-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JH7l+DkgBRHYDj91n9AhEtBD5f4q9cRSGlbelD0jA9Pi44pKUwwLtqHo6eJfN2rI pMTWhUBJgTSF9T4H5NW6RA== 0000950128-02-000325.txt : 20020415 0000950128-02-000325.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950128-02-000325 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILB ROGAL & HAMILTON CO /VA/ CENTRAL INDEX KEY: 0000814898 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 541194795 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15981 FILM NUMBER: 02593421 BUSINESS ADDRESS: STREET 1: THE HILB, ROGAL AND HAMILTON BUILDING STREET 2: 4951 LAKE BROOK DRIVE, SUITE 500 CITY: GLEN ALLEN STATE: VA ZIP: 23060 BUSINESS PHONE: 8047476500 MAIL ADDRESS: STREET 1: P O BOX 1220 CITY: GLEN ALLEN STATE: VA ZIP: 23060 10-K405 1 j9350501e10-k405.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year Ended December 31, 2001 COMMISSION FILE NO. 0-15981 HILB, ROGAL AND HAMILTON COMPANY (Exact name of registrant as specified in its charter) VIRGINIA 54-1194795 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4951 LAKE BROOK DRIVE, SUITE 500 23060 GLEN ALLEN, VIRGINIA (Zip Code) (Address of principal executive offices) (804) 747-6500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Exchange on Which Registered - --------------------------- ------------------------------------ COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ]. State the aggregate market value of the voting stock held by non-affiliates of the registrant. $914,639,915 AS OF MARCH 1, 2002 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 1, 2002 ----- ---------------------------- COMMON STOCK, NO PAR VALUE 28,491,053 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 2001 Annual Report to Shareholders are incorporated by reference into Parts I and II of this report. Portions of the registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated by reference into Part III hereof. PART I ITEM 1. BUSINESS THE COMPANY Hilb, Rogal and Hamilton Company (the "Company"), through its network of wholly-owned subsidiary insurance agencies (the "Agencies"), places various types of insurance, including property, casualty and employee benefits and other areas of specialized exosure, with insurance underwriters on behalf of its clients. The Agencies operate over 80 offices in 23 states. The Company's client base ranges from personal to large national accounts and is primarily comprised of middle-market commercial and industrial accounts. Insurance commissions accounted for approximately 91% of the Company's total revenues in 2001. The Company also advises clients on risk management and employee benefits and provides claims administration and loss control consulting services to clients, which contributed approximately 7% of revenues in 2001. The Company has historically grown principally through acquisitions of independent agencies with significant local market shares in small to medium-size metropolitan areas. Since 1984, the Company has acquired 199 independent agencies. The Company's prior growth strategy emphasized acquisitions of established independent agencies staffed by local professionals and centralization of certain administrative functions to allow agents to focus on business production. The Company believes that a key to its success has been a strong emphasis on local client service by experienced personnel with established community relationships. On May 3, 1999, the Company acquired American Phoenix Corporation, the property and casualty brokerage subsidiary of Phoenix Home Life Mutual Insurance Company, its largest acquisition to date. American Phoenix Corporation, based in Hartford, Connecticut, was the 14th largest property and casualty insurance brokerage firm in the United States. The Company's current acquisition program is largely focused on acquisitions which fit into the strategic and regional plans and targets entities which provide a specialty or product expertise which can be exported throughout the Company. The Agencies act as independent agents representing a large number of insurance companies, which gives the Company access to specialized products and capacity needed by its clients. Agencies and regions are staffed to handle the broad variety of insurance needs of their clients. Additionally, certain Agencies and regions have developed special expertise in areas such as professional liability, equipment maintenance and construction and this expertise is made available to clients throughout the regions and Company. The Company has established direct access to certain foreign insurance markets without the need to share commissions with excess and surplus lines brokers. This direct access allows the Company to enhance its revenues from insurance products written by foreign insurers and allows it to provide a broader array of insurance products to its clients. While the Agencies have historically been largely decentralized with respect to client solicitation, account maintenance, underwriting decisions, selection of insurance carriers and areas of insurance specialization, the Company maintains centralized administrative functions, including cash management and investment, human resources and legal functions, through its corporate headquarters. Accounting records and systems are maintained at each Agency, but the Company requires each Agency to comply with 2 standardized financial reporting and control requirements. Through its internal auditing department, Company personnel periodically visit each Agency and monitor compliance with internal accounting controls and procedures. The Company has created regional operating units to coordinate the efforts of several local offices in a geographic area to focus on markets, account retention, client service and new business production. The five U.S. regions are the Mid-Atlantic (Ohio, Pennsylvania, Maryland and Virginia); Northeast (Connecticut, Massachusetts, Maine, New Hampshire, New York and New Jersey); Southeast (Alabama, Georgia and Florida); Central (Oklahoma, Texas, Kansas, Michigan and Illinois) and West (Arizona, California, Colorado, Oregon and North Carolina). Regional management of a sizable mass of coordinated and complementary resources has enabled each Agency to address a broader spectrum of client needs and respond more quickly and expertly than each could do on a stand-alone basis. Additionally, operations were streamlined by merging multiple locations in the same city into a single profit center and converting smaller locations into sales offices of a larger profit center in the same region. The Company derives income primarily from commissions on the sale of insurance products to clients paid by the insurance underwriters with whom the Agencies place their clients' insurance. The Company acts as an agent in soliciting, negotiating and effecting contracts of insurance through insurance companies and occasionally as a broker in procuring contracts of insurance on behalf of insureds. In the past three years, the Company has derived in excess of 92% of its commission and fee revenue from the sale of insurance products, principally property and casualty insurance. Accordingly, no breakdown by industry segments has been made. The balance is primarily derived from service fee income related to claims management and loss control services, program administration and workers compensation consultative service. Within its range of services, the Company also places surplus lines coverages (coverages not available from insurance companies licensed by the states in which the risks are located) with surplus lines insurers for various specialized risks. Insurance agents' commissions are generally a percentage of the premium paid by the client. Commission rates vary substantially within the insurance industry. Commissions depend upon a number of factors, including the type of insurance, the amount of the premium, the particular insurer, the capacity in which the Company acts and the scope of the services it renders to the client. In some cases, the Company or an Agency is compensated by a fee paid directly by the client. The Company may also receive contingent commissions which are based on the profit an insurance company makes on the overall volume of business placed with it by the Company. Contingent commissions are generally received in the first quarter of each year and, accordingly, may cause first quarter revenues and earnings to vary from other quarterly results. The Company provides a variety of professional services to assist clients in analyzing risks and in determining whether protection against risks is best obtained through the purchase of insurance or through retention of all, or a portion of those risks, and the adoption of risk management policies and cost-effective loss control and prevention programs. No material part of the Company's business is dependent on a single client or on a few clients, and the Company does not depend on a single industry or type of client for a substantial amount of its business. In 2001, the largest single client accounted for approximately 0.5% of the Company's total revenues. OPERATING HISTORY AND ACQUISITION PROGRAM The Company was formed in 1982 to acquire and continue an existing insurance agency network. At that time, the Company undertook a program of consolidating agencies, closing or selling unprofitable 3 locations and acquiring new agencies. From 1984 to March 1, 2002, a total of 199 agencies have been acquired. One hundred forty-nine of those agencies acquired were accounted for using the purchase method of accounting at a total purchase price of approximately $362.1 million. In a purchase acquisition, the purchase price of an agency is typically paid in cash and deferred cash payments. In some cases, a portion of the purchase price may also be paid in Common Stock and, in the case of the American Phoenix acquisition, the issuance of Convertible Subordinated Debentures. From November 1, 1988 to May 1, 1995, 50 acquired agencies were accounted for using the pooling-of-interests method of accounting in exchange for a total of approximately 16.2 million shares of Common Stock of the Company. The Company has substantial experience in acquiring insurance agencies. Generally, each acquisition candidate is subjected to a due diligence process in which the Company evaluates the quality and reputation of the business and its management, revenues and earnings, specialized products and expertise, administrative and accounting records, growth potential and location. For candidates that pass this screening process, the Company uses a pricing method that emphasizes pro forma revenues, profits and tangible net worth. As a condition to completing an acquisition, the Company requires that the principals be subject to restrictive covenants in a Company prepared form. Once the acquisition is consummated, the Company takes steps to introduce its procedures and protocols and to integrate the agency's systems and employees into the Company. COMPETITION The Company participates in a very competitive industry. Competition is primarily based on price, service, relationships and expertise. The Company is a leading independent insurance agency system serving a wide variety of clients through its network of wholly-owned subsidiaries which operate over 80 offices located in 23 states. Many of the Company's competitors are larger and have greater resources than the Company and operate on an international scale. In some of the Agencies' cities, because no major national insurance broker has established a presence, the Company competes with local agents and private, regional firms, some of who may be larger than the Company's local Agency. The Company is also in competition with certain insurance companies which write insurance directly for their customers, and the banking industry, as well as self-insurance and other employer sponsored programs. EMPLOYEES As of December 31, 2001, the Company had approximately 2,600 employees. No employees are currently represented by a union. The Company believes its relations with its employees are good. REGULATION In every state in which the Company does business, the applicable Agency or an employee is required to be licensed or to have received regulatory approval by the state insurance department in order for the Company to conduct business. In addition to licensing requirements applicable to the Company, most jurisdictions require individuals who engage in brokerage and certain insurance service activities to be licensed personally. The Company's operations depend on the validity of and its continued good standing under the licenses and approvals pursuant to which it operates. Licensing laws and regulations vary from jurisdiction 4 to jurisdiction. In all jurisdictions, the applicable licensing laws and regulations are subject to amendment or interpretation by regulatory authorities, and generally such authorities are vested with general discretion as to the grant, renewal and revocation of licenses and approvals. ITEM 2. PROPERTIES Except as mentioned below, the Company leases its Headquarters' office in Richmond, Virginia and its Agencies' offices in various states. Information on the Company's lease commitments is incorporated herein by reference to "Note H-Leases" of the Notes to Consolidated Financial Statements in the Company's 2001 Annual Report to Shareholders. At December 31, 2001, the Company owned buildings in Oklahoma City, Oklahoma and Auburn, Maine. Subsequent to year end, the Oklahoma City, Oklahoma building was sold. ITEM 3. LEGAL PROCEEDINGS The Company and its Agencies have no material pending legal proceedings other than ordinary, routine litigation incidental to the business, to which it or a subsidiary is a party. With respect to the routine litigation, upon the advice of counsel, management believes that none of these proceedings, either individually or in the aggregate, if determined adversely to the Company, would have a material effect on the financial position or results of operations of the Company or its ability to carry on its business as currently conducted. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the registrant are as follows: Andrew L. Rogal, 53, has been Chairman of the Company since January 2000 and Chief Executive Officer since May 1997. He was President of the Company from 1995 until December 1999 and has been a director of the Company since 1989. He was Chief Operating Officer of the Company from 1995 to 1997. Martin L. Vaughan, III, 55, has been President of the Company since January 2000. He has been Chief Operating Officer and a director of the Company since June 1999. Prior thereto, he was President and Chief Executive Officer of American Phoenix Corporation from 1990 to 1999. Timothy J. Korman, 49, has been Executive Vice President, Finance and Administration since 1997 and has been a director of the Company since June 1999. He was Executive Vice President, Chief Financial Officer and Treasurer of the Company from 1995 to 1997. He is a first cousin of Robert S. Ukrop, a director of the Company. 5 Carolyn Jones, 46, has been Senior Vice President, Chief Financial Officer and Treasurer since 1997 and was Vice President and Controller of the Company from 1991 to 1997. Walter L. Smith, 44, has been Senior Vice President of the Company since August 2001. He has been General Counsel of the Company since 1991 and Secretary of the Company since 1998. He was Vice President from 1991 to August 2001 and he was Assistant Secretary of the Company from 1989 to 1998. Vincent P. Howley, 53, has been Vice President, Agency Financial Operations since 1997. He was Vice President-Audit of the Company from 1993 to 1997. John P. McGrath, 44, has been Senior Vice President - Business and Product Development since June 1999 and was Vice President of the Company from 1998 to June 1999. He has been Vice President of Hilb, Rogal and Hamilton Company of Pittsburgh, Inc., a subsidiary of the Company since 1998. He was Director of the Mid-Atlantic Region from 1995 to March 2000 and President and Chief Executive Officer of Hilb, Rogal and Hamilton Company of Pittsburgh, Inc. from 1993 to 1998. William L. Chaufty, 49, has been Vice President of the Company since 1998. He has been Director of the Central Region since 1997 and was President of Hilb, Rogal and Hamilton Company of Oklahoma, a subsidiary of the Company, from 1989 to 2000. Michael A. Janes, 42, has been Vice President of the Company since 1998. He has been Director of the West Region since 1997 and Chairman of Hilb, Rogal and Hamilton Company of Arizona, a subsidiary of the Company, since June 1998. He was President of this subsidiary from 1993 to 1998. Robert B. Lockhart, 51, has been Vice President of the Company since May 1999. He has been Director of the Northeast Region since May 1999. He was President of American Phoenix Corporation of Connecticut from 1996 to 1999. Prior thereto, he held various positions at Marsh & McLennan, Inc. from 1975 to 1996. Benjamin A. Tyler, 53, has been Vice President of the Company since May 1999. He has been Director of the Southeast Region since January 2001. He was Director of the Florida Region from May 1999 to January 2001. He was President of American Phoenix Corporation of Maryland from 1997 until May 1999. From 1994 until 1997, he was Senior Vice President of Marsh & McLennan, Baltimore/Washington. Prior thereto, he was President and Senior Consultant of Inteco, Incorporated from 1981 to 1994. Steven C. Deal, 48, has been Vice President of the Company since 1998. He has been Director of the Mid-Atlantic Region since March 2000. He was National Director of Select Commercial Operations from 1997 until March 2000 and National Director of Personal Lines from 1998 until March 2000. He has also been Chairman of Hilb, Rogal and Hamilton Company of Virginia, a subsidiary of the Company, since October 1997. He was President of this subsidiary from 1990 to 1997. Karl E. Manke, 55, has been Vice President of the Company since May 1999. Prior thereto, he was Vice President, Sales and Marketing for American Phoenix Corporation from 1993 to 1999. Henry C. Kramer, 57, has been Vice President, Human Resources since 1997. Prior thereto, he held various human resource positions with Alexander & Alexander, Inc. in Baltimore, Maryland from 1973 to 1997. 6 Robert W. Blanton, Jr., 37, has been Vice President and Controller of the Company since May 1998. He was Assistant Vice President and Controller from 1997 to 1998 and was Assistant Vice President of the Company from 1993 to 1997. William C. Widhelm, 33, has been Vice President, Internal Audit since August 2001. He was Assistant Vice President, Internal Audit from 1999 to 2001. He joined the Company in 1994 and has held various positions in the auditing department. A. Brent King, 33, has been Vice President and Associate General Counsel of the Company since November 2001. Prior thereto, he was an attorney at Williams Mullen from 1994 to October 2001. All officers serve at the discretion of the Board of Directors. Each holds office until the next annual election of officers by the Board of Directors, which will occur after the Annual Meeting of Shareholders, scheduled to be held on May 7, 2002, or until their successors are elected. There are no family relationships nor any arrangements or understandings between any officer and any other person pursuant to which any such officer was selected, except as noted above. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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, 2001, there were 594 holders of record of the Company's Common Stock. The following table sets forth the reported high and low sales prices per share of the Common Stock on the NYSE Composite Tape, based on published financial sources, and the dividends per share declared on Common Stock for the quarter indicated. 7
CASH DIVIDENDS QUARTER ENDED SALES PRICE DECLARED ---------------------------------------------------------------------------------------------------------------- HIGH LOW ---- --- 2001 March 31 $20.44 $16.88 $.0850 June 30 22.08 17.20 .0875 September 30 24.08 20.55 .0875 December 31 31.38 22.45 .0875 2000 March 31 $14.25 $12.91 $.0825 June 30 17.44 13.60 .0850 September 30 20.97 17.19 .0850 December 31 20.63 18.41 .0850
The Company's current dividend policy anticipates the payment of quarterly dividends in the future. The declaration and payment of dividends to holders of Common Stock will be at the discretion of the Board of Directors and will be dependent upon the future earnings and financial condition of the Company. The Company's current credit facility with seven banks limits the payment of cash dividends and other distributions on the Common Stock of the Company. The Company may not make dividend payments or other distributions exceeding $11,000,000 for the year ending December 31, 2001 and $11,500,000 each year thereafter through the due date of the loan agreement (June 30, 2004.) ITEM 6. SELECTED FINANCIAL DATA Information as to selected financial data is incorporated herein by reference to the material under the heading "Selected Financial Data" in the Company's 2001 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information as to management's analysis of financial condition and results of operations is incorporated herein by reference to the materials under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2001 Annual Report to Shareholders. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes that its exposure to market risk associated with transactions using derivative financial instruments is not material. 8 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted in a separate section of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except as to certain information regarding executive officers included in Part I, the information required by this item is incorporated by reference to the Company's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the material included on pages 7 and pages 10 through 14 of the Company's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated herein by reference to the material under the headings "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" contained in the definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated herein by reference to the material under the heading "Certain Relationships and Related Transactions" contained in the Proxy Statement for the 2002 Annual Meeting of Shareholders to be filed within 120 days after the end of the fiscal year. 9 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2). The response to this portion of Item 14 is submitted as a separate section of this report. 2001 Exhibits - Index
EXHIBIT NO. DOCUMENT ----------- -------- 3.1 Articles of Incorporation (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File No. 33-56488, effective March 1, 1993, hereinafter, the Form S-3) 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the year ended December 31, 1998, File No. 0-15981) 10.1 Indenture dated as of May 3, 1999 made by and among the registrant and Crestar Bank as Trustee (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q dated May 14, 1999, File No. 0-15981) 10.2 Risk Management Agreement dated as of May 3, 1999 by and between Phoenix Home Life Mutual Insurance Company and the registrant (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q dated May 14, 1999, File No. 0-15981) 10.3 Incentive Stock Option Plan, as amended (incorporated by reference to Exhibit 28.27 of the Form S-3) 10.4 Hilb, Rogal and Hamilton Company 2000 Stock Incentive Plan, incorporated by reference to Exhibit A of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders held on May 2, 2000 10.5 Consulting Agreement with Robert H. Hilb (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30, 1997, File No. 0-15981)
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EXHIBIT NO. DOCUMENT ----------- -------- 10.6 First Amendment to Consulting Agreement with Robert H. Hilb (incorporated by reference to Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1999, File No. 0-15981) 10.7 Hilb, Rogal and Hamilton Company 1989 Stock Plan, as amended and restated (incorporated by reference to Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1998) 10.8 Hilb, Rogal and Hamilton Company Non-employee Directors Stock Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 1998) 10.9 Voting and Standstill Agreement dated as of May 3, 1999 made by and among the registrant, PM Holdings, Inc. and Phoenix Home Life Mutual Insurance Company (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q dated May 14, 1999, File No. 0-15981) 10.10 Registration Rights Agreement dated as of May 3, 1999 made between the registrant, PM Holdings, Inc. and Phoenix Home Life Mutual Insurance Company (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q dated May 14, 1999, File No. 0-15981) 10.11 Form of Change of Control Employment Agreement for the following executive officers: Andrew L. Rogal, Timothy J. Korman, Martin L. Vaughan, III, Carolyn Jones, Walter L. Smith, Vincent P. Howley, Henry C. Kramer, Robert W. Blanton, Jr., A. Brent King and William C. Widhelm (incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 1998, File No. 0-15981) 10.12 Form of Change of Control Employment Agreement for the following executive officers: John P. McGrath, William C. Chaufty, Steven C. Deal, Michael A. Janes, Robert B. Lockhart, Benjamin A. Tyler, Karl E. Manke and Richard F. Galardini (incorporated by reference to Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 1998, File No. 0-15981)
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EXHIBIT NO. DOCUMENT ----------- -------- 10.13 Employment Agreement of Michael A. Janes (incorporated by reference to Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1998, File No. 0-15981) 10.14 Form of Hilb, Rogal and Hamilton Employee Non-qualified Stock Option Agreement with schedule of optionees and amounts of options granted (incorporated by reference to Exhibit 10.28 to the Company's Form 10-K for the year ended December 31, 2000, File No. 0-15981) 10.15 Form of Hilb, Rogal and Hamilton Restricted Stock Agreement with schedule of grantees and amounts of restricted stock granted (incorporated by reference to Exhibit 10.29 to the Company's Form 10-K for the year ended December 31, 2000, File No. 0-15981) 10.16 Form of Split-Dollar Agreement for the following executive officers: Andrew L. Rogal, Timothy J. Korman and John P. McGrath (incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for the year ended December 31, 2000, File No. 0-15981) 10.17 Form of Split-Dollar Agreement for the following named executive officers: Martin L. Vaughan, III, Robert B. Lockhart and Michael A. Janes (incorporated by reference to Exhibit 10.31 to the Company's Form 10-K for the year ended December 31, 2000, File No. 0-15981) 10.18 Amended and Restated Credit Agreement dated April 6, 2001 among the Registrant and First Union National Bank, PNC Bank, National Association, Bank of America Securities, LLC, Fleet National Bank, SunTrust Bank, Branch Banking and Trust Company and Comerica Bank (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q dated May 11, 2001, File No. 0-15981) 10.19 Senior Executive Employment Agreement of Andrew L. Rogal dated December 1, 2001 by and between Hilb, Rogal and Hamilton Company and Andrew L. Rogal*
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EXHIBIT NO. DOCUMENT ----------- -------- 10.20 Senior Executive Employment Agreement of Martin L. Vaughan, III dated December 1, 2001 by and between Hilb, Rogal and Hamilton Company and Martin L. Vaughan, III* 10.21 Senior Executive Employment Agreement of John P. McGrath dated December 1, 2001 by and between Hilb, Rogal and Hamilton Company and John P. McGrath* 10.22 Senior Executive Employment Agreement of Timothy J. Korman dated December 1, 2001 by and between Hilb, Rogal and Hamilton Company and Timothy J. Korman* 10.23 Hilb, Rogal and Hamilton Company Executive Voluntary Deferral Plan, as amended and restated effective January 1, 2002 (incorporated by reference to Exhibit 4.3 to the Company's Amendment No. 1 to Form S-3 dated February 11, 2002, File No. 333-74564) 10.24 Hilb, Rogal and Hamilton Company Outside Directors Deferral Plan, as amended and restated effective January 1, 2002 (incorporated by reference to Exhibit 4.5 to the Company's Amendment No. 1 to Form S-3 dated February 11, 2002, File No. 333-74564) 10.25 Form of Hilb, Rogal and Hamilton Company Employee Non-Qualified Stock Option Agreement with schedule of optionees and amounts of options granted* 10.26 Form of Hilb, Rogal and Hamilton Company Restricted Stock Agreement with schedule of grantees and amounts of restricted stock granted* 10.27 Hilb, Rogal and Hamilton Company Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2002* 13 2001 Annual Report to Shareholders* 21 Subsidiaries of Hilb, Rogal and Hamilton Company*
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EXHIBIT NO. DOCUMENT ----------- -------- 23 Consent of Ernst & Young LLP* * Filed Herewith (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 2001. (c) Exhibits The response to this portion of Item 14 as listed in Item 14(a)(3) above is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report.
14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, Hilb, Rogal and Hamilton Company, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HILB, ROGAL AND HAMILTON COMPANY By: /s/ ANDREW L. ROGAL -------------------------------- Andrew L. Rogal, Chairman of the Board and Chief Executive Officer Date: March 29, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ANDREW L. ROGAL Chairman of the Board and Chief Executive March 29, 2002 - -------------------------------------------------- Officer and Director Andrew L. Rogal (Principal Executive Officer) /s/ CAROLYN JONES Senior Vice President, Chief Financial March 29, 2002 - --------------------------------------------------- Officer and Treasurer Carolyn Jones (Principal Financial Officer) /s/ ROBERT W. BLANTON, JR. Vice President and Controller March 29, 2002 - --------------------------------------------------- (Principal Accounting Officer) Robert W. Blanton, Jr. /s/ ROBERT H. HILB Chairman Emeritus and Director March 29, 2002 - --------------------------------------------------- Robert H. Hilb /s/ MARTIN L. VAUGHAN, III President, Chief Operating Officer and March 29, 2002 - --------------------------------------------------- Director Martin L. Vaughan, III /s/ TIMOTHY J.KORMAN Executive Vice President, Administration March 29, 2002 - --------------------------------------------------- and Finance and Director Timothy J. Korman /s/ ROBERT S. UKROP Director March 29, 2002 - --------------------------------------------------- Robert S. Ukrop
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SIGNATURE TITLE DATE --------- ----- ---- /s/ THOMAS H. O'BRIEN Director March 29, 2002 - --------------------------------------------------- Thomas H. O'Brien /s/ J. S. M. FRENCH Director March 29, 2002 - --------------------------------------------------- J. S. M. French /s/ NORWOOD H. DAVIS, JR. Director March 29, 2002 - --------------------------------------------------- Norwood H. Davis, Jr. /s/ THEODORE L. CHANDLER, JR. Director March 29, 2002 - --------------------------------------------------- Theodore L. Chandler, Jr. /s/ ANTHONY F. MARKEL Director March 29, 2002 - --------------------------------------------------- Anthony F. Markel /s/ ROBERT W. FIONDELLA Director March 29, 2002 - --------------------------------------------------- Robert W. Fiondella /s/ DAVID W. SEARFOSS Director March 29, 2002 - --------------------------------------------------- David W. Searfoss /s/ JULIOUS P. SMITH, JR. Director March 29, 2002 - --------------------------------------------------- Julious P. Smith, Jr.
