HRH. The basic operating models we introduced in mid-1997 to
make our distribution system even stronger, continued to serve us and our
clients well. To realize the full potential of those models and to help
employees realize their full potential, in August 1999, we launched the Best
Practices initiative, a program that hit cruising speed in 2000. Under Best
Practices, producers and managers received new support tools and training
designed to enhance client service, increase sales and improve closing ratios.
In addition, we introduced tools for measuring performance and analyzing the
profitability of sales, service and support functions and began to apply these
tools in a comprehensive review of operations. The tools helped us identify
exceptional offices and producers, as well as lines of business and offices
needing special attention. We began to see positive results from Best Practices
immediately. As we complete the roll out of the program throughout
4
[PHOTO]
ANDREW L. ROGAL
Chairman and
Chief Executive Officer
MARTIN L. VAUGHAN, III [PHOTO]
President and
Chief Operating Officer
the regions and offices, we expect to see additional benefits in 2001 and
beyond.
Our growth strategy begins with proven operating models, continuously fine-tuned
for improved productivity and efficiency. We have added efficient regional and
business-line structures to support the agency operations with product and risk
management expertise. With those strategic assets in place to serve existing
markets, in 2000 we reinforced and activated our new business development and
acquisition teams with the objective of building upon and expanding our strong
foundation.
Soon after Jack McGrath, Senior Vice President, assumed full-time responsibility
for business and product development in March, HRH formed a major new alliance
with Pittsburgh-based PNC Financial Services Group, a leading regional bank and
provider of diversified financial services. Under the alliance, bank
relationship managers and HRH personnel offer HRH products and services to a
broad range of PNC's middle-market banking clients. The program was carefully
designed to play on the strengths and meet the defined needs of each company. By
year end, training had been completed, the pace of client introductions and
sales had picked up and the early results were very encouraging. In 2001, HRH
plans to dedicate additional personnel to work with PNC on selected accounts,
broaden the products offered and explore other marketing opportunities within
the bank. In addition, based on the early success, HRH is actively exploring
alliances with other banks.
Our development group is exploring the distribution of traditional products and
services through new channels, and the distribution of new products and services
through traditional channels. Technology and the Internet hold enormous promise
for insurance, generally, and insurance brokerage specifically. WorkPlus, HRH's
Web-based platform for clients to manage employee benefit communication and
enrollment, is also an excellent distribution system for employee benefit
products and additional employer-approved products (life, supplemental
disability, homeowners, automobile and long-term care insurance) offered
individually to employees. Previously marketed as stand-alone technology, our
focus in 2001 is to use WorkPlus as a vehicle to expand distribution of our
employee benefit products. In a separate project, to take advantage of the
Internet's ability to expedite information gathering and service delivery, HRH
plans to prototype an interactive system between the middle-market client and
HRH. Automating basic information exchanges has the potential to reduce costs
and will enhance communication between the client and HRH.
Under the judicious direction of Tim Korman, Executive Vice President, HRH is a
logical acquisitor with a reputation for successfully integrating its
acquisitions. HRH provides an attractive choice for well-established insurance
brokers with strong local
5
HRH PORTRAITS of PERFORMANCE
presence and relationships who often lack the array of products and services and
clout with insurance carriers offered by a national organization. We are highly
selective about the firms we acquire, requiring a close strategic fit and
applying stringent financial criteria.
During 2000, in addition to merge-in acquisitions, we actively looked for firms
that were premier middle-market intermediaries in new or existing geographic
markets and firms that would add specialty insurance products or expertise. The
largest single acquisition was Insurance One, Inc., a full-service agency that
significantly strengthened our presence in the Washington, DC metropolitan
market. We entered the states of Kansas and Maine with the acquisitions of
Dulaney, Johnston & Priest and The Dunlap Corporation in early February 2001,
both high-quality and exceptionally well-positioned firms in their respective
states. We also acquired BASE International, a provider of risk management
investigative and security services, further broadening our portfolio of loss
prevention and risk reduction products and services. Looking forward, we plan to
pursue the same strategy and disciplined selectivity in 2001 and become
increasingly active in exploring acquisitions.
To create value for clients through exceptionally responsive products and
services, as well as to enable our talented employees to achieve their personal
aspirations, we must continue to strive to be the premier domestic middle-market
insurance intermediary.
With our recent achievements and strong outlook, we are closer than ever to
realizing that objective. To create value for shareholders, our goal is to
increase earnings per share (before non-recurring items) by a minimum of 15
percent annually. We believe we are on track to achieve that goal for 2001.
In closing, we want to thank all of the employees of HRH for their inspiring
energy and sincere effort to pursue excellence. It is their dedication and
ongoing commitment to this company that will ensure continued success.
On behalf of everyone at Hilb, Rogal and Hamilton Company, we thank you for your
continued support. We look forward to bringing you even stronger results in the
years to come.
Sincerely,
/s/ ANDREW L. ROGAL
- ------------------------------------
ANDREW L. ROGAL
Chairman and Chief Executive Officer
/s/ MARTIN L. VAUGHAN, III
- ------------------------------------
MARTIN L. VAUGHAN, III
President and Chief Operating Officer
6
In the Year 2000, we at HRH continued to reap rewards for our shareholders and
stayed true to our goal of increasing earnings per share by a minimum of 15
percent annually. We achieved that goal and believe we will do so again in 2001
through a combination of new business development, productivity gains and an
improved industry setting.
To keep the momentum going, we continue to follow the strategic plan we
implemented four years ago. In 2000 we specifically identified and focused on
five key areas of opportunity for sustained growth. Each of these areas
represents a Portrait of Performance for our company, with great gains having
been made that increase our value to clients and shareholders. They are:
- --------------------------------------------------------------------------------
OPERATING EFFICIENCIES
MERGERS AND ACQUISITIONS
OPPORTUNITIES for NEW REVENUE STREAMS
SUSTAINED GROWTH E-STRATEGY
STRATEGIC ALLIANCES
- --------------------------------------------------------------------------------
The key to our success in each of these areas is our people. In October 2000 we
were honored to be named one of the Top 200 Best Small Companies in America by
Forbes magazine. Scored by growth in sales and earnings, HRH was number 80 - the
highest ranking of any insurance intermediary. This honor reflects the hard work
and passion of the people of HRH. Every day they work diligently toward the goal
of making HRH the premier domestic middle-market intermediary. As a team and as
individuals, their patience, perseverance and energy have made the following
Portraits of Performance a reality.
7
OPERATING EFFICIENCIES At HRH, we're sustaining our success - our growth -
through continued attention to operating efficiently and effectively. Together,
our operations, our practices and, most of all, our people make our dynamic
organization increasingly profitable. We are evolving: 2000 marked the fourth
year of positive results for our operating models, introduced in 1997. We
continue to hone our systems, create technological efficiencies, and provide
producers with more products and opportunities to sell and cross-sell via
traditional routes, new strategic alliances, and high-tech distribution systems.
- -- Our Best Practices initiative, introduced in mid-1999, enjoyed its first full
year of success. It continues to increase sales, enhance service, and improve
our margins as our producers and clients benefit from having the best sales and
support tools in the industry. In addition, our training and information
resources make our producers among the most knowledgeable in the business. In
2000, we successfully launched InfoSource throughout our organization. This
web-based communication tool allows producers to tap information and expertise
from any office within the growing HRH network; facilitates prospecting and
cross- selling as we continue to build our specialty services; and improves
client service. InfoSource, and the marketing knowledge it provides, is also a
key tool in driving new revenue streams. -- To more efficiently serve our
clients, we are also developing customer web sites with links to HRH. Through
this interactive communication and management tool, we will be able to automate
basic information exchanges with our clients and provide claims and risk
management reports in real time. -- The results of these and other operational
improvements are consistent performance and better results. At HRH, we are
always on the move, looking for new ways to improve our performance and
investigating new opportunities to maximize shareholder value.
MANAGING multiples
Lynda Brice knows how to get things done. She manages multiple tasks as "chief
claims advocate" for HRH's commercial clients and is the mother of five - ages
26 years to infant twins. To achieve optimal performance, she is always
prioritizing and always on the move: diapering at dawn, rolling under a pickup
truck to investigate faulty repairs at noon, or rushing to a client's burned-out
building to coordinate restorations at the end of the day. Lynda says, "My job
is to expedite claims for my clients. I cut through red tape and get people the
assistance they need. HRH lets me do what I do best, help people."It's our
pleasure, Lynda.
