Filed Pursuant to Rule 424(b)(5)
Registration No. 333-75158
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 21, 2001)
5,000,000 SHARES
(BROWN & BROWN LOGO)
COMMON STOCK
Brown & Brown, Inc. is selling 5,000,000 shares of its common stock in this
offering. Our common stock is traded on the New York Stock Exchange under the
symbol "BRO". On March 6, 2002, the last sale price of our common stock, as
reported on the New York Stock Exchange, was $32.25 per share.
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PER SHARE TOTAL
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Public offering price $31.500 $157,500,000
Underwriting discounts and commissions $ 1.575 $ 7,875,000
Proceeds to Brown & Brown, Inc., before expenses $29.925 $149,625,000
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We have granted the underwriters the right to purchase up to an additional
750,000 shares of common stock to cover over-allotments.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE READ "RISK FACTORS" ON PAGE
S-7 OF THIS PROSPECTUS SUPPLEMENT AND BEGINNING ON PAGE 3 OF THE ACCOMPANYING
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
JPMORGAN
SUNTRUST ROBINSON HUMPHREY
LEGG MASON WOOD WALKER
INCORPORATED
SANDLER O'NEILL & PARTNERS, L.P.
March 6, 2002
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Prospectus supplement summary............................... S-1
The offering................................................ S-4
Summary consolidated financial data......................... S-5
Risk factors................................................ S-7
Use of proceeds............................................. S-7
Price range of common stock................................. S-8
Dividend policy............................................. S-8
Capitalization.............................................. S-9
Management's discussion and analysis of financial condition
and results of operations................................. S-10
Business.................................................... S-19
Management.................................................. S-28
Underwriting................................................ S-31
Legal matters............................................... S-33
Incorporation by reference.................................. S-33
Index to the financial statements of Brown & Brown.......... F-1
PROSPECTUS
PAGE
About this prospectus....................................... 1
About Brown & Brown......................................... 1
Disclosure regarding forward-looking statements............. 2
Risk factors................................................ 3
Use of proceeds............................................. 9
Ratio of earnings to fixed charges.......................... 9
The securities.............................................. 10
Description of debt securities.............................. 10
Description of capital stock................................ 20
Description of warrants..................................... 23
Plan of distribution........................................ 25
Legal matters............................................... 26
Experts..................................................... 26
Where you can find more information......................... 26
Incorporation by reference.................................. 27
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
This prospectus supplement relates to the offer and sale by us of 5,000,000
shares of our common stock pursuant to the accompanying prospectus. You should
rely only on the information contained or incorporated by reference in this
prospectus supplement and the accompanying prospectus. We have not authorized
anyone to provide you with information different from that contained in this
prospectus supplement and the accompanying prospectus. The information contained
in this prospectus supplement and the accompanying prospectus is accurate only
as of the date of this prospectus supplement and the date of the accompanying
prospectus, regardless of the time of delivery of this prospectus supplement and
the accompanying prospectus or any sales of the securities. We are offering to
sell and seeking offers to buy shares of common stock only in jurisdictions
where offers and sales are permitted.
PROSPECTUS SUPPLEMENT SUMMARY
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. To understand this
offering fully, you should carefully read this entire prospectus supplement and
the accompanying prospectus and the documents incorporated by reference.
ABOUT BROWN & BROWN
OUR BUSINESS
We are the largest insurance agency and brokerage headquartered in the
southeastern United States and the eighth largest in the country, based on 2000
total revenues. We market and sell to our clients insurance products and
services, primarily in the property and casualty area. As an agent and broker,
we do not assume underwriting risks. Instead, we provide our clients with
quality insurance contracts, as well as other targeted, customized risk
management products. We are compensated for our services primarily by
commissions paid by insurance companies and fees for administrative, benefit
consulting and managed healthcare services. In 2001, we generated commission and
fee revenues of $359.7 million.
Our business is divided into four segments:
- The Retail Division, which provides a broad range of insurance products and
services to commercial, governmental, professional and individual clients.
- The National Programs Division, which is comprised of two units: Professional
Programs, which provides professional liability and related package products for
certain professionals delivered through nationwide networks of independent
agents; and Special Programs, which markets targeted products and services
designated for specific industries, trade groups and market niches.
- The Services Division, which provides insurance-related services, including
third-party administration, consulting for the workers' compensation and
employee benefit self-insurance markets and managed healthcare services.
- The Brokerage Division, which markets and sells excess and surplus commercial
insurance and reinsurance, primarily through independent agents and brokers.
Our primary objective is to continue to increase long-term shareholder value by
generating consistent annual net income per share growth. We have achieved this
objective in the past and intend to do so in the future by internally growing
our existing operations, selectively acquiring independent agencies in new and
existing geographic markets, developing new proprietary products and services
and inexorably recruiting high-quality people. We believe that our long-
standing decentralized operating structure has fostered a culture of meritocracy
which is vital to our future growth and profitability. In addition to our
culture, we believe that the following elements are critical to our success:
- Quality Personnel. We believe our most important competitive factor is our
ability to recruit, train and retain high-quality, entrepreneurial,
achievement-oriented people who respond to challenges. We provide incentives and
educational opportunities for our employees at virtually every level of our
organization. We believe that key employees who excel should be able to
participate in the long-term value that we create for our shareholders. Our top
producers participate in a stock-based compensation program that ties the
vesting of common stock grants to
S-1
increases in the price of our common stock and to the producers' extended tenure
at Brown & Brown.
- Decentralized Operating Structure. Our four divisions are divided into profit
centers based upon office location or specific line of business or service. Each
profit center has a manager who is accountable for that profit center's results.
We believe that our operating structure allows management to respond rapidly to
new opportunities, generate operating efficiencies, improve customer service and
attract and retain high-quality personnel. We also believe that a decentralized
operating structure allows us to measure and compare the performance of our
profit centers and internally distribute the results thereof so that our
personnel are motivated to consistently increase earnings.
- Focus on Middle Market Clients. Larger insurance brokerages such as Marsh &
McLennan Companies, Inc. and Aon Corp. have traditionally focused on Fortune
1000 companies, while we have historically targeted middle market commercial,
employee benefits and personal lines clients. We define middle market clients as
those that generate annual commissions and fees ranging from $2,500 to $250,000.
While we also have a number of Fortune 1000 companies among our clients, we
believe that the fragmentation and large number of business prospects in the
middle market offer the most profitable margins and growth opportunities for us.
As a result, we have created an operating structure that we believe allows us to
serve the middle market better than our competitors.
- Growth Through Selected Acquisitions. We have completed a total of 86
acquisitions since 1993, and in 2001, we entered 16 new markets and expanded
operations in seven of our existing markets. We believe that the fragmentation
of the insurance agency and brokerage industry presents a large number of
potential acquisition candidates. We believe that our ability to identify,
effect and integrate selected acquisitions has contributed significantly to our
expansion and profitability.
- Experienced and Motivated Management. Our Chairman, President and Chief
Executive Officer, J. Hyatt Brown, has led our business since 1961 and is our
largest shareholder. He and other members of our senior management team, such as
our Executive Vice President, Jim W. Henderson, our five Regional Executive Vice
Presidents and our Chief Financial Officer, Cory T. Walker, had extensive
experience managing profit centers for our company prior to assuming their
current roles. All of our managers are motivated by a compensation structure
that is designed to retain and reward those who continue to increase earnings
for our company. Our employees own approximately 34% of our outstanding common
stock.
The preceding key elements have resulted in a record of historical growth and
profitability. We have increased revenues from $95.6 million in 1993 (as
originally stated, without giving effect to any subsequent acquisitions
accounted for under the pooling-of-interests method of accounting) to $365.0
million in 2001, a compound annual growth rate of 18.2%. In the same period, we
increased net income from $8.0 million (as originally stated, without giving
effect to any subsequent acquisitions accounted for under the
pooling-of-interests method of accounting) to $53.9 million in 2001, a compound
annual growth rate of 26.9%. We have also increased net income per share 15.0%
or more for nine consecutive years, excluding the effect of a one-time
investment gain of $1.3 million in 1994 and favorable adjustments to our income
tax reserves of $0.7 million in 1994 and $0.5 million in 1995. For 2001, our
EBITDA margin, defined as income before income taxes and minority interest plus
interest, depreciation, amortization and non-cash stock grant compensation as a
percentage of total revenues, was 33.0%. We believe our EBITDA margin exceeded
the EBITDA margins of all publicly traded insurance agencies and brokerages in
the same period.