16 ITEM 8, ITEMS 14 (a)(1) AND (2) AND (d) INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 2001 HILB, ROGAL AND HAMILTON COMPANY GLEN ALLEN, VIRGINIA 17 HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The report of independent auditors is included on page 19 of this Form 10-K and the following consolidated financial statements of Hilb, Rogal and Hamilton Company and subsidiaries, included in the Company's 2001 Annual Report to Shareholders are incorporated by reference in Item 8 of this report: Consolidated Balance Sheets, December 31, 2001 and 2000 Statement of Consolidated Income, Years Ended December 31, 2001, 2000 and 1999 Statement of Consolidated Shareholders' Equity, Years Ended December 31, 2001, 2000 and 1999 Statement of Consolidated Cash Flows, Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements The following consolidated financial statement schedule of Hilb, Rogal and Hamilton Company and subsidiaries is included in item 14(d):
Page Number Schedule II Valuation and Qualifying Accounts................................................ 20
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 18 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS ------------------------------------------------- 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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As explained in Note B to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative instruments and hedging activities and, in 2000 changed its method of accounting for policy cancellations. /s/ Ernst & Young LLP Richmond, Virginia February 13, 2002 19 HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E ADDITIONS --------- CHARGED BALANCE AT CHARGED TO OTHER BALANCE BEGINNING TO COSTS ACCOUNTS DEDUCTIONS AT END DESCRIPTION OF PERIOD AND EXPENSES (DESCRIBE)* (DESCRIBE)** OF PERIOD Year ended December 31, 2001: Allowance for doubtful accounts $1,878,000 $2,119,000 $844,000 $1,467,000 $3,374,000 Year ended December 31, 2000: Allowance for doubtful accounts 1,456,000 1,307,000 89,000 974,000 1,878,000 Year ended December 31, 1999: Allowance for doubtful accounts 1,505,000 402,000 377,000 828,000 1,456,000
- ----------------------------------------------- * Recoveries ($70,000) and other adjustments ($774,000) ** Bad debts written off 20 EX-10.19 3 j9350501ex10-19.txt EMPLOYMENT AGREEMENT WITH ANDREW L. ROGEL Exhibit 10.19 HILB, ROGAL AND HAMILTON COMPANY SENIOR EXECUTIVE EMPLOYMENT AGREEMENT WITH ANDREW L. ROGAL EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, effective the 1st day of December, 2001, by and between ANDREW L. ROGAL, an individual residing in the County of Henrico, Virginia (the "Executive"), and HILB, ROGAL AND HAMILTON COMPANY, a Virginia corporation with corporate offices located at 4951 Lake Brook Drive, Suite 500, Glen Allen, Virginia 23060 (the "Company"). WHEREAS, the Company desires to continue to employ the Executive as its Chairman and Chief Executive Officer and wants to assure itself of the benefit of the Executive's services and experience; and WHEREAS, the Executive is willing to continue in the employ of the Company upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: I. TERM OF EMPLOYMENT. ------------------ (A) The term of the employment of the Executive under this Agreement shall be for the period commencing on December 1, 2001 , and ending on May 31, 2006; provided, however, that commencing on May 31, 2005, and on each annual anniversary of such date (such date and each annual anniversary being hereinafter referred to as the "Renewal Date") unless previously terminated, the term of employment shall automatically extend so as to terminate two (2) years from such Renewal Date, unless notice that the term of employment will not be extended is given by either party to the other at least 60 days prior to the Renewal Date. (B) Notwithstanding the foregoing provision (A) of this Section I., the term of employment of the Executive under this Agreement shall be subject to earlier termination by: (1) determination of disability of the Executive pursuant to Section IV.; or (2) dismissal of the Executive from his position as Chairman and Chief Executive Officer pursuant to resolution by the Board of Directors of the Company, or failure or refusal of the Board of Directors to re-elect the Executive to the position of Chairman and Chief Executive Officer; (3) resignation by Executive; or (4) death of the Executive; PROVIDED, however, that (i) in the event of termination for determination of disability pursuant to Paragraph (1) above, Section IV. shall apply; (ii) in the event of termination pursuant to Paragraph (2) above for Proper Cause (as defined in Section V.(A)) or pursuant to Paragraph (3) above for other than Good Reason (as defined in Section VI.(A)), Section V.(B) shall apply; (iii) in the event of termination pursuant to Paragraph (2) above without Proper Cause or pursuant to Paragraph (3) above for Good Reason, Section VI.(B) shall apply; (iv) in the event of retirement of the Executive upon the expiration of the term set forth in Section I.(A), Section VII shall apply; or (v) in the event of termination due to the death of the Executive pursuant to Paragraph (4) above, Section VIII. shall apply. II. SERVICES TO BE RENDERED. ----------------------- The Company agrees to employ the Executive as the Chairman and Chief Executive Officer of the Company, subject to the terms, conditions and provisions of this Agreement. The Executive hereby accepts such employment and agrees that he shall devote the same degree of skill and diligence in rendering services to the Company under this Agreement as he applied during his prior employment by the Company. The Executive shall report to and be subject to the direction of the Board of Directors of the Company. The Executive agrees that his employment as Chairman and Chief Executive Officer of the Company pursuant to this Agreement is a full time position. Notwithstanding the foregoing, the Executive may devote a reasonable amount of his time to serving as an officer and director of other companies affiliated with the Company; to his personal investments and business affairs, including service as a director of unaffiliated companies; and to civic, political and charitable activities; PROVIDED HOWEVER, the Executive shall not accept any position as a director of any unaffiliated for-profit business organization, other than positions presently held by him, without prior approval of the Board of Directors of the Company (which approval will not be unreasonably withheld). III. COMPENSATION. ------------ In consideration for the services rendered to the Company under this Agreement, the Company shall pay and provide to the Executive the following compensation and benefits: (A) SALARY. ------ The Company shall pay the Executive an annual base salary of $490,000, payable in twelve equal monthly installments on the last business day of each calendar month. This annual base salary shall be reviewed annually by the Compensation Committee of the Board of Directors (the "Compensation Committee") to consider appropriate increases, but in no event shall the amount of the base salary be reduced. -2- (B) ANNUAL INCENTIVE BONUS. ---------------------- In addition to the base salary to be paid to the Executive under Section III.(A), the Executive may also be entitled to an annual incentive bonus as established and modified, from time to time, by the Compensation Committee. (C) ANCILLARY BENEFITS. ------------------ The Executive shall also be entitled to vacations, participation in the Company's Profit Sharing Savings Plan (401K), Executive Voluntary Deferral Plan and Supplemental Executive Retirement Plan, sick leave benefits, post-retirement benefit plan, and all other ancillary benefits provided by the Company, including, but not limited to, group life, health and disability insurance coverage, consistent with the compensation policies and practices of the Company from time to time prevailing with respect to persons who are executive officers of the Company. (D) The Executive shall receive such stock option awards each year as determined by the Compensation Committee in its sole discretion. IV. DISABILITY. ---------- (A) The term of employment of the Executive may be terminated at the election of the Company upon the Board of Director's receiving evidence that the Executive is disabled as that term is defined in the Group Long Term Disability Insurance Certificate and Summary Plan Description for the Company's Group Disability Plan. (B) In the event of such termination for disability, the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items, but shall, in addition, pay to the Executive such disability compensation as set forth in any disability plan established by the Company for its executive officers. V. TERMINATION FOR PROPER CAUSE OR WITHOUT GOOD REASON. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Proper Cause" for termination of the employment of the Executive under this Agreement, at the election of the Board of Directors of the Company: (1) the Executive shall voluntarily resign as a director, officer or employee of the Company or any of its affiliates without the written consent of the Board of Directors of the Company; (2) the Executive shall breach this Agreement in any material respect and fail to cure such breach within sixty (60) calendar days after receiving written notice of such breach from the Company; or -3- (3) the commission of a fraud, or other criminal act, by the Executive directly involving the Company or any of its affiliates which would constitute a felony if prosecuted under criminal law; PROVIDED, HOWEVER, the inability of the Executive to achieve favorable results of operations shall clearly not be deemed Proper Cause for termination hereunder. (B) In the event of termination of the Executive's employment by the Company pursuant to Section I.(B)(2) for Proper Cause or by the Executive pursuant to Section I.(B)(3) other than for Good Reason (as defined in Section VI.(A)), the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items. VI. TERMINATION FOR GOOD REASON OR WITHOUT PROPER CAUSE. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Good Reason" for termination of employment by Executive: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section II. of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section III. of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (3) the Company's requiring the Executive to be principally based at any office or location other than within the Richmond, Virginia metropolitan area. (B) In the event of termination of the Executive by the Company pursuant to Section I.(B)(2) without Proper Cause or by the Executive pursuant to Section I.(B)(3) for Good Reason, the Company shall thereafter be and remain obligated to the Executive (or his estate or designated beneficiary) for the following: (1) continuation of the compensation and benefits provided under Section III.(A) and III.(B) and such benefits under III.(C) as are payable to a terminated employee until expiration of the term of employment established by Section I.(A) or for one (1) year, whichever is greater; (2) immediate full vesting of all unvested stock options and awards of restricted stock; -4- (3) immediate full vesting of all benefits in the Company's Supplemental Executive Retirement Plan; and (4) the transfer to the Executive of the Company's interest in the Split Dollar Agreement between the Company and the Executive dated April 1, 1999 and any subsequent split dollar agreements, including the transfer to the Executive of the Company's interest in the underlying insurance policies. (C) In the event of a dispute as to whether Executive was terminated for or without Proper Cause, or for or without Good Reason, or regarding the amount of compensation Executive is entitled to receive under this Section VI., the Company shall be obligated to continue to pay to the Executive (or his estate or designated beneficiary) all of the compensation and benefits reserved under this Section VI. until the dispute is resolved by an arbitrator pursuant to Section XVIII. hereof. (D) For purposes of calculating the annual incentive bonus payable under Section III.(B), the Company shall make to the Executive (or his estate or designated beneficiary), an annual payment equal to the greater of (i) the highest annual incentive bonus payment received by Executive pursuant to Section III.(B) for the last four (4) fiscal years prior to the date of termination or (ii) fifty percent (50%) of his annual base salary. VII. RETIREMENT AT EXPIRATION OF THE TERM OF CONTRACT. ------------------------------------------------ In the event Executive elects to retire upon expiration of the term set forth in Section I.(A), all unvested stock options and grants of restricted stock shall immediately vest, the Executive shall become fully vested in the Company's Supplemental Executive Retirement Plan and the Company shall forfeit its interest in the Split Dollar Life Agreement between the Company and the Executive dated April 1, 1999 and any subsequent split dollar agreements and the underlying insurance policies. VIII. DEATH. ----- In the event of termination of the Executive's employment pursuant to Section I.(B)(4) above, the Company shall pay the Executive's estate or designated beneficiary such death benefits as may be set forth in any life insurance plan established by the Company for its executive officers. IX. CONFIDENTIALITY. --------------- For purposes of this Agreement, "Confidential Information" shall mean any information of a proprietary or confidential nature and trade secrets of the Company and its affiliates relating to the business of the Company and its affiliates that have not previously been publicly released by duly authorized representatives of the Company. The Executive agrees to regard and preserve as confidential all Confidential Information pertaining to the Company's business that has been or may be obtained by the Executive in the course of his employment with the Company, whether -5- he has such information in his memory or in writing or other physical form. The Executive shall not, without written authority from the Company to do so, use for his personal benefit or his personal purposes, unrelated to business of the Company, nor disclose to others, either during the term of his employment hereunder or thereafter, except as required by the conditions of his employment hereunder, any Confidential Information of the Company. This provision shall not apply after the Confidential Information has been voluntarily disclosed to the public by a duly authorized representative of the Company, independently developed and disclosed by others, or otherwise enters the public domain through lawful means. X. REMOVAL OF DOCUMENTS OR OBJECTS. ------------------------------- The Executive agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or any of its affiliates, or except as specifically permitted in writing by the Company, any document or object containing or reflecting any Confidential Information of the Company. The Executive recognizes that all documents or material containing Confidential Information developed by him or by someone else in the course of employment by the Company, are the exclusive property of the Company. XI. NONPIRACY COVENANTS. ------------------- (A) For the purpose of this Agreement, the following terms shall have the following meanings: (1) "HRH Customers" shall be limited to those customers of the Company or its affiliates for whom there is an insurance policy or bond in force or to or for whom the Company or its affiliates are rendering services as of the date of termination of the Executive's employment; (2) "Affiliates of the Company" shall mean each of the subsidiary corporations of Hilb, Rogal and Hamilton Company engaged in business as an insurance agency as of the date of termination of the Executive's employment; (3) "Prohibited Services" shall mean services in the fields of insurance performed by the Company or its affiliates, their agents or employees in any other business engaged in by the Company or its affiliates on the date of termination of the Executive's employment. "Fields of Insurance" does not include title insurance, but does include all lines of insurance sold by the Company or its affiliates, including, without limitation, property and casualty, life, group, accident, health, disability, and annuities; (4) "Restricted Period" shall mean: (i) in the case of termination by the Company for Proper Cause or by the Executive without Good Reason, the period of two (2) years immediately following the date of termination of the Executive's employment; and (ii) in the case of termination by the Company without Proper Cause or by the Executive for Good Reason, the period following the date of termination of the Executive's employment during which the Executive is receiving compensation under this Agreement. -6- (B) The Executive recognizes that over a period of many years the Company has developed, at considerable expense, relationships with, and knowledge about, Customers which constitute a major part of the value of the Company. During the course of his employment by the Company, the Executive will either have substantial contact with, or obtain substantial knowledge about, these Customers. In order to protect the value of the Company's business, the Executive covenants and agrees that, in the event of the termination of his employment for any reason, whether voluntary or involuntary and whether with or without Proper Cause or Good Reason, he shall not, directly or indirectly, for his own account or for the account of any other person or entity, as an owner, stockholder, director, employee, partner, agent, broker, consultant or other participant during the Restricted Period: (1) solicit a Customer for the purpose of providing Prohibited Services to such Customer; and (2) accept an invitation from a Customer for the purpose of providing Prohibited Services to such Customer. Subsections (1) and (2) are separate and divisible covenants; if for any reason one covenant is held to be illegal, invalid or unenforceable, in whole or in part, the remaining covenant shall remain valid and enforceable and shall not be affected thereby. Further, the periods and scope of the restrictions set forth in any such subsection shall be reduced by the minimum amount necessary to reform such subsection to the maximum level of enforcement permitted to the Company by the law governing this Agreement. Additionally, the Executive agrees that no separate geographic limitation is needed for the foregoing nonpiracy covenants as such are not a prohibition on the Executive's employment in the insurance agency business and are already limited to only those entities which are included within the definition of "Customer." XII. NONRAIDING OF EMPLOYEES. ----------------------- The Executive covenants that during his employment hereunder and the Restricted Period specified in Section XI. hereof, he will not solicit, induce or encourage for the purposes of employing or offering employment to any individuals who, as of the date of termination of the Executive's employment, are employees of the Company or its affiliates, nor will he directly or indirectly solicit, induce or encourage any of the Company's or its affiliates' employees to seek employment with any other business, whether or not the Executive is then affiliated with such business. XIII. NOTIFICATION OF FORMER AND NEW EMPLOYMENT. ----------------------------------------- During the term of this Agreement and the Restricted Period specified in Section XI. hereof, the Executive covenants to notify any prospective employer or joint venturer, which is a competitor of the Company of this Agreement with the Company; and if the Executive accepts employment or establishes a relationship with such competitor, the Executive covenants to notify the Company immediately of such relationship. If the Company reasonably believes that the Executive is affiliated or employed by or with a competitor of the Company during the Restricted Period, then -7- the Executive grants the Company the right to forward a copy of this Agreement to such competitor. XIV. LIQUIDATED DAMAGES. ------------------- (A) If the Executive breaches Sections X. or XI. of this Agreement, the Company may, at its sole option, seek liquidated damages with respect to each Customer procured by or through the Executive, directly or indirectly, in violation of Sections X. or XI. of this Agreement (with such Customers being hereafter referred to as "Lost Customers"). The Executive acknowledges that it would be difficult to calculate damages incurred by the Company in the event of such a breach and that the following liquidated damages clause, when so elected by the Company, is necessary and reasonable for the protection of the Executive. The Executive also acknowledges that the Company, at its sole option, may or may not choose to exercise this liquidated damages provision as to some or all Lost Customers. Whether or not the Company seeks liquidated or actual damages, the Company shall retain the right to obtain injunctive relief with respect to any Lost Customer and with respect to any other actions by the Executive which breach this Agreement. Finally, the Executive acknowledges that he has no right whatsoever to force the Company to exercise this liquidated damages provision, and that such choice remains entirely the Company's. Liquidated damages shall be calculated as follows: (1) A Lost Customer shall be valued at 150% of the gross revenue to the Company in the most recent twelve (12) month period preceding the date of loss of such account. If such Lost Customer had not been a Customer of the Company for an entire twelve (12) month period, such liquidated damages shall be 150% of the gross revenue which would have been, in the absence of a breach by the Executive, realized by the Company in the initial twelve (12) month period of such Customer being served by the Company. (2) The Executive acknowledges that the foregoing damage amounts are fair and reasonable, that an industry rule of thumb for the valuation of any agency is 150% of revenue and that, on the margin, selected accounts may be worth much more than 150% of their annual revenue to an agency. (B) The Executive shall pay such liquidated damages to the Company within ninety (90) business days after a final order is entered by the Arbitrator and received by the Executive ordering the Executive to make such payment. Thereafter, such liquidated damages shall bear interest at the prime rate of interest in effect at the Bank of Virginia. The Executive acknowledges that a broker of record letter granted during the Restricted Period, if applicable, by a Customer in favor of the Executive or any person or entity with whom or which the Executive is directly affiliated shall be PRIMA FACIE evidence of a violation of Section XI. of this Agreement and establishes a rebuttable presumption in favor of the Company that Section XI. of this Agreement has been violated by the Executive. Further, the Executive acknowledges that if the Restricted Period is applicable to him, he has an affirmative duty to inform such Customer that he cannot accept its business until after the Restricted Period. -8- (C) The Executive agrees that the foregoing remedies shall be cumulative and not exclusive, shall not be waived by any partial exercise or nonexercise thereof and shall be in addition to any other remedies available to the Company at law or in equity. XV. TOLLING OF RESTRICTIVE COVENANTS DURING VIOLATION. ------------------------------------------------- If a material breach by the Executive of any of the restrictive covenants of this Agreement occurs, the Executive agrees that the restrictive period of each such covenant so materially violated shall be extended by a period of time equal to the period of such material violation by the Executive. It is the intent of this Section that the running of the restricted period of a restrictive covenant shall be tolled during any period of material violation of such covenant so that the Company shall get the full and reasonable protection for which it contracted and so that the Executive may not profit by his material breach. XVI. NOTICES. ------- All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (A) If to the Company, to it at the following address: 4951 Lake Brook Drive, Suite 500 Glen Allen, Virginia 23060 Attn: Chairman of the Board (B) If to the Executive, to him at the following address: 9023 Norwick Road Richmond, Virginia 23229 or to such other place as either party shall have specified by notice in writing to the other. A copy of any notice or other communication given under this Agreement shall also be sent to the Secretary and the Treasurer of the Company addressed to such officers at the then principal office of the Company. XVII. GOVERNMENTAL REGULATION. ----------------------- Nothing contained in this Agreement shall be construed so as to require commission of any act contrary to law and whenever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation, the latter shall prevail, but in such event any such provision of this Agreement shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. -9- XVIII. ARBITRATION. ----------- Any dispute or controversy as to the interpretation, construction, application or enforcement of, or otherwise arising under or in connection with this Agreement, shall be submitted at the request of either party hereto for mandatory, final and binding arbitration in the City of Richmond, Virginia, in accordance with the commercial arbitration rules then prevailing of the American Arbitration Association. The Company and Executive waive the right to submit any controversy or dispute to a Court and/or a jury. Any award rendered therein shall provide the full remedies available to the parties under the applicable law and shall be final and binding on each of the parties hereto and their heirs, executors, administrators, successors and assigns and judgment may be entered thereon in any court having jurisdiction. The prevailing party in any such arbitration shall be entitled to an award by the arbitrator of all reasonable attorneys' fees and expenses incurred in connection with the arbitration. XIX. INDEMNIFICATION BY THE COMPANY. ------------------------------ The Company shall defend, indemnify and hold harmless the Executive to the fullest extent permitted by the laws of the Commonwealth of Virginia, against any all claims, causes of actions, damages and expenses (including all legal fees and expenses) in any threatened, pending or completed action, arising out of or relating in any way to action or conduct by the Executive by reason of the fact that he was a representative of the Company or was serving at the request of the Company or acts or conduct within the course of his employment pursuant to this Agreement or in his capacity as a director of the Company. If the Company contends that any action or conduct by the Executive was not within the course of his employment or is otherwise not subject to this provision, the Company shall pay to the Executive all defense costs and expenses to defend such an action and shall only be entitled to reimbursement of such fees and expenses if after a final adjudication, including all available appeals, there is a holding that the Executive was not entitled to the defense and indemnification under this provision. XX. GOVERNING LAW. ------------- This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. XXI. DIVISIBILITY. ------------ Should an arbitrator declare any provision of this Agreement to be invalid, such declaration shall not affect the validity of the remaining portion of any such provision or the validity of any other term or provision of this Agreement as a whole or any part thereof, other than the specific portion declared to be invalid. XXII. HEADINGS. -------- The headings to the Sections and Paragraphs of this Agreement are for convenience of reference only and in case of any conflict the text of this Agreement, rather than the headings, shall control. -10- XXIII. SUCCESSORS AND ASSIGNS. ---------------------- This Agreement is binding upon and shall inure to the benefit of the successors and assigns of the Company and the heirs, executors and legal representatives of the Executive. XXIV. ENTIRE AGREEMENT. ---------------- This Agreement contains the entire understanding of the parties with respect to the subject matter contained herein and supersedes all prior agreements, arrangements and understandings relating to the subject matter and may only be amended by a written agreement signed by the parties hereto or their duly authorized representatives. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. WITNESS: /s/ Dena Higgins /s/ Andrew L. Rogal - ------------------------------------ ----------------------------------- Andrew L. Rogal ATTEST: HILB, ROGAL and HAMILTON COMPANY /s/ Dena Higgins By: /s/ Timothy J. Korman - ------------------------------------ -------------------------------- Its: Executive Vice President - Finance & Administration -11- EX-10.20 4 j9350501ex10-20.txt EMPLOYMENT AGREEMENT WITH MARTIN L. VAUGHN, III Exhibit 10.20 HILB, ROGAL AND HAMILTON COMPANY SENIOR EXECUTIVE EMPLOYMENT AGREEMENT WITH MARTIN L. VAUGHAN, III EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, effective the 1st day of December, 2001, by and between MARTIN L. VAUGHAN, III, an individual residing in the County of Henrico, Virginia (the "Executive"), and HILB, ROGAL AND HAMILTON COMPANY, a Virginia corporation with corporate offices located at 4951 Lake Brook Drive, Suite 500, Glen Allen, Virginia 23060 (the "Company"). WHEREAS, the Company desires to continue to employ the Executive as its President and Chief Operating Officer and wants to assure itself of the benefit of the Executive's services and experience; and WHEREAS, the Executive is willing to continue in the employ of the Company upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: I. TERM OF EMPLOYMENT. ------------------ (A) The term of the employment of the Executive under this Agreement shall be for the period commencing on December 1, 2001 , and ending on May 31, 2005; provided, however, that commencing on May 31, 2004, and on each annual anniversary of such date (such date and each annual anniversary being hereinafter referred to as the "Renewal Date") unless previously terminated, the term of employment shall automatically extend so as to terminate two (2) years from such Renewal Date, unless notice that the term of employment will not be extended is given by either party to the other at least 60 days prior to the Renewal Date. (B) Notwithstanding the foregoing provision (A) of this Section I., the term of employment of the Executive under this Agreement shall be subject to earlier termination by: (1) determination of disability of the Executive pursuant to Section IV.; or (2) dismissal of the Executive from his position as President and Chief Operating Officer pursuant to resolution by the Board of Directors of the Company, or failure or refusal of the Board of Directors to re-elect the Executive to the position of President and Chief Operating Officer; (3) resignation by Executive; or (4) death of the Executive; PROVIDED, however, that (i) in the event of termination for determination of disability pursuant to Paragraph (1) above, Section IV. shall apply; (ii) in the event of termination pursuant to Paragraph (2) above for Proper Cause (as defined in Section V.(A)) or pursuant to Paragraph (3) above for other than Good Reason (as defined in Section VI.(A)), Section V.(B) shall apply; (iii) in the event of termination pursuant to Paragraph (2) above without Proper Cause or pursuant to Paragraph (3) above for Good Reason, Section VI.(B) shall apply; (iv) in the event of retirement of the Executive upon the expiration of the term set forth in Section I.(A), Section VII shall apply; or (v) in the event of termination due to the death of the Executive pursuant to Paragraph (4) above, Section VIII. shall apply. II. SERVICES TO BE RENDERED. ----------------------- The Company agrees to employ the Executive as the President and Chief Operating Officer of the Company, subject to the terms, conditions and provisions of this Agreement. The Executive hereby accepts such employment and agrees that he shall devote the same degree of skill and diligence in rendering services to the Company under this Agreement as he applied during his prior employment by the Company. The Executive agrees that his employment as President and Chief Operating Officer of the Company pursuant to this Agreement is a full time position. Notwithstanding the foregoing, the Executive may devote a reasonable amount of his time to serving as an officer and director of other companies affiliated with the Company; to his personal investments and business affairs, including service as a director of unaffiliated companies; and to civic, political and charitable activities; PROVIDED HOWEVER, the Executive shall not accept any position as a director of any unaffiliated for-profit business organization, other than positions presently held by him, without prior approval of the Board of Directors of the Company (which approval will not be unreasonably withheld). III. COMPENSATION. ------------ In consideration for the services rendered to the Company under this Agreement, the Company shall pay and provide to the Executive the following compensation and benefits: (A) SALARY. ------ The Company shall pay the Executive an annual base salary of $385,000, payable in twelve equal monthly installments on the last business day of each calendar month. This annual base salary shall be reviewed annually by the Compensation Committee of the Board of Directors (the "Compensation Committee") to consider appropriate increases, but in no event shall the amount of the base salary be reduced. -2- (B) ANNUAL INCENTIVE BONUS. ---------------------- In addition to the base salary to be paid to the Executive under Section III.(A), the Executive may also be entitled to an annual incentive bonus as established and modified, from time to time, by the Compensation Committee. (C) ANCILLARY BENEFITS. ------------------ The Executive shall also be entitled to vacations, participation in the Company's Profit Sharing Savings Plan (401K), Executive Voluntary Deferral Plan and Supplemental Executive Retirement Plan, sick leave benefits, post-retirement benefit plan, and all other ancillary benefits provided by the Company, including, but not limited to, group life, health and disability insurance coverage, consistent with the compensation policies and practices of the Company from time to time prevailing with respect to persons who are executive officers of the Company. (D) The Executive shall receive such stock option awards each year as determined by the Compensation Committee in its sole discretion. IV. DISABILITY. ---------- (A) The term of employment of the Executive may be terminated at the election of the Company upon the Board of Director's receiving evidence that the Executive is disabled as that term is defined in the Group Long Term Disability Insurance Certificate and Summary Plan Description for the Company's Group Disability Plan. (B) In the event of such termination for disability, the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items, but shall, in addition, pay to the Executive such disability compensation as set forth in any disability plan established by the Company for its executive officers. V. TERMINATION FOR PROPER CAUSE OR WITHOUT GOOD REASON. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Proper Cause" for termination of the employment of the Executive under this Agreement, at the election of the Board of Directors of the Company: (1) the Executive shall voluntarily resign as a director, officer or employee of the Company or any of its affiliates without the written consent of the Board of Directors of the Company; (2) the Executive shall breach this Agreement in any material respect and fail to cure such breach within sixty (60) calendar days after receiving written notice of such breach from the Company; or -3- (3) the commission of a fraud, or other criminal act, by the Executive directly involving the Company or any of its affiliates which would constitute a felony if prosecuted under criminal law; PROVIDED, HOWEVER, the inability of the Executive to achieve favorable results of operations shall clearly not be deemed Proper Cause for termination hereunder. (B) In the event of termination of the Executive's employment by the Company pursuant to Section I.(B)(2) for Proper Cause or by the Executive pursuant to Section I.(B)(3) other than for Good Reason (as defined in Section VI.(A)), the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items. VI. TERMINATION FOR GOOD REASON OR WITHOUT PROPER CAUSE. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Good Reason" for termination of employment by Executive: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section II. of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (2) any failure by the Company to comply with any of the provisions of Section III. of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (3) the Company's requiring the Executive to be principally based at any office or location other than within the Richmond, Virginia metropolitan area. (B) In the event of termination of the Executive by the Company pursuant to Section I.(B)(2) without Proper Cause or by the Executive pursuant to Section I.(B)(3) for Good Reason, the Company shall thereafter be and remain obligated to the Executive (or his estate or designated beneficiary) for the following: (1) continuation of the compensation and benefits provided under Section III.(A) and III.(B) and such benefits under III.(C) as are payable to a terminated employee until expiration of the term of employment established by Section I.(A) or for one (1) year, whichever is greater; (2) immediate full vesting of all unvested stock options and awards of restricted stock; -4- (3) immediate full vesting of all benefits in the Company's Supplemental Executive Retirement Plan; and (4) the transfer to the Executive of the Company's interest in the Split Dollar Agreement between the Company and the Executive dated April 1, 1999 and any subsequent split dollar agreements, including the transfer to the Executive of the Company's interest in the underlying insurance policies. (C) In the event of a dispute as to whether Executive was terminated for or without Proper Cause, or for or without Good Reason, or regarding the amount of compensation Executive is entitled to receive under this Section VI., the Company shall be obligated to continue to pay to the Executive (or his estate or designated beneficiary) all of the compensation and benefits reserved under this Section VI. until the dispute is resolved by an arbitrator pursuant to Section XVIII. hereof. (D) For purposes of calculating the annual incentive bonus payable under Section III.(B), the Company shall make to the Executive (or his estate or designated beneficiary), an annual payment equal to the greater of (i) the highest annual incentive bonus payment received by Executive pursuant to Section III.(B) for the last four (4) fiscal years prior to the date of termination or (ii) fifty percent (50%) of his annual base salary. VII. RETIREMENT AT EXPIRATION OF THE TERM OF CONTRACT. ------------------------------------------------ In the event Executive elects to retire upon expiration of the term set forth in Section I.(A), all unvested stock options and grants of restricted stock shall immediately vest, the Executive shall become fully vested in the Company's Supplemental Executive Retirement Plan and the Company shall forfeit its interest in the Split Dollar Life Agreement between the Company and the Executive dated April 1, 1999 and any subsequent split dollar agreements and the underlying insurance policies. VIII. DEATH. ----- In the event of termination of the Executive's employment pursuant to Section I.(B)(4) above, the Company shall pay the Executive's estate or designated beneficiary such death benefits as may be set forth in any life insurance plan established by the Company for its executive officers. IX. CONFIDENTIALITY. --------------- For purposes of this Agreement, "Confidential Information" shall mean any information of a proprietary or confidential nature and trade secrets of the Company and its affiliates relating to the business of the Company and its affiliates that have not previously been publicly released by duly authorized representatives of the Company. The Executive agrees to regard and preserve as confidential all Confidential Information pertaining to the Company's business that has been or may be obtained by the Executive in the course of his employment with the Company, whether -5- he has such information in his memory or in writing or other physical form. The Executive shall not, without written authority from the Company to do so, use for his personal benefit or his personal purposes, unrelated to business of the Company, nor disclose to others, either during the term of his employment hereunder or thereafter, except as required by the conditions of his employment hereunder, any Confidential Information of the Company. This provision shall not apply after the Confidential Information has been voluntarily disclosed to the public by a duly authorized representative of the Company, independently developed and disclosed by others, or otherwise enters the public domain through lawful means. X. REMOVAL OF DOCUMENTS OR OBJECTS. ------------------------------- The Executive agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or any of its affiliates, or except as specifically permitted in writing by the Company, any document or object containing or reflecting any Confidential Information of the Company. The Executive recognizes that all documents or material containing Confidential Information developed by him or by someone else in the course of employment by the Company, are the exclusive property of the Company. XI. NONPIRACY COVENANTS. ------------------- (A) For the purpose of this Agreement, the following terms shall have the following meanings: (1) "HRH Customers" shall be limited to those customers of the Company or its affiliates for whom there is an insurance policy or bond in force or to or for whom the Company or its affiliates are rendering services as of the date of termination of the Executive's employment; (2) "Affiliates of the Company" shall mean each of the subsidiary corporations of Hilb, Rogal and Hamilton Company engaged in business as an insurance agency as of the date of termination of the Executive's employment; (3) "Prohibited Services" shall mean services in the fields of insurance performed by the Company or its affiliates, their agents or employees in any other business engaged in by the Company or its affiliates on the date of termination of the Executive's employment. "Fields of Insurance" does not include title insurance, but does include all lines of insurance sold by the Company or its affiliates, including, without limitation, property and casualty, life, group, accident, health, disability, and annuities; (4) "Restricted Period" shall mean: (i) in the case of termination by the Company for Proper Cause or by the Executive without Good Reason, the period of two (2) years immediately following the date of termination of the Executive's employment; and (ii) in the case of termination by the Company without Proper Cause or by the Executive for Good Reason, the period following the date of termination of the Executive's employment during which the Executive is receiving compensation under this Agreement. -6- (B) The Executive recognizes that over a period of many years the Company has developed, at considerable expense, relationships with, and knowledge about, Customers which constitute a major part of the value of the Company. During the course of his employment by the Company, the Executive will either have substantial contact with, or obtain substantial knowledge about, these Customers. In order to protect the value of the Company's business, the Executive covenants and agrees that, in the event of the termination of his employment for any reason, whether voluntary or involuntary and whether with or without Proper Cause or Good Reason, he shall not, directly or indirectly, for his own account or for the account of any other person or entity, as an owner, stockholder, director, employee, partner, agent, broker, consultant or other participant during the Restricted Period: (1) solicit a Customer for the purpose of providing Prohibited Services to such Customer; and (2) accept an invitation from a Customer for the purpose of providing Prohibited Services to such Customer. Subsections (1) and (2) are separate and divisible covenants; if for any reason one covenant is held to be illegal, invalid or unenforceable, in whole or in part, the remaining covenant shall remain valid and enforceable and shall not be affected thereby. Further, the periods and scope of the restrictions set forth in any such subsection shall be reduced by the minimum amount necessary to reform such subsection to the maximum level of enforcement permitted to the Company by the law governing this Agreement. Additionally, the Executive agrees that no separate geographic limitation is needed for the foregoing nonpiracy covenants as such are not a prohibition on the Executive's employment in the insurance agency business and are already limited to only those entities which are included within the definition of "Customer." XII. NONRAIDING OF EMPLOYEES. ----------------------- The Executive covenants that during his employment hereunder and the Restricted Period specified in Section XI. hereof, he will not solicit, induce or encourage for the purposes of employing or offering employment to any individuals who, as of the date of termination of the Executive's employment, are employees of the Company or its affiliates, nor will he directly or indirectly solicit, induce or encourage any of the Company's or its affiliates' employees to seek employment with any other business, whether or not the Executive is then affiliated with such business. XIII. NOTIFICATION OF FORMER AND NEW EMPLOYMENT. ----------------------------------------- During the term of this Agreement and the Restricted Period specified in Section XI. hereof, the Executive covenants to notify any prospective employer or joint venturer, which is a competitor of the Company of this Agreement with the Company; and if the Executive accepts employment or establishes a relationship with such competitor, the Executive covenants to notify the Company immediately of such relationship. If the Company reasonably believes that the Executive is affiliated or employed by or with a competitor of the Company during the Restricted Period, then -7- the Executive grants the Company the right to forward a copy of this Agreement to such competitor. XIV. LIQUIDATED DAMAGES. ------------------- (A) If the Executive breaches Sections X. or XI. of this Agreement, the Company may, at its sole option, seek liquidated damages with respect to each Customer procured by or through the Executive, directly or indirectly, in violation of Sections X. or XI. of this Agreement (with such Customers being hereafter referred to as "Lost Customers"). The Executive acknowledges that it would be difficult to calculate damages incurred by the Company in the event of such a breach and that the following liquidated damages clause, when so elected by the Company, is necessary and reasonable for the protection of the Executive. The Executive also acknowledges that the Company, at its sole option, may or may not choose to exercise this liquidated damages provision as to some or all Lost Customers. Whether or not the Company seeks liquidated or actual damages, the Company shall retain the right to obtain injunctive relief with respect to any Lost Customer and with respect to any other actions by the Executive which breach this Agreement. Finally, the Executive acknowledges that he has no right whatsoever to force the Company to exercise this liquidated damages provision, and that such choice remains entirely the Company's. Liquidated damages shall be calculated as follows: (1) A Lost Customer shall be valued at 150% of the gross revenue to the Company in the most recent twelve (12) month period preceding the date of loss of such account. If such Lost Customer had not been a Customer of the Company for an entire twelve (12) month period, such liquidated damages shall be 150% of the gross revenue which would have been, in the absence of a breach by the Executive, realized by the Company in the initial twelve (12) month period of such Customer being served by the Company. (2) The Executive acknowledges that the foregoing damage amounts are fair and reasonable, that an industry rule of thumb for the valuation of any agency is 150% of revenue and that, on the margin, selected accounts may be worth much more than 150% of their annual revenue to an agency. (B) The Executive shall pay such liquidated damages to the Company within ninety (90) business days after a final order is entered by the Arbitrator and received by the Executive ordering the Executive to make such payment. Thereafter, such liquidated damages shall bear interest at the prime rate of interest in effect at the Bank of Virginia. The Executive acknowledges that a broker of record letter granted during the Restricted Period, if applicable, by a Customer in favor of the Executive or any person or entity with whom or which the Executive is directly affiliated shall be PRIMA FACIE evidence of a violation of Section XI. of this Agreement and establishes a rebuttable presumption in favor of the Company that Section XI. of this Agreement has been violated by the Executive. Further, the Executive acknowledges that if the Restricted Period is applicable to him, he has an affirmative duty to inform such Customer that he cannot accept its business until after the Restricted Period. -8- (C) The Executive agrees that the foregoing remedies shall be cumulative and not exclusive, shall not be waived by any partial exercise or nonexercise thereof and shall be in addition to any other remedies available to the Company at law or in equity. XV. TOLLING OF RESTRICTIVE COVENANTS DURING VIOLATION. ------------------------------------------------- If a material breach by the Executive of any of the restrictive covenants of this Agreement occurs, the Executive agrees that the restrictive period of each such covenant so materially violated shall be extended by a period of time equal to the period of such material violation by the Executive. It is the intent of this Section that the running of the restricted period of a restrictive covenant shall be tolled during any period of material violation of such covenant so that the Company shall get the full and reasonable protection for which it contracted and so that the Executive may not profit by his material breach. XVI. NOTICES. ------- All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (A) If to the Company, to it at the following address: 4951 Lake Brook Drive, Suite 500 Glen Allen, Virginia 23060 Attn: Chairman of the Board (B) If to the Executive, to him at the following address: 3809 Rupert Lane Richmond, Virginia 23233 or to such other place as either party shall have specified by notice in writing to the other. A copy of any notice or other communication given under this Agreement shall also be sent to the Secretary and the Treasurer of the Company addressed to such officers at the then principal office of the Company. XVII. GOVERNMENTAL REGULATION. ----------------------- Nothing contained in this Agreement shall be construed so as to require commission of any act contrary to law and whenever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation, the latter shall prevail, but in such event any such provision of this Agreement shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. -9- XVIII. ARBITRATION. ----------- Any dispute or controversy as to the interpretation, construction, application or enforcement of, or otherwise arising under or in connection with this Agreement, shall be submitted at the request of either party hereto for mandatory, final and binding arbitration in the City of Richmond, Virginia, in accordance with the commercial arbitration rules then prevailing of the American Arbitration Association. The Company and Executive waive the right to submit any controversy or dispute to a Court and/or a jury. Any award rendered therein shall provide the full remedies available to the parties under the applicable law and shall be final and binding on each of the parties hereto and their heirs, executors, administrators, successors and assigns and judgment may be entered thereon in any court having jurisdiction. The prevailing party in any such arbitration shall be entitled to an award by the arbitrator of all reasonable attorneys' fees and expenses incurred in connection with the arbitration. XIX. INDEMNIFICATION BY THE COMPANY. ------------------------------ The Company shall defend, indemnify and hold harmless the Executive to the fullest extent permitted by the laws of the Commonwealth of Virginia, against any all claims, causes of actions, damages and expenses (including all legal fees and expenses) in any threatened, pending or completed action, arising out of or relating in any way to action or conduct by the Executive by reason of the fact that he was a representative of the Company or was serving at the request of the Company or acts or conduct within the course of his employment pursuant to this Agreement or in his capacity as a director of the Company. If the Company contends that any action or conduct by the Executive was not within the course of his employment or is otherwise not subject to this provision, the Company shall pay to the Executive all defense costs and expenses to defend such an action and shall only be entitled to reimbursement of such fees and expenses if after a final adjudication, including all available appeals, there is a holding that the Executive was not entitled to the defense and indemnification under this provision. XX. GOVERNING LAW. ------------- This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. XXI. DIVISIBILITY. ------------ Should an arbitrator declare any provision of this Agreement to be invalid, such declaration shall not affect the validity of the remaining portion of any such provision or the validity of any other term or provision of this Agreement as a whole or any part thereof, other than the specific portion declared to be invalid. -10- XXII. HEADINGS. -------- The headings to the Sections and Paragraphs of this Agreement are for convenience of reference only and in case of any conflict the text of this Agreement, rather than the headings, shall control. XXIII. SUCCESSORS AND ASSIGNS. ---------------------- This Agreement is binding upon and shall inure to the benefit of the successors and assigns of the Company and the heirs, executors and legal representatives of the Executive. XXIV. ENTIRE AGREEMENT. ---------------- This Agreement contains the entire understanding of the parties with respect to the subject matter contained herein and supersedes all prior agreements, arrangements and understandings relating to the subject matter and may only be amended by a written agreement signed by the parties hereto or their duly authorized representatives. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. WITNESS: /s/ Dena Higgins /s/ Martin L. Vaughn, III - ------------------------------------ ------------------------------------ Martin L. Vaughan, III ATTEST: HILB, ROGAL and HAMILTON COMPANY /s/ By: /s/ Timothy J. Korman - ------------------------------------ --------------------------------- Its: Executive Vice President - Finance and Administration -11- EX-10.21 5 j9350501ex10-21.txt EMPLOYMENT AGREEMENT WITH JOHN P. MCGRATH Exhibit 10.21 HILB, ROGAL AND HAMILTON COMPANY SENIOR EXECUTIVE EMPLOYMENT AGREEMENT WITH JOHN P. MCGRATH EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, effective the 1st day of December, 2001, by and between John P. McGrath, an individual residing in Pittsburgh, Pennsylvania (the "Executive"), and HILB, ROGAL AND HAMILTON COMPANY, a Virginia corporation with corporate offices located at 4951 Lake Brook Drive, Suite 500, Glen Allen, Virginia 23060 (the "Company"). WHEREAS, the Company desires to continue to employ the Executive as its Sr. Vice President - Business and Product Development and wants to assure itself of the benefit of the Executive's services and experience; and WHEREAS, the Executive is willing to continue in the employ of the Company upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: I. TERM OF EMPLOYMENT. ------------------ (A) The term of the employment of the Executive under this Agreement shall be for the two (2) year period commencing on December 1, 2001, and ending on November 30, 2003; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary being hereinafter referred to as the "Renewal Date") unless previously terminated, the term of employment shall automatically extend so as to terminate two (2) years from such Renewal Date, unless notice that the term of employment will not be extended is given by either party to the other at least 60 days prior to the Renewal Date. (B) Notwithstanding the foregoing provision (A) of this Section I., the term of employment of the Executive under this Agreement shall be subject to earlier termination by: (1) determination of disability of the Executive pursuant to Section IV.; or (2) dismissal of the Executive from his position as Sr. Vice President - Business and Product Development, pursuant to resolution by the Board of Directors of the Company, or failure or refusal of the Board of Directors to re-elect the Executive to the position of Sr. Vice President - Business and Product Development. (3) resignation by Executive; or (4) death of the Executive; PROVIDED, however, that (i) in the event of termination for determination of disability pursuant to Paragraph (1) above, Section IV. shall apply; (ii) in the event of termination pursuant to Paragraph (2) above for "Proper Cause" (defined in Section V.(A)) or pursuant to Paragraph (3) above for other than "Good Reason" (defined in Section VI.(A)), Section V.(B) shall apply; (iii) in the event of termination pursuant to Paragraph (2) above without "Proper Cause" (defined in Section V.(A)) or pursuant to Paragraph (3) above for "Good Reason" (defined in Section VI.(A)), Section VI.(B) shall apply; or (iv) in the event of termination due to the death of the Executive pursuant to Paragraph (3) above, Section VII. shall apply. II. SERVICES TO BE RENDERED. ----------------------- The Company agrees to employ the Executive as the Sr. Vice President - Business and Product Development, subject to the terms, conditions and provisions of this Agreement. The Executive hereby accepts such employment and agrees that he shall devote the same degree of skill and diligence in rendering services to the Company under this Agreement as he applied during his prior employment by the Company. The Executive agrees that his employment as Sr. Vice President - Business and Product Development of the Company pursuant to this Agreement is a full time position. Notwithstanding the foregoing, the Executive may devote a reasonable amount of his time to serving as an officer and director of other companies affiliated with the Company; to his personal investments and business affairs, including service as a director of unaffiliated companies; and to civic, political and charitable activities; PROVIDED HOWEVER, the Executive shall not accept any position as a director of any unaffiliated for-profit business organization, other than positions presently held by him, without prior approval of the Board of Directors of the Company (which approval will not be unreasonably withheld). III. COMPENSATION. ------------ In consideration for the services rendered to the Company under this Agreement, the Company shall pay and provide to the Executive the following compensation and benefits: (A) SALARY. ------ The Company shall pay the Executive an annual base salary of $332,000, payable in twenty four semi-monthly installments on the 15th and last business day of each calendar month. This annual base salary shall be reviewed annually by the Compensation Committee of the Board of Directors (the "Compensation Committee") to consider appropriate increases, but in no event shall the amount of the base salary be reduced. -2- (B) ANNUAL INCENTIVE BONUS. ---------------------- In addition to the base salary to be paid to the Executive under Section III.(A), the Executive may also be entitled to an annual incentive bonus as established and modified, from time to time, by the Compensation Committee. (C) ANCILLARY BENEFITS. ------------------ The Executive shall also be entitled to vacations, participation in the Company's Profit Sharing Savings Plan (401K), Executive Voluntary Deferral Plan and Supplemental Executive Retirement Plan, sick leave benefits, post-retirement benefit plan, and all other ancillary benefits provided by the Company, including, but not limited to, group life, health and disability insurance coverage, consistent with the compensation policies and practices of the Company from time to time prevailing with respect to persons who are executive officers of the Company. (D) The Executive shall receive such stock option awards each year as determined by the Compensation Committee in its sole discretion. IV. DISABILITY. ---------- (A) The term of employment of the Executive may be terminated at the election of the Company upon the Board of Director's receiving evidence that the Executive is disabled as that term is defined in the Group Long Term Disability Insurance Certificate and Summary Plan Description for the Company's Group Disability Plan. (B) In the event of such termination for disability, the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items, but shall, in addition, pay to the Executive such disability compensation as set forth in any disability plan established by the Company for its executive officers. V. TERMINATION FOR PROPER CAUSE OR WITHOUT GOOD REASON. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Proper Cause" for termination of the employment of the Executive under this Agreement, at the election of the Board of Directors of the Company: (1) the Executive shall voluntarily resign as a director, officer or employee of the Company or any of its affiliates without the written consent of the Board of Directors of the Company; (2) the Executive shall breach this Agreement in any material respect and fail to cure such breach within sixty (60) calendar days after receiving written notice of such breach from the Company; or -3- (3) the commission of a fraud, or other criminal act, by the Executive directly involving the Company or any of its affiliates which would constitute a felony if prosecuted under criminal law; PROVIDED, HOWEVER, the inability of the Executive to achieve favorable results of operations shall clearly not be deemed Proper Cause for termination hereunder. (B) In the event of termination of the Executive's employment by the Company pursuant to Section I.(B)(2) for Proper Cause or by the Executive pursuant to Section I.(B)(3) other than for "Good Reason" (defined in Section VI.(A)), the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items. VI. TERMINATION FOR GOOD REASON OR WITHOUT PROPER CAUSE. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Good Reason" for termination of employment by Executive: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements, reassignment to a location other than corporate headquarters, etc), authority, duties or responsibilities as contemplated by Section II. of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (2) any failure by the Company to comply with any of the provisions of Section III. of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive. (B) In the event of termination of the Executive by the Company pursuant to Section I.(B)(2) without Proper Cause (as defined in Section V.(A) above) or by the Executive pursuant to Section I.(B)(3) for Good Reason (as defined in Section VI.(A) above), the Company shall thereafter be and remain obligated to pay to the Executive (or his estate or designated beneficiary) the compensation and benefits provided under Section III.(A) and III.(B) and such benefits under III.(C) as are payable to a terminated employee until expiration of the term of employment established by Section I.(A). In the event of a dispute as to whether Executive was terminated for or without "Proper Cause," or for or without "Good Reason," or regarding the amount of compensation Executive is entitled to receive under this Section VI., the Company shall be obligated to continue to pay to the Executive (or his estate or designated beneficiary) all of the compensation and benefits reserved under Section III. until the dispute is resolved by an arbitrator pursuant to Section XVII. hereof. -4- (C) For purposes of calculating the annual incentive bonus payable under Section III.(B), the Company shall make to the Executive (or his estate or designated beneficiary), an annual payment equal to the greater of (i) the highest annual incentive bonus payment received by Executive pursuant to Section III.(B) for the last two (2) fiscal years prior to the date of termination or (ii) fifty percent (50%) of his annual base salary. VII. DEATH. ----- In the event of termination of the Executive's employment pursuant to Section I.