8
HRH PORTRAITS OF PERFORMANCE
[PHOTO]
LYNDA BRICE
Vice President, Director of Claims Management, HRH of Virginia
[LOGO]
HRH PORTRAITS OF PERFORMANCE
[PHOTO]
KEVIN G. EARLS, ChFc, CLU
President, HRH Securities, Inc. and Senior Vice President, HRH of New York
[LOGO]
MERGERS AND ACQUISITIONS As an aggressive consolidator, HRH continues its
disciplined approach to mergers and acquisitions (M&A) by strategically
identifying the best organizations and successfully weaving them into our
operations to increase revenues and shareholder value. -- In 2000 we acquired 11
companies to open new geographic territories, expand specialty lines, and build
our presence in existing markets. Insurance One, Inc., a full-lines agency and
our largest acquisition, bolstered our presence in the Washington, DC market.
Acquisitions in Portland, Oregon, and San Diego, California, serve dual purposes
by facilitating our expansion into new geographic territories, while building
our insurance program business. Red Hawk in San Diego specializes in programs
for auto-related businesses. Granite in Oregon designs programs for bankruptcy
trustees and petroleum service industries. -- Our M&A success has been
facilitated by the excellent fit between HRH and its acquired businesses.
Integrations have been seamless as we attract organizations with similar
cultures and business philosophies and exceptionally talented employees. Once in
the HRH network, these companies find a new balance: They gain strength by being
part of a firm with national resources and expanded products and services, yet
continue to operate as part of their local communities, where they have their
own successes and established relationships. -- In 2000 we achieved our target
of 5 to 10 percent growth through acquisition. In 2001 our expansion will
continue. Already we have acquired three premier, middle-market insurance
agencies. Two of them extend our reach to Maine, New Hampshire and Kansas, and
one strengthens our presence in Greater Philadelphia. -- 2000's and 2001's
acquisitions complement HRH's current network and bring the number of agencies
serving our clients to more than 80 throughout the United States. At HRH we will
continue to grow our organization to serve our clients better, gain expertise,
and enhance or add to our current revenue streams.
scouting for CHAMPIONS
Kevin Earls knows a winner when he sees one. He's a top HRH producer and a
producer of Olympic dreams. At HRH, he takes the lead in designing winning
investment and pension strategies for his clients. As Chairman of the New York
Athletic Club Olympic Judo Program, he identifies and develops future Olympic
Judo Champions. This Fourth Degree Judo Black Belt is committed to giving his
athletes the support they need to reach their full potential: guidance, workout
facilities, coaches, and funds for worldwide competitions. Kevin believes,
"Strong character and commitment to hard work produce winners, whether in
competition or in life." We couldn't agree more.
11
NEW REVENUE STREAMS To maintain our momentum - and gain speed - we at HRH pay
constant attention to developing business opportunities. As planned, many of the
M&A transactions completed in 2000 created new revenue streams for our
organization. We added new product lines and expertise for our producers to sell
and cross sell, and we brought a new core business into HRH's offerings - risk
management investigative and security services. -- This new business, a natural
expansion of our workers compensation and insurance claims activities, was made
possible through the acquisition of BASE International in Pittsburgh,
Pennsylvania, now HRH Security Services, Inc. Among the security services now
offered to new and existing clients are workers compensation, disability and due
diligence investigations, pre-employment screening, substance abuse
surveillance, and executive protection. -- Another innovative insurance
capability HRH acquired in 2000 is equipment maintenance consulting and
insurance services, mainly for large institutions that depend on expensive
electronic equipment for their operations. HRH evaluates and renegotiates all
equipment service contracts for these clients and places reinsurance above those
contracts to guarantee the cost of repairs and tighten the cap on equipment
maintenance expenditures. -- As a premier insurance distribution system, HRH is
in an excellent position to attract partners who can help us continue to broaden
our product offerings. One area we are particularly enthusiastic about is
financial services products for employers, such as 401(k)s and other retirement
and pension planning services. We are also introducing work-site marketing of
voluntary insurance products for employees, such as life, disability, auto,
homeowners and long-term care using WorkPlus. As we head into 2001, HRH
continues to explore these and other untapped opportunities to create new,
profitable revenue streams that add value for our clients and shareholders.
in hot PURSUIT
Stephanie Anderson is always looking for a challenge. Whether a marathon or a
prospect, this HRH sales leader isn't satisfied unless she's planning a new
pursuit. A fitness buff, Stephanie rises before dawn for an hour-long bike ride
or run - time she also uses to plan her workday. She has seven marathons under
her belt and is training for her eighth. For fun, Stephanie Rides the Rockies -
a six-day cycling trip covering 60 to 80 miles a day - at elevations up to
12,000 feet. While her workouts keep her mentally and physically fresh and
better able to do her job, Stephanie says, "I am innately driven to reach
whatever goal I set for myself, whether in work or out." We can tell.
12
HRH PORTRAITS OF PERFORMANCE
[PHOTO]
STEPHANIE ANDERSON, CIC
Vice President, HRH of Denver, Inc.
[LOGO]
HRH PORTRAITS OF PERFORMANCE
[PHOTO]
ROY ZIMMER
Producer, HRH of Orlando, Inc.
[LOGO]
E-STRATEGY At HRH we're using web-based technology to move our employees,
clients and carriers into new communication territory. In 2000, as part of our
E-Strategy, we've explored and developed several programs to enhance
communication, support the businesses we're in, expand our offerings, and create
new value for our clients. WorkPlus and InfoSource are central to this strategy.
- -- InfoSource gives our employees instant access to information that helps them
to better serve their clients and win new business. In addition to being an
educational tool, InfoSource helps our staff members keep up with the latest
industry news via a customized link to a news service and gives them access to
sales information and on-line prospecting tools. -- WorkPlus is HRH's web-based
platform for clients to manage employee benefits communication and enrollment.
WorkPlus differentiates HRH from its competitors and adds value that gives us
the edge in winning new accounts. Through WorkPlus we are solving communication
problems for our commercial customers and laying the foundation to use this tool
to penetrate the employee market with employee-paid, voluntary products. --
Through another E-Strategy, we've created a new opportunity with existing
resources. In 2000, we created a web site to facilitate processing of student
health policies for our school program business in Connecticut. Students visit
the site for product information and can apply and pay for policies on line. In
addition to creating a more efficient and customer-friendly process for our
current clients, we've created a new product we're marketing to college and
university students in Connecticut. In 2001, we intend to go national with this
program. -- At HRH we will continue to innovate on line to educate employees and
create tools that reduce costs and enhance communication with our clients.
ULTRALIGHT heavyweight
When Roy Zimmer isn't exploring new ways to create value for his HRH commercial
clients, he is airborne - flying Cessnas, hang gliding or, most likely, piloting
an amphibious ultralight. A producer since 1973, when Roy doesn't have his feet
on the ground, he prefers to be flying over unexplored territory. His most
daring expedition was a 3,500-mile ultralight flight from Florida to the
Brazilian Amazon. In a harrowing, five-week journey, Roy and a flying companion
followed Columbus' route through the Bahamas. A crash landing, confusion at sea,
engine trouble, and uncooperative officials marked their trip. Yet they
persevered and eventually reached their destination. The understated Roy says,
"Once I start something, I tend to stick with it." We're sure glad he did.
15
STRATEGIC ALLIANCES Joining forces with well-matched partners is another way
we're multiplying growth opportunities at HRH. As a premier insurance
distribution system, HRH is in an excellent position to attract collaborators.
We see the evolution of the financial services industry and the desire for banks
to offer their customers insurance services as another opportunity. As an
insurance intermediary, we can help extend insurance into the banking field and
profit from those institutions' existing relationships, making the
bank/insurance partnership a winning combination. -- In May 2000 we formed a
strategic alliance with PNC Financial Services Group (PNC) to offer commercial
insurance to PNC business customers. Under the alliance, PNC bank relationship
managers and HRH personnel offer HRH products and services to a broad range of
PNC's middle-market banking clients. 2001 will see the expansion of HRH's
banking partnerships, as we dedicate more personnel to working with PNC, broaden
the products offered, and explore alliances with banks outside of PNC's
geographical footprint. -- PNC is an enormous opportunity and prototype for the
future that allows us to effectively produce business in alliance with other
financial institutions. There is huge growth potential through such matchmaking.