S-2
In general, there has been a gradual increase in property and casualty insurance
rates since 1999. In light of the events of September 11, 2001, we believe that
this trend will continue through at least 2002. Since we derive a large portion
of our revenues from commissions on the sale of property and casualty insurance
products, we believe that our company is in a position to benefit from any
further increase in property and casualty insurance rates.
As of December 31, 2001, our activities were conducted in 140 locations in 28
states:
Florida.......................... 45
New York......................... 20
Virginia......................... 8
Louisiana........................ 7
Minnesota........................ 6
Colorado......................... 5
North Dakota..................... 5
South Carolina................... 5
Georgia.......................... 4
Texas............................ 4
Arizona.......................... 3
California....................... 3
New Mexico....................... 3
Washington....................... 3
Connecticut...................... 2
Michigan......................... 2
New Jersey....................... 2
Pennsylvania..................... 2
Wisconsin........................ 2
Indiana.......................... 1
Iowa............................. 1
Missouri......................... 1
Nevada........................... 1
North Carolina................... 1
Ohio............................. 1
Oklahoma......................... 1
Tennessee........................ 1
Wyoming.......................... 1
Our principal executive offices are located at 220 South Ridgewood Avenue,
Daytona Beach, Florida 32114 and 401 East Jackson Street, Suite 1700, Tampa,
Florida 33602, and our telephone numbers at those addresses are (386) 252-9601
and (813) 222-4100, respectively. Our website is located at
http://www.bbinsurance.com. Information contained in our website is not a part
of this prospectus supplement or the accompanying prospectus.
S-3
THE OFFERING
Common stock offered by Brown & Brown: 5,000,000 shares. We may sell up to
750,000 additional shares if the underwriters exercise their over-allotment
option in full.
Common stock to be outstanding after the offering: 68,295,076 shares.
Use of proceeds
We will use the net proceeds from the sale of the common stock offered hereby
for acquisitions and for other general corporate purposes, including working
capital and capital expenditures.
New York Stock Exchange symbol: BRO
The number of shares of our common stock to be outstanding after this offering
is based on the number of shares of common stock outstanding as of March 5, 2002
and does not include:
- 1,132,000 shares issuable upon exercise of stock options outstanding under our
incentive stock option plan, of which 62,040 shares were exercisable;
- 146,574 shares granted under our stock performance plan that were subject to
vesting conditions that had not been satisfied; and
- 2,822,078 shares available for future grant or issuance pursuant to our
employee stock purchase plan, incentive stock option plan and stock performance
plan.
See note 11 of the notes to our consolidated financial statements for more
information about these plans.
S-4
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in conjunction
with our consolidated financial statements and the related notes and
"Management's discussion and analysis of financial condition and results of
operations" included elsewhere in this prospectus supplement. The summary
consolidated financial data have been derived from our audited financial
statements. Historical results are not necessarily indicative of future results.
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YEAR ENDED DECEMBER 31,(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA
AND PERCENTAGES) 2001 2000 1999 1998 1997
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INCOME STATEMENT DATA:
Revenues
Commissions and fees............. $359,697 $258,309 $231,437 $211,722 $188,366
Investment income................ 3,686 4,887 3,535 4,350 5,431
Other income..................... 1,646 2,209 2,551 718 2,315
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Total revenues........... 365,029 265,405 237,523 216,790 196,112
Expenses
Employee compensation and
benefits...................... 187,653 149,836 131,270 119,879 111,277
Other operating expenses......... 56,815 44,372 41,893 41,228 38,043
Amortization..................... 15,860 9,226 8,343 6,329 6,057
Depreciation..................... 6,536 6,158 5,892 5,216 4,764
Interest......................... 5,703 1,266 1,360 1,233 1,684
Non-cash stock grant
compensation.................. 1,984 483 1,263 732 176
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Total expenses........... 274,551 211,341 190,021 174,617 162,001
--------------------------------------------------------
Income before income taxes and
minority interest................ 90,478 54,064 47,502 42,173 34,111
Income taxes....................... 34,834 20,146 18,331 16,179 13,408
Minority interest, net of income
taxes............................ 1,731 1,125 900 848 862
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Net income............... $ 53,913 $ 32,793 $ 28,271 $ 25,146 $ 19,841
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PER SHARE DATA:
Net income per share:
Basic............................ $ 0.86 $ 0.53 $ 0.46 $ 0.41 $ 0.32
Diluted.......................... $ 0.85 $ 0.53 $ 0.46 $ 0.41 $ 0.32
Weighted average number of shares
outstanding:
Basic............................ 62,563 61,845 61,639 61,524 61,267
Diluted.......................... 63,222 62,091 61,655 61,524 61,267
Dividends declared per share....... $ 0.1600 $ 0.1350 $ 0.1150 $ 0.1025 $ 0.0883
BALANCE SHEET DATA (PERIOD END):
Total assets....................... $488,737 $324,677 $286,416 $285,028 $254,636
Long-term debt..................... 78,195 10,660 10,905 24,522 15,993
Shareholders' equity(2)............ 175,285 118,372 100,355 82,073 72,377
OTHER FINANCIAL DATA:
EBITDA(3).......................... $120,561 $ 71,197 $ 64,360 $ 55,683 $ 46,792
EBITDA margin(4)................... 33.0% 26.8% 27.1% 25.7% 23.9%
S-5
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YEAR ENDED DECEMBER 31,(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA
AND PERCENTAGES) 2001 2000 1999 1998 1997
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Net cash flow provided by operating
activities....................... $ 69,938 $ 42,267 $ 44,190 $ 38,594 $ 29,383
Net cash flow (used in) investing
activities....................... (137,838) (21,204) (19,777) (34,947) (12,868)
Net cash flow provided by (used in)
financing activities............. 46,921 (18,783) (30,028) (16,692) (7,170)
------------------------------------------------------------------------------------------------
(1) All share and per share information has been restated to give effect to the
two-for-one common stock split that became effective November 21, 2001, the
two-for-one common stock split that became effective August 23, 2000 and the
three-for-two common stock split that became effective February 27, 1998. Each
stock split was effected as a stock dividend. Prior years' results have been
restated to give effect to acquisitions accounted for under the
pooling-of-interests method of accounting. In addition, we made acquisitions
accounted for under the purchase method of accounting during those periods,
which affect the comparability of results. See "Management's discussion and
analysis of financial condition and results of operations: General" and notes 2
and 3 of the notes to our consolidated financial statements for a description of
our acquisitions in 2001, 2000 and 1999.
(2) Shareholders' equity as of December 31, 2001, 2000, 1999, 1998 and 1997
included net increases (in thousands) of $4,393, $2,495, $4,922, $5,540 and
$6,744, respectively, as a result of our application of Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities."
(3) EBITDA is defined as income before income taxes and minority interest plus
interest, depreciation, amortization and non-cash stock grant compensation.
EBITDA is not a measure of financial performance under generally accepted
accounting principles, and should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other income
or cash flow statement data prepared in accordance with generally accepted
accounting principles as a measure of profitability or liquidity. We believe the
presentation of EBITDA is relevant because EBITDA is a measurement that industry
analysts use when evaluating our operating performance. Investors should be
aware that EBITDA may not be comparable with similarly titled measures presented
by other companies and could be misleading unless all companies and analysts
calculate such measures in the same manner.
(4) EBITDA margin represents EBITDA as a percentage of total revenues. EBITDA
margin is presented because we believe that it is a useful indicator to
investors of our profitability. EBITDA margin should not be considered by
investors as an alternative to operating margin as an indicator of our
profitability. Because all companies do not calculate EBITDA identically, this
presentation of EBITDA margin may not be comparable with other similarly titled
measures of other companies.
S-6
RISK FACTORS
Before you decide whether to purchase any of our common stock offered hereby, in
addition to the other information in this prospectus supplement and the
accompanying prospectus, you should carefully consider the following risk factor
as well as the risk factors set forth under the heading "Risk Factors" in the
accompanying prospectus.
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING
AND MAY SPEND THE PROCEEDS IN WAYS WITH WHICH YOU DO NOT AGREE.
Our management has broad discretion as to the use of the net proceeds from this
offering. Accordingly, you will not have an opportunity to evaluate the specific
uses of the net proceeds from this offering, and you may not agree with those
uses. Our failure to use the proceeds effectively could have a material adverse
effect on our business, financial condition, operating results and prospects.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of our common stock in this
offering will be approximately $149.3 million ($171.8 million if the
underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and our estimated offering expenses. We will use the net
proceeds from the sale of the common stock offered hereby for acquisitions and
for other general corporate purposes, including working capital and capital
expenditures. We have no agreements or understandings with respect to any
material acquisitions as of the date of this prospectus supplement. However, we
have identified four acquisition opportunities with purchase prices totaling
approximately $10.5 million that we currently consider probable and that, if
consummated, would add additional insurance agencies in New Jersey, South
Carolina and Tennessee. We cannot assure you that we will consummate either of
these potential acquisitions. We are continuing to actively evaluate, pursue and
negotiate additional acquisitions.