(B)(4) above, the Company shall pay the Executive's estate or designated beneficiary such death benefits as may be set forth in any life insurance plan established by the Company for its executive officers. VIII. CONFIDENTIALITY. --------------- For purposes of this Agreement, "Confidential Information" shall mean any information of a proprietary or confidential nature and trade secrets of the Company and its affiliates relating to the business of the Company and its affiliates that have not previously been publicly released by duly authorized representatives of the Company. The Executive agrees to regard and preserve as confidential all Confidential Information pertaining to the Company's business that has been or may be obtained by the Executive in the course of his employment with the Company, whether he has such information in his memory or in writing or other physical form. The Executive shall not, without written authority from the Company to do so, use for his personal benefit or his personal purposes, unrelated to business of the Company, nor disclose to others, either during the term of his employment hereunder or thereafter, except as required by the conditions of his employment hereunder, any Confidential Information of the Company. This provision shall not apply after the Confidential Information has been voluntarily disclosed to the public by a duly authorized representative of the Company, independently developed and disclosed by others, or otherwise enters the public domain through lawful means. IX. REMOVAL OF DOCUMENTS OR OBJECTS. ------------------------------- The Executive agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or any of its affiliates, or except as specifically permitted in writing by the Company, any document or object containing or reflecting any Confidential Information of the Company. The Executive recognizes that all documents or material containing Confidential Information developed by him or by someone else in the course of employment by the Company, are the exclusive property of the Company. X. NONPIRACY COVENANTS. ------------------- (A) For the purpose of this Agreement, the following terms shall have the following meanings: (1) "HRH Customers" shall be limited to those customers of the Company or its affiliates for whom there is an insurance policy or bond in force or to or for whom the -5- Company or its affiliates are rendering services as of the date of termination of the Executive's employment; (2) "Affiliates of the Company" shall mean each of the subsidiary corporations of Hilb, Rogal and Hamilton Company engaged in business as an insurance agency as of the date of termination of the Executive's employment; (3) "Prohibited Services" shall mean services in the fields of insurance performed by the Company or its affiliates, their agents or employees in any other business engaged in by the Company or its affiliates on the date of termination of the Executive's employment. "Fields of Insurance" does not include title insurance, but does include all lines of insurance sold by the Company or its affiliates, including, without limitation, property and casualty, life, group, accident, health, disability, and annuities; (4) "Restricted Period" shall mean: (i) in the case of termination by the Company for Proper Cause or by the Executive without Good Reason, the period of two (2) years immediately following the date of termination of the Executive's employment; and (ii) in the case of termination by the Company without Proper Cause or by the Executive for Good Reason, the period following the date of termination of the Executive's employment during which the Executive is receiving compensation under this Agreement. (B) The Executive recognizes that over a period of many years the Company has developed, at considerable expense, relationships with, and knowledge about, Customers which constitute a major part of the value of the Company. During the course of his employment by the Company, the Executive will either have substantial contact with, or obtain substantial knowledge about, these Customers. In order to protect the value of the Company's business, the Executive covenants and agrees that, in the event of the termination of his employment for any reason, whether voluntary or involuntary and whether with or without Proper Cause or Good Reason, he shall not, directly or indirectly, for his own account or for the account of any other person or entity, as an owner, stockholder, director, employee, partner, agent, broker, consultant or other participant during the Restricted Period: (1) solicit a Customer for the purpose of providing Prohibited Services to such Customer; and (2) accept an invitation from a Customer for the purpose of providing Prohibited Services to such Customer. Subsections (1) and (2) are separate and divisible covenants; if for any reason one covenant is held to be illegal, invalid or unenforceable, in whole or in part, the remaining covenant shall remain valid and enforceable and shall not be affected thereby. Further, the periods and scope of the restrictions set forth in any such subsection shall be reduced by the minimum amount necessary to reform such subsection to the maximum level of enforcement permitted to the Company by the law governing this Agreement. Additionally, the Executive agrees that no separate geographic limitation is needed for the foregoing nonpiracy covenants as -6- such are not a prohibition on the Executive's employment in the insurance agency business and are already limited to only those entities which are included within the definition of "Customer." XI. NONRAIDING OF EMPLOYEES. ----------------------- The Executive covenants that during his employment hereunder and the Restricted Period specified in Section X. hereof, he will not solicit, induce or encourage for the purposes of employing or offering employment to any individuals who, as of the date of termination of the Executive's employment, are employees of the Company or its affiliates, nor will he directly or indirectly solicit, induce or encourage any of the Company's or its affiliates' employees to seek employment with any other business, whether or not the Executive is then affiliated with such business. XII. NOTIFICATION OF FORMER AND NEW EMPLOYMENT. ----------------------------------------- During the term of this Agreement and the Restricted Period specified in Section X. hereof, the Executive covenants to notify any prospective employer or joint venturer, which is a competitor of the Company of this Agreement with the Company; and if the Executive accepts employment or establishes a relationship with such competitor, the Executive covenants to notify the Company immediately of such relationship. If the Company reasonably believes that the Executive is affiliated or employed by or with a competitor of the Company during the Restricted Period, then the Executive grants the Company the right to forward a copy of this Agreement to such competitor. XIII. LIQUIDATED DAMAGES. ------------------- (A) If the Executive breaches Sections IX. or X. of this Agreement, the Company may, at its sole option, seek liquidated damages with respect to each Customer procured by or through the Executive, directly or indirectly, in violation of Sections IX. or X. of this Agreement (with such Customers being hereafter referred to as "Lost Customers"). The Executive acknowledges that it would be difficult to calculate damages incurred by the Company in the event of such a breach and that the following liquidated damages clause, when so elected by the Company, is necessary and reasonable for the protection of the Executive. The Executive also acknowledges that the Company, at its sole option, may or may not choose to exercise this liquidated damages provision as to some or all Lost Customers. Whether or not the Company seeks liquidated or actual damages, the Company shall retain the right to obtain injunctive relief with respect to any Lost Customer and with respect to any other actions by the Executive which breach this Agreement. Finally, the Executive acknowledges that he has no right whatsoever to force the Company to exercise this liquidated damages provision, and that such choice remains entirely the Company's. Liquidated damages shall be calculated as follows: (1) A Lost Customer shall be valued at 150% of the gross revenue to the Company in the most recent twelve (12) month period preceding the date of loss of such account. If such Lost Customer had not been a Customer of the Company for an entire twelve (12) month period, such liquidated damages shall be 150% of the gross revenue which would have been, in the absence of a breach by the Executive, realized by the -7- Company in the initial twelve (12) month period of such Customer being served by the Company. (2) The Executive acknowledges that the foregoing damage amounts are fair and reasonable, that an industry rule of thumb for the valuation of any agency is 150% of revenue and that, on the margin, selected accounts may be worth much more than 150% of their annual revenue to an agency. (B) The Executive shall pay such liquidated damages to the Company within ninety (90) business days after a final order is entered by the Arbitrator and received by the Executive ordering the Executive to make such payment. Thereafter, such liquidated damages shall bear interest at the prime rate of interest in effect at the Bank of Virginia. The Executive acknowledges that a broker of record letter granted during the Restricted Period, if applicable, by a Customer in favor of the Executive or any person or entity with whom or which the Executive is directly affiliated shall be PRIMA FACIE evidence of a violation of Section X. of this Agreement and establishes a rebuttable presumption in favor of the Company that Section X. of this Agreement has been violated by the Executive. Further, the Executive acknowledges that if the Restricted Period is applicable to him, he has an affirmative duty to inform such Customer that he cannot accept its business until after the Restricted Period. (C) The Executive agrees that the foregoing remedies shall be cumulative and not exclusive, shall not be waived by any partial exercise or nonexercise thereof and shall be in addition to any other remedies available to the Company at law or in equity. XIV. TOLLING OF RESTRICTIVE COVENANTS DURING VIOLATION. ------------------------------------------------- If a material breach by the Executive of any of the restrictive covenants of this Agreement occurs, the Executive agrees that the restrictive period of each such covenant so materially violated shall be extended by a period of time equal to the period of such material violation by the Executive. It is the intent of this Section that the running of the restricted period of a restrictive covenant shall be tolled during any period of material violation of such covenant so that the Company shall get the full and reasonable protection for which it contracted and so that the Executive may not profit by his material breach. XV. NOTICES. ------- All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (A) If to the Company, to it at the following address: 4951 Lake Brook Drive, Suite 500 Glen Allen, Virginia 23060 Attn: Chairman of the Board -8- (B) If to the Executive, to him at the following address: [EXECUTIVE'S ADDRESS] with a copy to: [EXECUTIVE'S ATTORNEY] or to such other place as either party shall have specified by notice in writing to the other. A copy of any notice or other communication given under this Agreement shall also be sent to the Secretary and the Treasurer of the Company addressed to such officers at the then principal office of the Company. XVI. GOVERNMENTAL REGULATION. ----------------------- Nothing contained in this Agreement shall be construed so as to require commission of any act contrary to law and whenever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation, the latter shall prevail, but in such event any such provision of this Agreement shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. XVII. ARBITRATION. ----------- Any dispute or controversy as to the interpretation, construction, application or enforcement of, or otherwise arising under or in connection with this Agreement, shall be submitted at the request of either party hereto for mandatory, final and binding arbitration in the City of Richmond, Virginia, in accordance with the commercial arbitration rules then prevailing of the American Arbitration Association. The Company and Executive waive the right to submit any controversy or dispute to a Court and/or a jury. Any award rendered therein shall provide the full remedies available to the parties under the applicable law and shall be final and binding on each of the parties hereto and their heirs, executors, administrators, successors and assigns and judgment may be entered thereon in any court having jurisdiction. The prevailing party in any such arbitration shall be entitled to an award by the arbitrator of all reasonable attorneys' fees and expenses incurred in connection with the arbitration. XVIII. INDEMNIFICATION BY THE COMPANY. ------------------------------ The Company shall defend, indemnify and hold harmless the Executive to the fullest extent permitted by the laws of the Commonwealth of Virginia, against any all claims, causes of actions, damages and expenses (including all legal fees and expenses) in any threatened, pending or completed action, arising out of or relating in any way to action or conduct by the Executive by reason of the fact that he was a representative of the Company or was serving at the request of the Company or acts or conduct within the course of his employment pursuant to this Agreement or in his capacity as a director of the Company. If the Company contends that any action or conduct by the Executive was not within the course of his employment or is otherwise not subject to this provision, the Company shall pay to the Executive all defense costs and expenses -9- to defend such an action and shall only be entitled to reimbursement of such fees and expenses if after a final adjudication, including all available appeals, there is a holding that the Executive was not entitled to the defense and indemnification under this provision. XIX. GOVERNING LAW. ------------- This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. XX. DIVISIBILITY. ------------ Should an arbitrator declare any provision of this Agreement to be invalid, such declaration shall not affect the validity of the remaining portion of any such provision or the validity of any other term or provision of this Agreement as a whole or any part thereof, other than the specific portion declared to be invalid. XXI. HEADINGS. -------- The headings to the Sections and Paragraphs of this Agreement are for convenience of reference only and in case of any conflict the text of this Agreement, rather than the headings, shall control. XXII. SUCCESSORS AND ASSIGNS. ---------------------- This Agreement is binding upon and shall inure to the benefit of the successors and assigns of the Company and the heirs, executors and legal representatives of the Executive. XXIII. ENTIRE AGREEMENT. ---------------- This Agreement contains the entire understanding of the parties with respect to the subject matter contained herein and supersedes all prior agreements, arrangements and understandings relating to the subject matter and may only be amended by a written agreement signed by the parties hereto or their duly authorized representatives. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. WITNESS: /s/ Janet Cuda /s/ John P. McGrath - ------------------------------------ ------------------------------------ John P. McGrath -10- ATTEST: HILB, ROGAL and HAMILTON COMPANY /s/ Dena Higgins By: /s/ Andrew L. Rogal - ------------------------------------ ----------------------------------- Its: Chairman and Chief Executive Officer -11- EX-10.22 6 j9350501ex10-22.txt EMPLOYMENT AGREEMENT WITH TIMOTHY J. KORMAN Exhibit 10.22 HILB, ROGAL AND HAMILTON COMPANY SENIOR EXECUTIVE EMPLOYMENT AGREEMENT WITH TIMOTHY J. KORMAN EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT, effective the 1st day of December, 2001, by and between Timothy J. Korman, an individual residing in the County of Chesterfield, Virginia (the "Executive"), and HILB, ROGAL AND HAMILTON COMPANY, a Virginia corporation with corporate offices located at 4951 Lake Brook Drive, Suite 500, Glen Allen, Virginia 23060 (the "Company"). WHEREAS, the Company desires to continue to employ the Executive as its Executive Vice President - Finance and Administration and wants to assure itself of the benefit of the Executive's services and experience; and WHEREAS, the Executive is willing to continue in the employ of the Company upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the premises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: I. TERM OF EMPLOYMENT. ------------------ (A) The term of the employment of the Executive under this Agreement shall be for the two (2) year period commencing on December 1, 2001, and ending on November 30, 2003; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary being hereinafter referred to as the "Renewal Date") unless previously terminated, the term of employment shall automatically extend so as to terminate two (2) years from such Renewal Date, unless notice that the term of employment will not be extended is given by either party to the other at least 60 days prior to the Renewal Date. (B) Notwithstanding the foregoing provision (A) of this Section I., the term of employment of the Executive under this Agreement shall be subject to earlier termination by: (1) determination of disability of the Executive pursuant to Section IV.; or (2) dismissal of the Executive from his position as Executive Vice President - Finance and Administration, pursuant to resolution by the Board of Directors of the Company, or failure or refusal of the Board of Directors to re-elect the Executive to the position of Executive Vice President - Finance and Administration. (3) resignation by Executive; or (4) death of the Executive; PROVIDED, however, that (i) in the event of termination for determination of disability pursuant to Paragraph (1) above, Section IV. shall apply; (ii) in the event of termination pursuant to Paragraph (2) above for "Proper Cause" (defined in Section V.(A)) or pursuant to Paragraph (3) above for other than "Good Reason" (defined in Section VI.(A)), Section V.(B) shall apply; (iii) in the event of termination pursuant to Paragraph (2) above without "Proper Cause" (defined in Section V.(A)) or pursuant to Paragraph (3) above for "Good Reason" (defined in Section VI.(A)), Section VI.(B) shall apply; or (iv) in the event of termination due to the death of the Executive pursuant to Paragraph (3) above, Section VII. shall apply. II. SERVICES TO BE RENDERED. ----------------------- The Company agrees to employ the Executive as the Executive Vice President - Finance and Administration, subject to the terms, conditions and provisions of this Agreement. The Executive hereby accepts such employment and agrees that he shall devote the same degree of skill and diligence in rendering services to the Company under this Agreement as he applied during his prior employment by the Company. The Executive agrees that his employment as Sr. Vice President - Finance and Administration of the Company pursuant to this Agreement is a full time position. Notwithstanding the foregoing, the Executive may devote a reasonable amount of his time to serving as an officer and director of other companies affiliated with the Company; to his personal investments and business affairs, including service as a director of unaffiliated companies; and to civic, political and charitable activities; PROVIDED HOWEVER, the Executive shall not accept any position as a director of any unaffiliated for-profit business organization, other than positions presently held by him, without prior approval of the Board of Directors of the Company (which approval will not be unreasonably withheld). III. COMPENSATION. ------------ In consideration for the services rendered to the Company under this Agreement, the Company shall pay and provide to the Executive the following compensation and benefits: (A) SALARY. ------ The Company shall pay the Executive an annual base salary of $286,000, payable in twenty four semi-monthly installments on the 15th and last business day of each calendar month. This annual base salary shall be reviewed annually by the Compensation Committee of the Board of Directors (the "Compensation Committee") to consider appropriate increases, but in no event shall the amount of the base salary be reduced. -2- (B) ANNUAL INCENTIVE BONUS. ---------------------- In addition to the base salary to be paid to the Executive under Section III.(A), the Executive may also be entitled to an annual incentive bonus as established and modified, from time to time, by the Compensation Committee. (C) ANCILLARY BENEFITS. ------------------ The Executive shall also be entitled to vacations, participation in the Company's Profit Sharing Savings Plan (401K), Executive Voluntary Deferral Plan and Supplemental Executive Retirement Plan, sick leave benefits, post-retirement benefit plan, and all other ancillary benefits provided by the Company, including, but not limited to, group life, health and disability insurance coverage, consistent with the compensation policies and practices of the Company from time to time prevailing with respect to persons who are executive officers of the Company. (D) The Executive shall receive such stock option awards each year as determined by the Compensation Committee in its sole discretion. IV. DISABILITY. ---------- (A) The term of employment of the Executive may be terminated at the election of the Company upon the Board of Director's receiving evidence that the Executive is disabled as that term is defined in the Group Long Term Disability Insurance Certificate and Summary Plan Description for the Company's Group Disability Plan. (B) In the event of such termination for disability, the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items, but shall, in addition, pay to the Executive such disability compensation as set forth in any disability plan established by the Company for its executive officers. V. TERMINATION FOR PROPER CAUSE OR WITHOUT GOOD REASON. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Proper Cause" for termination of the employment of the Executive under this Agreement, at the election of the Board of Directors of the Company: (1) the Executive shall voluntarily resign as a director, officer or employee of the Company or any of its affiliates without the written consent of the Board of Directors of the Company; (2) the Executive shall breach this Agreement in any material respect and fail to cure such breach within sixty (60) calendar days after receiving written notice of such breach from the Company; or -3- (3) the commission of a fraud, or other criminal act, by the Executive directly involving the Company or any of its affiliates which would constitute a felony if prosecuted under criminal law; PROVIDED, HOWEVER, the inability of the Executive to achieve favorable results of operations shall clearly not be deemed Proper Cause for termination hereunder. (B) In the event of termination of the Executive's employment by the Company pursuant to Section I.(B)(2) for Proper Cause or by the Executive pursuant to Section I.(B)(3) other than for "Good Reason" (defined in Section VI.(A)), the Company shall thereupon be relieved of its obligations to pay any compensation and benefits under Section III., except for accrued and unpaid items. VI. TERMINATION FOR GOOD REASON OR WITHOUT PROPER CAUSE. --------------------------------------------------- (A) The occurrence of any of the following events shall constitute "Good Reason" for termination of employment by Executive: (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles, reporting requirements, reassignment to a location other then corporate headquarters, etc.), authority, duties or responsibilities as contemplated by Section II. of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (2) any failure by the Company to comply with any of the provisions of Section III. of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive. (B) In the event of termination of the Executive by the Company pursuant to Section I.(B)(2) without Proper Cause (as defined in Section V.(A) above) or by the Executive pursuant to Section I.(B)(3) for Good Reason (as defined in Section VI.(A) above), the Company shall thereafter be and remain obligated to pay to the Executive (or his estate or designated beneficiary) the compensation and benefits provided under Section III.(A) and III.(B) and such benefits under III.(C) as are payable to a terminated employee until expiration of the term of employment established by Section I.(A). In the event of a dispute as to whether Executive was terminated for or without "Proper Cause," or for or without "Good Reason," or regarding the amount of compensation Executive is entitled to receive under this Section VI., the Company shall be obligated to continue to pay to the Executive (or his estate or designated beneficiary) all of the compensation and benefits reserved under Section III. until the dispute is resolved by an arbitrator pursuant to Section XVII. hereof. -4- (C) For purposes of calculating the annual incentive bonus payable under Section III.(B), the Company shall make to the Executive (or his estate or designated beneficiary), an annual payment equal to the greater of (i) the highest annual incentive bonus payment received by Executive pursuant to Section III.(B) for the last two (2) fiscal years prior to the date of termination or (ii) fifty percent (50%) of his annual base salary. VII. DEATH. ----- In the event of termination of the Executive's employment pursuant to Section I.(B)(4) above, the Company shall pay the Executive's estate or designated beneficiary such death benefits as may be set forth in any life insurance plan established by the Company for its executive officers. VIII. CONFIDENTIALITY. --------------- For purposes of this Agreement, "Confidential Information" shall mean any information of a proprietary or confidential nature and trade secrets of the Company and its affiliates relating to the business of the Company and its affiliates that have not previously been publicly released by duly authorized representatives of the Company. The Executive agrees to regard and preserve as confidential all Confidential Information pertaining to the Company's business that has been or may be obtained by the Executive in the course of his employment with the Company, whether he has such information in his memory or in writing or other physical form. The Executive shall not, without written authority from the Company to do so, use for his personal benefit or his personal purposes, unrelated to business of the Company, nor disclose to others, either during the term of his employment hereunder or thereafter, except as required by the conditions of his employment hereunder, any Confidential Information of the Company. This provision shall not apply after the Confidential Information has been voluntarily disclosed to the public by a duly authorized representative of the Company, independently developed and disclosed by others, or otherwise enters the public domain through lawful means. IX. REMOVAL OF DOCUMENTS OR OBJECTS. ------------------------------- The Executive agrees not to remove from the premises of the Company, except as an employee of the Company in pursuit of the business of the Company or any of its affiliates, or except as specifically permitted in writing by the Company, any document or object containing or reflecting any Confidential Information of the Company. The Executive recognizes that all documents or material containing Confidential Information developed by him or by someone else in the course of employment by the Company, are the exclusive property of the Company. X. NONPIRACY COVENANTS. ------------------- (A) For the purpose of this Agreement, the following terms shall have the following meanings: (1) "HRH Customers" shall be limited to those customers of the Company or its affiliates for whom there is an insurance policy or bond in force or to or for whom the -5- Company or its affiliates are rendering services as of the date of termination of the Executive's employment; (2) "Affiliates of the Company" shall mean each of the subsidiary corporations of Hilb, Rogal and Hamilton Company engaged in business as an insurance agency as of the date of termination of the Executive's employment; (3) "Prohibited Services" shall mean services in the fields of insurance performed by the Company or its affiliates, their agents or employees in any other business engaged in by the Company or its affiliates on the date of termination of the Executive's employment. "Fields of Insurance" does not include title insurance, but does include all lines of insurance sold by the Company or its affiliates, including, without limitation, property and casualty, life, group, accident, health, disability, and annuities; (4) "Restricted Period" shall mean: (i) in the case of termination by the Company for Proper Cause or by the Executive without Good Reason, the period of two (2) years immediately following the date of termination of the Executive's employment; and (ii) in the case of termination by the Company without Proper Cause or by the Executive for Good Reason, the period following the date of termination of the Executive's employment during which the Executive is receiving compensation under this Agreement. (B) The Executive recognizes that over a period of many years the Company has developed, at considerable expense, relationships with, and knowledge about, Customers which constitute a major part of the value of the Company. During the course of his employment by the Company, the Executive will either have substantial contact with, or obtain substantial knowledge about, these Customers. In order to protect the value of the Company's business, the Executive covenants and agrees that, in the event of the termination of his employment for any reason, whether voluntary or involuntary and whether with or without Proper Cause or Good Reason, he shall not, directly or indirectly, for his own account or for the account of any other person or entity, as an owner, stockholder, director, employee, partner, agent, broker, consultant or other participant during the Restricted Period: (1) solicit a Customer for the purpose of providing Prohibited Services to such Customer; and (2) accept an invitation from a Customer for the purpose of providing Prohibited Services to such Customer. Subsections (1) and (2) are separate and divisible covenants; if for any reason one covenant is held to be illegal, invalid or unenforceable, in whole or in part, the remaining covenant shall remain valid and enforceable and shall not be affected thereby. Further, the periods and scope of the restrictions set forth in any such subsection shall be reduced by the minimum amount necessary to reform such subsection to the maximum level of enforcement permitted to the Company by the law governing this Agreement. Additionally, the Executive agrees that no separate geographic limitation is needed for the foregoing nonpiracy covenants as -6- such are not a prohibition on the Executive's employment in the insurance agency business and are already limited to only those entities which are included within the definition of "Customer." XI. NONRAIDING OF EMPLOYEES. ----------------------- The Executive covenants that during his employment hereunder and the Restricted Period specified in Section X. hereof, he will not solicit, induce or encourage for the purposes of employing or offering employment to any individuals who, as of the date of termination of the Executive's employment, are employees of the Company or its affiliates, nor will he directly or indirectly solicit, induce or encourage any of the Company's or its affiliates' employees to seek employment with any other business, whether or not the Executive is then affiliated with such business. XII. NOTIFICATION OF FORMER AND NEW EMPLOYMENT. ----------------------------------------- During the term of this Agreement and the Restricted Period specified in Section X. hereof, the Executive covenants to notify any prospective employer or joint venturer, which is a competitor of the Company of this Agreement with the Company; and if the Executive accepts employment or establishes a relationship with such competitor, the Executive covenants to notify the Company immediately of such relationship. If the Company reasonably believes that the Executive is affiliated or employed by or with a competitor of the Company during the Restricted Period, then the Executive grants the Company the right to forward a copy of this Agreement to such competitor. XIII. LIQUIDATED DAMAGES. ------------------- (A) If the Executive breaches Sections IX. or X. of this Agreement, the Company may, at its sole option, seek liquidated damages with respect to each Customer procured by or through the Executive, directly or indirectly, in violation of Sections IX. or X. of this Agreement (with such Customers being hereafter referred to as "Lost Customers"). The Executive acknowledges that it would be difficult to calculate damages incurred by the Company in the event of such a breach and that the following liquidated damages clause, when so elected by the Company, is necessary and reasonable for the protection of the Executive. The Executive also acknowledges that the Company, at its sole option, may or may not choose to exercise this liquidated damages provision as to some or all Lost Customers. Whether or not the Company seeks liquidated or actual damages, the Company shall retain the right to obtain injunctive relief with respect to any Lost Customer and with respect to any other actions by the Executive which breach this Agreement. Finally, the Executive acknowledges that he has no right whatsoever to force the Company to exercise this liquidated damages provision, and that such choice remains entirely the Company's. Liquidated damages shall be calculated as follows: (1) A Lost Customer shall be valued at 150% of the gross revenue to the Company in the most recent twelve (12) month period preceding the date of loss of such account. If such Lost Customer had not been a Customer of the Company for an entire twelve (12) month period, such liquidated damages shall be 150% of the gross revenue which would have been, in the absence of a breach by the Executive, realized by the -7- Company in the initial twelve (12) month period of such Customer being served by the Company. (2) The Executive acknowledges that the foregoing damage amounts are fair and reasonable, that an industry rule of thumb for the valuation of any agency is 150% of revenue and that, on the margin, selected accounts may be worth much more than 150% of their annual revenue to an agency. (B) The Executive shall pay such liquidated damages to the Company within ninety (90) business days after a final order is entered by the Arbitrator and received by the Executive ordering the Executive to make such payment. Thereafter, such liquidated damages shall bear interest at the prime rate of interest in effect at the Bank of Virginia. The Executive acknowledges that a broker of record letter granted during the Restricted Period, if applicable, by a Customer in favor of the Executive or any person or entity with whom or which the Executive is directly affiliated shall be PRIMA FACIE evidence of a violation of Section X. of this Agreement and establishes a rebuttable presumption in favor of the Company that Section X. of this Agreement has been violated by the Executive. Further, the Executive acknowledges that if the Restricted Period is applicable to him, he has an affirmative duty to inform such Customer that he cannot accept its business until after the Restricted Period. (C) The Executive agrees that the foregoing remedies shall be cumulative and not exclusive, shall not be waived by any partial exercise or nonexercise thereof and shall be in addition to any other remedies available to the Company at law or in equity. XIV. TOLLING OF RESTRICTIVE COVENANTS DURING VIOLATION. ------------------------------------------------- If a material breach by the Executive of any of the restrictive covenants of this Agreement occurs, the Executive agrees that the restrictive period of each such covenant so materially violated shall be extended by a period of time equal to the period of such material violation by the Executive. It is the intent of this Section that the running of the restricted period of a restrictive covenant shall be tolled during any period of material violation of such covenant so that the Company shall get the full and reasonable protection for which it contracted and so that the Executive may not profit by his material breach. XV. NOTICES. ------- All notices and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid: (A) If to the Company, to it at the following address: 4951 Lake Brook Drive, Suite 500 Glen Allen, Virginia 23060 Attn: Chairman of the Board -8- (B) If to the Executive, to him at the following address: [EXECUTIVE'S ADDRESS] with a copy to: [EXECUTIVE'S ATTORNEY] or to such other place as either party shall have specified by notice in writing to the other. A copy of any notice or other communication given under this Agreement shall also be sent to the Secretary and the Treasurer of the Company addressed to such officers at the then principal office of the Company. XVI. GOVERNMENTAL REGULATION. ----------------------- Nothing contained in this Agreement shall be construed so as to require commission of any act contrary to law and whenever there is any conflict between any provision of this Agreement and any statute, law, ordinance, order or regulation, the latter shall prevail, but in such event any such provision of this Agreement shall be curtailed and limited only to the extent necessary to bring it within the legal requirements. XVII. ARBITRATION. ----------- Any dispute or controversy as to the interpretation, construction, application or enforcement of, or otherwise arising under or in connection with this Agreement, shall be submitted at the request of either party hereto for mandatory, final and binding arbitration in the City of Richmond, Virginia, in accordance with the commercial arbitration rules then prevailing of the American Arbitration Association. The Company and Executive waive the right to submit any controversy or dispute to a Court and/or a jury. Any award rendered therein shall provide the full remedies available to the parties under the applicable law and shall be final and binding on each of the parties hereto and their heirs, executors, administrators, successors and assigns and judgment may be entered thereon in any court having jurisdiction. The prevailing party in any such arbitration shall be entitled to an award by the arbitrator of all reasonable attorneys' fees and expenses incurred in connection with the arbitration. XVIII. INDEMNIFICATION BY THE COMPANY. ------------------------------ The Company shall defend, indemnify and hold harmless the Executive to the fullest extent permitted by the laws of the Commonwealth of Virginia, against any all claims, causes of actions, damages and expenses (including all legal fees and expenses) in any threatened, pending or completed action, arising out of or relating in any way to action or conduct by the Executive by reason of the fact that he was a representative of the Company or was serving at the request of the Company or acts or conduct within the course of his employment pursuant to this Agreement or in his capacity as a director of the Company. If the Company contends that any action or conduct by the Executive was not within the course of his employment or is otherwise not subject to this provision, the Company shall pay to the Executive all defense costs and expenses -9- to defend such an action and shall only be entitled to reimbursement of such fees and expenses if after a final adjudication, including all available appeals, there is a holding that the Executive was not entitled to the defense and indemnification under this provision. XIX. GOVERNING LAW. ------------- This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. XX. DIVISIBILITY. ------------ Should an arbitrator declare any provision of this Agreement to be invalid, such declaration shall not affect the validity of the remaining portion of any such provision or the validity of any other term or provision of this Agreement as a whole or any part thereof, other than the specific portion declared to be invalid. XXI. HEADINGS. -------- The headings to the Sections and Paragraphs of this Agreement are for convenience of reference only and in case of any conflict the text of this Agreement, rather than the headings, shall control. XXII. SUCCESSORS AND ASSIGNS. ---------------------- This Agreement is binding upon and shall inure to the benefit of the successors and assigns of the Company and the heirs, executors and legal representatives of the Executive. XXIII. ENTIRE AGREEMENT. ---------------- This Agreement contains the entire understanding of the parties with respect to the subject matter contained herein and supersedes all prior agreements, arrangements and understandings relating to the subject matter and may only be amended by a written agreement signed by the parties hereto or their duly authorized representatives. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. WITNESS: /s/ Walter Smith /s/ Timothy J. Korman - ------------------------------------ ------------------------------------ Timothy J. Korman -10- ATTEST: HILB, ROGAL and HAMILTON COMPANY /s/ Walter Smith By: /s/ Andrew L. Rogal - ------------------------------------ ----------------------------------- Its: Chairman and Chief Executive Officer -11- EX-10.25 7 j9350501ex10-25.txt NON-QUALIFYING STOCK OPTION AGREEMENT Exhibit 10.25 HILB, ROGAL AND HAMILTON COMPANY EMPLOYEE NON-QUALIFIED STOCK OPTION AGREEMENT ------------------------------------ THIS AGREEMENT dated as of the 11th day of February, 2002, between Hilb, Rogal and Hamilton Company, a Virginia corporation (the "Company"), and _______________ ("Optionee"), is made pursuant and subject to the provisions of the Company's 2000 Stock Incentive Plan, as amended (the "Plan"), a copy of which is attached. All terms used herein that are defined in the Plan shall have the same meaning given them in the Plan. 1. GRANT OF OPTION. Pursuant to the Plan, the Company, on February 11, 2002, granted to Optionee, subject to the terms and conditions of the Plan and subject further to the terms and conditions herein set forth, the right and option to purchase from the Company all or any part of an aggregate of __ shares of the common stock of the Company ("Common Stock") at the Option price of $37.45 per share. Such Option will be exercisable as hereinafter provided. 2. TERMS AND CONDITIONS. This Option is subject to the following terms and conditions: (a) EXPIRATION DATE. The "Expiration Date" of this Option is February 11, 2009. (b) EXERCISE OF OPTION. Except as provided in paragraphs 3, 4, 5 and 10, this Option shall be exercisable with respect to twenty-five percent (25%) of the aggregate number of shares covered by this Option for each one (1) full year, up to a total of four (4) full years, that Optionee continues to be employed by the Company after the date of this Agreement. Once this Option has become exercisable with respect to any portion of the total number of shares in accordance with the preceding sentence, it shall continue to be exercisable with respect to such shares until the termination of Optionee's rights hereunder pursuant to paragraphs 3, 4 or 5, or until the Expiration Date. A partial exercise of this Option shall not affect Optionee's right to exercise subsequently this Option with respect to the remaining shares that are exercisable, subject to the conditions of the Plan and this Agreement. (c) METHOD OF EXERCISING AND PAYMENT FOR SHARES. This Option may be exercised only by written notice delivered to the attention of the Company's Secretary at the Company's principal office in Glen Allen, Virginia. The written notice shall specify the number of shares being acquired pursuant to the exercise of the Option when such Option is being exercised in part in accordance with subparagraph 2(b) hereof. The exercise date shall be the date such notice is received by the Company. Such notice shall be accompanied by payment of the Option price in full for each share (a) in cash (United States dollars) or by cash equivalent acceptable to the Company, or (b) by a cashless exercise pursuant to Section IX(2) of the Plan. (d) NONTRANSFERABILITY. This Option is nontransferable except, in the event of the Optionee's death, by will or by the laws of descent and distribution subject to the terms hereof. During Optionee's lifetime, this Option may be exercised only by Optionee. 3. EXERCISE IN THE EVENT OF DEATH. This Option shall be exercisable in full in the event that Optionee dies while employed by the Company or an Affiliate and prior to the Expiration Date of this Option. In that event, this Option may be exercised by Optionee's estate, or the person or persons to whom his rights under this Option shall pass by will or the laws of descent and distribution. Optionee's estate or such persons must exercise this Option, if at all, within one year of the date of Optionee's death or during the remainder of the period preceding the Expiration Date, whichever is shorter, but in no event may the Option be exercised prior to the expiration of six (6) months from the date of the grant of the Option. 4. EXERCISE IN THE EVENT OF PERMANENT AND TOTAL DISABILITY. This Option shall be exercisable in full if Optionee becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code) while employed by the Company or an Affiliate and prior to the Expiration Date of this Option. In that event, Optionee must exercise this Option, if at all, within one year of the date he becomes disabled or during the remainder of the period preceding the Expiration Date, whichever is shorter, but in no event may the Option be exercised prior to the expiration of six (6) months from the date of the grant of the Option. 5. EXERCISE AFTER TERMINATION OF EMPLOYMENT. In the event that the Optionee retires from employment with the Company after attaining age 62 and serving at least 10 consecutive years with the Company or an Affiliate or predecessor thereof, then this Option shall be exercisable in full but must be exercised by the Optionee, if at all, within one year following his retirement date or during the remainder of the period preceding the Expiration Date, whichever is shorter, but in no event may the Option be exercised prior to the expiration of six (6) months from the date of the grant of the Option. In all events other than those events addressed in paragraphs 3 or 4 or the foregoing sentence of this paragraph 5, in which Optionee ceases to be employed by the Company: (a) Optionee may exercise the Option in whole or in part with respect to that number of shares which are exercisable by him under paragraph 2(b) above on the date his employment terminated, and (b) this Option must be exercised by Optionee, if at all, within ninety (90) days following the date upon which he ceases to be employed by the Company or during the remainder of the period preceding the Expiration Date, whichever is shorter, but in no event may the Option be exercised prior to the expiration of six (6) months from the date of the grant of the Option. 6. FRACTIONAL SHARES. Fractional shares shall not be issuable hereunder, and when any provision hereof may entitle Optionee to a fractional share such fraction shall be disregarded. 7. NO RIGHT TO CONTINUED EMPLOYMENT. This Option does not confer upon Optionee any right with respect to continuance of employment by the Company or an Affiliate, nor shall it interfere in any way with the right of the Company or an Affiliate to terminate his employment at any time. 8. INVESTMENT REPRESENTATION. Optionee agrees that, unless such shares previously have been registered under the Securities Act of 1933, as amended (the "Securities Act"): (i) any shares purchased by him hereunder will be purchased for investment and not with a view to distribution or resale and (ii) until such registration, certificates representing such shares may bear an appropriate legend to assure compliance with the Securities Act. This investment representation shall terminate when such shares have been registered under the Securities Act. 9. CHANGE IN CAPITAL STRUCTURE. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by this Option, and the price per share thereof, shall be proportionately adjusted by the Company for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from any stock dividend (but only on the Common Stock), stock split, combination, reclassification, recapitalization or general issuance to holders of Common Stock of rights to purchase Common Stock at substantially below its then fair market value, or any change in the number of such shares outstanding effected without receipt of cash or property or labor or services by the Company, or any spin-off or other distribution of assets to shareholders. In the event of a change in the Common Stock of the Company as presently constituted, which is limited to a change of all or a part of its authorized shares without par value into the same number of shares with a par value, or any subsequent change into the same number of shares with a different par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. The grant of this Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 10. CHANGE OF CONTROL. Notwithstanding any other provision of this Agreement to the contrary, in the event of a Change of Control, the provisions of Section XIII(3) of the Plan shall apply to this Option. 11. FORFEITURE OF CERTAIN GAINS. (a) TERMINATION FOR CAUSE. If Optionee's employment is terminated for "Cause" within one year of any exercise of this Option, in whole or in part, the Optionee shall pay to the Company an amount equal to the gain realized by Optionee from such exercise represented by the excess of the Fair Market Value on the date of exercise over the Option price multiplied by the number of shares purchased, without regard to any subsequent market price increase or decrease ("Option Gain"). For purposes of this paragraph, "Cause" shall have the meaning ascribed to it in any employment agreement between the Optionee and the Company that is in effect at the time of termination and, if no such agreement exists, it shall mean: (i) the willful and continued failure of the Optionee to perform substantially the Optionee's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Optionee by the Company which specifically identifies the manner in which the Company believes that the Optionee has not substantially performed the Optionee's duties, or (ii) the willful engaging by the Optionee in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. (b) FORFEITURE IF OPTIONEE ENGAGES IN CERTAIN ACTIVITIES. If Optionee engages in any activity in competition with any activity of the Company, or inimical, contrary or harmful to the interests of the Company, including but not limited to (i) accepting employment with or serving as a consultant advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company, (ii) disclosing or misusing any confidential information or material concerning the Company or (iii) participating in any hostile takeover attempt, then (1) this Option shall terminate effective the date on which Optionee enters into such activity, unless terminated sooner by operation of another term on condition of this Agreement or the Plan, and (2) the Optionee shall pay to the Company an amount equal to the Option Gain realized by Optionee from any exercise of this Option, in whole or in part, within one year of the date such activity began. (c) RIGHT OF SET-OFF. Optionee hereby consents to a deduction from any amounts owed by the Company to Optionee from time to time (including amounts owed as ways or other compensation, fringe benefits or vacation pay, to the extent of any amounts Optionee owes the Company under paragraph 10(a) and (b). Whether or not the Company elects to make any set-off in whole or in part, if Company does not recover by means of set-off the full amount owed by Optionee under paragraphs 10(a) and (b), Optionee agrees to immediately pay the unpaid balance to the Company. 12. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Virginia, except to the extent that federal law shall be deemed to apply. 13. CONFLICTS. In the event of any conflict between the provisions of the Plan as in effect on the date hereof and the provisions of this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the date hereof. 14. OPTIONEE BOUND BY PLAN. Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 15. BINDING EFFECT. Subject to the limitations stated above and in the Plan, this Agreement shall be binding upon and inure to the benefit of the legatees, distributes, and personal representatives of Optionee and the successors of the Company. 16. GENDER. All pronouns used herein shall be deemed to refer to either the male or female as appropriate. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by a duly authorized officer, and Optionee has affixed his signature hereto. OPTIONEE: HILB, ROGAL AND HAMILTON COMPANY By: - --------------------------------- ---------------------------------------- Title: Chairman and Chief Executive Officer NONQUALIFIED STOCK OPTIONS FOR NAMED EXECUTIVE EMPLOYEES GRANT DATE OPTIONS GRANTED ---------- --------------- Michael A. Janes 02/11/2002 13,000 Timothy J. Korman 02/11/2002 16,000 John P. McGrath 02/11/2002 16,000 Andrew L. Rogal 02/11/2002 50,000 Martin L. Vaughan, III 02/11/2002 24,000 EX-10.26 8 j9350501ex10-26.txt RESTRICTED STOCK AGREEMENT Exhibit 10.26 HILB, ROGAL AND HAMILTON COMPANY RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT, dated as of this 11th day of February, 2002, between Hilb, Rogal and Hamilton Company, a Virginia corporation ("the Company"), and _______________ (the "Employee"), is made pursuant and subject to the provisions of the Company's 2000 Stock Incentive Plan, as amended, which is incorporated herein by reference, and any future amendments thereto (the "Plan"), a copy of which is attached. All terms used herein that are defined in the Plan shall have the same meanings given them in the Plan. 1. AWARD OF RESTRICTED STOCK. The Company hereby awards to the Employee, subject to the terms and conditions of the Plan and the provisions of this Agreement, ______ shares of Common Stock of the Company (the "Restricted Stock"). 2. TERMS AND CONDITIONS. The award of Restricted Stock hereunder is subject to the following terms and conditions: (a) CONTINGENT VESTING. The award of Restricted Stock to Employee is intended to encourage Employee to cause the operating earnings of Company to grow by at least 10% per calendar year. At each of the vesting dates set forth in paragraph 2(b), Restricted Stock will be eligible to vest only if the Company achieves a 10% annual growth in fully diluted earnings per share based on Operating Income in at least one of the two preceding calendar years. If the earnings growth requirement has not been met at any of the vesting dates set forth in paragraph 2(b), all of the Restricted Shares eligible for vesting on that date shall be cancelled. (b) RESTRICTED PERIOD. Except as provided in paragraphs 2(a) and 3, the Restricted Stock shall vest and become nonforfeitable in accordance with the schedule set forth below:
10% Percent of DATE Earnings Growth Requirement AWARD VESTED ---- ------------ February 11, 2004 2003 vs. 2002 25% or 2002 vs. 2001 February 11, 2005 2004 vs. 2003 50% or 2003 vs. 2002 February 11, 2006 2005 vs. 2004 75% or 2004 vs. 2003 February 11, 2007 2006 vs. 2005 100% or 2005 vs. 2004
The period from the date hereof until the shares of Restricted Stock have become 100% vested shall be referred to as the "Restricted Period." (c) ISSUANCE OF CERTIFICATES; RESTRICTIVE LEGEND. The stock certificate(s) evidencing the Restricted Stock shall be issued and registered on the Company's books and records in the name of the Employee as soon as practicable following the date of this Agreement. The Company shall retain physical possession and custody of each stock certificate representing the Restricted Stock until such time as the Restricted Stock becomes vested in accordance with paragraph 2(b) above. The Employee will deliver to the Company a stock power, endorsed in blank, with respect to each award of Restricted Stock. Each stock certificate shall bear a restrictive legend in substantially the following form: The shares represented by this certificate are restricted and may be transferred only in accordance with the Restricted Stock Agreement between Hilb, Rogal and Hamilton Company and _______________, dated February 11, 2002. Upon the written request of the Employee following the vesting of any portion of the shares of Restricted Stock prior to any event of forfeiture under paragraph 3, the Company will promptly issue a stock certificate, without such restrictive legend, with respect to the vested portion of the shares of the Restricted Stock registered on the Company's books and records in the name of the Employee. Following the expiration of the Restricted Period, the Company will promptly issue a stock certificate, without such restrictive legend, for any shares of Restricted Stock that have vested prior to any event of forfeiture under paragraph 3 and have not been reissued without a restrictive legend as provided in the preceding sentence. (d) TRANSFERABILITY. During the Restricted Period, the Employee shall not sell, assign, transfer, pledge, exchange, hypothecate, or otherwise dispose of unvested Restricted Stock. Upon receipt by the Employee of stock certificate(s) representing vested shares without a restrictive legend pursuant to paragraph 2(c) above, the Employee may hold or dispose of the shares represented by such certificate(s), subject to compliance with (i) the terms and conditions of the Plan and this Agreement and (ii) applicable securities laws of the United States of America and the Commonwealth of Virginia. (e) SHAREHOLDER RIGHTS. Prior to any forfeiture of the shares of Restricted Stock and while the shares are Restricted Stock, the Employee shall, subject to the terms of this Agreement and the restrictions of the Plan, have all rights of a shareholder with respect to the shares of Restricted Stock awarded hereunder, including the right to receive dividends and other distributions as and when declared by the Board of Directors of the Company and the right to vote the shares of Restricted Stock. (f) TAX WITHHOLDING. The Company shall have the right to retain and withhold from any award of the Restricted Stock, the amount of taxes required by any government to be withheld or otherwise deducted and paid with respect to such award. At its discretion, the Company may require the Employee receiving shares of Restricted Stock to pay or otherwise reimburse the Company in cash for any such taxes required to be withheld by the Company and withhold any distribution in whole or in part until the Company is so paid or reimbursed. In lieu thereof, the Company shall have the unrestricted right to withhold, from any other cash amounts due (or to become due) from the Company to the Employee, an amount equal to such taxes required to be withheld by the Company to reimburse the Company for any such taxes (or retain and withhold a number of shares of vested Restricted Stock, having a market value not less than the amount of such taxes, and cancel in whole or in part any such shares so withheld, in order to reimburse the Company for any such taxes). 3. DEATH; DISABILITY; RETIREMENT; TERMINATION OF EMPLOYMENT. The shares of Restricted Stock not yet vested shall become 100% vested and transferable in the event that the Employee dies or becomes permanently and total disabled (within the meaning of Section 22(e)(3) of the Internal Revenue Code) while employed by the Company or an Affiliate during the Restricted Period. Upon attaining age 62 with 10 consecutive years of service with the Company or an Affiliate, or in any other circumstance approved by the Committee in its sole discretion, the shares of Restricted Stock shall become 100% vested and transferable. In all events other than those previously addressed in this paragraph, if the Employee ceases to be an employee of the Company or an Affiliate, the Employee shall be vested only as to that percentage of shares of Restricted Stock which are vested at the time of the termination of his employment and the Employee shall forfeit the right to the shares of Restricted Stock which are not yet vested on the termination date. 4. NO RIGHT TO CONTINUED EMPLOYMENT. This Agreement does not confer upon the Employee any right with respect to continuance of employment by the Company or an Affiliate, nor shall it interfere in any way with the right of the Company or an Affiliate to terminate his or her employment at any time. 5. CHANGE OF CONTROL OR CAPITAL STRUCTURE. Subject to any required action by the shareholders of the Company, the number of shares of Restricted Stock covered by this award shall be proportionately adjusted and the terms of the restrictions on such shares shall be adjusted as the Committee shall determine to be equitably required for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from any stock dividend (but only on the Common Stock), stock split, subdivision, combination, reclassification, recapitalization or general issuance to the holders of Common Stock of rights to purchase Common Stock at substantially below its then fair market value or any change in the number of shares of Common Stock outstanding effected without receipt of cash, property, labor or services by the Company or for any spin-off or other distribution of assets to shareholders. In the event of a Change of Control, this award of Restricted Stock shall immediately vest pursuant to the provisions of Section XIII(3) of the Plan. In the event of a change in the Common Stock of the Company as presently constituted, which is limited to a change of all or part of its authorized shares without par value into the same number of shares with a par value, or any subsequent change into the same number of shares with a different par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. The award of Restricted Stock pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. 6. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Virginia, except to the extent that federal law shall be deemed to apply. 7. CONFLICTS. In the event of any conflict between the provisions of the Plan as in effect on the date hereof and the provisions of this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the date hereof. 8. EMPLOYEE BOUND BY PLAN. The Employee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. 9. BINDING EFFECT. Subject to the limitations stated herein and in the Plan, this Agreement shall be binding upon and inure to the benefit of the legatees, distributees, and personal representatives of the Employee and the successors of the Company. 10. FORFEITURE OF CERTAIN GAINS. (a) TERMINATION FOR CAUSE. If Employee's employment is terminated for "Cause" within one year of any vesting of Restricted Stock herein, the Employee shall pay to the Company an amount equal to the Fair Market Value of such Restricted Stock on the date of vesting without regard to any subsequent market price increase or decrease. For purposes of this paragraph, "Cause" shall have the meaning ascribed to it in any employment agreement between the Employee and the Company that is in effect at the time of termination and, if no such agreement exists, it shall mean: (i) the willful and continued failure of the Employee to perform substantially the Employee's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Company which specifically identifies the manner in which the Company believes that the Employee has not substantially performed the Employee's duties, or (ii) the willful engaging by the Employee in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. (b) FORFEITURE IF EMPLOYEE ENGAGES IN CERTAIN ACTIVITIES. If Employee engages in any activity in competition with any activity of the Company, or inimical, contrary or harmful to the interests of the Company, including but not limited to (i) accepting employment with or serving as a consultant advisor or in any other capacity to an employer that is in competition with or acting against the interests of the Company, (ii) disclosing or misusing any confidential information or material concerning the Company or (iii) participating in any hostile takeover attempt, then (1) any unvested Restricted Stock shall be forfeited and cancelled and (2) the Employee shall pay to the Company an amount equal to the Fair Market Value on the date of vesting, without regard to any subsequent market price increase or decrease, of any Restricted Stock that vested within one year of the date such activity began. (c) RIGHT OF SET-OFF. Employee hereby consents to a deduction from any amounts owed by the Company to Employee from time to time (including amounts owed as wages or other compensation, fringe benefits or vacation pay, to the extent of any amounts Employee owes the Company under paragraph 10(a) and (b). Whether or not the Company elects to make any set-off in whole or in part, if Company does not recover by means of set-off the full amount owed by Employee under paragraphs 10(a) and (b), Employee agrees to immediately pay the unpaid balance to the Company. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by a duly authorized Employee, and the Employee has affixed his or her signature hereto. HILB, ROGAL AND HAMILTON COMPANY By: ------------------------------------ Title: ---------------------------------- [Name of officer] ---------------------------------------- Signature FOR VALUE RECEIVED I, _______________, hereby sell, assign and transfer unto HILB, ROGAL AND HAMILTON COMPANY, _________ (___) shares of the Common Stock of Hilb, Rogal and Hamilton Company standing in my name on the books of said Corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint WALTER L. SMITH, or his designee or successor, attorney to transfer the said stock on the books of the within named Company with full power of substitution in the premises. Dated __________, 200_ ----------------------------- [Signature - exact name as it appears on certificate(s)] ----------------------------- RESTRICTED STOCK OPTIONS FOR NAMED EXECUTIVE EMPLOYEES GRANT DATE OPTIONS GRANTED ---------- --------------- Michael A. Janes 02/11/2002 3,000 Timothy J. Korman 02/11/2002 4,000 John P. McGrath 02/11/2002 4,000 Andrew L. Rogal 02/11/2002 10,000 Martin L. Vaughan, III 02/11/2002 6,000 EX-10.27 9 j9350501ex10-27.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Exhibit 10.27 HILB, ROGAL, AND HAMILTON COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2002 HILB, ROGAL, AND HAMILTON COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE I GENERAL Section 1.1 Effective Date............................................................ 1 Section 1.2 Purpose................................................................... 1 ARTICLE II DEFINITIONS AND USAGE Section 2.1 Definitions............................................................... 2 Section 2.2 Usage..................................................................... 6 ARTICLE III ELIGIBILITY AND PARTICIPATION Section 3.1 Eligibility and Participation............................................. 6 ARTICLE IV SUPPLEMENTAL BENEFIT Section 4.1 Entitlement to Benefits................................................... 7 Section 4.2 Supplemental Benefit...................................................... 7 Section 4.3 Normal Form of Payment.................................................... 8 Section 4.4 Time of Payment........................................................... 9 Section 4.5 Segregation of Assets..................................................... 9 Section 4.6 Forfeiture of Supplemental Benefit........................................ 9 ARTICLE V DEATH AND DISABILITY BENEFITS Section 5.1 Death Benefit............................................................. 9 Section 5.2 Disability Benefit........................................................ 10 ARTICLE VI ADMINISTRATION Section 6.1 General................................................................... 10
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Section 6.2 Administrative Rules...................................................... 11 Section 6.3 Duties.................................................................... 11 Section 6.4 Fees...................................................................... 12 ARTICLE VII CLAIMS PROCEDURE Section 7.1 General................................................................... 12 Section 7.2 Denials................................................................... 12 Section 7.3 Notice.................................................................... 12 Section 7.4 Appeals Procedure......................................................... 13 Section 7.5 Review.................................................................... 13 ARTICLE VIII MISCELLANEOUS PROVISIONS Section 8.1 Amendment................................................................. 13 Section 8.2 Termination............................................................... 14 Section 8.3 No Assignment............................................................. 14 Section 8.4 Incapacity................................................................ 15 Section 8.5 Successors and Assigns.................................................... 15 Section 8.6 Governing Law............................................................. 15 Section 8.7 No Guarantee of Employment................................................ 15 Section 8.8 Unfunded Plan............................................................. 15 Section 8.9 Severability ............................................................. 16 Section 8.10 Notification of Addresses................................................. 16 Section 8.11 Bonding......................................................................... 16
