At December 31, 2002, the Company owned a building in Auburn, Maine.
(1) See Note L 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, 1999 and 1998, the Company consummated three and six purchase acquisitions, respectively, including the acquisition of American Phoenix Corporation in May 1999.
(3) Effective January 1, 2002, the Company changed its method of accounting for commissions on premiums billed and collected directly by insurance carriers on its middle-market property and casualty business. See Note B of Notes to Consolidated Financial Statements for information.
(4) Adoption of SEC Staff Accounting Bulletin 101, effective January 1, 2000, required the Company to establish a reserve for policy cancellations.
For 2002, net income was $65.1 million, or $2.01 per share, compared to $32.3 million, or $1.07 per share, last year. Excluding the effects of non-operating gains and the 2002 cumulative effect of an accounting change relating to revenue recognition and adjusting 2001 to eliminate goodwill amortization, net income was $61.0 million, or $1.89 per share, up from $39.2 million, or $1.29 per share, a year ago, an increase of 55.8%. Non-operating gains, net of tax, were $0.1 million and $1.6 million for 2002 and 2001, respectively. The 2001 adjustment relating to goodwill amortization was $8.4 million, net of tax.
Commissions and fees for 2002 were $446.7 million, an increase of 38.3% from commissions and fees of $323.1 million during the prior year. Approximately $97.2 million of commissions were derived from new insurance agencies and accounts purchased in 2002 and 2001. This increase was offset by decreases of approximately $2.1 million from the sale of certain offices and accounts in 2002 and 2001. Commissions and fees, excluding the effect of acquisitions and dispositions, increased 8.8%. This increase principally reflects new business production and a continued strong rate environment slightly offset by continued culling pursuant to the Company’s focus on writing and renewing profitable business.
Total operating expenses for 2002 were $349.5 million, an increase of $75.9 million, or 27.8% from 2001. For 2001, total operating expenses were $273.5 million, an increase of $51.2 million, or 23.0% from 2000.
Other operating expenses and depreciation expense for 2001 were $62.1 million and $6.1 million, respectively, or 23.8% and 14.2% 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.
Interest expense increased by $1.6 million, or 17.7%, in 2002, and by $0.9 million, or 10.8%, in 2001. These increases were due to additional bank borrowings related to acquisitions, offset somewhat by decreased interest rates. Our primary bank borrowing in 2002 related to the Hobbs acquisition.
The effective tax rate for the Company was 40.8%, 43.0% and 44.3% in 2002, 2001 and 2000, respectively. An analysis of the effective income tax rate is presented in “Note G -- Income Taxes” of Notes to Consolidated Financial Statements.
On July 1, 2002, the Company signed the Second Amended and Restated Credit Agreement (Amended Credit Agreement). The new agreement provides a $190.0 million term loan facility ($30.0 million of which was retained from the previous credit agreement) under which borrowings are due in various amounts through 2007, including $149.6 million due in 2007. The Amended Credit Agreement also continues the availability to the Company of a revolving credit facility in the aggregate principal amount of $100.0 million. The proceeds were used in part to fund the cash portion of the Hobbs acquisition. At December 31, 2002, there were term loans of $173.4 million outstanding under the Amended Credit Agreement with $100.0 million available under the revolving portion of the facility for future borrowings.
The Company had a current ratio (current assets to current liabilities) of 1.10 to 1.00 as of December 31, 2002. Shareholders’ equity of $310.6 million at December 31, 2002, increased from $142.8 million at December 31, 2001, and the debt to equity ratio of 0.57 to 1.00 at December 31, 2002 decreased
from the prior year-end ratio of 0.80 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.
On July 1, 2002, the Company acquired all of the issued and outstanding membership interest units of Hobbs other than those owned by HIRAC, and all of the issued and outstanding capital stock of HIRAC, pursuant to a Purchase Agreement dated May 10, 2002, by and among the Company, Hobbs, the members of Hobbs (other than HIRAC) and the shareholders of HIRAC. Hobbs, which is based in Atlanta, Georgia, is one of the nation’s premier insurance brokers serving top-tier clients and provides property and casualty insurance brokerage, risk management, and executive and employee benefits services. This acquisition allows the Company to expand its capabilities in the top-tier market. In addition, Hobbs will provide the Company with additional market presence and expertise in the employee benefits services area and an increased presence in executive benefits. Hobb Hobbs will also bring increased depth to the geographic reach of the Company's existing national platform.
The amount the Company paid in connection with the acquisition consisted of approximately $116.5 million in cash, which included acquisition costs of $2.3 million and the Company’s assumption and retirement of certain debt of Hobbs, and the issuance to the members of Hobbs (other than HIRAC) and the shareholders of HIRAC of an aggregate of 719,729 shares of the Company’s Common Stock valued at $31.6 million. In addition, the Company has agreed to pay up to approximately $101.9 million in cash and shares of Common Stock contingent on Hobbs achieving certain financial performance goals within the next two years. The Company has further agreed to assume and satisfy certain existing earn-out and deferred compensation obligations of Hobbs from Hobbs’ prior acquisitions estimated to approximate a net present value of $30 million. The contingent payments and assumed existing earn-outs will be recorded when their respective contingencies are resolved and consideration is paid.
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.
Effective January 1, 2002, the Company changed its method of accounting for commissions on premiums billed and collected directly by insurance carriers on its middle-market property and casualty business. Prior to 2002, this revenue was recognized when received. Beginning January 1, 2002, this revenue is recorded on the later of the billing date or the effective date, consistent with the revenue recognition policy for agency billed business. Commissions on premiums billed and collected directly by insurance carriers on non-middle-market property and casualty and employee benefits business are recorded as revenue when received.
ma amounts have been presented to reflect the effect of retroactive application of the change as it is not practical for the Company to compute prior period pro forma amounts due to the lack of prior period data.
When used in the Company’s 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.