Pending the application of the net proceeds for the above-stated purposes, we
expect to invest the proceeds in investment-grade debt securities.
S-7
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the New York Stock Exchange (NYSE) under the
symbol "BRO". The table below sets forth, for the periods indicated, the
intra-day high and low sales prices for our common stock as reported on the NYSE
Composite Tape and dividends declared on our common stock. The stock prices and
dividends reflect the two-for-one common stock split on August 23, 2000 and the
two-for-one common stock split on November 21, 2001. Each such stock split was
effected as a stock dividend.
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BROWN & BROWN
COMMON STOCK
--------------------- CASH
HIGH LOW DIVIDENDS
------------------------------------------------------------------------------------------------
2000
First Quarter...................................... $10.06 $ 7.81 $0.0325
Second Quarter..................................... 13.11 9.50 0.0325
Third Quarter...................................... 16.00 11.86 0.0325
Fourth Quarter..................................... 17.94 14.88 0.0375
2001
First Quarter...................................... $19.96 $14.38 $0.0375
Second Quarter..................................... 23.05 16.95 0.0375
Third Quarter...................................... 26.30 20.50 0.0375
Fourth Quarter..................................... 31.50 23.70 0.0475
2002
First Quarter (through March 6, 2002).............. $36.33 $26.03 $0.0475
------------------------------------------------------------------------------------------------
The last reported sale price of our common stock on the New York Stock Exchange
on March 6, 2002 was $32.25 per share. At March 5, 2002, there were 63,295,076
shares of our common stock outstanding, held by approximately 964 shareholders
of record.
DIVIDEND POLICY
Historically, we generally have paid quarterly dividends on our common stock and
expect to continue to pay comparable quarterly dividends in the future. However,
the payment of dividends in the future, and the amount of such dividends, if
any, will be at the discretion of our Board of Directors and will depend on our
future operating performance. We cannot assure you that any such dividends will
be paid.
S-8
CAPITALIZATION
The following table summarizes our cash and cash equivalents and capitalization
as of December 31, 2001 on an actual basis and as adjusted to reflect this
offering of our common stock and the receipt of the proceeds from this offering,
after deducting underwriting discounts and our estimated offering expenses. You
should read this table together with our consolidated financial statements and
related notes and "Management's discussion and analysis of financial condition
and results of operations."
--------------------------------------------------------------------------------------------
AT DECEMBER 31, 2001
(IN THOUSANDS) ACTUAL AS ADJUSTED
--------------------------------------------------------------------------------------------
Cash and cash equivalents................................... $ 16,048 $165,388
----------------------------
Current portion of long-term debt........................... $ 20,855 $ 20,855
----------------------------
Long-term debt (less current portion)....................... 78,195 78,195
----------------------------
Shareholders' equity:
Common stock, $0.10 par value; 140,000 shares authorized,
63,194 shares issued and outstanding, 68,194 shares
outstanding, as adjusted(1)............................ 6,319 6,819
Additional paid-in capital................................ 11,181 160,021
Retained earnings......................................... 153,392 153,392
Accumulated other comprehensive income, net of tax
effect................................................. 4,393 4,393
----------------------------
Total shareholders' equity............................. 175,285 324,625
----------------------------
Total capitalization.............................. $274,335 $423,675
--------------------------------------------------------------------------------------------
(1) This information excludes:
- 1,132,000 shares issuable upon exercise of stock options outstanding, with a
weighted average exercise price of $9.67 per share, under our incentive stock
option plan, of which 62,040 shares were exercisable;
- 146,574 shares granted under our stock performance plan that were subject to
vesting conditions that had not been satisfied; and
- 2,822,078 shares available for future grant or issuance pursuant to our
employee stock purchase plan, incentive stock option plan and stock performance
plan.
See note 11 of the notes to our consolidated financial statements for more
information about these plans.
S-9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes to those consolidated financial statements,
included elsewhere in this prospectus supplement.
GENERAL
We are a general insurance agency and brokerage headquartered in Daytona Beach
and Tampa, Florida. Since the early 1980s, our stated corporate objective has
been to increase our net income per share by at least 15% every year. We have
increased revenues from $95.6 million in 1993 (as originally stated, without
giving effect to any subsequent acquisitions accounted for under the
pooling-of-interests method of accounting) to $365.0 million in 2001, a compound
annual growth rate of 18.2%. In the same period, we increased net income from
$8.0 million (as originally stated, without giving effect to any subsequent
acquisitions accounted for under the pooling-of-interests method of accounting)
to $53.9 million in 2001, a compound annual growth rate of 26.9%. We have also
increased net income per share 15.0% or more for nine consecutive years,
excluding the effect of a one-time investment gain of $1.3 million in 1994 and
favorable adjustments to our income tax reserves of $0.7 million in 1994 and
$0.5 million in 1995. Since 1993, excluding the historical impact of poolings,
our pre-tax margins improved in all but one year, and in that year, the pre-tax
margin was essentially flat. These improvements have resulted primarily from net
new business growth (new business production offset by lost business) and
continued operating efficiencies. Our growth in 2001 was primarily the result of
a higher than historical number of acquisitions, driven in large part by the
then-anticipated elimination of pooling-of-interests accounting treatment for
acquisitions, coupled with a general increase in premium rates and stronger net
new business growth.
Our revenues are comprised principally of commissions paid by insurance
companies, fees paid directly by clients and investment income. Commission
revenues generally represent a percentage of the premium paid by the insured and
are materially affected by fluctuations in both premium rate levels charged by
insurance underwriters and the insureds' underlying "insurable exposure units,"
which are units that insurers use to measure or express insurance exposed to
risk (such as property values, sales and payroll levels) so as to determine what
premium to charge the policyholder. These premium rates are established by
insurance companies based upon many factors, including reinsurance rates, none
of which we control. Beginning in 1987 and continuing through 1999, revenues
were adversely influenced by a consistent decline in premium rates resulting
from intense competition among property and casualty insurers for market share.
Among other factors, this condition of a prevailing decline in premium rates,
commonly referred to as a "soft market," generally resulted in flat to reduced
commissions on renewal business. The effect of this softness in rates on our
revenues was somewhat offset by our acquisitions and new business production. As
a result of increasing "loss ratios" (the comparison of incurred losses plus
adjustment expense against earned premiums) of insurance companies through 1999,
there was a general increase in premium rates beginning in the first quarter of
2000 and continuing through the fourth quarter of 2001. Although premium rates
vary by line of business, geographical region, insurance company and specific
underwriting factors, we believe this was the first time since 1987 that we
operated in an environment of increased premiums for eight consecutive quarters.
Additionally, in light of the events of September 11, 2001, insurance companies,
as well as reinsurers, may extend this trend of increasing premium rates. While
we cannot predict the timing or extent of premium pricing changes as a result of
market fluctuations or their effect on our
S-10
operations in the future, we believe that premium rates will continue to
increase through at least 2002.
The volume of business from new and existing clients, fluctuations in insurable
exposure units and changes in general economic and competitive conditions
further impact our revenues. For example, stagnant rates of inflation and the
general decline of economic activity in recent years have generally limited the
increases in the values of insurable exposure units. Conversely, the increasing
costs of litigation settlements and awards have caused some clients to seek
higher levels of insurance coverage. Still, our revenues continue to grow
through acquisitions and an intense focus on net new business growth. We
anticipate that results of operations for 2002 will continue to be influenced by
these competitive and economic conditions.
We also earn "contingent commissions," which are revenue-sharing commissions
from insurance companies based upon the volume and the growth and/or
profitability of the business placed with such companies during the prior year.
These commissions are primarily received in the first and second quarters of
each year, and over the last three years, have averaged approximately 4.6% of
total commissions and fees. Contingent commissions are included in our total
commissions and fees in the consolidated statements of income in the year
received. The term "core commissions and fees" excludes contingent commissions
and represents the revenues earned directly from each specific insurance policy
sold or from fee-based services rendered.
Fee revenues are generated primarily by our Services Division, which provides
insurance-related services, including third-party administration, consulting for
the workers' compensation and employee benefit self-insurance markets and
managed healthcare services. In each of the past three years, fee revenues
generated by the Services Division have averaged approximately 6.8% of total
commissions and fees.