-ii- HILB, ROGAL, AND HAMILTON COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ARTICLE I GENERAL ------- 1.1 EFFECTIVE DATE. The provisions of the Plan shall be effective as of December 16, 1994, and, as amended and restated, effective January 1, 1998. The rights, if any, of any person whose status as an employee of the Company and its subsidiaries and affiliates, if any, has terminated shall be determined pursuant to the Plan as in effect on the date such employee terminated, unless subsequently adopted provisions of the Plan are made specifically applicable to such person. 1.2 PURPOSE. The purpose of the Plan is to provide supplemental retirement income to a Participant. The Plan is intended to be (and shall be construed and administered as) an "employee pension benefit plan" under the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") which is unfunded and maintained by the Company solely to provide retirement income to a select group of management or highly compensated employees as such group is described under sections 201(2), 301(a)(3), and 401(a)(1) of ERISA as interpreted by the U.S. Department of Labor. The Plan is not intended to be a plan described in section 401(a) of the Code or section 3(2)(A) of ERISA. ARTICLE II DEFINITIONS AND USAGE 2.1 DEFINITIONS. Wherever used in the Plan, the following words and phrases shall have the meanings set forth below unless the context plainly requires a different meaning: - "BENEFIT COMMENCEMENT DATE" means the January 1 following a Participant's termination of employment with the Company, or such earlier date in the absolute discretion of the Committee. - "BOARD" means the Board of Directors of the Company. - "CHANGE OF CONTROL" means (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change of Control: (w) any acquisition directly from the Company, (x) any acquisition by the Company, (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (z) any acquisition by any corporation pursuant to a transaction -2- which complies with clauses (a), (b) and (c) of subsection (iii) of this Section; or (ii) Individuals who, as of February 2, 1999, constitute the Board "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to February 2, 1999 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (a) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such -3- Business Combination (including, without limitation a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (c) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, for purposes of subsection (i) of this Section, a Change of Control shall not be deemed to have taken place if, as a result of an acquisition by the Company which reduces the Outstanding Company -4- Common Stock or the Outstanding Company Voting Securities, the beneficial ownership of a Person increases to 25% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities; provided, however, that if a Person shall become the beneficial owner of 25% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities by reason of share purchases by the Company and, after such share purchases by the Company, such Person becomes the beneficial owner of any additional shares of the Outstanding Company Common Stock or the Outstanding Company Voting Stock through any means except an acquisition directly from the Company, for purposes of subsection (a) of this Section, a Change of Control shall be deemed to have taken place. - "CODE" means the Internal Revenue Code of 1986, as amended from time to time. - "COMMITTEE" means the Compensation Committee of the Board, if any, and otherwise, the Board. - "COMPANY" means Hilb, Rogal, and Hamilton Company and any successor thereto. - "COMPENSATION" means total base compensation, excluding bonuses and other forms of compensation, paid to a Participant for personal services rendered to the Company without regard to any Compensation Limitation. - "COMPENSATION LIMITATION" means $150,000 as adjusted to reflect cost-of-living increases by the Secretary of the Treasury or his delegate from time to time -5- under section 401(a)(17) of the Code. - "ELIGIBLE EMPLOYEE" means an employee of the Company whose Compensation exceeds $150,000 as adjusted from time to time under section 401(a)(17) of the Code. - "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. - "GRANDFATHERED PARTICIPANT" means a Participant who is designated by the Committee as a "grandfathered participant." - "PARTICIPANT" means an Eligible Employee who is participating in the Plan in accordance with Section 3.1 hereof and shall include a Grandfathered Participant, unless otherwise specified. - "PLAN" means the Hilb, Rogal, and Hamilton Company Supplemental Executive Retirement Plan. - "PLAN YEAR" means the calendar year. - "PRE-1998 ACCRUED BENEFIT" means the value of the benefit for each Participant in the Plan who was not in pay status (receiving benefits) as of December 31, 1997 determined in accordance with the terms of the Plan determined in accordance with the terms of the Plan then in effect as though the Participant had terminated employment as of that date. - "RETIREMENT PLAN" means the Hilb, Rogal and Hamilton Company Profit Sharing Savings Plan. - "SEPARATION FROM SERVICE" means a Participant's termination from employment -6- as described in the Retirement Plan. - "SUPPLEMENTAL BENEFIT" means the benefit provided in accordance with Section 4.2 of the Plan. - "YEARS OF SERVICE", for purposes of benefit accrual and vesting, means a Participant's full years of employment with the Company. Years of employment with Insurance Management Corporation shall be credited as Years of Service for purposes of vesting and benefit accrual. 2.2 USAGE. Except where otherwise indicated by the context, any masculine terminology used herein shall also include the feminine and vice versa, and the definition of any term herein in the singular shall also include the plural and vice versa. ARTICLE III ELIGIBILITY AND PARTICIPATION ----------------------------- 3.1 ELIGIBILITY AND PARTICIPATION. The Committee shall designate from time to time Eligible Employees of the Company who shall participate in the Plan; PROVIDED, HOWEVER, that such Eligible Employees shall be members of a select group of management or highly compensated employees as such group is described under sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. The Eligible Employees of the Company so designated by the Committee shall become Participants in the Plan. -7- ARTICLE IV SUPPLEMENTAL BENEFIT -------------------- 4.1 ENTITLEMENT TO BENEFITS. Each Participant shall be entitled to the vested portion of his Supplemental Benefit provided in Section 4.2 of the Plan upon reaching his Benefit Commencement Date. A Participant who terminates employment (for any reason other than disability or death) shall have a vested interest in his Supplemental Benefit, based upon the following vesting schedule: YEARS OF SERVICE VESTING PERCENTAGE ---------------- ------------------ 0-4 0% 5 33.33% 6-15 6.66% per year Notwithstanding the foregoing, a Participant shall be fully vested upon a Change of Control. 4.2 SUPPLEMENTAL BENEFIT. A Participant's Supplemental Benefit shall be equal to his account balance under the Plan. (a) DEEMED CONTRIBUTIONS TO ACCOUNT. Annually the account of a Participant shall be credited (deemed to have been contributed) with an amount that is calculated by determining the total employer match and profit sharing contribution (as a percentage of compensation) that the Participant would have received under the Retirement Plan but without the Compensation Limitation that applies to such Retirement Plan, reduced by the amount of employer match and profit sharing contribution actually contributed to the Retirement Plan by the Company. -8- (b) ACCOUNT ADJUSTMENTS. A deemed contribution to the Participant's account shall be treated as having been invested in one or more deemed investments designated by the Committee from time to time. The value of a Participant's account shall be adjusted at least annually to reflect increase or decrease in the value of such deemed investments. In the absence of any designation of one or more deemed investments, the Participant's account shall be credited with interest at an annual rate specified from time to time by the Committee. (c) EXCEPTION FOR GRANDFATHERED PARTICIPANTS. Participants in the Plan as of December 31, 1997 shall be regarded as Grandfathered Participants. Effective January 1, 1998, their accounts shall be administered as set forth above except as follows: (1) A Grandfathered Participant's Pre-1998 Accrued Benefit shall be determined and shall be the beginning amount in the Participant's account as of January 1, 1998. (2) Annually, the account of a Grandfathered Participant shall be credited with the greater of 2% of Compensation or the amount determined in Paragraph (a) above. 4.3 NORMAL FORM OF PAYMENT. The normal form of payment of the Participant's Supplemental Benefit shall be five annual installments with interest as determined by the Committee from time to time. Effective as of June 7, 1999, if, at the Participant's Benefit Commencement Date, the Participant's account balance is $20,000 or less, then the Participant's Supplemental Benefit shall be paid in one lump sum distribution. 4.4 TIME OF PAYMENT. (a) GENERAL TIME OF PAYMENT. The actual payment of the Supplemental -9- Benefit shall commence on the Participant's Benefit Commencement Date. (b) ACCELERATED PAYMENT OF BENEFITS: Notwithstanding anything herein to the contrary, in the sole discretion of the Committee, payment of benefits under Article IV or V of the Plan may be accelerated. 4.5 SEGREGATION OF ASSETS. The Company may, but shall not be obligated, to segregate assets in trust or otherwise for the purpose of paying obligations under this plan. Further, the Company has no obligation to match with actual investment any deemed contribution or deemed investment. 4.6 FORFEITURE OF SUPPLEMENTAL BENEFIT. Notwithstanding anything in Article IV to the contrary, a Participant shall forfeit the right to or interest in his Supplemental Benefit as follows: After a Participant has begun receiving payment of his Supplemental Benefit, he shall forfeit all right to or interest in any future payments if he enters into employment with a competitor of the Company without the consent of the Company. ARTICLE V DEATH AND DISABILITY BENEFITS ----------------------------- 5.1 DEATH BENEFIT. If a Participant dies while employed by the Company before his Benefit Commencement Date, the surviving spouse of the Participant shall be entitled to a death benefit equal to the Participant's Supplemental Benefit determined as of the Participant's date of death. A deceased Participant shall be fully vested in his Supplemental Benefit as of his date of death. If a Participant dies after retirement and after he has begun to receive his benefits under the Plan, the death benefit shall be equal to the principal of any of the Participant's remaining -10- payments. The death benefit shall be paid to his designated beneficiary, if any, in a lump sum within sixty (60) days of the Participant's date of death or as soon thereafter as is practicable. If no beneficiary is designated, the death benefit shall be paid to his estate. 5.2 DISABILITY BENEFIT. If a Participant becomes disabled, as defined in the Retirement Plan, he shall become fully vested in his Supplemental Benefit determined as of the date of his separation from service as a result of disability. ARTICLE VI ADMINISTRATION -------------- 6.1 GENERAL. The Administrator shall be the Committee, or such other person or persons as designated by the Committee. Except as otherwise specifically provided in the Plan, the Administrator shall be responsible for administration of the Plan. The Administrator shall be the "named fiduciary" within the meaning of Section 402(c)(2) of ERISA. 6.2 ADMINISTRATIVE RULES. The Administrator may adopt such rules of procedure as it deems desirable for the conduct of its affairs, except to the extent that such rules conflict with the provisions of the Plan. 6.3 DUTIES. The Administrator shall have the following rights, powers and duties: (a) The decision of the Administrator in matters within its jurisdiction shall be final, binding and conclusive upon the Company and upon any other person affected by such decision, subject to the claims procedure hereinafter set forth. (b) The Administrator shall have the duty and authority to interpret and -11- construe the provisions of the Plan, to decide any question that may arise regarding the rights of employees, Participants and beneficiaries, and the amounts of their respective interests, to adopt such rules and to exercise such powers as the Administrator may deem necessary for the administration of the Plan, and to exercise any other rights, powers or privileges granted to the Administrator by the terms of the Plan. (c) The Administrator shall maintain full and complete records of its decisions. Its records shall contain all relevant data pertaining to the Participant and his rights and duties under the Plan. The Administrator shall have the duty to maintain account records of all Participants. (d) The Administrator shall cause the principal provisions of the Plan to be communicated to the Participants, and a copy of the Plan and other documents to be available at the principal office of the Company for inspection by the Participants at reasonable times determined by the Administrator. (e) The Administrator shall periodically report to the Committee with respect to the status of the Plan. 6.4 FEES. No fee or compensation shall be paid to any person for services as the Administrator. ARTICLE VII CLAIMS PROCEDURE ---------------- 7.1 GENERAL. Any claim for benefits under the Plan shall be filed by the Participant or surviving spouse ("claimant") on the form prescribed for such purpose with the Administrator. 7.2 DENIALS. If a claim for benefits under the Plan is wholly or partially denied, notice -12- of the decision shall be furnished to the claimant by the Administrator within a reasonable period of time after receipt of the claim by the Administrator. 7.3 NOTICE. Any claimant who is denied a claim for benefits shall be furnished written notice setting forth: (a) the specific reason or reasons for the denial; (b) specific reference to the pertinent provision of the Plan upon which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim; and (d) an explanation of the claim review procedure under the Plan. 7.4 APPEALS PROCEDURE. In order that a claimant may appeal a denial of a claim, the claimant or the claimant's duly authorized representative may: (a) request a review by written application to the Administrator, or its designate, no later than sixty (60) days after receipt by the claimant of written notification of denial of a claim; (b) review pertinent documents; and (c) submit issues and comments in writing. 7.5 REVIEW. A decision on review of a denied claim shall be made not later than sixty (60) days after receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered within a reasonable period of time, but not later than one hundred and twenty (120) days after receipt of a request for review. The decision on review shall be in writing and shall include the specific reason(s) for the -13- decision and the specific reference(s) to the pertinent provisions of the Plan on which the decision is based. ARTICLE VIII MISCELLANEOUS PROVISIONS ------------------------ 8.1 AMENDMENT. The Company reserves the right to amend the Plan in any manner that it deems advisable by a resolution of the Board, or its authorized delegate, which shall be communicated to Participants not later than sixty (60) days following the effective date of such amendment. No amendment shall, without the Participant's consent, affect the amount of the Participant's Supplemental Benefit at the time the amendment becomes effective or the right of the Participant to receive a Retirement Benefit after the Participant has met the entitlement requirements provided in Section 4.1 of the Plan. 8.2 TERMINATION. The Company reserves the right to terminate the Plan at any time by resolution of the Board, which shall be communicated to Participant not later than sixty (60) days following the effective date of such amendment. No termination shall, without the consent of the Participant, affect the amount of the Participant's Supplemental Benefit prior to the termination of the right of the Participant to receive a Supplemental Benefit after the Participant has met the entitlement requirements provided in Section 4.1 of the Plan. 8.3 NO ASSIGNMENT. The Participant shall not have the power to pledge, transfer, assign, anticipate, mortgage or otherwise encumber or dispose of in advance any interest in amounts payable hereunder or any of the payments provided for herein, no shall any interest in amounts payable hereunder or in any payments be subject to seizure for payment of any debts, -14- judgments, alimony or separate maintenance, or be reached or transferred by operation of law in the event of bankruptcy, insolvency or otherwise. 8.4 INCAPACITY. If the Administrator determines that any person to whom such benefit is payable is incompetent by reason of physical or mental disability, the Administrator may cause the payments becoming due to such person to be made to another for his benefit. Payments made pursuant to this Section shall, as to such payment, operate as a complete discharge of the Plan, each Company, the Committee and the Administrator. 8.5 SUCCESSORS AND ASSIGNS. The provisions of the Plan are binding upon and inure to the benefit of each Company, its respective successors and assigns, and the Participant and his beneficiaries, heirs, legal representatives, and assigns. 8.6 GOVERNING LAW. The Plan shall be subject to and construed in accordance with the laws of the Commonwealth of Virginia to the extent not preempted by the provisions of ERISA. 8.7 NO GUARANTEE OF EMPLOYMENT. Nothing contained in the Plan shall be construed as a contract of employment or deemed to give any Participant the right to be retained in the employ of the Company or to give any Participant any equity or other interest in the assets, business, or affairs of the Company. No Participant hereunder shall have a security interest in assets of any Company used to make contributions or pay benefits. 8.8 UNFUNDED PLAN. The obligation of the Company to make payments under this Plan constitutes nothing more than an unsecured promise of the Company to make such payments, and any property of the Company that may be set aside in a trust or otherwise for the payment of benefits under this Plan shall, in the event of the Company's bankruptcy or -15- insolvency, remain subject to the claims of the Company's general creditors until such benefits are distributed in accordance with Article IV hereof. 8.9 SEVERABILITY. If any provision of the Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, but the Plan shall be construed and enforced as if such illegal or invalid provision had never been included herein. 8.10 NOTIFICATION OF ADDRESSES. Each Participant shall file with the Administrator, from time to time, in writing, the post office address of the Participant, the post office address of each Beneficiary, and each change of post office address. Any communication, statement or notice addressed to the last post office address filed with the Administrator (or if no such address was filed with the Administrator, then to the last post office address of the Participant or beneficiary as shown on the Company's records) shall be binding on the Participant and each beneficiary for all purposes of the Plan and neither the Administrator nor any Company shall be obliged to search for or ascertain the whereabouts of any Participant or beneficiary. 8.11 BONDING. The Administrator and all agents and advisors employed by it shall not be required to be bonded, except as otherwise required by ERISA. -16- IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer. HILB, ROGAL & HAMILTON COMPANY By /s/ Walter Smith ------------------------- -17- EX-13 10 j9350501ex13.txt ANNUAL REPORT 2001 ANNUAL REPORT 2001 PERFORMING IN A WORLD OF UNCERTAINTY Hilb, Rogal and Hamilton Company The Hilb, Rogal and Hamilton Building Suite 500 4951 Lake Brook Drive Glen Allen, Virginia 23060-9272 804-747-6500 www.hrh.com P1 PERFORMING IN A WORLD OF UNCERTAINTY P2 FINANCIAL HIGHLIGHTS P3 HRH LOCATIONS P4 TO OUR SHAREHOLDERS P8 SERVING IN A WORLD OF UNCERTAINTY P20 THE HRH CHARITABLE FOUNDATION P21 FINANCIAL CONTENTS P47 BOARD OF DIRECTORS AND OFFICERS P48 GENERAL INFORMATION HRH believes fundamentally in the power of people and in the power of the excellence that exists in people. We believe if the right people are properly inspired, properly directed and properly deployed -- and committed to excellence - -- they will carry the day. The names appearing throughout this book are those of our employees -- the people who carry the day at HRH. (Ghosted image of employee names print throughout the book) HILB, ROGAL AND HAMILTON COMPANY PROFILE 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 which client risks are 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. 2001 was another record year for HRH with increases in total revenues of 26 percent and operating net income per share up 34 percent. Yet it was also a year in which an unprecedented level of uncertainty entered the lives of our clients, associates, families and friends. The year began with a hardening insurance market and, after the tragic events of September 11th, ended with an increased awareness of risk and loss for most. Today, throughout our business community and nation, risk is not quite so intangible or remote anymore. More than any time before, clients have questions, and clients need answers and assurances. At HRH, risk has never been intangible but has always been a fundamental reality to be uncovered, assessed and managed by professionals who understand exactly what is at stake. In these challenging times, HRH is committed to providing our clients with the exceptional service and attention they need because our clients must be able to perform, even in a world of uncertainty. FINANCIAL HIGHLIGHTS Operating Net Income1 Per Share (Graph) Operating Cash Flow2 Per Share (Graph) Total Revenues (Graph) 1 Net income before gains, accounting change and an integration charge. 2 Operating net income plus amortization and depreciation. Selected Financial Data Hilb, Rogal and Hamilton Company and Subsidiaries (In thousands, except per share amounts) 2001 2000 Total Revenues .................... $330,267 $262,119 Net Income ........................ $ 32,349 $ 21,802 Net Income Per Share: Basic .................... $ 1.18 $ 0.83 Diluted .................. $ 1.07 $ 0.77 Dividends Per Share ............... $ 0.3475 $ 0.3375 Total Assets ...................... $499,301 $353,371 Total Shareholders' Equity......... $142,801 $ 88,222 HRH LOCATIONS HRH has a network of more than 80 offices in the United States. The offices are organized in five geographic regions: West, Central, Southeast, Mid-Atlantic and Northeast. TO OUR SHAREHOLDERS HRH achieved record financial results for 2001, surpassing our long-term annual earnings growth goal. Five years have passed since we launched our Strategic Plan that set value creation and aggressive financial goals as the key priorities to help HRH become the premier domestic middle-market insurance and risk management intermediary. In addition to contributing decisively to past performance, the Strategic Plan is a strong foundation for future growth. As we enter the next five years, we remain committed to becoming the premier domestic middle-market insurance and risk management intermediary and to our financial objectives of increasing annual operating earnings per share by a minimum of 15 percent each year. We do, however, anticipate even more emphasis in the future on building a high performance sales and service organization. HRH's 2001 performance was driven by organic revenue growth, improved profitability and a successful acquisition program. Organic growth reflected market share gains from higher productivity, new products, new markets and rising property and casualty premium rates. Our Best Practices initiative, completing its second year, focused on improving sales and service delivery methods and further enhancing profitability. Through Best Practices, we were also able to give our professionals the tools, training and resources worthy of a premier company. The blending of local, hands-on service with the risk management expertise and placement capabilities of a national organization continued to serve as HRH's trademark. Lastly, the 2001 acquisition class, exemplifying strategic fit, entrepreneurial talent and growth potential, quickly became an integral part of the HRH team. Property and casualty insurance premiums rose for many middle-market commercial lines early in the year, as insurers focused on their loss experience, return on capital and profitability. Faced with a softening macroeconomic outlook, many middle-market businesses explored ways to stretch their insurance dollars through risk reduction and prevention, closer analysis of coverage requirements and higher retention levels. The tragic events of September 11th heightened awareness of risk and raised the probability that risks, once thought remote, could indeed be realized. Prompted by sharp increases in cost and limited availability of certain types of coverage, many businesses began to rethink their risk management strategies. While large, multi-national enterprises were most affected by these trends, many of our middle-market clients also began to make insurance coverage and cost a higher priority than in the recent past. HRH's client-focused and service-oriented approach to managing risk directly addresses these evolving middle-market requirements. Total revenues for 2001 rose 26.0 percent to $330.3 million, influenced by acquisitions as well as internal growth. Commissions and fees, before acquisitions and divestitures, rose 5.6 percent. Net income for the year rose 48.4 percent to $32.3 million, or $1.07 per share, from $21.8 million, or $0.77 per share. Operating net income, which excludes gains and an accounting change in 2000, increased 42.6 percent to $30.8 million, or $1.02 per share, from $21.6 million, or $0.76 per share, in the prior year. Operating cash flow (operating net income plus depreciation and amortization) for the year was $50.7 million, or $1.66 per share. (All references to share amounts have [Photo - Chief Executive Officer and Chief Operating Officer] been adjusted for the 2-for-1 Common Stock split payable December 31, 2001.) Our acquisition pace accelerated in 2001, reflecting the opportunities created by the continuing industry consolidation, our increasing ability to attract high caliber agencies, the success of our previous acquisitions and, finally, the growing number of HRH professionals who have developed skills and experience in identifying, negotiating, closing and, particularly, integrating acquisitions. The integration process, in which we develop mutually beneficial synergies and, through our Best Practices initiative, margin improvement and new growth channels, worked particularly well in 2001. In July 2001, we acquired our largest acquisition for the year, Berwanger Overmyer Associates, central Ohio's largest independent insurance broker, which has been highly regarded during its nearly 30 years of operation. In addition to opening Ohio for HRH, this acquisition also brought profitable specialty insurance capabilities, including employee benefits and program management, which can be distributed by other HRH agencies. Earlier in the year, HRH set a pattern for entry into new markets by entering first Kansas and then Maine through the acquisitions of Dulaney, Johnston & Priest and The Dunlap Corporation, also premier firms serving prominent middle-market clients. Each of these firms, as part of HRH, has multiple opportunities for accelerating growth and enhancing profitability. Through a series of smaller acquisitions in 2001, we strengthened our presence in California, Connecticut, Maryland, Pennsylvania and Texas with highly competitive agencies that brought talent, distribution capacity and expertise to the HRH system. In early 2002, using the same basic model and financial discipline, we have continued to explore acquisition opportunities and look forward to another active year. For the past two years, our Best Practices program has been instrumental in developing a more powerful sales culture through tools and materials, sales and sales management training and performance incentives. Best Practices is designed to apply, throughout our network of offices, the most successful modes of operation found anywhere within HRH. On the cost management side, Best Practices has improved margins of existing and acquired offices by fine-tuning operations and culling low-margin business. In its third year, Best Practices will continue its work, from one profit center to another, with the goal of attaining optimal operating performance. Careful tailoring of products and services to match clients' evolving needs is an integral part of HRH's growth strategy. In response to industry conditions -- rising premiums for many commercial lines and limited availability of certain insurance coverages -- HRH began to expand and deepen relationships with insurers that are able to supply needed coverages at competitive costs. While HRH already has excellent relationships with many insurers, from the largest carriers to the smallest, adding experts to manage those relationships and market risks to underwriters is HRH's way of pulling out all the stops to deliver for our clients. Similarly, HRH is continuing to invest in experienced, productive sales and sales management personnel. These investments will directly benefit our existing and prospective clients, and they pave the way for future growth and represent a worthy reinvestment of a portion of our earnings. Over the past five years, HRH has focused on becoming the premier domestic middle-market insurance and risk management intermediary through the successful implementation of our Strategic Plan. The objectives we established seemed ambitious at the time -- the doubling of earnings over five years, improving our distribution system, increasing our core commissions and fees through internal growth and strategic acquisitions, and creating a performance-oriented culture through compensation and incentive programs. Our success can be measured in terms of our financial performance, high employee morale and client satisfaction. We will not, however, become complacent with our initial success. As we embark on the next five years, we remain committed to a continuation of our financial goals and to our core values, through a pursuit of excellence in all that we do. In particular, we will increase our focus on becoming a high performance sales and professional services organization. We are confident that we are ready for the challenges that will face our Company. The past year has been difficult and painful for our country. We are immensely proud of this Company and its employees, who rose to the many challenges, from quickly addressing the immediate needs and concerns of our client base with professionalism and excellence to making a $1 million commitment to the terrorism relief efforts. We want to personally thank our employees for their dedication to our clients and to HRH. On behalf of everyone at Hilb, Rogal and Hamilton Company, we thank you for your continued support and look forward to bringing you even stronger results in the years to come. Sincerely, Andrew L. Rogal Chairman and Chief Executive Officer Martin L. Vaughan, III President and Chief Operating Officer SERVING IN A WORLD OF UNCERTAINTY To the people of HRH, Performing in a World of Uncertainty means serving our clients and seeing them through uncertain times and certain risks. we know that Now, more than ever, providing exceptional service to our clients is key to their security and ability to perform. We understand that in today's climate being well served means being represented by a broker with extensive market knowledge; professional, well-trained staff; relationships with carriers; access to specialized coverages; a nationwide network; and claims management, including loss control and risk management services. Most importantly, it means working with someone you can trust and on whom you can rely, especially in the tough times. Through the tough times of 2001, we continued to put our clients first and to follow our Strategic Plan, which creates value for clients and shareholders alike. In particular, our approach to mergers and acquisitions, our operational excellence, industry knowledge and claims management capabilities helped us fulfill our clients' ever-increasing needs and brought us yet another step closer to achieving our goal of being the premier domestic middle-market insurance and risk management intermediary. Mergers and Acquisitions HRH continues to build its network of talented people, operations, systems, specialties and locations to better serve our clients. In 2001 we acquired 10 quality insurance brokerage operations with annual revenues in excess of $60 million, once again exceeding our goal of 10 to 15 percent growth through acquisition. We've extended our reach in California, Texas, Pennsylvania, Maryland and Connecticut and expanded into new territories through acquisitions in Kansas, Ohio and Maine. We've also added new specialist capabilities in architecture and engineering, nonprofit organizations, the construction industry and automotive trade. Since early 1999, HRH has acquired and integrated over $150 million in annual revenue. After three years of perfecting the M&A process internally, the machinery is in place, the momentum is going, and the opportunities are plentiful. With a goal of 10 to 15 percent growth through acquisitions in 2002, we will continue to be an aggressive consolidator looking for quality operations with talented people to join our team, serve our clients and expand our specialist capabilities. Operational Excellence Over the past five years, HRH has steadily improved operations, investing time to identify, develop and implement Best Practices; investing resources in the best sales and support tools and training; and investing in technology to operate more efficiently and better serve our clients. 