In addition to these strategic alliances, opportunities exist for HRH to market
voluntary employee benefits products through WorkPlus and 401(k) and retirement
planning products through an alliance with a 401(k) administrator. Such
alliances allow us to tap into a much broader market, while continuing to do
what we do best and not distracting us from our main goal - to become the
premier domestic middle-market intermediary. -- At HRH we thrive on a culture of
movement, vibrancy, and the continuing pursuit of opportunities for sustained
growth. We are proud of our people for cultivating the opportunities for growth
we established for HRH in our strategic plan and for making each a reality.
JOINING forces
As the mayor of Corpus Christi, Texas, a retired Army Reserve Colonel and a top
HRH producer, S. Loyd Neal knows the value of strategic alliances. At HRH he
works closely with his support team to provide exceptional client service. As
mayor he joins forces with his bipartisan City Council to best serve Corpus
Christi's citizens. To his clients, Loyd's an expert at writing P&C coverage for
large corporations, hospitals and banks. To his citizens, he's a leader who
marshaled a multimillion-dollar bond issue for the city. Loyd says he follows
three principles to build trust and get things done: "Listen Effectively, Govern
Consistently and Be Fair." We'll second that.
16
HRH PORTRAITS OF PERFORMANCE
[PHOTO]
S. LOYD NEAL, JR., CPCU, CIC, CLU, CPIA, ARM
Chairman, HRH of Corpus Christi, Inc.
[LOGO]
HRH PORTRAITS of PERFORMANCE
BOARD of DIRECTORS
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
ANDREW L. ROGAL(1) ROBERT H. HILB(1,2,4) MARTIN L. VAUGHAN, III(6) TIMOTHY J. KORMAN(5)
Chairman and Chief Chairman Emeritus President and Chief Executive Vice President
Executive Officer Hilb, Rogal and Operating Officer Finance and Administration
Hilb, Rogal and Hamilton Company Hilb, Rogal and Hilb, Rogal and
Hamilton Company Glen Allen, Virginia Hamilton Company Hamilton Company
Glen Allen, Virginia Glen Allen, Virginia Glen Allen, Virginia
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
THEODORE L. NORWOOD H. DAVIS, JR.(1,2,4,6) J.S.M. FRENCH(3) ROBERT W. FIONDELLA(5,6)
CHANDLER, JR.(1,2,3,4,5) Chairman Emeritus President Chairman and
Senior Executive Vice President Trigon Healthcare, Inc. Dunn Investment Company Chief Executive Officer
LandAmerica Financial Group, Inc. Richmond, Virginia Birmingham, Alabama Phoenix Home Life Mutual
Richmond, Virginia Insurance Company
Hartford, Connecticut
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
ANTHONY F. MARKEL(1,3,6) THOMAS H. O'BRIEN(1,2,4) DAVID W. SEARFOSS(3) ROBERT S. UKROP(5)
President and Chief Chairman Executive Vice President and President and Chief
Operating Officer The PNC Financial Chief Financial Officer Executive Officer
Markel Corporation Services Group, Inc. Phoenix Home Life Mutual Ukrop's Super Markets, Inc.
Glen Allen, Virginia Pittsburgh, Pennsylvania Insurance Company Richmond, Virginia
Hartford, Connecticut
(1) Executive Committee Member
(2) Compensation Committee Member
(3) Audit Committee Member
(4) Corporate Governance Committee Member
(5) Corporate Affairs Committee Member
(6) Product Development Committee Member
18
FINANCIAL Performance
19
21 SELECTED FINANCIAL DATA
22 MANAGEMENT'S DISCUSSION AND ANALYSIS
26 CONSOLIDATED BALANCE SHEET
27 STATEMENT OF CONSOLIDATED INCOME
28 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
29 STATEMENT OF CONSOLIDATED CASH FLOWS
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
44 REPORT OF INDEPENDENT AUDITORS
45 OFFICERS AND GENERAL INFORMATION
SELECTED FINANCIAL DATA
Hilb, Rogal and Hamilton Company and Subsidiaries
Year Ended December 31 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Statement of Consolidated Income Data(1):
Commissions and fees $256,366 $219,293 $170,203 $163,262 $148,692
Investment income 2,626 2,046 1,579 1,740 1,533
Other(2) 3,127 5,887 3,582 3,411 2,742
-------- -------- -------- -------- --------
Total revenues 262,119 227,226 175,364 168,413 152,967
Compensation and employee benefits 146,442 125,577 98,478 96,240 88,406
Other operating expenses 55,522 49,500 41,286 40,181 36,675
Amortization of intangibles 12,239 10,690 7,919 8,110 7,596
Interest expense 8,179 6,490 2,317 2,037 1,245
Integration costs 0 1,900 -- -- --
-------- -------- -------- -------- --------
Total expenses 222,382 194,157 150,000 146,568 133,922
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of accounting change 39,737 33,069 25,364 21,845 19,045
Income taxes 17,610 13,583 10,419 9,055 7,639
-------- -------- -------- -------- --------
Income before cumulative effect
of accounting change $ 22,127 $ 19,486 $ 14,945 $ 12,790 $ 11,406
Cumulative effect of accounting change,
net of tax(3) 325 -- -- -- --
-------- -------- -------- -------- --------
Net income $ 21,802 $ 19,486 $ 14,945 $ 12,790 $ 11,406
======== ======== ======== ======== ========
Net Income Per Share - Basic:
Income before cumulative effect of
accounting change $ 1.69 $ 1.51 $ 1.20 $ 0.98 $ 0.84
Cumulative effect of accounting change,
net of tax(3) (0.03) -- -- -- --
-------- -------- -------- -------- --------
Net income $ 1.66 $ 1.51 $ 1.20 $ 0.98 $ 0.84
======== ======== ======== ======== ========
Net Income Per Share - Assuming Dilution:
Income before cumulative effect
of accounting change $ 1.56 $ 1.44 $ 1.18 $ 0.97 $ 0.84
Cumulative effect of accounting change,
net of tax(3) (0.02) -- -- -- --
-------- -------- -------- -------- --------
Net income $ 1.54 $ 1.44 $ 1.18 $ 0.97 $ 0.84
======== ======== ======== ======== ========
Weighted average number of shares outstanding:
Basic 13,112 12,876 12,497 13,099 13,500
Diluted 14,892 14,007 12,709 13,215 13,526
Dividends paid per share $ 0.675 $ 0.655 $ 0.635 $ 0.62 $ 0.605
Consolidated Balance Sheet Data:
Intangible assets, net $196,658 $184,048 $ 87,471 $ 82,170 $ 80,006
Total assets 353,371 317,981 188,066 181,607 181,475
Long-term debt, less current portion 103,114 111,826 43,658 32,458 27,196
Other long-term liabilities 11,034 10,672 10,192 9,537 9,870
Total shareholders' equity 88,222 71,176 45,710 51,339 55,298
(1) See Note J 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, 1997 and
1996 the Company consummated six and fifteen purchase acquisitions,
respectively.
(2) During 2000, 1999, 1998, 1997, and 1996 the Company sold certain insurance
accounts and other assets resulting in gains of approximately $1,844,000,
$4,906,000, $2,638,000, $2,475,000 and $1,856,000 respectively.
(3) Adoption of SEC Staff Accounting Bulletin 101, effective January 1, 2000
establishing a reserve for policy cancellations.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Hilb, Rogal and Hamilton Company and Subsidiaries
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. Increases
and decreases in premium rates result directly in revenue changes to the
Company. Since 1987, the property and casualty insurance industry had been in a
"soft market"; however, during 2000, the industry experienced modest firming of
commercial premium rates. The Company's revenues during this period have
increased due to changes in premium rates and the Company's acquisition and new
business programs, partially offset by selected pruning or selling of low margin
or nonstrategic business, and declines in contingent commissions due to changes
in industry conditions. 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.
On May 3, 1999, the Company acquired all of the issued and outstanding shares of
common stock of American Phoenix Corporation (American Phoenix), a subsidiary of
Phoenix Home Life Mutual Insurance Company, from Phoenix Home Life Mutual
Insurance Company and Martin L. Vaughan, III. The assets and liabilities of
American Phoenix were revalued to their respective fair market values in
purchase accounting. The financial statements of the Company reflect the
combined operations of the Company and American Phoenix from the closing date of
the acquisition.