Investment income consists primarily of interest earnings on premiums and
advance premiums collected and held in a fiduciary capacity before being
remitted to insurance companies. Our policy is to invest available funds in
high-quality, short-term fixed income investment securities. Investment income
also includes gains and losses realized from the sale of investments.
ACQUISITIONS AND THE IMPACT OF THE POOLING-OF-INTERESTS METHOD OF ACCOUNTING
During 2001, we acquired the following 12 agency groups in stock-for-stock
transactions accounted for under the pooling-of-interests method of accounting:
- The Huval Companies
- Spencer & Associates, Inc. and SAN of East Central Florida, Inc.
- The Young Agency, Inc.
- Layne & Associates, Ltd.
- Agency of Insurance Professionals, Inc., CompVantage Insurance Agency, LLC and
Agency of Indian Programs Insurance, LLC
- Finwall & Associates Insurance, Inc.
- The Connelly Insurance Group, Inc.
- The Benefit Group, Inc.
- Logan Insurance Agency, Inc. and Automobile Insurance Agency of Virginia, Inc.
S-11
- Froelich-Paulson-Moore, Inc. and M&J Buildings, LLC
- McKinnon & Mooney, Inc.
- Raleigh, Schwarz & Powell, Inc.
We also acquired the assets of 12 general insurance agencies, several books of
business (customer accounts) and the outstanding stock of two general insurance
agencies in transactions accounted for under the purchase method of accounting.
During 2000, we acquired the following four agency groups in stock-for-stock
transactions accounted for under the pooling-of-interests method of accounting:
- Bowers, Schumann & Welch
- The Flagship Group, Ltd.
- WMH, Inc. and Huffman & Associates, Inc.
- Mangus Insurance & Bonding, Inc.
We also acquired the assets of five general insurance agencies, several books of
business and the outstanding stock of two general insurance agencies in
transactions accounted for under the purchase method of accounting.
During 1999, we acquired the following two agency groups in stock-for-stock
transactions accounted for under the pooling-of-interests method of accounting:
- Ampher Insurance, Inc. and Ross Insurance of Florida, Inc.
- Signature Insurance Group, Inc. and C,S&D, a Florida general partnership.
We also acquired the assets of seven general insurance agencies, several books
of business and the outstanding stock of three general insurance agencies in
transactions accounted for under the purchase method of accounting.
The revenues and expenses of entities that were acquired and accounted for under
the purchase method of accounting are recognized only from the date of
acquisition, and therefore did not impact our previously reported historical
results. However, the applicable accounting rules require that our consolidated
financial statements be restated for all periods to include the results of
operations, financial positions and cash flows of entities acquired in
transactions accounted for under the pooling-of-interests method. Because most
of the pooled entities were operated as privately-held companies that paid
significant year-end bonuses and compensation to their principals and owners
during the periods prior to our acquisition of such entities, the combination of
their lower net income results with our results diluted our historically
reported profit margins, defined as income before income taxes and minority
interest as a percentage of total revenues. As restated, our profit margins were
24.8%, 20.4% and 20.0% in 2001, 2000 and 1999, respectively. Without giving
effect to any acquisitions accounted for under the pooling-of-interests method
in the year of acquisition or in any prior year, our profit margins were 27.9%,
27.4% and 26.2% in 2001, 2000 and 1999, respectively. We believe that, as we
continue to integrate these acquired entities, our profit margins will continue
to improve.
The pooling-of-interests method of accounting has been eliminated for all
business combinations initiated after June 30, 2001. This change in accounting
rules was the impetus for many of our acquisitions in 2001. The pace of our
ongoing acquisition activities may be significantly slower than it was in 2001,
although we will continue to seek qualified acquisition candidates. Future
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acquisitions will be accounted for under the purchase method of accounting. See
note 1 of the notes to our consolidated financial statements.
See notes 2 and 3 of the notes to our consolidated financial statements for a
description of our acquisitions.
The following discussion and analysis regarding results of operations and
liquidity and capital resources should be considered in conjunction with the
accompanying consolidated financial statements and related notes.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMISSIONS AND FEES
Commissions and fees increased 39% in 2001, 12% in 2000 and 9% in 1999. Core
commissions and fees increased 11.3% in 2001, 11.1% in 2000 and 0.4% in 1999,
excluding commissions and fees generated from operations acquired that were
accounted for under the purchase method of accounting and excluding divested
operations. The 2001 and 2000 results reflect stronger premium rate increases
that began in the first quarter of 2000 and continued through 2001.
Additionally, the 2001 increase was impacted by the higher than historical
number of acquisitions consummated during that year. During 1999, property and
casualty insurance premium prices declined from the previous year, and this
decline was primarily responsible for the lower growth rate.
INVESTMENT INCOME
Investment income decreased to $3.7 million in 2001, compared with $4.9 million
in 2000 and $3.5 million in 1999. The decrease in 2001 is primarily a result of
lower available investment cash balances due to increased acquisition activity,
although lower investment yields also contributed to reduced income. The
increase in 2000 was primarily a result of higher levels of invested cash.
Investment income also included gains of approximately $0.3 million in 2001,
$0.2 million in 2000 and $0.1 million in 1999 realized from the sale of
investments in various equity securities and partnership interests.
OTHER INCOME
Other income consists primarily of gains and losses from the sale and
disposition of assets. In 2001, gains of $0.8 million were recognized from the
sale of customer accounts that were primarily related to the Automobile Dealers
Protector Plan(R), based in central Florida. Gains from the sale of customer
accounts were $0.1 million in 2000, compared with gains of $0.4 million in 1999.
This decrease from 1999 to 2000 was primarily due to the gain on sales of
certain accounts in 1999 within the Lawyer's Protector Plan(R) of our National
Programs Division.
EMPLOYEE COMPENSATION & BENEFITS
Employee compensation and benefits increased approximately 25% in 2001, 14% in
2000 and 10% in 1999, primarily as a result of acquisitions and an increase in
commissions paid to new and existing employees. Employee compensation and
benefits as a percentage of total revenues was 51% in 2001, 56% in 2000 and 55%
in 1999. The percentages are higher in 2000 and 1999 due to higher compensation
and year-end bonuses paid to the principals and owners of pooled entities prior
to the dates of acquisition. We had approximately 3,000 full-time employees at
December 31, 2001, compared with approximately 2,140 at December 31, 2000 and
approximately 2,000 at December 31, 1999.
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OTHER OPERATING EXPENSES
Other operating expenses increased 28% in 2001, 6% in 2000, and 2% in 1999.
Other operating expenses as a percentage of total revenues decreased to 16% in
2001 from 17% in 2000 and 18% in 1999. The continuing decline in other operating
expenses, expressed as a percentage of total revenues, is attributable to the
effective cost containment measures brought about by an initiative designed to
identify areas of excess expense, and to the fact that, in an increasing premium
rate environment, certain significant other operating expenses such as office
rent, office supplies and telephone costs, increase at a slower rate than
commission and fee revenues increase during the same period.
DEPRECIATION
Depreciation increased 6% in 2001, 5% in 2000 and 13% in 1999. These increases
were primarily due to the purchase of new computer equipment and the
depreciation associated with acquired assets.
AMORTIZATION
Amortization expense increased $6.6 million, or 72%, in 2001, $0.9 million, or
11%, in 2000, and $2.0 million, or 32%, in 1999. The increase each year is due
to the additional amortization of intangibles as a result of new acquisitions.
See notes 1, 3 and 6 of the notes to our consolidated financial statements.
INTEREST EXPENSE
Interest expense increased $4.4 million, or 350%, in 2001, and decreased $0.1
million, or 7%, in 2000. On January 3, 2001, we obtained a $90 million term
loan, primarily to acquire the insurance agency business-related assets of
Riedman Corporation, which accounts for the increase in 2001. The average London
Interbank Offered Rate (LIBOR) for the interest paid on that loan in 2001 was
4.4%. Effective January 2, 2002, we entered into an interest rate swap agreement
to lock in an effective fixed interest rate of 4.53% for the remaining six years
of the term loan, excluding our "credit risk spread" (additional interest paid
to offset risk of default) between 0.5% and 1.0%. The decrease in 2000 was the
result of reduced outstanding debt.
NON-CASH STOCK GRANT COMPENSATION
Non-cash stock grant compensation expense represents the expense required to be
recorded under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," relating to our stock performance plan, which is more
fully described in note 11 of the notes to our consolidated financial
statements.
The annual cost of this stock performance plan increases only when our average
stock price over a 20 trading day period increases by increments of 20% or more
from the price at the time of the original grant, or when more shares are
granted and the stock price increases.