2001 was the first full year in which our strategic and conceptual sales program reached all HRH producers, managers and account executives, giving us a methodology and a common language by which to communicate within our organization and with our clients. In 2001 internal communication also continued to be enhanced by InfoSource -- our internal, web-based communication tool. InfoSource allows producers to tap information and expertise from any office within the growing HRH network, including information on our growing specialty markets, to better serve clients and win new business. InfoSource is one important way in which our Practice Leaders -- producers with specialist knowledge -- share resources with their colleagues and export their knowledge throughout the organization. For many of our clients, communication was significantly improved in 2001 by access to WorkPlus and HRH Online. WorkPlus is HRH's web-based platform for clients to manage employee benefits communication and enrollment. HRH Online, due to be rolled out throughout the Company in 2002, is a management tool that allows HRH clients to view their HRH accounts and coverages and make changes online. In 2002 and beyond, we remain committed to bringing technology to our clients that enhances communication and makes their jobs easier. Knowledge Even before September 11th, a hardening insurance market, marked by volatile rates in some instances, pushed fundamental values like taking care of our clients to the forefront. Starting early in 2001 we've had the opportunity, again and again, to show our clients that they can count on us to see them through the hard market and to use our market knowledge and clout with carriers to negotiate affordable, comprehensive coverage for them. We've also been there to listen and to answer questions. Particularly in the days after September 11th, we've answered a multitude of questions from worried clients. We've reviewed insurance programs and provided assurance and expertise and, most importantly, a sense of security. At HRH we know how important reliability, predictability and peace of mind are to our clients. And we know, above all, that a large part of being an excellent organization today is about serving our clients well, simply because it's the right thing to do. Claims Management For many of our clients, having access to affordable coverage can come down to knowing the art of loss control and claims management -- expertise we can provide. Our risk management services include comprehensive loss control audits based on in-depth knowledge of a client's industry and the insurance marketplace, safety and loss prevention programs, and vigilant claims management and tracking. We are experts in workers compensation, self-insurance, reinsurance and other specialized coverages and programs. When necessary, we're also there when losses occur and clients need help with their claims. At HRH we are pleased to provide our clients with the services of an "in house" Risk Management Department -- identifying and reducing risks, while we build relationships. COVERING NEW TERRITORY Since The Columbus Zoo and Aquarium was founded nearly 75 years ago, it has been in a continual state of movement and expansion. From its earliest days as a small park, it has grown to a 588-acre world-class zoological facility known for its top-notch educational and conservation programs -- and traveling animals. The animals are most likely to be trotting the globe as part of an exchange with another zoo, visiting a local school or agency, or appearing on national television with Director Emeritus Jack Hanna. Currently, the zoo has over 600 different species of animals in its collection and, in 2001, hosted 1.3 million visitors. At the height of the summer, it requires over 700 full- and part-time employees to take care of the zoo's animals, human visitors and grounds, which include a golf course, an amusement park and several restaurants. For nearly 10 years now, The Columbus Zoo has counted on Berwanger Overmyer Associates (BOA), which merged with HRH in July 2001, to make sure all of its risks are properly assessed and covered. In addition to property and casualty, general liability, directors and officers liability and employee benefits, BOA/HRH writes specialty coverages unique to zoos, such as animal mortality insurance for the traveling animals and International Worldwide Liability and Repatriation for the handlers who accompany them. Columbus Zoo Executive Director Gerald Borin says, "The Columbus Zoo is a diverse and complex organization. BOA provides us with expertise and sound advice for many different lines of insurance and meets all our special needs. They're also an integral part of our loss control efforts. However, the commitment between BOA and the zoo goes beyond just providing insurance. As a successful business in central Ohio, BOA recognizes the significance of the zoo to the community and for that reason has been a long-time friend and proud supporter." HRH is on the move, expanding into new geographic territory to better serve our clients and discover new opportunities. CONSTRUCTING SOLUTIONS At Cianbro Corporation, there's a long history of teamwork, innovation -- and excellent results. The employee-owned company is one of the largest and most successful civil and heavy industrial construction firms on the East Coast with offices in Maine, Connecticut and Maryland. Founded in 1949 by Cianchette brothers Carl, Ken, Bud and Chuck, Cianbro is still thriving today due to a "can-do" spirit that's the legacy of its founders and a culture of trust and mutual respect. Over the years, it has built a reputation as an innovator in the construction industry. Cianbro's 2,000-plus employees are mostly in the business of building bridges, power generating plants and industrial facilities for their public and private sector clients. Their team of experts also can be found constructing commercial buildings, cement and paper plants, highways, parking garages and piers. To get the job done, Cianbro maintains an inventory of over 2,000 pieces of equipment - -- from tugboats and barges to trucks, trailers and cranes. At any given time, the equipment is dispersed on projects in 10 to 12 states. From the beginning, Cianbro has looked to The Dunlap Corporation for its insurance and risk management needs. Dunlap, which HRH acquired in 2001, was formed over 130 years ago and is well known as an innovator in the insurance industry and an expert in the construction business. These specialist capabilities date back to the 1930s and `40s when Erlon Dunlap took to the often unpaved Maine roads to develop his business and began to work closely with the contractors who would one day build Maine's highways, including Cianbro. Today, Dunlap writes Cianbro's property and casualty, surety, workers compensation, employee benefits, disability and liability coverages. Most important in this high-risk industry, Cianbro considers Dunlap its insurance and risk management partner. In fact, Cianbro's CFO, Tom Stone says, "Dunlap shares Cianbro's values and philosophy. Cianbro is very fortunate to have Dunlap as a stakeholder in our company." Rick Leonard, Cianbro's Manager of Financial Services, echoes this sentiment. "They make us feel like we're their only client. They are partners in every sense. They are part of Cianbro. We're one, together in it," he says. HRH acquisitions have brought the benefit of hundreds of highly skilled insurance professionals, many with specialist capabilities. [Photo] HELPING WITH HIGH TECH The people of CuraGen Corporation feel there is a higher purpose to the work they do --using knowledge gained from the human genome to develop drugs to treat obesity and diabetes, cancer, inflammatory diseases and central nervous system disorders. Perhaps that's why the company has grown in only nine years from a few person operation founded in a basement to a publicly-traded company planning a new, world-class pharmaceutical research facility and about to file its first investigational new drug with the FDA. From the beginning, CuraGen recognized that reaching its ultimate goal to "get a child out of the hospital by getting a new drug on the market" would require a massive integration of biology and information technology. That's why the company developed a suite of technologies to manage the volumes of information created through human genome mapping. These patented systems allow the scientists to understand genes and proteins and their roles in disease. CuraGen has built laboratories that look more like high-throughput assembly-lines in order to evaluate genes and proteins at a much faster rate than scientists have been able to with traditional scientific methods. The scientists at CuraGen believe this is the future of drug development. Since going public in 1998, CuraGen has relied on HRH for all its employee benefits and directors and officers liability coverage. With a growing workforce of nearly 500, CuraGen has welcomed HRH's high tech approach to employee benefits communication -- WorkPlus. "With WorkPlus, HRH created a secure, self-service site where employees can go to get the information they need to make decisions on their work life and career here at CuraGen from health and welfare issues, such as medical coverage, to financial matters. In addition, to meet our individual needs, HRH customized the site to have the look and feel of CuraGen's intranet. The service and the results are exceptional," says Stephen Mordecai, CuraGen's Assistant Director of Human Resources. HRH is using new technology to help our clients work smarter. [Photo] KNOWING THE WAY With watershed management and pipeline and wastewater treatment plant design firmly under their belts, environmental engineers and consultants Brown and Caldwell know the answers when it comes to supplying, moving and treating water. They're also experts at investigating and remediating soil and groundwater contamination. The firm's current projects include designing the new Brightwater Wastewater Treatment Plant for King County, Washington, and leading a $1.8 million site closure for the Arizona Army National Guard. In addition, Brown and Caldwell has begun using its extensive infrastructure knowledge to team with a leading consultant in force protection and homeland defense to provide facility security services for utilities nationwide. With headquarters in Walnut Creek, California, Brown and Caldwell serves its private, municipal and government clients from 44 offices in 21 states across the country. To protect its network, the company counts on the expertise of Professional Practice Insurance Brokers, Inc. (PPIB), an HRH company. PPIB writes all their professional liability, workers compensation, commercial auto and international insurance coverage. The professionals at PPIB strive to use their knowledge of insurance and the environmental engineering industry to design and manage the company's insurance program so it will facilitate business and help expand the firm's scope of operations. To achieve that goal, they work so closely with Brown and Caldwell's general counsel and in-house risk management department, they like to consider themselves the engineering firm's "partners in practice." Bob Leichtner, Brown and Caldwell's Senior Vice President and General Counsel, says, "Brown and Caldwell has been a PPIB client for over a decade. PPIB's founder, Dave Lakamp, established an excellent professional liability program for our company in difficult market conditions, and then enabled us to enhance our coverage and dramatically lower our costs as the market eased. More recently, we shifted our other insurance lines to PPIB as well, based on their dedication to superior client service, their expertise and their ability to develop creative, customized solutions to address Brown and Caldwell's evolving needs as our business has grown. What distinguishes PPIB is their tradition of integrity and quality, their proven ability to understand our particular needs and concerns, and their energy in advocating for our interests in a challenging business environment." Every day HRH applies its industry and market knowledge to serve the best interests of clients. [Photo] CLAIMING VICTORY The Arizona Diamondbacks are used to making fast progress. The National League team, which was only formed in 1998, marked its first season with a seven-game winning streak -- the longest by any expansion team in history; clinched the National League West championship and made the playoffs in its second year; turned the first triple play in club history in 2000; and won the 2001 World Series in a dramatic Game 7, bottom of the ninth victory against the 26-time champion New York Yankees. For nearly every one of the 200 athletes who play with the Diamondbacks or in its six minor league teams, there is a person behind the scenes working hard to ensure more victories and the health and welfare of the players. The team behind the teams includes seven managers, 20 coaching staff, 10 trainers and 150 office and clerical staff. In 2001, the Diamondbacks brought in another team player -- HRH of Amarillo, Texas -- to take control of their workers compensation program, which had become a no-win situation. After auditing the group to identify problems and opportunities, HRH of Amarillo, specialists in pro sports claims management, developed and implemented an internal claims management system to manage the exposure as they switched the club from a guaranteed cost policy to a retrospective rating plan. As part of the system, HRH works closely with the teams' coaches, trainers, owners/management, providers and adjusters, including weekly conference calls to keep on top of injuries and recoveries. Just one year later, the savings for the Diamondbacks look to be tremendous -- between 40 percent and 50 percent, depending on final numbers. Diamondback CFO Tom Harris says, "With HRH, we're more on top of our workers comp than ever before. We have a better handle on our potential exposures, and we're saving money -- which seem to go hand in hand. We're a better organization due to HRH's claims management system. And it gives us a good comfort feel to know we're headed in the right direction." With HRH's claims management expertise, clients come out winners. HELPING THROUGH THE HRH CHARITABLE FOUNDATION HRH, through its existing charitable foundation, is aiming to make a difference in the lives of the victims of the September 11th attacks. HRH has committed $1 million to relief efforts for the victims, with employee contributions helping to fulfill the pledge. Through The HRH Charitable Foundation, the Company's donation is going primarily to the victims and the families of our business partners, associates and industry competitors, many of whom suffered extensive losses. America's business and financial community, a community of which we are a part, sustained such massive devastation. We feel it is our responsibility to do all we can to support the victims of that community -- the spouses and children of the people who, like us, were tending to business when this horrific strike occurred. We want to do all we can to help rebuild the lives of those who've suffered such immeasurable loss. By early December 2001, The HRH Charitable Foundation reviewed its first requests for funding and made initial disbursement decisions, with gifts totaling $277,000. The Foundation continues to review and respond to requests for assistance. The HRH Charitable Foundation was initially established in April 1995 to provide financial assistance to families of the victims of the Oklahoma City bombing. Since then, the fund has been used to provide financial assistance to a student-victim of the Columbine High School shooting. This private foundation is funded primarily through contributions from HRH and its employees. Contributions are not solicited from outside the HRH family. The broad focus of the Foundation's work is to support the victims of America's business and financial community -- the spouses and children of the people who, like us, were tending to business when this horrific strike occurred. SELECTED FINANCIAL DATA P22 MANAGEMENT'S DISCUSSION AND ANALYSIS P23 CONSOLIDATED BALANCE SHEET P28 STATEMENT OF CONSOLIDATED INCOME P29 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY P30 STATEMENT OF CONSOLIDATED CASH FLOWS P31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS P32 REPORT OF INDEPENDENT AUDITORS P46 BOARD OF DIRECTORS AND OFFICERS P47 GENERAL INFORMATION P48 HRH P22 SELECTED FINANCIAL DATA
Year Ended December 31 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Statement of Consolidated Income Data(1): Commissions and fees $ 323,078 $ 256,366 $ 219,293 $ 170,203 $ 163,262 Investment income 2,585 2,626 2,046 1,579 1,740 Other income(2) 4,604 3,127 5,887 3,582 3,411 ------------------------------------------------------------ Total revenues 330,267 262,119 227,226 175,364 168,413 Compensation and employee benefits 182,397 146,442 125,577 98,478 96,240 Other operating expenses 68,211 55,522 49,500 41,286 40,181 Amortization of intangibles 13,868 12,239 10,690 7,919 8,110 Interest expense 9,061 8,179 6,490 2,317 2,037 Integration costs -- -- 1,900 -- -- ------------------------------------------------------------ Total expenses 273,537 222,382 194,157 150,000 146,568 ------------------------------------------------------------ Income before income taxes and cumulative effect of accounting change 56,730 39,737 33,069 25,364 21,845 Income taxes 24,381 17,610 13,583 10,419 9,055 ------------------------------------------------------------ Income before cumulative effect of accounting change 32,349 22,127 19,486 14,945 12,790 Cumulative effect of accounting change, net of tax(3) -- (325) -- -- -- ------------------------------------------------------------ Net income $ 32,349 $ 21,802 $ 19,486 $ 14,945 $ 12,790 ============================================================ Net Income Per Share - Basic: Income before cumulative effect of accounting change $ 1.18 $ 0.84 $ 0.76 $ 0.60 $ 0.49 Cumulative effect of accounting change, net of tax(3) -- (0.01) -- -- -- ------------------------------------------------------------ Net income $ 1.18 $ 0.83 $ 0.76 $ 0.60 $ 0.49 ============================================================ Net Income Per Share - Assuming Dilution: Income before cumulative effect of accounting change $ 1.07 $ 0.78 $ 0.72 $ 0.59 $ 0.48 Cumulative effect of accounting change, net of tax(3) -- (0.01) -- -- -- ------------------------------------------------------------ Net income $ 1.07 $ 0.77 $ 0.72 $ 0.59 $ 0.48 ============================================================ Weighted average number of shares outstanding: Basic 27,411 26,224 25,752 24,994 26,198 Assuming Dilution 31,160 29,784 28,014 25,418 26,430 Dividends paid per share $ 0.3475 $ 0.3375 $ 0.3275 $ 0.3175 $ 0.3100 Consolidated Balance Sheet Data: Intangible assets, net $ 271,309 $ 196,658 $ 184,048 $ 87,471 $ 82,170 Total assets 499,301 353,371 317,981 188,066 181,607 Long-term debt, less current portion 114,443 103,114 111,826 43,658 32,458 Other long-term liabilities 17,012 11,034 10,672 10,192 9,537 Total shareholders' equity 142,801 88,222 71,176 45,710 51,339
1 See Note K of Notes to Consolidated Financial Statements for information regarding business purchase transactions which impact the comparability of this information. In addition, during the years ended December 31, 1998 and 1997 the Company consummated six purchase acquisitions in each year. 2 During 2001, 2000, 1999, 1998 and 1997 the Company sold certain insurance accounts and other assets resulting in gains of approximately $2,709,000, $1,844,000, $4,906,000, $2,638,000 and $2,475,000, respectively. 3 Adoption of SEC Staff Accounting Bulletin 101, effective January 1, 2000 establishing a reserve for policy cancellations. HRH P23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The income of an insurance agency operation 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. From 1987 until 1999, the property and casualty insurance industry had been in a "soft market"; however, beginning in 2000, the industry has experienced firming of commercial premium rates. The Company's revenues have increased due to firming premium rates and the Company's acquisition and new business programs offset in part by continued culling or selling of low margin or nonstrategic business. 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. During the fourth quarter of 2001, the Company announced a 2-for-1 Common Stock split payable December 31, 2001. References to common shares and per share amounts have been restated to reflect the stock split for all periods presented. 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, after the 2000 cumulative effect of an accounting change, increased 48.4% to $32.3 million, or $1.07 per share, compared to $21.8 million, or $0.77 per share last year. Excluding net non-recurring gains and the 2000 cumulative effect of an accounting change, net income for 2001, increased 42.6% to $30.8 million, or $1.02 per share, compared with $21.6 million, or $0.76 per share in the prior year. The cumulative effect of the accounting change was a non-cash charge to first quarter 2000 net income to record a reserve for the cancellation of customer insurance policies in accordance with Staff Accounting Bulletin 101. For 2000, net income was $21.8 million, or $0.77 per share compared to $19.5 million, or $0.72 per share in 1999. Excluding net non-recurring gains, an accounting change in 2000 and a 1999 integration charge related to the American Phoenix acquisition, net income was $21.6 million, or $0.76 per share, compared with $17.3 million, or $0.65 per share in 1999. Commissions and fees for 2001 were $323.1 million, or 26.0% higher than 2000. Approximately $57.7 million of commissions and fees were derived from purchase acquisitions of new insurance agencies in 2001 and 2000. These increases were partially offset by decreases of $5.3 million from the sale of certain offices and accounts. Excluding the effects of acquisitions and dispositions, commissions and fees increased 5.6%. This increase relates primarily to a combination of new business production and firming premium pricing levels partially offset by continued culling due to the Company's focus on writing and renewing profitable business. 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 in 2000 and 1999. These increases were partially offset by decreases of $7.7 million from the sale of certain offices and accounts. 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 pricing levels partially offset by selected pruning of low margin business. HRH P24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment income decreased $0.1 million in 2001 and increased $0.6 million in 2000. Other income increased $1.5 million in 2001 and decreased $2.8 million in 2000. Other income includes gains of $2.7 million, $1.8 million and $4.9 million in 2001, 2000 and 1999, respectively, from the sale of certain offices, insurance accounts and other assets. Total operating expenses for 2001 were $273.5 million, an increase of $51.2 million, or 23.0% from 2000. For 2000, total operating expenses were $222.4 million, an increase of $28.2 million, or 14.5% from 1999. Compensation and employee benefits costs for 2001 were $182.4 million, an increase of $36.0 million, or 24.6% from 2000. Increases include approximately $31.8 million related to 2001 and 2000 purchase acquisitions and increases in revenue production and performance-based compensation agreements partially offset by decreases of $2.9 million related to offices sold. 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 2000 and 1999 purchase acquisitions and increases for performance-based compensation agreements offset in part by decreases of $2.9 million related to offices sold. Other operating expenses for 2001 were $68.2 million, or 22.9% higher than 2000. Increases relate primarily to purchase acquisitions in 2001 and 2000 and costs associated with revenue growth offset in part by the sale of certain offices. Other operating expenses for 2000 were $55.5 million, or 12.2% higher than 1999. Increases relate primarily to purchase acquisitions in 2000 and 1999 and costs associated with revenue growth offset in part by the sale of certain offices. Amortization expense reflects the amortization of intangible assets acquired in the purchase of insurance agencies. Amortization expense increased by $1.6 million, or 13.3% in 2001 and by $1.5 million, or 14.5% in 2000, which is attributable to purchase acquisitions consummated during 2001, 2000 and 1999 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 $0.9 million, or 10.8% in 2001 and by $1.7 million, or 26.0% in 2000. The increase is due to additional bank borrowings related to acquisitions partially offset by decreased interest rates. The effective tax rates for the Company were 43.0% in 2001, 44.3% in 2000 and 41.1% in 1999. An analysis of the effective income tax rates is presented in "Note G - Income Taxes" of Notes to Consolidated Financial Statements. Over the last three years, inflationary pressure has been relatively modest and did not have a significant effect on the Company's operations. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations totaled $62.1 million, $47.8 million and $17.6 million for the years ended December 31, 2001, 2000 and 1999, 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 $5.6 million, $7.5 million and $6.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. The timing and extent of the purchase of investments is dependent upon cash needs and yields on alternate investments and cash equivalents. Cash outlays related to the purchase of insurance agencies accounted for under the purchase method of accounting amounted to $34.9 million, $21.8 million and HRH P25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $33.7 million in the years ended December 31, 2001, 2000 and 1999, 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 Notes to Consolidated Financial Statements. Cash proceeds from the sales of certain offices, insurance accounts and other assets totaled $4.8 million, $9.0 million and $5.6 million in the years ended December 31, 2001, 2000 and 1999, respectively. The Company did not have any material capital expenditure commitments as of December 31, 2001. Financing activities (utilized) provided cash of ($4.0) million, ($19.9) million and $20.8 million for the years ended December 31, 2001, 2000 and 1999, respectively, as the Company borrowed funds to finance acquisitions, made scheduled debt payments and annually increased its dividend rate. In addition, during 2001, 2000 and 1999, the Company repurchased, on the open market, 10,000, 255,400 and 541,400 shares, respectively, of its Common Stock under a stock repurchase program. The Company is currently authorized to purchase an additional 748,200 shares of its Common Stock. The Company has a bank credit agreement for $148.3 million under which loans are due in various amounts through 2004 and $32.0 million face value of 5.25% Convertible Subordinated Debentures due 2014. At December 31, 2001, there were loans of $78.3 million outstanding under the bank agreement with $70.0 million available under the revolving portion of the facility for future borrowings. The Company had a current ratio (current assets to current liabilities) of 0.88 to 1.00 as of December 31, 2001. Shareholders' equity of $142.8 million at December 31, 2001, increased from $88.2 million at December 31, 2000, and the debt to equity ratio of 0.80 to 1.00 at December 31, 2001 decreased from the last year-end ratio of 1.17 to 1.00 due to net income and the issuance of Common Stock including the income tax benefit from the exercise of stock options offset in part by dividends and an increase in debt related to acquisitions. 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. 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. CRITICAL ACCOUNTING POLICIES The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes that of its significant accounting policies (see "Note A - Significant Accounting Policies" of Notes to Consolidated Financial Statements), the following may involve a higher degree of judgment and complexity. REVENUE RECOGNITION The Company is engaged in insurance agency and brokerage activities and derives revenues primarily from commissions on the sale of insurance products to clients that are paid by the insurance underwriters with whom our subsidiary agencies place their clients' insurance. Generally, commission income, as well as the related premiums receivable from customers and premiums payable to insurance companies, is recognized as of the effective date of insurance coverage or billing date, whichever is later, net of an allowance for estimated policy cancellations. Contingent commissions, commissions billed directly by insurance carriers and miscellaneous commissions are recorded as revenue when received. HRH P26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Service fees are recognized when the services are rendered. The Company continues to review its practices with respect to premiums billed directly by insurance carriers and may make revisions in the future as changes in facts or availability of information occur. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company monitors its allowance utilizing accounts receivable aging data as the basis to support the estimate. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In addition, the Company has the ability to cancel coverage for customers who have not made required payments. INTANGIBLE ASSETS The Company has significant intangible assets acquired in business acquisitions. The determination of estimated useful lives and whether the assets are impaired requires significant judgment and affects the amount of future amortization and possible impairment charges. The carrying value of the Company's intangible assets is periodically reviewed to determine that no conditions exist indicating a possible impairment. During the first quarter of 2002, the Company will adopt Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and will be required to perform goodwill impairment testing as prescribed during the first six months of fiscal 2002, and on a periodic basis thereafter. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (Statement 141), and No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. All of the Company's future acquisitions will be accounted for using the purchase method. Under Statement 142, goodwill will no longer be amortized but will be subject to annual impairment tests. Intangible assets with finite lives will continue to be amortized over their useful lives. The Company will apply Statement 142 on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Goodwill and other intangible assets acquired on or subsequent to July 1, 2001 were immediately subject to Statement 142. As a result, the Company did not record amortization in 2001 for goodwill related to acquisitions consummated on or subsequent to July 1, 2001. Instead the Company will test goodwill for impairment using the two-step process prescribed in Statement 142. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. The Company does not presently expect the application of Statement 142 to result in any material impairment charges. If Statement 142 had been adopted as of January 1, 2001, after tax net income would have increased approximately $8.4 million. This impact includes a reduction of approximately $11.4 million in amortization expense offset by related income taxes. Effective January 1, 2001, the Company adopted Financial Accounting Standards Board Statement No. 133 (Statement 133), "Accounting for Derivative Instruments and Hedging Activities." Statement 133 requires the Company to recognize all derivatives in the balance sheet at fair value. At adoption, the Company had two interest rate swaps, designated as cash flow hedges, used to modify interest characteristics for a portion of its credit facility. At adoption, the interest rate swaps were recorded at fair value resulting in a cumulative effect accounting change that had no impact on net income and on an after-tax basis decreased accumulated other comprehensive income by $517,000. HRH P27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In accordance with Staff Accounting Bulletin 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 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 Company periodically reviews the adequacy of the allowance and adjusts it as necessary. Based on the analysis, the allowance as of December 31, 2001 and 2000 was $765,000 and $580,000, respectively. For the year ended December 31, 2001, the net increase in the cancellation reserve was comprised of $130,000 in new reserves related to acquisitions and $55,000 from higher revenue levels. 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 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. HRH P28 CONSOLIDATED BALANCE SHEET
December 31 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents, including $19,837,000 and $15,005,000, respectively, of restricted funds $ 51,580,095 $ 28,880,784 Investments 3,499,421 2,127,404 Receivables: Premiums, less allowance for doubtful accounts of $3,374,000 and $1,878,000, respectively 116,219,367 81,117,359 Other 17,672,780 12,883,269 ----------------------------------- 133,892,147 94,000,628 Prepaid expenses and other current assets 8,435,944 6,469,289 ----------------------------------- TOTAL CURRENT ASSETS 197,407,607 131,478,105 INVESTMENTS 1,335,798 1,653,775 PROPERTY AND EQUIPMENT, NET 19,484,705 16,495,033 INTANGIBLE ASSETS 325,130,299 243,025,280 Less accumulated amortization 53,821,407 46,366,851 ----------------------------------- 271,308,892 196,658,429 OTHER ASSETS 9,764,122 7,085,521 ----------------------------------- $ 499,301,124 $ 353,370,863 =================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Premiums payable to insurance companies $ 169,501,575 $ 110,399,098 Accounts payable 7,303,804 5,458,152 Accrued expenses 20,302,435 13,606,919 Premium deposits and credits due customers 20,940,410 15,980,901 Current portion of long-term debt 6,996,423 5,555,940 ----------------------------------- TOTAL CURRENT LIABILITIES 225,044,647 151,001,010 LONG-TERM DEBT 114,443,224 103,113,474 OTHER LONG-TERM LIABILITIES 17,011,914 11,034,413 SHAREHOLDERS' EQUITY Common Stock, no par value; authorized 50,000,000 shares; outstanding 28,310,568 and 26,560,936 shares, respectively 55,542,485 22,361,312 Retained earnings 88,604,274 65,860,654 Accumulated other comprehensive income (loss): Unrealized loss on derivative contracts, net of deferred tax benefit of $955,000 (1,433,296) -- Other 87,876 -- ----------------------------------- 142,801,339 88,221,966 ----------------------------------- $ 499,301,124 $ 353,370,863 ===================================
See notes to consolidated financial statements HRH P29 STATEMENT OF CONSOLIDATED INCOME
Year Ended December 31 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- REVENUES Commissions and fees $ 323,078,357 $ 256,366,197 $ 219,293,008 Investment income 2,584,600 2,625,818 2,045,596 Other 4,604,383 3,126,959 5,887,335 -------------------------------------------------------- 330,267,340 262,118,974 227,225,939 OPERATING EXPENSES Compensation and employee benefits 182,397,310 146,441,626 125,576,664 Other operating expenses 68,210,873 55,521,582 49,500,824 Amortization of intangibles 13,867,645 12,239,177 10,690,269 Interest expense 9,061,585 8,179,390 6,489,645 Integration costs -- -- 1,900,000 -------------------------------------------------------- 273,537,413 222,381,775 194,157,402 -------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 56,729,927 39,737,199 33,068,537 Income taxes 24,381,412 17,610,032 13,582,740 -------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 32,348,515 22,127,167 19,485,797 Cumulative effect of accounting change, net of tax -- (325,000) -- -------------------------------------------------------- NET INCOME $ 32,348,515 $ 21,802,167 $ 19,485,797 ======================================================== NET INCOME PER SHARE - BASIC: Income before cumulative effect of accounting change $ 1.18 $ 0.84 $ 0.76 Cumulative effect of accounting change, net of tax -- (0.01) -- -------------------------------------------------------- Net income $ 1.18 $ 0.83 $ 0.76 ======================================================== NET INCOME PER SHARE - ASSUMING DILUTION: Income before cumulative effect of accounting change $ 1.07 $ 0.78 $ 0.72 Cumulative effect of accounting change, net of tax -- (0.01) -- -------------------------------------------------------- Net income $ 1.07 $ 0.77 $ 0.72 ========================================================
See notes to consolidated financial statements. HRH P30 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
Accumulated Other Common Retained Comprehensive Stock Earnings Income (Loss) - ---------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1999 $ 3,831,208 $ 41,879,167 $ -- Issuance of 2,424,532 shares of Common Stock 20,334,046 Purchase of 541,400 shares of Common Stock (6,216,542) Income tax benefit from exercise of stock options 300,000 Payment of dividends ($.3275 per share) (8,437,900) Net income 19,485,797 --------------------------------------------------- BALANCE AT DECEMBER 31, 1999 18,248,712 52,927,064 -- Issuance of 705,986 shares of Common Stock 6,741,497 Purchase of 263,006 shares of Common Stock (3,862,736) Income tax benefit from exercise of stock options 1,233,839 Payment of dividends ($.3375 per share) (8,868,577) Net income 21,802,167 --------------------------------------------------- BALANCE AT DECEMBER 31, 2000 22,361,312 65,860,654 -- Issuance of 1,759,632 shares of Common Stock 32,131,149 Purchase of 10,000 shares of Common Stock (211,080) Income tax benefit from exercise of stock options 1,261,104 Payment of dividends ($.3475 per share) (9,604,895) Unrealized loss on derivative contracts, net of deferred tax benefit of $955,000 (1,433,296) Other 87,876 Net income 32,348,515 --------------------------------------------------- BALANCE AT DECEMBER 31, 2001 $ 55,542,485 $ 88,604,274 $ (1,345,420) ===================================================
See notes to consolidated financial statements. HRH P31 STATEMENT OF CONSOLIDATED CASH FLOWS