RESULTS OF OPERATIONS
Net income for 2000 was $21.8 million, or $1.54 per share, after an accounting
change, compared to $19.5 million, or $1.44 per share last year. Excluding net
non-recurring gains, an accounting change in 2000 and a 1999 integration charge
related to the American Phoenix acquisition, net income increased 24.6% to $21.6
million, or $1.52 per share, compared with $17.3 million, or $1.29 per share in
1999.
For 1999, net income was $19.5 million, or $1.44 per share, compared to $14.9
million, or $1.18 per share in 1998. Excluding net non-recurring gains and the
above mentioned integration charge, net income was $17.3 million, or $1.29 per
share, compared with $13.4 million, or $1.05 per share in 1998.
Commissions and fees for 2000 were $256.4 million, or 16.9% higher than 1999.
Approximately $32.7 million of commissions and fees were derived from purchase
acquisitions of new insurance agencies. These increases were offset by decreases
of $7.7 million from the sale of certain offices and accounts in 2000 and 1999.
Excluding the effects of acquisitions and dispositions, commissions and fees
increased 5.5%. This increase relates primarily to new business production and
modest firming of premium levels partially offset by selected pruning of low
margin business.
Commissions and fees for 1999 were $219.3 million, or 28.8% higher than 1998.
Approximately $52.2 million of commissions and fees were derived from purchase
acquisitions of new insurance agencies. These increases were offset by decreases
of $10.4 million from the sale of certain offices and accounts in 1999 and 1998.
Excluding the effects of acquisitions and dispositions, commissions and fees
increased 4.4%. This increase relates primarily to new business production.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Hilb, Rogal and Hamilton Company and Subsidiaries
Investment income increased by $0.6 million and $0.5 million in 2000 and 1999,
respectively, due to higher levels of invested assets and higher interest rates.
Other income decreased $2.8 million in 2000 and increased $2.3 million in 1999.
Other income includes gains of $1.8 million, $4.9 million and $2.6 million in
2000, 1999 and 1998, respectively, from the sale of certain offices, insurance
accounts and other assets.
Total operating expenses for 2000 were $222.4 million, an increase of $28.2
million or 14.5% from 1999. For 1999, total operating expenses were $194.2
million, an increase of $44.2 million or 29.4% from 1998.
Compensation and employee benefits costs for 2000 were $146.4 million, an
increase of $20.9 million or 16.6% from 1999. Increases include approximately
$18.4 million related to purchase acquisitions and increases for
performance-based compensation arrangements, partially offset by decreases of
$2.9 million related to offices sold in 2000 and 1999. Compensation and employee
benefits costs for 1999 were $125.6 million, an increase of $27.1 million or
27.5% from 1998. Increases include approximately $28.6 million related to
purchase acquisitions and amounts related to revenue growth offset by decreases
of $5.3 million related to offices sold in 1999 and 1998.
Other operating expenses for 2000 were $55.5 million, or 12.2% higher than 1999.
Increases relate primarily to purchase acquisitions and costs associated with
revenue growth offset in part by the sale of certain offices in 2000 and 1999.
Other operating expenses for 1999 were $49.5 million, or 19.9% higher than 1998.
Increases relate primarily to purchase acquisitions and costs associated with
revenue growth offset in part by the sale of certain offices in 1999 and 1998.
Amortization expense reflects the amortization of intangible assets acquired in
the purchase of insurance agencies. Amortization expense increased by $1.5
million or 14.5% in 2000 and by $2.8 million or 35.0% in 1999 which is
attributable to purchase acquisitions consummated during 2000, 1999 and 1998
offset in part by decreases related to the sale of certain offices and amounts
which became fully amortized in those years.
Interest expense increased by $1.7 million or 26.0% in 2000 and by $4.2 million
or 180.1% in 1999. The increase is due to additional bank borrowings, interest
rate increases and the issuance of Convertible Subordinated Debentures in 1999
utilized to finance the American Phoenix acquisition.
During the second quarter of 1999, integration costs of $1.9 million were
recorded related to severance, lease termination costs and other costs necessary
to integrate the operations of American Phoenix with the Company.
The effective tax rates for the Company were 44.3% in 2000, 41.1% in 1999 and
41.1% in 1998. 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.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Hilb, Rogal and Hamilton Company and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled $47.8 million, $17.6 million and $19.6
million for the years ended December 31, 2000, 1999 and 1998, 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. Cash expenditures for the acquisition of property and
equipment were $7.5 million, $6.6 million and $5.0 million for the years ended
December 31, 2000, 1999 and 1998, 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 2000, 1999 and 1998, total
proceeds from maturities of investments exceeded purchases of investments by
$0.9 million, $1.8 million and $0.4 million, respectively, as the Company
utilized these funds for the repurchase of Common Stock of the Company, the
acquisition of insurance agencies and the repayment of debt. Cash outlays
related to the purchase of insurance agencies accounted for under the purchase
method of accounting amounted to $21.8 million, $33.7 million and $10.4 million
in the years ended December 31, 2000, 1999 and 1998, respectively. Cash outlays
for such insurance agency acquisitions have been funded primarily through
operations and from long-term borrowings. In addition, a portion of the purchase
price of such acquisitions may be paid through Common Stock, deferred cash
payments and, in the case of the American Phoenix acquisition during 1999,
issuance of Convertible Subordinated Debentures, see "Note K - Acquisitions" of
the Notes to Consolidated Financial Statements. Cash proceeds from the sales of
certain offices, insurance accounts and other assets totaled $9.0 million, $5.6
million and $8.9 million in the years ended December 31, 2000, 1999 and 1998,
respectively. The Company did not have any material capital expenditure
commitments as of December 31, 2000.
Financing activities (utilized) provided cash of ($19.9) million, $20.8 million
and ($16.4) million for the years ended December 31, 2000, 1999 and 1998,
respectively, as the Company borrowed funds to finance acquisitions, made
scheduled debt payments and annually increased its dividend rate. In addition,
during 2000, 1999 and 1998, the Company repurchased, on the open market,
127,700, 270,700 and 1,045,000, respectively, shares of its Common Stock under a
stock repurchase program. The Company is currently authorized to purchase an
additional 379,100 shares and anticipates that it will continue to repurchase
shares in 2001. The Company has a bank credit agreement for $105.0 million under
which loans are due in various amounts through 2004 and $28.7 million of 5.25%
Convertible Subordinated Debentures due 2014. At December 31, 2000, there were
loans of $70.5 million outstanding under the bank agreement.
The Company had a current ratio (current assets to current liabilities) of 0.87
to 1.00 as of December 31, 2000. Shareholders' equity of $88.2 million at
December 31, 2000, increased from $71.2 million at December 31, 1999, and the
debt to equity ratio of 1.17 to 1.00 at December 31, 2000 decreased from the
last year-end ratio of 1.57 to 1.00 due to debt payments, $8.0 million related
to the issuance of Common Stock including the income tax benefit from the
exercise of stock options offset in part by the impact of the aforementioned
Common Stock repurchase program.
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.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Hilb, Rogal and Hamilton Company and Subsidiaries
MARKET RISK
The Company has certain investments and utilizes derivative financial
instruments which are subject to market risk; however, the Company believes that
exposure to market risk associated with these instruments is not material.
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 premium rates charged by insurance underwriters, which are subject
to fluctuation based on the prevailing economic conditions and competitive
factors that affect insurance underwriters; carrier override and contingent
commissions are less predictable than in the past, and any decreases in the
Company's collection of them may have an adverse impact on our operating
results; the Company's continued growth 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 general level
of economic activity can have a substantial impact on revenues that is difficult
to predict, a strong economic period may not necessarily result in higher
revenues if the volume of insurance business brought about by favorable economic
conditions is offset by premium rates that have declined in response to
increased competitive conditions; if the Company is unable to respond in a
timely and cost effective manner to rapid technological change in the insurance
intermediary industry, there may be a resulting adverse effect on business and
operating results.
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.