During 2001, after the first vesting condition for most of the previously
granted performance stock was satisfied as a result of increases in our average
stock price over a 20 trading day period, we granted additional shares of
performance stock. With the awards granted in 2001 and the increase in our stock
price during that year, the expense for the stock performance plan increased to
$2.0 million in 2001 from $0.5 million in 2000. If our stock price continues to
increase in 2002, this expense could increase to as much as $3.0 million,
excluding the cost of any new shares granted.
S-14
INCOME TAXES
The effective tax rate on income from operations was 38.5% in 2001, 37.3% in
2000 and 38.6% in 1999.
SEGMENT INFORMATION
As discussed in note 15 of the notes to our consolidated financial statements,
we operate in four business segments: the Retail, National Programs, Services
and Brokerage Divisions.
The Retail Division is our insurance agency business that provides a broad range
of insurance products and services to commercial, governmental, professional and
individual clients. Over 95% of the Retail Division's revenues are
commission-based. As a majority of our operating expenses do not change as
premiums fluctuate, we believe that a majority of any fluctuation in commissions
received by us will be reflected in our pre-tax income. The Retail Division's
revenues accounted for 77% to 80% of our total consolidated commissions and fees
over the last three years. The Retail Division's total revenues in 2001
increased $88.0 million to $287.6 million, a 44.1% increase over 2000. Of this
increase, approximately $69.8 million related to commissions and fees from
acquisitions accounted for under the purchase method of accounting that had no
comparable revenues in 2000. The remaining increase is primarily due to net new
business growth, which benefited from rising premium rates during 2001. Income
before income taxes and minority interest in 2001 increased $21.9 million to
$52.0 million, a 72.7% increase over 2000. This increase is due to acquired
revenues, increases in premium rates and the lack of comparable year-end bonuses
paid in 2000 related to the pooled entities. Total revenues in 2000 increased
$17.0 million to $199.5 million, a 9.3% increase over 1999. This increase is
primarily due to net new business growth and rising premium rates during 2000.
Income before income taxes and minority interest in 2000 increased $2.0 million
to $30.1 million, a 6.8% increase over 1999. This increase is due to net new
business growth, acquired revenues and rising premium rates.
The National Programs Division is comprised of two units: Professional Programs,
which provides professional liability and related package products for certain
professionals delivered through nationwide networks of independent agents; and
Special Programs, which markets targeted products and services designated for
specific industries, trade groups and market niches. Similar to the Retail
Division, essentially all of the National Programs Division's revenues are
commission-based. Total revenues in 2001 increased $7.0 million to $43.8
million, an 18.9% increase over 2000, of which $2.4 million was related to net
new business growth. All of this net new business growth was related to our
Special Programs Division, but was partially offset by the loss of approximately
$3.4 million of auto industry-related business that was terminated. Revenues
related to our Professional Programs Division were essentially flat for 2001;
however, prior to 2001, we experienced at least three years of 10% to 20% of
annual revenue declines in this business. Income before income taxes and
minority interest in 2001 increased $2.9 million to $17.9 million, a 19.6%
increase over 2000, due primarily to net increases in revenues. Total revenues
in 2000 increased $4.2 million to $36.8 million, a 12.8% increase over 1999, due
to net new business growth in the Special Programs Division, which was partially
offset by an 12.7% decline in the Professional Programs Division. Income before
income taxes and minority interest in 2000 increased $2.6 million to $14.9
million, a 20.7% increase over 1999, primarily due to revenue increases in
Special Programs.
The Services Division provides insurance-related services, including third-party
administration, consulting for the workers' compensation and employee benefit
self-insurance markets and managed healthcare services. Unlike our other
segments, over 90% of the Services Division's revenues are fees, which are not
significantly affected by fluctuations in general insurance
S-15
premiums. The Services Division's total revenues in 2001 increased $3.3 million
to $25.0 million, a 15.4% increase over 2000. Of this increase, $2.2 million was
the result of net new business growth and the remaining portion was acquired.
Income before income taxes and minority interest in 2001 increased $0.9 million
to $4.0 million, a 29.3% increase over 2000, primarily due to strong net new
business growth. Total revenues in 2000 increased $4.5 million to $21.6 million,
a 26.6% increase over 1999. Of this increase, $2.6 million was the result of net
new business growth and the remaining portion was acquired. Income before income
taxes and minority interest in 2000 increased $0.5 million to $3.1 million, a
18.8% increase over 1999, again due primarily to strong net new business growth.
The Brokerage Division markets and sells excess and surplus commercial insurance
and reinsurance, primarily through independent agents and brokers. Similar to
our Retail and National Programs Divisions, essentially all of the Brokerage
Division's revenues are commission-based. Total Brokerage revenues in 2001
increased $4.2 million to $12.2 million, a 53.1% increase over 2000, due
entirely to net new business growth. As a result of the Brokerage Division's
strong net new business growth, income before income taxes and minority interest
in 2001 increased $1.4 million to $4.1 million, a 51.5% increase over 2000.
Brokerage revenue in 2000 increased $1.6 million to $8.0 million, a 24.6%
increase over 1999, solely due to net new business growth. Income before income
taxes and minority interest for 2000 increased $0.6 million to $2.7 million, a
27.3% increase over 1999, again due to net new business growth.
QUARTERLY OPERATING RESULTS
The following table sets forth our quarterly operating results for 2001 and
2000:
------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------------------------------------------------------------------------------------------
2001
Total revenues..................... $89,410 $89,933 $89,809 $95,877
Income before income taxes and
minority interest................ 21,753 21,229 21,623 25,873
Net income......................... 12,876 12,420 13,402 15,215
Net income per share:
Basic............................ $ 0.21 $ 0.20 $ 0.21 $ 0.24
Diluted.......................... $ 0.20 $ 0.20 $ 0.21 $ 0.24
------------------------------------------------------------------------------------------------------
2000
Total revenues..................... $67,951 $65,002 $65,069 $67,383
Income before income taxes and
minority interest................ 16,272 13,504 14,593 9,695
Net income......................... 9,910 8,299 8,819 5,765
Net income per share:
Basic............................ $ 0.16 $ 0.14 $ 0.14 $ 0.09
Diluted.......................... $ 0.16 $ 0.14 $ 0.14 $ 0.09
------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents of $16.0 million at December 31, 2001 reflects a
decrease of $21.0 million from our December 31, 2000 balance of $37.0 million.
During 2001, $70.0 million of cash was provided from operating activities and
$90.1 million was received from long-term debt financing. From this borrowing
and existing cash balances, $131.0 million was used for acquisitions,
S-16
$33.3 million was used to repay long-term debt, $9.7 million was used to pay
dividends and $11.0 million was used for additions to fixed assets.
Our cash and cash equivalents of $37.0 million at December 31, 2000 reflects an
increase of $2.3 million from the December 31, 1999 balance of $34.7 million.
During 2000, $42.3 million of cash was provided from operating activities and
$0.5 million was received from long-term debt financing. From this financing and
existing cash balances, $17.7 million was used for acquisitions, $5.5 million
was used for purchases of our stock, $4.5 million was used to repay long-term
debt, $7.5 million was used to pay dividends and $5.6 million was used for
additions to fixed assets.
Our cash and cash equivalents of $34.7 million at December 31, 1999 reflects a
decrease of $5.6 million from the December 31, 1998 balance of $40.4 million.
During 1999, $44.2 million of cash was provided from operating activities and
$0.7 million was received from long-term debt financing. From this financing and
existing cash balances, $16.2 million was used for acquisitions, $1.2 million
was used for purchases of our stock, $17.9 million was used to repay long-term
debt, $6.2 million was used to pay dividends and $6.2 million was used for
additions to fixed assets.
Our ratio of current assets to current liabilities (the "current ratio") was
0.78 and 0.94 at December 31, 2001 and 2000, respectively. The decrease in the
current ratio in 2001 is primarily attributable to the use of cash and increased
debt to fund the higher level of acquisition activity.
In January 2001, we entered into a $90 million seven-year term loan agreement
with SunTrust Banks, Inc. Borrowings under this facility bear interest based
upon the 30-, 60- or 90-day LIBOR plus a margin ranging from 0.50% to 1.00%,
depending upon our quarterly ratio of funded debt to earnings before interest,
taxes, depreciation and amortization. Ninety-day LIBOR was 1.88% as of December
31, 2001. The loan was fully funded on January 3, 2001 and a balance of $77.1
million remained outstanding as of December 31, 2001. This loan is to be repaid
in equal quarterly principal installments of $3.2 million through December 2007.
Effective January 2, 2002, we entered into an interest rate swap agreement with
SunTrust Banks, Inc. to lock in an effective fixed interest rate of 4.53% for
the remaining six years of the term loan, excluding our credit risk spread
between 0.50% and 1.00%.