Year Ended December 31 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 32,348,515 $ 21,802,167 $ 19,485,797 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 13,867,645 12,239,177 10,690,269 Depreciation and amortization 6,116,098 5,356,583 4,501,081 ----------------------------------------------- Net income plus amortization, depreciation and cumulative effect of accounting change, net of tax 52,332,258 39,722,927 34,677,147 Provision for losses on receivables 2,118,935 1,307,232 402,226 Provision for deferred income taxes 599,795 112,505 972,342 Gain on sale of assets (2,708,506) (1,843,686) (4,906,173) Income tax benefit from exercise of stock options 1,261,104 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 (20,121,512) (15,806,134) 11,372,878 (Increase) decrease in prepaid expenses (336,731) 3,712,165 (4,014,117) Increase (decrease) in premiums payable to insurance companies 15,483,045 16,552,601 (27,232,583) Increase in premium deposits and credits due customers 4,831,511 835,810 7,278,076 (Decrease) increase in accounts payable (1,264,622) (935,314) 2,958,551 Increase (decrease) in accrued expenses 5,998,257 1,458,384 (7,039,304) Other 3,945,790 1,470,897 2,802,707 ----------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 62,139,324 47,821,226 17,571,750 INVESTING ACTIVITIES Purchase of held-to-maturity investments (587,973) (92,233) (2,116,165) Proceeds from maturities and calls of held-to-maturity investments 1,127,992 1,011,755 3,867,344 Purchase of property and equipment (5,633,007) (7,513,583) (6,587,055) Purchase of insurance agencies, net of cash acquired (34,947,824) (21,832,643) (33,681,000) Proceeds from sale of assets 4,756,610 8,951,274 5,635,066 Other investing activities (143,577) (1,864,218) (2,519,849) ----------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (35,427,779) (21,339,648) (35,401,659) FINANCING ACTIVITIES Proceeds from long-term debt 37,067,296 3,000,000 106,000,000 Principal payments on long-term debt (34,435,662) (13,701,450) (73,976,681) Repurchase of Common Stock (211,080) (3,583,986) (6,216,542) Dividends (9,604,895) (8,868,577) (8,437,900) Other financing activities 3,172,107 3,216,497 3,402,796 ----------------------------------------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (4,012,234) (19,937,516) 20,771,673 ----------------------------------------------- INCREASE IN CASH AND CASH EQUIVALENTS 22,699,311 6,544,062 2,941,764 Cash and cash equivalents at beginning of year 28,880,784 22,336,722 19,394,958 ----------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 51,580,095 $ 28,880,784 $ 22,336,722 ===============================================
See notes to consolidated financial statements. HRH P32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 HILB, ROGAL AND HAMILTON COMPANY (THE COMPANY), A VIRGINIA CORPORATION, OPERATES AS A NETWORK OF WHOLLY-OWNED SUBSIDIARY INSURANCE AGENCIES LOCATED IN 23 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, in many cases, 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. The Company continues to review its practices with respect to premiums billed by insurance carriers and may make revisions in the future as changes in facts or availability of information occur. 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 in which the policy renews. This investment activity is part of our normal operations and accordingly investment income earned is reported in operating income. 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. HRH P33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 21.1 years and 20.4 years as of December 31, 2001 and 2000, respectively. The carrying value of the Company's intangible assets is periodically reviewed to determine 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 123), established accounting and disclosure requirements using a fair value based method of accounting for employee stock options. The pro forma disclosures of the effect of applying the fair value method to the Company's employee stock options required by Statement 123 have been included in Note I to the financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the balance sheet for cash and cash equivalents, receivables, premiums payable to insurance companies, accounts payable, 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 of comparable instruments, or if none are available, on third party pricing models or formulas using current assumptions and are disclosed in Notes C and E, respectively. HRH P34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DERIVATIVES: Effective January 1, 2001, the Company adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133) as amended by Statement No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities" (see Note B). Statement 133 requires the Company to recognize all derivatives as either assets or liabilities on the balance sheet at fair value. Gains and losses resulting from changes in fair value must be recognized currently in earnings unless specific hedge criteria are met. If a derivative is a hedge, depending upon the nature of the hedge, a change in its fair value is either offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in accumulated other comprehensive income (OCI) until the hedged item is recognized in earnings. Any difference between the fair value of the hedge and the item being hedged, known as the ineffective portion, is immediately recognized in earnings. The Company's use of derivative instruments is limited to interest rate swap agreements used to modify the interest characteristics for a portion of its outstanding debt. These interest rate swaps are designated as cash flow hedges and are structured so that there would be no ineffectiveness. The effective portion of the change in value of the interest rate swaps is reported as a component of the Company's OCI and reclassified into interest expense in the same period or periods during which the hedged transaction affects earnings. The remaining change in value of the interest rate swaps (i.e., the ineffective portion) in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in the Company's current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the Company's current earnings during the period of change. Derivative instruments are carried at fair value on the balance sheet in the applicable line item other assets or other long-term liabilities. Prior to the adoption of Statement 133, the Company used the accrual method to account for all interest rate swap agreements and all amounts which were due to or from counterparties were recorded as an adjustment to interest expense in the periods in which they were accrued. Termination of an interest rate swap agreement would result in the amount previously recorded in OCI being reclassified 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 debt obligation, any amounts in OCI relating to designated hedge transactions of the extinguished debt would be reclassified to earnings coincident with the extinguishment. 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 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (Statement 141), and No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Under Statement 142, goodwill will no longer be amortized but will be subject to annual impairment tests. Intangible assets with finite lives will continue to be amortized over their useful lives. HRH P35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company will apply Statement 142 on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. In accordance with Statement 142, the Company did not record amortization in 2001 for goodwill related to acquisitions consummated on or subsequent to July 1, 2001. Based on the Company's current analysis, if Statement 142 had been adopted as of January 1, 2001, after tax net income would have increased approximately $8.4 million. This impact includes a reduction of approximately $11.4 million in amortization expense offset by related income taxes. The Company will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill as of January 1, 2002 in the first six months of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle in the first quarter of 2002. The Company does not anticipate these tests will have a material impact on the earnings or financial position of the Company. STOCK SPLIT: On November 8, 2001, the Board of Directors of the Company approved a 2-for-1 Common Stock split effected in the form of a 100% share dividend. The distribution of the additional shares was made on December 31, 2001, to shareholders of record as of December 14, 2001. References in the consolidated financial statements to common shares, share prices and per share amounts have been restated to reflect the stock split for all periods presented. NOTE B CHANGES IN METHODS OF ACCOUNTING Effective January 1, 2001, the Company adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133). Statement 133 requires the Company to recognize all derivatives as either assets or liabilities on the balance sheet at fair value (see Note A). At adoption, the Company's use of derivative instruments was limited to interest rate swaps used to modify characteristics for a portion of its outstanding debt. These interest rate swaps were designated as cash flow hedges. At adoption, the interest rate swaps were recorded at fair value and resulted in a cumulative effect accounting change that had no impact on net income and an after-tax net decrease to OCI of $517,000. In accordance with Staff Accounting Bulletin 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 Company periodically reviews the adequacy of the allowance and adjusts it as necessary. Based on the analysis, the allowance as of December 31, 2001 and 2000 was $765,000 and $580,000, respectively. For the year ended December 31, 2001, the net increase in the cancellation reserve was comprised of $130,000 in new reserves related to acquisitions and $55,000 from higher revenue levels. HRH P36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2001 Cost Gains Losses Value --------------------------------------------------------------------------------------------------- Obligations of states and political subdivisions $2,677,000 $ 27,000 $-- $2,704,000 Certificates of deposit and other 2,158,000 -- -- 2,158,000 ------------------------------------------------- $4,835,000 $ 27,000 $-- $4,862,000 =================================================
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 ==================================================
The amortized cost and fair value of held-to-maturity investments at December 31, 2001, 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 $3,499,000 $3,526,000 Due after one year through five years 1,336,000 1,336,000 ----------------------- $4,835,000 $4,862,000 =======================
NOTE D PROPERTY AND EQUIPMENT Property and equipment consists of the following:
2001 2000 -------------------------------------------------------------------------- Furniture and equipment $38,931,000 $34,687,000 Buildings and land 1,549,000 1,097,000 Leasehold improvements 5,291,000 4,368,000 ------------------------- 45,771,000 40,152,000 Less accumulated depreciation and amortization 26,286,000 23,657,000 ------------------------- $19,485,000 $16,495,000 =========================
HRH P37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E LONG-TERM DEBT
2001 2000 ----------------------------------------------------------------------------------------------------------------- Notes payable to banks, interest currently 3.19% to 3.38% $ 78,319,000 $ 70,500,000 5.25% Convertible Subordinated Debentures due 2014, with a conversion price of $11.375, callable 2009 28,905,000 28,745,000 Installment notes payable primarily incurred in acquisitions of insurance agencies, 2.45% to 10.0%, due in various installments to 2005 14,215,000 9,425,000 --------------------------- 121,439,000 108,670,000 Less current portion 6,996,000 5,556,000 --------------------------- $114,443,000 $103,114,000 ===========================
Maturities of long-term debt for the four years ending after December 31, 2002 are $4,449,000 in 2003, $80,016,000 in 2004, $320,000 in 2005 and $29,658,000 beyond 2006. At December 31, 2001, the Company had a term loan facility included in notes payable to banks with $16,688,000 due within one year classified as long-term debt in accordance with the Company's intent and ability to refinance this obligation on a long-term basis under its revolving credit facility. Interest paid was $8,902,000, $9,195,000 and $6,674,000 in 2001, 2000 and 1999, respectively. On April 6, 2001, the Company signed the Amended and Restated Credit Agreement with seven banks that allows for borrowings of up to $160,000,000 consisting of a $100,000,000 revolving credit facility and a $60,000,000 term loan facility, both of which bear interest at variable rates. The term portion of the facility is payable quarterly beginning June 30, 2001 with the final payment due June 30, 2004. The revolving credit facility is due on June 30, 2004. At December 31, 2001, $78,319,000 was borrowed under this agreement. This credit agreement contains, among other provisions, requirements for maintaining certain financial ratios and specific limits or restrictions on acquisitions, indebtedness, investments, payment of dividends and repurchase of Common Stock. On June 17, 1999 the Company entered into two interest rate swap agreements with a combined notional amount of $45,000,000. The combined notional amount of these interest rate swaps is reduced quarterly by $937,500 beginning September 30, 2000 through their maturity on June 30, 2004. The Company designated these interest rate swaps as cash flow hedges under Statement 133. The Company entered into these interest rate swap agreements to manage interest cost and cash flows associated with variable interest rates, primarily short-term changes in LIBOR; changes in cash flows of the interest rate swaps offset changes in the interest payments on the covered portion of the Company's credit facility. The notional amounts of the interest rate swap 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's exposure to credit loss on its interest rate swap agreements in the event of non-performance by the counterparties is believed to be remote due to the Company's requirement that the counterparties have a strong credit rating. The Company is exposed to market risk from changes in interest rates. 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 1.94% for each agreement. In connection with these interest rate swap agreements, the Company recorded an after-tax charge of $917,000 in other comprehensive income for 2001. There was no impact on net income due to ineffectiveness. The fair market value of the interest rate swaps at December 31, 2001 resulted in a liability of $2,389,000 which is included in other long-term liabilities. HRH P38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2001, 2000 and 1999 was approximately $3,222,000, $2,413,000 and $2,075,000, 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 $256,000, $261,000 and $241,000 in 2001, 2000 and 1999, 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 sharing contributions to such Plan. The Plan also provides for the crediting of interest to participant accounts. Expense recognized by the Company in 2001, 2000 and 1999 related to these Plan provisions amounted to $186,000, $140,000 and $108,000, respectively. At December 31, 2001 and 2000, the Company's accrued liability for benefits under the Plan, including benefits earned prior to January 1, 1998 was $2,118,000 and $1,952,000, respectively, and is included in other long-term liabilities. HRH P39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G INCOME TAXES The components of income taxes shown in the statement of consolidated income are as follows: 2001 2000 1999 ---------------------------------------------------------- Current Federal $19,858,000 $14,457,000 $10,409,000 State 3,923,000 3,040,000 2,201,000 --------------------------------------- 23,781,000 17,497,000 12,610,000 Deferred Federal 509,000 96,000 825,000 State 91,000 17,000 148,000 --------------------------------------- 600,000 113,000 973,000 --------------------------------------- $24,381,000 $17,610,000 $13,583,000 ======================================= 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. The effective income tax rate varied from the statutory federal income tax rate as follows: 2001 2000 1999 ----------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Tax exempt investment income (0.4) (0.4) (0.4) State income taxes, net of federal tax benefit 4.6 5.0 4.6 Non-deductible goodwill amortization 2.4 2.4 2.2 Basis difference on sale of insurance accounts 0.1 1.2 (0.4) Other 1.3 1.1 0.1 ----------------------- Effective income tax rate 43.0% 44.3% 41.1% ======================= Income taxes paid were $22,120,000, $11,968,000 and $15,346,000 in 2001, 2000 and 1999, respectively. Significant components of the Company's deferred tax liabilities and assets on the balance sheet are as follows:
2001 2000 ----------------------------------------------------------------------------------- Deferred tax liabilities: Intangible assets $ 6,899,000 $ 5,999,000 Other 845,000 625,000 ------------------------- Total deferred tax liabilities 7,744,000 6,624,000 Deferred tax assets: Deferred compensation 3,374,000 1,925,000 Bad debts 1,333,000 742,000 Accrued transaction costs 383,000 901,000 Deferred rent and income 1,409,000 1,443,000 Unrealized loss on derivative contracts 955,000 -- Other 1,269,000 1,053,000 ------------------------- Total deferred tax assets 8,723,000 6,064,000 ------------------------- Net deferred tax assets (liabilities) $ 979,000 $ (560,000) =========================
HRH P40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2011 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: 2002 $15,761,000 2003 14,106,000 2004 11,596,000 2005 9,457,000 2006 6,747,000 Thereafter 10,457,000 ---------- $68,124,000 =========== Rental expense for all operating leases amounted to $14,198,000 in 2001, $11,661,000 in 2000 and $10,225,000 in 1999. Included in rental expense for 2001, 2000 and 1999 is approximately $1,278,000, $436,000 and $429,000, respectively, which was paid to employees or related parties. 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 2,893,000 and 2,800,000 shares of Common Stock as of December 31, 2001 and 2000, 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, 1999 2,412,918 $7.77 Granted 182,200 10.62 Exercised 361,334 7.36 Expired 73,284 7.48 --------- Outstanding at December 31, 1999 2,160,500 8.09 Granted 397,000 14.11 Exercised 344,588 7.53 Expired 36,910 9.53 --------- Outstanding at December 31, 2000 2,176,002 9.25 Granted 587,000 19.58 Exercised 233,906 7.90 Expired 34,790 11.21 --------- Outstanding at December 31, 2001 2,494,306 11.79 ========= Exercisable at December 31, 2001 1,653,956 9.44 Exercisable at December 31, 2000 1,380,372 8.45 Exercisable at December 31, 1999 1,270,960 7.81 HRH P41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarized information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable -------------------------------------------- ----------------------------------- Weighted Average Remaining Ranges of Number Contractual Weighted Average Number Weighted Average Exercise Prices Outstanding Life Exercise Prices Exercisable Exercise Prices ----------------------------------------------------------------------------------------------------- $ 5.76 - 8.63 937,606 2.4 $ 7.58 937,606 $ 7.58 8.63 - 11.51 595,950 4.4 9.32 458,850 9.34 11.51 - 14.39 378,750 5.9 14.12 157,500 14.24 17.27 - 20.14 500,000 6.8 18.98 100,000 19.88 20.14 - 23.02 72,000 6.6 22.53 -- -- 25.90 - 28.78 10,000 6.9 28.78 -- -- ---------------------------------------------------------- -------------------------------- 2,494,306 4.4 $11.79 1,653,956 $ 9.44 ====================================== ================================
There were 1,965,000 and 2,570,000 shares available for future grant under these plans as of December 31, 2001 and 2000, respectively. No compensation expense related to these options is recognized in operations for 2001, 2000 or 1999. During 2001, 2000 and 1999, the Company awarded 64,750, 178,640 and 11,000 shares, respectively, of restricted stock under the 2000 and 1989 Stock Plans with a weighted average fair value at the grant date of $16.16, $14.16 and $11.32 per share, respectively. These restricted shares vest ratably over a four year period beginning in the second year of continued employment. During 2001 and 2000, 1,740 and 4,800 shares, respectively, of restricted stock expired. Compensation expense related to these awards was $1,176,000, $725,000 and $17,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The following is provided solely in connection with disclosure requirements of Statement 123, "Accounting for Stock-Based Compensation." If the Company had elected to recognize compensation cost related to its stock options in 2001, 2000 and 1999 in accordance with the provisions of Statement 123, pro forma net income and earnings per share would have been $31.1 million, $21.3 million and $18.9 million; and $1.13 ($1.03 assuming dilution), $0.80 ($0.74 assuming dilution) and $0.74 ($0.70 assuming dilution), respectively. The fair value of options was estimated at the grant date using a Black-Scholes option-pricing model with the following weighted average assumptions for 2001, 2000 and 1999, respectively: risk free rates of 5.01%, 6.70% and 5.97%; dividend yields of 1.76%, 2.35% and 3.11%; volatility factors of .209, .202 and .206; and an expected life of 7 years. HRH P42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J NET INCOME PER SHARE The following table sets forth the computation of basic and diluted net income per share:
2001 2000 1999 ---------------------------------------------------------------------------------------------------------------- Numerator for basic net income per share - net income $32,348,515 $21,802,167 $19,485,797 Effect of dilutive securities: 5.25% convertible debenture 1,085,766 1,079,959 710,995 --------------------------------------- Numerator for dilutive net income per share - net income available after assumed conversions $33,434,281 $22,882,126 $20,196,792 ======================================= Denominator Weighted average shares 27,339,162 26,124,126 25,566,598 Effect of guaranteed future shares to be issued in connection with agency acquisitions 72,310 99,602 184,424 --------------------------------------- Denominator for basic net income per share 27,411,472 26,223,728 25,751,022 Effect of dilutive securities: Employee stock options 798,106 694,414 363,404 Employee non-vested stock 108,208 38,276 564 Contingent stock - acquisitions 29,177 13,928 23,998 5.25% convertible debenture 2,813,186 2,813,186 1,875,458 --------------------------------------- Dilutive potential common shares 3,748,677 3,559,804 2,263,424 --------------------------------------- Denominator for diluted net income per share - adjusted weighted average shares and assumed conversions 31,160,149 29,783,532 28,014,446 ======================================= Net Income Per Share: Basic $ 1.18 $ 0.83 $ 0.76 ======================================= Assuming Dilution $ 1.07 $ 0.77 $ 0.72 =======================================
See Note A regarding the Company's stock split. NOTE K ACQUISITIONS During 2001, the Company acquired certain assets and liabilities of 10 insurance agencies for $84,120,000 ($48,035,000 in cash, $8,578,000 in guaranteed future payments and 1,379,820 shares of Common Stock) in purchase accounting transactions. Assets acquired include intangible assets of $82,701,000. The combined purchase price may be increased by approximately $7,710,000 in 2002, $5,810,000 in 2003 and $3,560,000 in 2004 based upon net profits realized. 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 170,304 shares of Common Stock) in purchase accounting transactions. Assets acquired include intangible assets of $25,452,000. The combined purchase price was increased by approximately $4,446,000 in 2001, and may be increased by approximately $4,530,000 in 2002 and $1,555,000 in 2003 based upon net profits realized. HRH P43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $11.375 per share, callable in 2009, and 2,000,000 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 method of accounting. 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 $1,900,000 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, 2001, the Company had fully settled all of the employee severance, lease termination and other obligations. 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, 2001, the Company had paid approximately $2,563,000 of these costs with the remaining balance of $137,000 relating to a lease obligation to be paid through December 2003 when the lease expires. 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. 1999 --------------------------------------------------- Revenues $252,000,000 Net Income 20,783,000 Net Income Per Share: Basic $ 0.79 Assuming Dilution $ 0.73 Weighted Average Shares Outstanding: Basic 26,418,000 Assuming Dilution 29,618,000 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 $998,000 in 2001 and $656,000 in 2000. The above purchase acquisitions have been included in the Company's consolidated financial statements from their respective acquisition dates. HRH P44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE L SALE OF ASSETS During 2001, 2000 and 1999, the Company sold certain insurance accounts and other assets resulting in gains of approximately $2,709,000, $1,844,000 and $4,906,000, respectively. Taxes related to these gains were $1,165,000, $1,278,000 and $1,599,000 in 2001, 2000 and 1999, 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 $247,000 and $1,122,000 of funds held in escrow at December 31, 2001 and 2000, 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 $19,590,000 and $13,883,000 at December 31, 2001 and 2000, 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. HRH P45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N QUARTERLY RESULTS OF OPERATIONS (unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000:
Three Months Ended(1) ------------------------------------------------- (in thousands, except per share amounts) March 31 June 30 September 30 December 31 ------------------------------------------------------------------------------------------------------------------- 2001 Total Revenues $77,912 $77,790 $87,609 $86,957 Net income 7,781 7,787 9,677 7,103 Net Income Per Share:(3) Basic 0.29 0.29 0.35 0.25 Assuming Dilution 0.27 0.26 0.31 0.23 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:(3) Income before cumulative effect of accounting change $ 0.26 $ 0.19 $ 0.24 $ 0.16 Cumulative effect of accounting change, net of tax (0.02)(2) -- -- -- ------------------------------------------------- Net income $0.24 $ 0.19 $ 0.24 $ 0.16 ================================================= Net Income Per Share - Assuming Dilution:(3) Income before cumulative effect of accounting change $ 0.24 $ 0.18 $ 0.22 $ 0.15 Cumulative effect of accounting change, net of tax (0.01)(2) -- -- -- ------------------------------------------------- Net income $ 0.23 $ 0.18 $ 0.22 $ 0.15 =================================================
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. 3 See Note A for discussion on stock split. HRH P46 REPORT OF INDEPENDENT AUDITORS 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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note B to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative instruments and hedging activities and, in 2000 changed its method of accounting for policy cancellations. /s/ Ernst & Young LLP Richmond, Virginia February 13, 2002 HRH P47
BOARD OF DIRECTORS OFFICERS ANDREW L. ROGAL(1) ANTHONY F. MARKEL(1,2,3,6) ANDREW L. ROGAL Chairman and Chief Executive Officer President and Chief Operating Officer Chairman and Chief Executive Officer Hilb, Rogal and Hamilton Company Markel Corporation Glen Allen, Virginia Glen Allen, Virginia MARTIN L. VAUGHAN, III President and Chief Operating Officer ROBERT H. HILB(1,2) THOMAS H. O'BRIEN(2,4) Chairman Emeritus Director TIMOTHY J. KORMAN Hilb, Rogal and Hamilton Company The PNC Financial Services Group, Inc. Executive Vice President, Finance and Glen Allen, Virginia Pittsburgh, Pennsylvania Administration CAROLYN JONES MARTIN L. VAUGHAN, III(1,6) DAVID W. SEARFOSS(3,4) Senior Vice President, Chief Financial Officer President and Chief Operating Officer Executive Vice President and Treasurer Hilb, Rogal and Hamilton Company and Chief Financial Officer Glen Allen, Virginia The Phoenix Companies, Inc. JOHN P. MCGRATH Hartford, Connecticut Senior Vice President, Business TIMOTHY J. KORMAN(5) and Product Development Executive Vice President JULIOUS P. SMITH, JR.(4,6) Finance and Administration Chairman and Chief Executive Officer WALTER L. SMITH Hilb, Rogal and Hamilton Company Williams Mullen Senior Vice President, General Counsel Glen Allen, Virginia Richmond, Virginia and Secretary WILLIAM L. CHAUFTY THEODORE L. CHANDLER, JR.(2,3,4,5) ROBERT S. UKROP(5,6) Vice President; Director, Central Region Senior Executive Vice President President and Chief Executive Officer LandAmerica Financial Group, Inc. Ukrop's Super Markets, Inc. ROBERT B. LOCKHART Richmond, Virginia Richmond, Virginia Vice President; Director, Northeast Region NORWOOD H. DAVIS, JR.(1,4) BENJAMIN A. TYLER Chairman Emeritus Vice President; Director, Southeast Region Trigon Healthcare, Inc. (1) Executive Committee Member Richmond, Virginia (2) Compensation Committee Member MICHAEL A. JANES (3) Audit Committee Member Vice President; Director, West Region J.S.M. FRENCH(3,5) (4) Corporate Governance Committee Member President (5) Corporate Affairs Committee Member STEVEN C. DEAL Dunn Investment Company (6) Product Development Committee Member Vice President; Director, Mid-Atlantic Region Birmingham, Alabama RICHARD F. GALARDINI ROBERT W. FIONDELLA(1,2,5,6) Vice President Chairman and Chief Executive Officer The Phoenix Companies, Inc. KARL E. MANKE Hartford, Connecticut 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 WILLIAM C. WIDHELM Vice President, Internal Audit A. BRENT KING Vice President, Associate General Counsel ELIZABETH J. COUGOT Assistant Vice President, Corporate Communications VALERIE C. ELWOOD Assistant Vice President DIANE D. SCHNUPP Assistant Vice President, Chief Technology Officer ERIN K. SCOTT Assistant Vice President, Corporate Services
HRH P48 GENERAL INFORMATION FORM 10-K Any shareholder wishing to obtain a copy for the Company's Form 10-K for the year ended December 31, 2001 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 7, 2002, 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.melloninvestor.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 Richmond, Virginia INDEPENDENT AUDITORS Ernst & Young LLP Richmond, Virginia CORPORATE HEADQUARTERS 4951 Lake Brook Drive Suite 500 Glen Allen, Virginia 23060 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, 2001, there were 594 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 - ------------------------------------------------- 2001 March 31 $20.44 $16.88 $.0850 June 30 22.08 17.20 .0875 September 30 24.08 20.55 .0875 December 31 31.38 22.45 .0875 2000 March 31 $14.25 $12.91 $.0825 June 30 17.44 13.60 .0850 September 30 20.97 17.19 .0850 December 31 20.63 18.41 .0850 EX-21 11 j9350501ex21.txt SUBSIDIARIES OF THE COMPANY Exhibit 21 Subsidiaries of Hilb, Rogal and Hamilton Company
STATE/PROVINCE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ----------------- Aris/B&W Insurance Services, Inc. (4 locations) California Berwanger Overmyer Associates Ohio Dulaney, Johnston & Priest, Inc. (4 locations) Kansas HRH Financial Institutions Group, Inc. Pennsylvania HRH Insurance Services of the Coachella Valley, Inc. (2 locations) California HRH Insurance Services of Central California, Inc. (3 locations) California HRH Consulting Group, LLC New York HRH of Northern California Insurance Services, Inc. (6 locations) California HRH Securities, Inc. New York HRH Security Services, Inc. (4 locations) Pennsylvania Hilb, Rogal and Hamilton Company of Alabama, Inc. (4 locations) Alabama Hilb, Rogal and Hamilton Company of Arizona (3 locations) Arizona Hilb, Rogal and Hamilton Company of Atlanta, Inc. Georgia Hilb, Rogal and Hamilton Company of Baltimore Maryland Hilb, Rogal and Hamilton Company of Connecticut, LLC (4 locations) Connecticut Hilb, Rogal and Hamilton Company of Denver Colorado Hilb, Rogal and Hamilton Company of the District of Columbia (2 Delaware locations) Hilb, Rogal and Hamilton Company of Gainesville, Florida, Inc. Florida Hilb, Rogal and Hamilton Company of Gainesville, Georgia Georgia Hilb, Rogal and Hamilton Company of Grand Rapids Michigan Hilb, Rogal and Hamilton Company of Illinois (2 locations) Illinois
Exhibit 21 (Continued) Subsidiaries of Hilb, Rogal and Hamilton Company
STATE/PROVINCE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ----------------- Hilb, Rogal and Hamilton Insurance Agency of Massachusetts, LLC (2 Virginia locations) Hilb, Rogal and Hamilton Company of New York, LLC New York Hilb, Rogal and Hamilton Company of Northern New Jersey, LLC New Jersey Hilb, Rogal and Hamilton Company of Oklahoma Oklahoma Hilb, Rogal and Hamilton Company of Oregon Oregon Hilb, Rogal and Hamilton Company of Orlando Florida Hilb, Rogal and Hamilton Company of Philadelphia, LLC Pennsylvania Hilb, Rogal and Hamilton Company of Pittsburgh, LLC Pennsylvania Hilb, Rogal and Hamilton Company of Port Huron Michigan Hilb, Rogal and Hamilton Company of Sarasota Florida Hilb, Rogal and Hamilton Company of Savannah, Inc. Georgia Hilb, Rogal and Hamilton Services Company Virginia Hilb, Rogal and Hamilton Company of South Florida Florida Hilb, Rogal and Hamilton Company of Southern New Jersey New Jersey Hilb, Rogal and Hamilton Company of Tampa Bay, Inc. Florida Hilb, Rogal and Hamilton Company of Texas (11 locations) Texas Hilb, Rogal and Hamilton Company of Upstate New York, LLC (2 Delaware locations) Hilb, Rogal and Hamilton Company of Virginia (2 locations) Virginia Hilb, Rogal and Hamilton Insurance Services of San Diego, Inc. California Hilb, Rogal and Hamilton Realty Company Delaware Hilb, Rogal and Hamilton Investment Company Delaware Hunt Insurance Group, Inc. Florida
Exhibit 21 (Continued) Subsidiaries of Hilb, Rogal and Hamilton Company
STATE/PROVINCE OF NAME OF SUBSIDIARY INCORPORATION ------------------ ----------------- ISU North American Insurance Agency (2 locations) California NIB/Lees Preston Ltd. United Kingdom Premium Funding Associates, Inc. Connecticut Professional Practice Insurance Brokers, Inc. (3 locations) California The Dunlap Corporation (4 locations) Maine The Managing Agency Group, Inc. Connecticut Thomas M. Murphy & Associates, Inc. Connecticut
Each of the above subsidiaries is 100% owned by the registrant except for NIB/Lees Preston Ltd. which is owned 70% by the registrant. EX-23 12 j9350501ex23.txt CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS -------------------------------------------------- We consent to the incorporation by reference in the Registration Statements (Form S-4 No. 33-44271, Form S-8 No. 33-59866, Form S-8 No. 333-44735, Form S-8 No. 333-53417, Form S-8 No. 333-93633, Form S-8 No. 333-30650, Form S-8 No. 333-37142, Form S-4 No. 333-50018, Form S-8 No. 333-74344, Form S-8 No. 333-74340 and Form S-3 No. 333-74564) of Hilb, Rogal and Hamilton Company and in the related Prospectuses of our report dated February 13, 2002, with respect to the consolidated financial statements of Hilb, Rogal and Hamilton Company incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2001 and the related financial statement schedule included therein, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Richmond, Virginia March 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----