25
CONSOLIDATED BALANCE SHEET
Hilb, Rogal and Hamilton Company and Subsidiaries
December 31 2000 1999
- --------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including $15,005,000 and
$14,619,000, respectively, of restricted funds $ 28,880,784 $ 22,336,722
Investments 2,127,404 2,939,238
Receivables:
Premiums, less allowance for doubtful accounts of
$1,878,000 and $1,456,000, respectively 81,117,359 61,853,039
Other 12,883,269 13,418,165
------------ ------------
94,000,628 75,271,204
Prepaid expenses and other current assets 6,469,289 10,653,387
------------ ------------
TOTAL CURRENT ASSETS 131,478,105 111,200,551
INVESTMENTS 1,653,775 1,761,463
PROPERTY AND EQUIPMENT, NET 16,495,033 15,412,623
INTANGIBLE ASSETS 243,025,280 229,130,542
Less accumulated amortization 46,366,851 45,082,914
------------ ------------
196,658,429 184,047,628
OTHER ASSETS 7,085,521 5,559,054
------------ ------------
$353,370,863 $317,981,319
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $110,399,098 $ 87,752,334
Accounts payable 5,458,152 6,453,881
Accrued expenses 13,606,919 11,042,786
Premium deposits and credits due customers 15,980,901 15,192,499
Current portion of long-term debt 5,555,940 3,865,137
------------ ------------
TOTAL CURRENT LIABILITIES 151,001,010 124,306,637
LONG-TERM DEBT 103,113,474 111,826,434
OTHER LONG-TERM LIABILITIES 11,034,413 10,672,472
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized 50,000,000 shares;
outstanding 13,280,468 and 13,058,978 shares, respectively 22,361,312 18,248,712
Retained earnings 65,860,654 52,927,064
------------ ------------
88,221,966 71,175,776
------------ ------------
$353,370,863 $317,981,319
============ ============
See notes to consolidated financial statements.
26
STATEMENT OF CONSOLIDATED INCOME
Hilb, Rogal and Hamilton Company and Subsidiaries
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions and fees $ 256,366,197 $219,293,008 $170,202,554
Investment income 2,625,818 2,045,596 1,578,782
Other 3,126,959 5,887,335 3,582,345
------------- ------------ ------------
262,118,974 227,225,939 175,363,681
OPERATING EXPENSES
Compensation and employee benefits 146,441,626 125,576,664 98,478,098
Other operating expenses 55,521,582 49,500,824 41,285,499
Amortization of intangibles 12,239,177 10,690,269 7,919,355
Interest expense 8,179,390 6,489,645 2,317,195
Integration costs -- 1,900,000 --
------------- ------------ ------------
222,381,775 194,157,402 150,000,147
------------- ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 39,737,199 33,068,537 25,363,534
Income taxes 17,610,032 13,582,740 10,418,469
------------- ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 22,127,167 19,485,797 14,945,065
Cumulative effect of accounting change, net of tax 325,000 -- --
------------- ------------ ------------
NET INCOME $ 21,802,167 $ 19,485,797 $ 14,945,065
============= ============ ============
NET INCOME PER SHARE - BASIC:
Income before cumulative effect of accounting change $ 1.69 $ 1.51 $ 1.20
Cumulative effect of accounting change, net of tax (0.03) -- --
------------- ------------ ------------
Net income $ 1.66 $ 1.51 $ 1.20
============= ============ ============
NET INCOME PER SHARE - ASSUMING DILUTION:
Income before cumulative effect of accounting change $ 1.56 $ 1.44 $ 1.18
Cumulative effect of accounting change, net of tax (0.02) -- --
------------- ------------ ------------
Net income $ 1.54 $ 1.44 $ 1.18
============= ============ ============
See notes to consolidated financial statements.
27
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
Hilb, Rogal and Hamilton Company and Subsidiaries
Common Stock Retained Earnings
- ----------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1998 $ 16,540,461 $34,798,138
Issuance of 349,669 shares of Common Stock 5,684,404
Purchase of 1,045,280 shares of Common Stock (18,672,302)
Payment of dividends ($.635 per share) (7,864,036)
Other 278,645
Net income 14,945,065
------------ -----------
BALANCE AT DECEMBER 31, 1998 3,831,208 41,879,167
Issuance of 1,212,266 shares of Common Stock 20,334,046
Purchase of 270,700 shares of Common Stock (6,216,542)
Income tax benefit from exercise of stock options 300,000
Payment of dividends ($.655 per share) (8,437,900)
Net income 19,485,797
------------ -----------
BALANCE AT DECEMBER 31, 1999 18,248,712 52,927,064
Issuance of 352,993 shares of Common Stock 6,741,497
Purchase of 131,503 shares of Common Stock (3,862,736)
Income tax benefit from exercise of stock options 1,233,839
Payment of dividends ($.675 per share) (8,868,577)
Net income 21,802,167
------------ -----------
Balance at December 31, 2000 $ 22,361,312 $65,860,654
============ ===========
See notes to consolidated financial statements.
28
STATEMENT OF CONSOLIDATED CASH FLOWS
Hilb, Rogal and Hamilton Company and Subsidiaries
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 21,802,167 $ 19,485,797 $ 14,945,065
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax 325,000 -- --
Amortization of intangible assets 12,239,177 10,690,269 7,919,355
Depreciation and amortization 5,356,583 4,501,081 3,589,957
------------ ------------ ------------
Net income plus amortization, depreciation and
cumulative effect of accounting change, net of tax 39,722,927 34,677,147 26,454,377
Provision for losses on receivables 1,307,232 402,226 560,262
Provision for deferred income taxes 112,505 972,342 (503,796)
Gain on sale of assets (1,843,686) (4,906,173) (2,637,829)
Income tax benefit from exercise of stock options 1,233,839 300,000 --
Changes in operating assets and liabilities net of effects
from insurance agency acquisitions and dispositions:
(Increase) decrease in accounts receivable (15,806,134) 11,372,878 (5,991,755)
Decrease (increase) in prepaid expenses 3,712,165 (4,014,117) (460,178)
Increase (decrease) in premiums payable to
insurance companies 16,552,601 (27,232,583) 2,562,095
Increase in premium deposits and credits due customers 835,810 7,278,076 13,073
(Decrease) increase in accounts payable (935,314) 2,958,551 1,634,550
Increase (decrease) in accrued expenses 1,458,384 (7,039,304) (1,228,915)
Other operating activities 1,470,897 2,802,707 (752,315)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 47,821,226 17,571,750 19,649,569
INVESTING ACTIVITIES
Purchase of held-to-maturity investments (92,233) (2,116,165) (444,281)
Proceeds from maturities and calls of held-to-maturity
investments 1,011,755 3,867,344 833,593
Purchase of property and equipment (7,513,583) (6,587,055) (4,978,966)
Purchase of insurance agencies, net of cash acquired (21,832,643) (33,681,000) (10,446,138)
Proceeds from sale of assets 8,951,274 5,635,066 8,912,516
Other investing activities (1,864,218) (2,519,849) 2,403
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (21,339,648) (35,401,659) (6,120,873)
FINANCING ACTIVITIES
Proceeds from long-term debt 3,000,000 106,000,000 18,975,000
Principal payments on long-term debt (13,701,450) (73,976,681) (11,071,664)
Repurchase of Common Stock (3,583,986) (6,216,542) (18,672,302)
Dividends (8,868,577) (8,437,900) (7,864,036)
Other financing activities 3,216,497 3,402,796 2,184,404
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (19,937,516) 20,771,673 (16,448,598)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,544,062 2,941,764 (2,919,902)
Cash and cash equivalents at beginning of year 22,336,722 19,394,958 22,314,860
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,880,784 $ 22,336,722 $ 19,394,958
============ ============ ============
See notes to consolidated financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
December 31, 2000
Hilb, Rogal and Hamilton Company (the Company), a Virginia corporation, operates
as a network of wholly-owned subsidiary insurance agencies located in 19 states.
Its principal activity is the performance of retail insurance services which
involves placing various types of insurance, including property, casualty,
employee benefits, and other areas of specialized exposure with insurance
underwriters on behalf of its 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.
The Company carries a reserve for policy cancellations which is periodically
evaluated and adjusted as necessary. Miscellaneous premium adjustments are
recorded as they occur. Contingent commissions and commissions on premiums
billed and collected directly by insurance companies are recorded as revenue
when received which is the Company's first notification of amounts earned.