We also have a revolving credit facility with SunTrust Banks, Inc. that provides
for available borrowings of up to $50 million, with a maturity date of October
2002. Borrowings under this facility bear interest based upon the 30-, 60- or
90-day LIBOR plus a margin ranging from 0.45% to 1.00%, depending upon our
quarterly ratio of funded debt to earnings before interest, taxes, depreciation
and amortization. A commitment fee of 0.15% to 0.25% per year is assessed on the
unused balance. As noted above, 90-day LIBOR was 1.88% as of December 31, 2001.
There were no borrowings under this facility at December 31, 2001 or December
31, 2000.
We continue to maintain our credit agreement with Continental Casualty Company
(CNA) under which $2.0 million (the maximum amount available for borrowing) was
outstanding at December 31, 2001. The available amount will decrease by $1.0
million each August through 2003.
All three of our credit agreements require us to maintain certain financial
ratios and comply with certain other covenants. We were in compliance with all
such covenants as of December 31, 2001.
We believe that our existing cash, cash equivalents, short-term investment
portfolio, funds generated from operations and the availability of the bank line
of credit will be sufficient to satisfy our normal liquidity needs through at
least the end of 2002. Additionally, we believe that funds generated from future
operations will be sufficient to satisfy our normal liquidity needs, including
the required annual principal payments on our long-term debt.
S-17
In December 2001, a universal "shelf" registration statement that we filed with
the Securities and Exchange Commission covering the public offering and sale,
from time to time, of up to an aggregate of $250 million of debt and/or equity
securities, was declared effective. The primary use of this capital would be to
fund acquisitions. The securities being offered by this prospectus supplement
are offered pursuant to such registration statement.
S-18
BUSINESS
GENERAL
We are the largest insurance agency and brokerage headquartered in the
southeastern United States and the eighth largest in the country, based on 2000
total revenues. The name of the company following the 1993 combination of Brown
& Brown, Inc., which commenced doing business in 1939, and Poe & Associates,
Inc., which commenced doing business in 1959, was Poe & Brown, Inc. The name was
changed to Brown & Brown, Inc. in 1999.
We market and sell to our clients insurance products and services, primarily in
the property and casualty area. As an agent and broker, we do not assume
underwriting risks. Instead, we provide our clients with quality insurance
contracts, as well as other targeted, customized risk management products.
We are compensated for our services primarily by commissions paid by insurance
companies and fees paid by clients for certain services. The commission is
usually a percentage of the premium paid by the insured. Commission rates
generally depend upon the type of insurance, the particular insurance company
and the nature of the services provided by us. In some cases, a commission is
shared with other agents or brokers who have acted jointly with us in a
transaction. We may also receive from an insurance company a contingent
commission that is generally based on the profitability and volume of business
placed with it by us over a given period of time. Fees are principally generated
by our Services Division, which offers third-party administration, benefit
consulting and managed healthcare services primarily in the workers'
compensation and employee benefit markets. The amount of our income from
commissions and fees is a function of, among other factors, continued new
business production, retention of existing clients, acquisitions and
fluctuations in insurance premium rates and insurable exposure units.
Premium pricing within the property and casualty insurance underwriting industry
has historically been cyclical, displaying a high degree of volatility based on
prevailing economic and competitive conditions. From the mid-1980s through 1999,
the property and casualty insurance industry experienced a "soft market" during
which the underwriting capacity of insurance companies expanded, stimulating an
increase in competition and a decrease in premium rates and related commissions.
The effect of this softness in rates on our revenues was somewhat offset by our
acquisitions and new business production. As a result of increasing "loss
ratios" (the comparison of incurred losses plus adjustment expense against
earned premiums) of insurance companies through 1999, there was a general
increase in premium rates beginning in the first quarter of 2000 and continuing
through the fourth quarter of 2001. Although premium increases vary by line of
business, geographical region, insurance company and specific underwriting
factors, we believe this was the first time since 1987 that we operated in an
environment of increased premiums for eight consecutive quarters. Additionally,
in light of the events of September 11, 2001, insurance companies, as well as
reinsurers, may extend this trend of increasing premium rates. While we cannot
predict the timing or extent of premium pricing changes as a result of market
fluctuations or their effect on our operations in the future, we believe that
premium rates will continue to increase through at least 2002.
Beginning in 1993 through 2001, we acquired 86 insurance agency operations
(excluding acquired books of business) that had aggregate estimated annual
revenues of $240.0 million for the 12 calendar months immediately following the
date of acquisition. Of these, 26 operations were acquired during 2001, with
aggregate estimated annual revenues of $148.0 million for the 12 calendar months
immediately following the date of acquisition, including our asset acquisition
of the insurance agency business-related assets of Riedman Corporation,
effective January 1, 2001,
S-19
with estimated annual revenues of $54.0 million for the 12 calendar months
immediately following the date of acquisition. The large number of acquisitions
in 2001 was largely due to the then-anticipated elimination of
pooling-of-interests accounting for stock acquisitions, which encouraged the
shareholders of certain agencies, especially "C" corporations, to accelerate the
sale of their stock to us. As of December 31, 2000, our activities were
conducted in 39 locations in 12 states; however, with the acquisitions
consummated during 2001, we had 140 locations in 28 states:
Florida......................... 45 Connecticut..................... 2
New York........................ 20 Michigan........................ 2
Virginia........................ 8 New Jersey...................... 2
Louisiana....................... 7 Pennsylvania.................... 2
Minnesota....................... 6 Wisconsin....................... 2
Colorado........................ 5 Indiana......................... 1
North Dakota.................... 5 Iowa............................ 1
South Carolina.................. 5 Missouri........................ 1
Georgia......................... 4 Nevada.......................... 1
Texas........................... 4 North Carolina.................. 1
Arizona......................... 3 Ohio............................ 1
California...................... 3 Oklahoma........................ 1
New Mexico...................... 3 Tennessee....................... 1
Washington...................... 3 Wyoming......................... 1
Our business is divided into four segments: (1) the Retail Division; (2) the
National Programs Division; (3) the Services Division; and (4) the Brokerage
Division. The Retail Division provides a broad range of insurance products and
services to commercial, governmental, professional and individual clients. The
National Programs Division is comprised of two units: Professional Programs,
which provides professional liability and related package products for certain
professionals; and Special Programs, which markets targeted products and
services designated for specific industries, trade groups and market niches.
These programs and products are marketed and sold primarily through independent
agencies and agents across the United States. For these programs, we receive an
"override commission," which is a commission based upon the commissions
generated by these independent agencies. The Services Division provides
insurance-related services, including third-party administration, consulting for
the workers' compensation and employee benefit self-insurance markets and
managed healthcare services. The Brokerage Division markets and sells excess and
surplus commercial insurance and reinsurance, primarily through independent
agents and brokers. In 2001, we generated commission and fee revenues of $359.7
million.
The following table sets forth a summary of (1) the commission and fee revenues
generated by each of our operating segments for 2001, 2000 and 1999, and (2) the
percentage of our total commission and fee revenues represented by each segment
for each such period:
----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT
PERCENTAGES) 2001 % 2000 % 1999 %
----------------------------------------------------------------------------------------------
Retail Division(1).......... $281,118 78.2 $195,222 75.6 $178,667 77.2
National Programs Division.. 42,176 11.7 34,011 13.2 29,988 13.0
Services Division........... 24,509 6.8 21,299 8.2 16,874 7.3
Brokerage Division.......... 11,894 3.3 7,777 3.0 5,908 2.5
--------------------------------------------------------------
Total............. $359,697 100.0 $258,309 100.0 $231,437 100.0
----------------------------------------------------------------------------------------------
(1) Numbers and percentages have been restated to give effect to acquisitions
accounted for under the pooling-of-interests method of accounting. In addition,
we made acquisitions accounted for under the purchase method of accounting
during those periods, which affect the comparability of results. See
"Management's discussion and analysis of financial condition and results of
operations: General" and notes 2 and 3 of the notes to our consolidated
financial statements for a description of our acquisitions.
S-20
DIVISIONS
RETAIL DIVISION
As of December 31, 2001, our Retail Division operated in 26 states and employed
approximately 2,320 persons. Our retail insurance agency business provides a
broad range of income products and services to commercial, governmental,
professional and individual clients. The categories of insurance principally
sold by us are: Property insurance against physical damage to property and
resultant interruption of business or extra expense caused by fire, windstorm or
other perils; and Casualty insurance relating to legal liabilities, workers'
compensation, commercial and private passenger automobile coverages, and
fidelity and surety insurance. We also sell and service group and individual
life, accident, disability, health, hospitalization, medical and dental
insurance.