Contingent commissions are commissions paid by insurance underwriters and are
based on the estimated profit and overall volume of business placed with the
underwriter. The data necessary for the calculation of contingent commissions
cannot be reasonably obtained prior to receipt of the commission. Commissions on
premiums billed directly by insurance carriers usually represent a large number
of relatively small transactions. Since these amounts are billed directly by the
carrier, determination of the renewal is difficult to predict. Accordingly,
revenue cannot be estimated until receipt of commission and the accompanying
policy detail is received from the carrier. Service fee revenue is recorded on a
pro rata basis as the services are provided. Service fee revenue typically
relates to claims management and loss control services, program administration
and workers' compensation consultative services which are provided over a period
of time, typically one year. Carrier overrides are commissions paid by insurance
underwriters in excess of the standard commission rates on specific classes of
business. These amounts are paid as a percentage of certain classes of business
written with the specific underwriter and are recorded as earned. Investment
income is recorded as earned. The Company's investment policy provides for the
investment of premiums between the time they are collected from the client and
remitted (net of commission) to the underwriter. Typically, premiums are due to
the underwriters 45 days after the end of the month the policy renews. This
investment activity is part of our normal operations and accordingly investment
income earned is reported in operating income.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
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, 4 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 the excess of costs over the fair value of net
assets acquired and are being amortized on a straight-line basis over periods
ranging up to 40 years. The weighted average life of the intangible assets is
20.4 years and 20.3 years as of December 31, 2000 and 1999, respectively. The
carrying value of the Company's intangible assets is periodically reviewed to
ensure that there are no conditions which exist indicating that the recorded
amount of intangible assets is not recoverable from future undiscounted cash
flows.
ACCOUNTING FOR STOCK-BASED COMPENSATION: The Company continues to account for
its employee stock options using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25).
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement No. 123), established accounting and disclosure
requirements using a fair value based method of accounting for employee stock
options. 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.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
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, accrued expenses and long-term debt
approximate those assets' and liabilities' fair values. Fair values for
investment securities and interest rate swaps are based on quoted market prices
and are disclosed in Notes C and E, respectively.
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 files a consolidated federal income tax return with
its subsidiaries. Deferred taxes result from temporary differences between the
income tax and financial statement bases of assets and liabilities and are based
on tax laws as currently enacted.
ACCOUNTING PRONOUNCEMENTS: In June 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires the Company to recognize all derivatives as either
assets or liabilities in the balance sheet and measure these instruments at fair
value. Upon adoption, the Company will be required to adjust derivative
instruments to fair value in the balance sheet and recognize offsetting gains or
losses as adjustments to be reported in net income or other comprehensive
income, as appropriate. The Company will adopt Statement No. 133 in the first
quarter of 2001. Because of the Company's minimal use of derivatives, the new
statement will not have a material effect on earnings or the financial position
of the Company.
RECLASSIFICATIONS: Certain amounts for the prior period have been classified to
conform to current year presentation.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
note b CHANGE IN METHOD OF ACCOUNTING
In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements," effective January 1, 2000, the Company changed its
method of accounting for cancellation of customer insurance policies.
Previously, the Company did not record a reserve for such cancellations. Under
the new method of accounting adopted retroactive to January 1, 2000, the Company
now records a reserve for such cancellations. The cumulative effect of the
change on prior years resulted in a charge to income of $325,000 (net of income
taxes of $225,000), for the year ended December 31, 2000. The effect of the
change on the year ended December 31, 2000 was to decrease income before the
cumulative effect of the accounting change by $30,000. The Company will
periodically review the adequacy of the allowance and adjust it as necessary.
note c INVESTMENTS
The following is a summary of held-to-maturity investments included in current
and long-term assets on the consolidated balance sheet:
Held-to-Maturity Investments
-------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
DECEMBER 31, 2000 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $2,570,000 $7,000 $-- $2,577,000
Certificates of deposit and other 1,211,000 -- -- 1,211,000
---------- ------ --- ----------
$3,781,000 $7,000 $-- $3,788,000
========== ====== === ==========
Held-to-Maturity Investments
-------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
DECEMBER 31, 1999 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $3,057,000 $10,000 $-- $3,067,000
Certificates of deposit and other 1,644,000 -- -- 1,644,000
---------- ------- --- ----------
$4,701,000 $10,000 $-- $4,711,000
========== ======= === ==========
The amortized cost and fair value of held-to-maturity investments at December
31, 2000, 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.
HELD-TO-MATURITY INVESTMENTS Cost Fair Value
- --------------------------------------------------------------------------
Due in one year $2,127,000 $2,129,000
Due after one year through five years 1,654,000 1,659,000
--------- ---------
$3,781,000 $3,788,000
========== ==========
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
note d PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Furniture and equipment $34,687,000 $31,747,000
Buildings and land 1,097,000 2,688,000
Leasehold improvements 4,368,000 3,424,000
----------- -----------
40,152,000 37,859,000
Less accumulated depreciation and amortization 23,657,000 22,446,000
----------- -----------
$16,495,000 $15,413,000
=========== ===========
note e LONG-TERM DEBT
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Notes payable to banks, interest currently 7.44% to 7.56% $ 70,500,000 $ 78,000,000
5.25% Convertible Subordinated Debentures due 2014, with a conversion
price of $22.75, callable 2009 28,745,000 28,594,000
Installment notes payable primarily incurred in acquisitions of
insurance agencies, 4.24% to 8.00%, due in various installments to 2003 9,425,000 9,098,000
------------ ------------
108,670,000 115,692,000
Less current portion 5,556,000 3,865,000
------------ ------------
$103,114,000 $111,827,000
============ ============
Maturities of long-term debt for the four years ending after December 31, 2001
are $2,334,000 in 2002, $4,272,000 in 2003, $67,056,000 in 2004, and $29,452,000
beyond 2005.
Interest paid was $9,195,000, $6,674,000 and $2,321,000 in 2000, 1999 and 1998,
respectively.
The Company entered into a credit agreement in 1999 with five banks that allows
for borrowings of up to $110,000,000 consisting of a term loan facility of
$45,000,000 and a revolving credit facility in the aggregate principal amount of
$65,000,000, both of which bear interest at variable rates. The term portion of
the facility is payable quarterly beginning September 30, 2000 with the final
payment due June 30, 2004. The revolving credit facility is due in 2004. At
December 31, 2000, $70,500,000 was borrowed under this agreement. This credit
agreement contains, among other provisions, requirements for maintaining certain
financial ratios and specific limits or restrictions on merger activity,
indebtedness, investments, payment of dividends and repurchase of Common Stock.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
The Company entered into two interest rate swap agreements effective June 17,
1999 to manage interest rate exposure on its long-term debt. The swap agreements
are contracts to exchange floating rate for fixed rate interest payments
periodically over the lives of the agreements without the exchange of the
underlying combined notional amount of $45,000,000, which amortizes quarterly by
$937,500 beginning September 30, 2000 through their maturity on June 30, 2004.
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 counterparties' 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 agreements is
recognized as an adjustment to interest expense. Under the Company's interest
rate swap agreements, the Company contracted with the counterparties to exchange
the difference between the Company's fixed pay rates of 6.43% and 6.46% and the
counterparties' variable LIBOR pay rate. At the end of the year, the variable
rate was approximately 6.60% for each agreement. The contracts expire June 30,
2004. The fair market value of the interest rate swaps at December 31, 2000
resulted in an unrecognized liability of $861,000.
note f RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors the HRH Retirement Savings Plan (the Retirement Savings
Plan) which covers substantially all employees of the Company and its
subsidiaries. The Retirement Savings 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 Retirement Savings Plan.
Prior to merger with the Company, certain of the merged companies had separate
profit sharing or benefit plans. These plans were terminated or frozen at the
time of merger with the Company.
The total expense recorded under the Retirement Savings Plan for 2000, 1999 and
1998 was approximately $2,413,000, $2,075,000 and $2,378,000, respectively.
In addition, in January 1998, the Company amended and restated the Supplemental
Executive Retirement Plan (the Plan) for key executives to convert the Plan from
a defined benefit arrangement to a cash balance plan. Upon amendment of the
Plan, benefits earned prior to 1998 were frozen. The Company continues to accrue
interest and amortize prior service costs related to the benefits earned prior
to January 1, 1998 under the Plan and recognized expense related to these items
of $261,000, $241,000 and $274,000 in 2000, 1999 and 1998, respectively. The
Plan, as amended, provides that beginning in 1998 the Plan participants shall be
credited each year with an amount that is calculated by determining the total
Company match and profit sharing contribution that the participant would have
received under the Retirement Savings Plan absent the compensation limitation
that applies to such plan, reduced by the amount of actual company match and
profit
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
sharing contributions to such Plan. The Plan also provides for the crediting of
interest to participant accounts. Expense recognized by the Company in 2000,
1999 and 1998 related to these Plan provisions amounted to $140,000, $108,000
and $75,000, respectively. At December 31, 2000 and 1999, the Company's accrued
liability for benefits under the Plan, including benefits earned prior to
January 1, 1998 was $1,952,000 and $1,631,000, respectively, and is included in
other long-term liabilities on the balance sheet.
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 tables set forth a statement of benefit obligation, fair value of
assets, accrued benefit cost, weighted average discount rate and net periodic
benefit cost for the postretirement benefit plans:
2000 1999
- --------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 631,000 $ 694,000
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ -- $ --
ACCRUED BENEFIT COST $(843,000) $(796,000)
WEIGHTED AVERAGE DISCOUNT RATE AS OF DECEMBER 31: 7.75% 7.75%
2000 1999 1998
- ------------------------------------------------------------------------
NET PERIODIC BENEFIT COST $ 85,000 $116,000 $104,000
The accrued benefit liability recognized in the consolidated balance sheet as of
December 31, 2000 and 1999 was $843,000 and $796,000, respectively.
For measurement purposes, a 7.0% gross medical trend rate was assumed in 2001.
The rate is assumed to decrease to 6.2% over the period to 2020 and remain level
thereafter. The effect of a 1% change in the assumed health care costs trend
rates is immaterial.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
note g INCOME TAXES
The components of income taxes shown in the statement of consolidated income are
as follows:
2000 1999 1998
- ---------------------------------------------------------------------------
Current
Federal $14,457,000 $10,409,000 $ 8,542,000
State 3,040,000 2,201,000 2,039,000
Foreign -- -- 341,000
----------- ----------- -----------
17,497,000 12,610,000 10,922,000
Deferred
Federal 96,000 825,000 (362,000)
State 17,000 148,000 (68,000)
Foreign -- -- (74,000)
----------- ----------- -----------
113,000 973,000 (504,000)
----------- ----------- -----------
$17,610,000 $13,583,000 $10,418,000
=========== =========== ===========
The effective income tax rate varied from the statutory federal income tax rate
as follows:
2000 1999 1998
- ----------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax exempt investment income (0.4) (0.4) (0.5)
State income taxes, net of federal tax benefit 5.0 4.6 5.0
Non-deductible goodwill amortization 2.4 2.2 1.2
Basis difference on sale of insurance accounts 1.2 (0.4) --
Other 1.1 0.1 0.4
---- ---- ----
Effective income tax rate 44.3% 41.1% 41.1%
==== ==== ====
Income taxes paid were $11,968,000, $15,346,000 and $10,678,000 in 2000, 1999
and 1998, respectively.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
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:
2000 1999
- ------------------------------------------------------------------------
Deferred tax liabilities:
Intangible assets $5,999,000 $6,042,000
Other - net 625,000 438,000
---------- ----------
Total deferred tax liabilities 6,624,000 6,480,000
Deferred tax assets:
Deferred compensation 1,925,000 1,434,000
Bad debts 742,000 575,000
Accrued transaction costs 901,000 1,407,000
Deferred rent/income 1,443,000 1,061,000
Other 1,053,000 403,000
---------- ----------
Total deferred tax assets 6,064,000 4,880,000
---------- ----------
Net deferred tax liabilities $ 560,000 $1,600,000
========== ==========
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:
2001 $12,971,000
2002 11,822,000
2003 10,556,000
2004 7,922,000
2005 5,845,000
Thereafter 8,562,000
-----------
$57,678,000
===========
Rental expense for all operating leases amounted to $11,661,000 in 2000,
$10,225,000 in 1999 and $7,474,000 in 1998. Included in rental expense for 2000,
1999 and 1998 is approximately $436,000, $429,000 and $554,000, respectively,
which was paid to employees or related parties.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
note i SHAREHOLDERS' EQUITY
The Company has adopted and the shareholders have approved the 2000 Stock
Incentive Plan, the Non-employee Directors Stock Incentive Plan, the Hilb, Rogal
and Hamilton Company 1989 Stock Plan and the 1986 Incentive Stock Option Plan,
which provide for the granting of options to purchase up to an aggregate of
approximately 1,400,000 and 1,955,000 shares of Common Stock as of December 31,
2000 and 1999, respectively. 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 plans was as follows:
Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------
Outstanding at January 1, 1998 1,106,463 $14.70
Granted 290,747 17.68
Exercised 136,405 13.16
Expired 54,346 15.20
---------
Outstanding at December 31, 1998 1,206,459 15.54
Granted 91,100 21.24
Exercised 180,667 14.73
Expired 36,642 14.96
---------
Outstanding at December 31, 1999 1,080,250 16.17
Granted 198,500 28.22
Exercised 172,294 15.05
Expired 18,455 19.06
---------
Outstanding at December 31, 2000 1,088,001 18.50
=========
Exercisable at December 31, 2000 690,186 16.89
The options outstanding at December 31, 2000 have exercise prices that range
from $11.88 to $28.75. The weighted average contractual life of these options is
five years.
There were 1,285,000 and 349,000 shares available for future grant under these
plans as of December 31, 2000 and 1999, respectively.
No compensation expense is recognized in operations for 2000, 1999 or 1998.
During 2000 and 1999, the Company also awarded 89,320 and 5,500 shares,
respectively, of restricted stock under the 1989 Stock Plan, with a weighted
average fair value at the grant date of $28.32 and $22.63 per share,
respectively. These restricted shares vest ratably over a four year period
beginning in the second year of continued employment. During 2000, 2,400 shares
of restricted stock expired. Compensation expense related to these awards was
$725,000 and $17,000 for the years ended December 31, 2000 and 1999,
respectively.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
note j NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Twelve Months Ended
-------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Numerator for basic net income per share - net income $21,802,167 $19,485,797 $14,945,065
Effect of dilutive securities: 5.25% convertible debenture 1,079,959 710,995 --
----------- ----------- -----------
Numerator for dilutive net income per share - net income
available after assumed conversions $22,882,126 $20,196,792 $14,945,065
=========== =========== ===========
Denominator
Weighted average shares 13,062,063 12,783,299 12,453,558
Effect of guaranteed future shares to be issued in connection
with agency acquisitions 49,801 92,212 43,194
----------- ----------- -----------
Denominator for basic net income per share 13,111,864 12,875,511 12,496,752
Effect of dilutive securities:
Employee stock options 347,207 181,702 187,794
Employee non-vested stock 19,138 282 --
Contingent stock - acquisitions 6,964 11,999 24,198
5.25% convertible debenture 1,406,593 937,729 --
----------- ----------- -----------
Dilutive potential common shares 1,779,902 1,131,712 211,992
----------- ----------- -----------
Denominator for diluted net income per share - adjusted weighted
average shares and assumed conversions 14,891,766 14,007,223 12,708,744
=========== =========== ===========
Net Income Per Share:
Basic $ 1.66 $ 1.51 $ 1.20
=========== =========== ===========
Diluted $ 1.54 $ 1.44 $ 1.18
=========== =========== ===========
note k ACQUISITIONS
During 2000, the Company acquired certain assets and liabilities of 11 insurance
agencies for $25,827,000 ($19,147,000 in cash, $3,679,000 in guaranteed future
payments and 85,152 shares of Common Stock) in purchase accounting transactions.
Assets acquired include intangible assets of $25,452,000. The combined purchase
price may be increased by approximately $4,230,000 in 2001, $4,530,000 in 2002
and $1,555,000 in 2003 based upon net profits realized.
On May 3, 1999, the Company acquired all of the issued and outstanding shares of
American Phoenix Corporation (American Phoenix), a subsidiary of Phoenix Home
Life Mutual Insurance Company, from Phoenix Home Life Mutual Insurance Company
and Martin L. Vaughan, III. The shares were acquired in exchange for
approximately $49 million in cash, $32 million face value in 5.25% Convertible
Subordinated Debentures due 2014, with a conversion price of $22.75 per share,
callable in 2009, and 1,000,000 shares of Common Stock of the Company. The
Company funded the cash portion of the purchase price with a credit facility
obtained in connection with the acquisition. The acquisition has been accounted
for by the purchase
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
method of accounting. Intangible assets of approximately $97 million, created by
the acquisition, are being amortized over 25 years. The assets and liabilities
of American Phoenix have been revalued to their respective fair market values.