No material part of our retail business is attributable to a single client or a
few clients. During 2001, commissions and fees from our largest single Retail
Division client represented less than one percent of the Retail Division's total
commission and fee revenues.
In connection with the selling and marketing of insurance coverages, we provide
a broad range of related services to our clients, such as risk management
surveys and analysis, consultation in connection with placing insurance
coverages and claims processing. We believe these services are important factors
in securing and retaining clients.
NATIONAL PROGRAMS DIVISION
As of December 31, 2001, our National Programs Division employed approximately
200 persons. Our National Programs Division consists of two units: Professional
Programs and Special Programs.
Professional Programs. Professional Programs provides professional liability
and related package products for certain professionals delivered through
nationwide networks of independent agents. Professional Programs tailors
insurance products to the needs of a particular professional group, negotiates
policy forms, coverages and commission rates with an insurance company and, in
certain cases, secures the formal or informal endorsement of the product by a
professional association. The professional groups serviced by the National
Programs Division include dentists, lawyers, physicians, optometrists and
opticians. These programs are marketed and sold primarily through a national
network of independent agencies. We also market a variety of these products
through certain of our retail offices. Under agency agreements with the
insurance companies that underwrite these programs, we often have authority to
bind coverages, subject to established guidelines, to bill and collect premiums
and, in some cases, to process claims.
Below are brief descriptions of the programs offered to these major professional
groups:
- Dentists: The Professional Protector Plan(R) is a package insurance policy
that provides comprehensive coverage for dentists, dental schools and dental
students, including practice protection and professional liability. This
program, initiated in 1969, is endorsed by a number of state and local dental
societies and is offered in 49 states, the District of Columbia, the U.S. Virgin
Islands and Puerto Rico. We believe that this program presently insures
approximately 20% of the eligible practicing dentists within our marketing
territories.
- Lawyers: We began marketing lawyers' professional liability insurance in
1973, and the national Lawyer's Protector Plan(R) was introduced in 1983. This
program is presently offered in 47 states, the District of Columbia and Puerto
Rico.
- Physicians: We market professional liability insurance for physicians,
surgeons and other health care providers through a program known as the
Physicians Protector Plan(R). This program, initiated in 1980, is currently
offered in five states.
S-21
- Optometrists and Opticians: The Optometric Protector Plan(R) ("OPP(R)") and
the Optical Services Protector Plan(R) ("OSPP(R)") were created in 1973 and
1987, respectively, to provide optometrists and opticians with a package of
practice and professional liability coverage. These programs insure optometrists
and opticians in all 50 states and Puerto Rico.
Special Programs. This unit markets targeted products and services designated
for specific industries, trade groups and market niches. Special Programs
consists of the following:
- Florida Intracoastal Underwriters, Limited Company ("FIU") is a managing
general agency that specializes in providing insurance coverage for coastal and
inland high-value condominiums and apartments. FIU has developed a specialty
reinsurance facility to support the underwriting activities associated with
these risks. One of our subsidiaries has a 75% ownership interest in FIU.
- Parcel Insurance Plan(R) ("PIP(R)") is a specialty insurance agency providing
insurance coverage to commercial and private shippers for small packages and
parcels with insured values of less than $25,000 each.
- Program Management Services is a managing general agent that offers unique
property and casualty insurance products targeted at governmental entities on a
national basis.
- Apollo Financial Corporation offers targeted insurance products to social
services organizations.
- Commercial Programs serves the insurance needs of certain specialty
trade/industry groups. Programs offered include:
- Manufacturers Protector Plan(R). Introduced in 1997, this program
provides specialized coverages for manufacturers, with an emphasis on
selected niche markets.
- Wholesalers & Distributors Preferred Program(R). Introduced in 1997, this
program provides property and casualty protection for businesses principally
engaged in the wholesale-distribution industry.
- Railroad Protector Plan(R). Also introduced in 1997, this program is
designed for contractors, manufacturers and other entities that service the
needs of the railroad industry.
- Environmental Protector Plan(R). This program was introduced in 1998 and
is currently offered in 36 states. It provides a variety of specialized
environmental coverages, with an emphasis on municipal Mosquito Control and
Water Control Districts.
- Food Processors Preferred Program(SM). This program, introduced in 1998,
provides property and casualty insurance protection for businesses involved
in the handling and processing of various foods.
During 2001, we discontinued the following Commercial Programs due to loss of
underwriting insurance companies: Towing Operators Protector Plan(R); Automobile
Dealers Protector Plan(R); Automobile Transporters Protector Plan(R); Automotive
Aftermarket Protector Plan(R); High-Tech Target Program(SM) and Assisted Living
Facilities Protector Plan(R). We are currently evaluating the continued
viability of these programs. In addition, SCPIE Indemnity Company and American
Healthcare Indemnity Company, which are subsidiaries of SCPIE Holdings, Inc.,
underwrite the Physicians Protector Plan(R). In 2001, revenues from this program
represented less than 0.75% of our revenues. Recently, these insurance carriers
have indicated that they wish to discontinue their involvement with this
program, and to terminate the arrangement whereby they underwrite the
Professional Protector Plan(R) for Dentists in two states. Under the contracts
between us and these insurance carriers, one year's advance written notice is
required in order to terminate these arrangements. We are in the process of
reaching an agreement to terminate these arrangements
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and identifying other insurance carriers to replace the present carriers. We
expect to replace the present carriers within the next year. We cannot, however,
assure you that replacement carriers will be identified and agreements will be
reached with such carriers.
SERVICES DIVISION
At December 31, 2001, the Services Division employed approximately 325 persons
and consisted of subsidiaries that provide the following services: (1)
insurance-related services as a third-party administrator and consultant for
employee health and welfare benefit plans; (2) insurance-related services
providing comprehensive risk management and third-party administration to
insurance entities and self-funded or fully-insured workers' compensation and
liability plans; and (3) certified managed care and utilization management
services for both insurance programs and self-funded plans.
In connection with its employee benefit plan administrative services, the
Services Division provides third-party administration and consulting related to
benefit plan design and costing, arrangement for the placement of stop-loss
insurance and other employee benefit coverages, and settlement of claims.
Services Division units also provide utilization management services such as
pre-admission review, concurrent/retrospective review, pre-treatment review of
certain non-hospital treatment plans and medical and psychiatric case
management. In addition to the administration of self-funded health care plans,
this unit offers administration of flexible benefit plans, including plan
design, employee communication, enrollment and reporting.
The Services Division's workers' compensation and liability third-party
administration include claim administration, access to major reinsurance
markets, cost containment consulting, services for secondary disability and
subrogation recoveries and risk management services such as loss control. In
2001, our largest workers' compensation contract represented approximately 38%
of our workers' compensation third-party administration revenues, or
approximately 1.6% of our total commission and fee revenues. In addition, the
Services Division provides managed care services certified by the American
Accreditation Health Care Commission, which include medical networks, case
management and utilization review services.
BROKERAGE DIVISION
The Brokerage Division markets excess and surplus commercial insurance and
reinsurance to retail agencies primarily in the southeastern United States, as
well as throughout the United States, including through our Retail Division. The
Brokerage Division represents various U.S. and U.K. surplus lines companies and
is also a Lloyd's of London correspondent. In addition to surplus lines
insurance companies, the Brokerage Division represents admitted insurance
companies for smaller agencies that do not have access to large insurance
company representation. Excess and surplus products include commercial
automobile, garage, restaurant, builder's risk and inland marine lines.
Difficult-to-insure general liability and products liability coverages are a
specialty, as is excess workers' compensation coverage. Retail agency business
is solicited through mailings and direct contact with retail agency
representatives. At December 31, 2001, the Brokerage Division employed
approximately 80 persons.
In January 2002, the operations of Champion Underwriters, Inc., a subsidiary
based in Ft. Lauderdale, Florida that specializes in the marketing and selling
of excess and surplus commercial insurance, were combined with Peachtree Special
Risk Brokers, LLC, an affiliate headquartered in Atlanta, Georgia that
specializes in the marketing and selling of excess and surplus lines of property
insurance.
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In September 2001, we established Brown & Brown Re, Inc., a subsidiary based in
Stamford, Connecticut that specializes in treaty and facultative reinsurance
brokerage services.
EMPLOYEES
At December 31, 2001, we had approximately 3,000 employees. We have contracts
with our sales employees and certain other employees that include provisions
restricting their right to solicit our clients and employees after termination
of employment with us. The enforceability of such contracts varies from state to
state depending upon state statutes, judicial decisions and factual
circumstances. The majority of these contracts are terminable by either party;
however, the agreements not to solicit our clients and employees generally
continue for a period of two or three years after employment termination.