Purchase accounting adjustments were finalized in May of 2000. As a result of
this finalization, the total purchase price increased by a total of $605,000
primarily related to additional professional fees associated with the
transaction ($75,000), increased liabilities for certain abandoned leases of
American Phoenix ($300,000) and premerger litigation ($180,000). The financial
statements of the Company reflect the combined operations of the Company and
American Phoenix from the closing date of the acquisition.
Pursuant to EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity," the Company recorded a charge of
$1.9 million in the second quarter of 1999 related to employee severance, lease
termination costs and other costs necessary to integrate the operations of
American Phoenix with the Company. Costs incurred to exit certain leases and
physically merge common locations comprised $950,000 of this amount. The
remaining amount relates to employee severance and other integration costs.
These charges have been included in the following pro forma amounts. As of
December 31, 2000, the Company had paid approximately $1,457,000 of these
integration costs. The remaining balance of $443,000 will be used for payment of
approximately $388,000 and $55,000 in 2001 and 2002, respectively. Similar costs
related to American Phoenix's severance and termination costs were approximately
$2,700,000 and were capitalized as part of the purchase price. As of December
31, 2000, the Company had paid approximately $1,573,000 of these costs with the
remaining balance of $1,077,000 relating principally to lease obligations to be
paid through October 2005 as leases expire. The following unaudited pro forma
results of operations of the Company give effect to the acquisition of American
Phoenix as though the transaction had occurred on January 1, 1999 and 1998,
respectively.
1999 1998
- -----------------------------------------------------------------------------
Revenues $252,000,000 $250,616,000
Net Income 20,783,000 13,913,000
Net Income Per Common Share:
Basic $1.57 $1.03
Diluted $1.45 $0.99
Weighted Average Shared Outstanding:
Basic 13,209,000 13,497,000
Diluted 14,809,000 15,115,000
During 1999, the Company also acquired certain assets and liabilities of two
other insurance agencies for $4,313,000 ($3,250,000 in cash and $1,063,000 in
guaranteed future payments) in purchase accounting transactions. Assets acquired
include intangible assets of $4,500,000. The combined purchase price was
increased by approximately $656,000 in 2000, and may be increased by
approximately $1,012,500 in 2001 based upon net profits realized.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
During 1998, the Company acquired certain assets and liabilities of six
insurance agencies for $9,998,000 ($4,498,000 in cash, $3,500,000 in guaranteed
future payments and 113,945 shares of Common Stock) in purchase accounting
transactions. Assets acquired include intangible assets of $11,787,000. The
combined purchase price was increased by approximately $1,569,000 in 2000 and
$2,389,000 in 1999, and may be increased by approximately $1,500,000 in 2001,
$1,125,000 in 2002 and $525,000 in 2003 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.
note l SALE OF ASSETS
During 2000, 1999 and 1998, the Company sold certain insurance accounts and
other assets resulting in gains of approximately $1,844,000, $4,906,000 and
$2,638,000, respectively. Taxes related to these gains were $1,278,000,
$1,599,000 and $1,082,000 in 2000, 1999 and 1998, 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 $1,122,000 and $213,000 of funds held in escrow at
December 31, 2000 and 1999, 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 $13,883,000 and $14,406,000 at
December 31, 2000 and 1999, 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 SUBSEQUENT EVENTS
Subsequent to December 31, 2000, the Company acquired certain assets and
liabilities of four insurance agencies for approximately $29,200,000
($21,300,000 in cash, $4,000,000 in guaranteed future payments and approximately
106,000 shares of Common Stock). The acquired operations, in aggregate, are not
material to the consolidated financial statements. These acquisitions have been
accounted for as purchase transactions.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
note o QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999:
Three Months Ended(1)
-------------------------------------------------------
(in thousands, except per share amounts) March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------------------
2000
Total Revenues $67,013 $62,216 $65,775 $67,116
Income before cumulative effect of accounting change $ 6,737 $ 4,941 $ 6,152 $ 4,297
Cumulative effect of accounting change, net of tax 325 (2) -- -- --
------- ------- ------- -------
Net income $ 6,412 $ 4,941 $ 6,152 $ 4,297
======= ======= ======= =======
Net Income Per Share - Basic:
Income before cumulative effect of accounting change $ 0.51 $ 0.38 $ 0.47 $ 0.32
Cumulative effect of accounting change, net of tax (0.03)(2) -- -- --
------- ------- ------- -------
Net income $ 0.48 $ 0.38 $ 0.47 $ 0.32
======= ======= ======= =======
Net Income Per Share - Assuming Dilution:
Income before cumulative effect of accounting change $ 0.47 $ 0.35 $ 0.43 $ 0.30
Cumulative effect of accounting change, net of tax (0.02)(2) -- -- --
------- ------- ------- -------
Net income $ 0.45 $ 0.35 $ 0.43 $ 0.30
======= ======= ======= =======
1999
Total Revenues $50,254 $54,885 $63,207 $58,880
Net Income 7,437 3,044 5,916 3,089
Net Income Per Share:
Basic 0.61 0.24 0.45 0.23
Assuming Dilution 0.60 0.23 0.42 0.23
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 See Note B.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hilb, Rogal and Hamilton Company and Subsidiaries
Shareholders and Board of Directors
Hilb, Rogal and Hamilton Company
We have audited the accompanying consolidated balance sheets of Hilb, Rogal and
Hamilton Company and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
As explained in Note B of the consolidated financial statements, in 2000 the
Company changed its method of accounting for policy cancellations.
/s/ Ernst & Young LLP
Richmond, Virginia
February 9, 2001
44
OFFICERS AND GENERAL INFORMATION
Hilb, Rogal and Hamilton Company and Subsidiaries
OFFICERS
Andrew L. Rogal
Chairman and Chief Executive Officer
Martin L. Vaughan, III
President and Chief Operating Officer
Timothy J. Korman
Executive Vice President, Finance and Administration
Carolyn Jones
Senior Vice President, Chief Financial Officer and Treasurer
John P. McGrath
Senior Vice President, Business and Product Development
Walter L. Smith
Vice President, General Counsel and Secretary
William L. Chaufty
Vice President; Director, Central Region
Robert B. Lockhart
Vice President; Director, Northeast Region
Benjamin A. Tyler
Vice President; Director, Southeast Region
Michael A. Janes
Vice President; Director, West Region
Steven C. Deal
Vice President; Director, Mid-Atlantic Region
Richard F. Galardini
Vice President
Karl E. Manke
Vice President, Marketing and Sales Development
Henry C. Kramer
Vice President, Human Resources
Vincent P. Howley
Vice President, Agency Financial Operations
Robert W. Blanton, Jr.
Vice President and Controller
Valerie C. Elwood
Assistant Vice President
William C. Widhelm
Assistant Vice President, Internal Audit
FORM 10-K
Any shareholder wishing to obtain a copy for the Company's Form 10-K for the
year ended December 31, 2000 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 1, 2001 at
10:00 A.M. at the Jefferson Hotel, 101 West Franklin Street, Richmond, Virginia.
TRANSFER AGENT AND REGISTRAR
Mellon Investor Services, LLC
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 Mellon Investor Services, LLC Shareholder Services.
Other inquiries should be directed to the Secretary at the corporate address.
OUTSIDE COUNSEL
Williams, Mullen, Clark & 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,
2000, there were 605 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:
Sales Price Cash
-------------------- Dividends
Quarter Ended High Low Declared
- ------------- -------------------- --------
1999
March 31 $19.13 $15.56 $.160
June 30 22.38 17.19 .165
September 30 25.06 20.88 .165
December 31 29.13 24.25 .165
2000
March 31 $28.50 $25.81 $.165
June 30 34.88 27.19 .170
September 30 41.94 34.38 .170
December 31 41.25 36.81 .170
Design: BD&E, Inc.
Feature Photography: David Levin
Executive Photography: Duane Berger
Copywriting: Valerie Barker Communications
Printing: Superior Printing