None of our employees is represented by a labor union, and we consider our
relations with our employees to be satisfactory.
COMPETITION
The insurance agency and brokerage business is highly competitive, and numerous
firms actively compete with us for clients and insurance companies. Although we
are the largest insurance agency and brokerage headquartered in the southeastern
United States and were ranked in 2001, based on 2000 revenues, as the nation's
eighth largest by Business Insurance magazine, a number of firms with
substantially greater resources and market presence compete with us in the
southeastern United States and elsewhere. This situation is particularly
pronounced outside of Florida. Competition in the insurance business is largely
based on innovation, quality of service and price.
A number of insurance companies are engaged in the direct sale of insurance,
primarily to individuals, and do not pay commissions to third-party agents and
brokers. In addition, the Internet continues to be a source for direct placement
of personal lines business. To date, such direct writing has had relatively
little effect on our operations, primarily because our Retail Division is
commercially oriented.
In addition, to the extent that the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 and regulations recently enacted thereunder permit
banks, securities firms and insurance companies to affiliate, the financial
services industry may experience further consolidation, which in turn could
result in increased competition from diversified financial institutions,
including competition for acquisition candidates.
REGULATION, LICENSING AND AGENCY CONTRACTS
We or our designated employees must be licensed to act as agents by state
regulatory authorities in the states in which we conduct business. Regulations
and licensing laws vary in individual states and are often complex.
The applicable licensing laws and regulations in all states are subject to
amendment or reinterpretation by state regulatory authorities, and such
authorities are vested in most cases with relatively broad discretion as to the
granting, revocation, suspension and renewal of licenses. The possibility exists
that we or our employees could be excluded or temporarily suspended from
carrying on some or all of our activities in, or otherwise subjected to
penalties by, a particular state.
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PROPERTIES
We lease our executive offices, which are located at 220 South Ridgewood Avenue,
Daytona Beach, Florida 32114, and 401 East Jackson Street, Suite 1700, Tampa,
Florida 33602. We lease offices at every location with the exception of our
Ocala, Florida; Opelousas and Ruston, Louisiana; Washington, New Jersey;
Dansville, Hornell and Jamestown New York; and Grand Forks, North Dakota
offices, where we own the buildings. In addition, we own buildings in
Loreauville and Scott, Louisiana, and Penn Yan, New York, where we no longer
have offices, as well as a parcel of undeveloped property outside of Lafayette,
Louisiana. There is a mortgage on the Ocala, Florida building with an
outstanding balance as of December 31, 2001 of $0.6 million. There is also a
mortgage on the Grand Forks, North Dakota building with an outstanding balance
as of December 31, 2001 of $0.1 million. There are no outstanding mortgages on
our other owned properties. Set forth below is information relating to our
office locations as of December 31, 2001, summarized by business segment:
Retail Division Office Locations:
- Arizona: Phoenix, Prescott, Tucson
- California: Novato, Oakland, Thousand Oaks
- Colorado: Colorado Springs, Denver, Ft. Collins, Longmont, Steamboat Springs
- Connecticut: Newington
- Florida: Brooksville, Clearwater, Daytona Beach, Ft. Lauderdale, Ft. Myers,
Ft. Pierce, Jacksonville, Leesburg, Melbourne, Miami Lakes, Monticello, Naples,
Ocala, Orlando, Panama City, Pensacola, Perry, Port Charlotte, Sarasota, St.
Petersburg, Tallahassee, Tampa, Titusville, West Palm Beach, Winter Haven
- Georgia: Atlanta, Canton, Rome
- Indiana: Indianapolis
- Iowa: Des Moines
- Louisiana: Abbeville, Baton Rouge, Breaux Bridge, Lafayette, New Iberia,
Opelousas, Ruston
- Michigan: Flint, Jackson
- Minnesota: Duluth, East Grand Forks, Fairmont, Mankato, New Ulm, St. Cloud
- Nevada: Las Vegas
- New Jersey: Clark, Washington
- New Mexico: Albuquerque, Roswell, Taos
- New York: Avon, Clifton Park, Dansville, East Greenbush, Endicott, Geneva,
Hornell, Ithaca, Jamestown, Naples, Rochester, Rome, Sodus, Spencerport,
Syracuse, Wellsville, Williamsville, Wolcott
- North Dakota: Bismarck, Fargo, Grand Forks, Jamestown, Minot
- Ohio: Toledo
- Oklahoma: Pryor
- Pennsylvania: Bethlehem
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- South Carolina: Charleston, Georgetown, Greenville, Spartanburg, Union
- Tennessee: Kingsport
- Texas: El Paso, Houston
- Virginia: Bristol, Manassas, Norfolk, Norton, Richlands, Richmond, Salem,
Virginia Beach
- Washington: Seattle, Tacoma, Wenatachee
- Wisconsin: Hartland, LaCrosse
- Wyoming: Cheyenne
National Programs Division Office Locations:
- Professional Programs: Tampa, Florida
- Special Programs:
- Florida: Altamonte Springs, Miami Lakes, Plantation, Tampa
- Missouri: St. Louis
- New York: Mechanicville
- Pennsylvania: Bethlehem
- Texas: San Antonio
Services Division Office Locations:
- Florida: Altamonte Springs, Daytona Beach, Orlando, Oviedo
- Louisiana: Lafayette
Brokerage Division Office Locations:
- Connecticut: Stamford
- Florida: Daytona Beach, Ft. Lauderdale, Lake Mary, Orlando, St. Petersburg
- Georgia: Atlanta
- New York: Massapequa, Rochester
- North Carolina: Charlotte
Our operating leases expire on various dates. These leases generally contain
renewal options and escalation clauses based on increases in the lessors'
operating expenses and other charges. We expect that most leases will be renewed
or replaced upon expiration. From time to time, we may have unused space and
seek to sublet such space to third parties, depending on the demand for office
space in the locations involved. See note 13 of the notes to our consolidated
financial statements for additional information on our lease commitments.
LEGAL PROCEEDINGS
On January 19, 2000, a complaint was filed in the Superior Court of Henry
County, Georgia, captioned Gresham & Associates, Inc. vs. Anthony T. Strianese,
et al. The complaint names us, certain of our subsidiaries and affiliates, and
two of their employees as defendants. The complaint
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alleges, among other things, that we tortiously interfered with the contractual
relationship between the plaintiff and certain of its employees. The plaintiff
alleges that we hired such persons and actively encouraged them to violate the
restrictive covenants contained in their employment agreements with plaintiff.
The complaint seeks compensatory damages from us with respect to each of the two
employees in amounts "not less than $750,000" and seeks punitive damages for
alleged intentional wrongdoing in an amount "not less than $10,000,000." The
complaint also sought a declaratory judgment regarding the enforceability of the
restrictive covenants in the employment agreements and an injunction prohibiting
the violation of those agreements. The plaintiff subsequently dismissed the
claims for a declaratory judgment and an injunction, as well as its claims of
breach of contract against the two individual employees named as defendants.
Those individuals, and Peachtree Special Risk Brokers, LLC, one of our
affiliates named as a defendant in this action, have filed counterclaims against
the plaintiff, seeking damages, and seeking a declaratory judgment holding that
the restrictive covenants in the employment agreements are not enforceable. We
believe that we have meritorious defenses to each of the claims remaining in
this action, and intend to contest this action vigorously.
We are involved in various other pending or threatened proceedings by or against
us or one or more of our subsidiaries that involve routine litigation relating
to insurance risks placed by us and other contractual matters. Our management
does not believe that any of such pending or threatened proceedings will have a
materially adverse effect on our consolidated financial position or future
operations.
S-27
MANAGEMENT
Set forth below is certain information concerning our executive officers and
directors. All directors and officers hold office for one-year terms or until
their successors are elected and qualified.
--------------------------------------------------------------------------------------------------------
YEAR FIRST BECAME
NAME POSITIONS AGE A DIRECTOR
--------------------------------------------------------------------------------------------------------
J. Hyatt Brown Chairman of the Board, President and 64 1993
Chief Executive Officer
Jim W. Henderson Executive Vice President, Assistant 55 1993
Treasurer and Director
Samuel P. Bell, III Director 62 1993
Bradley Currey, Jr. Director 71 1995
Theodore J. Hoepner Director 60 1994
David H. Hughes Director 58 1997
Toni Jennings Director 52 1999
John R. Riedman Director 73 2001
Jan E. Smith Director 62 1997
C. Roy Bridges Regional Executive Vice President 52 --
Linda S. Downs Regional Executive Vice President 51 --
Kenneth D. Kirk Regional Executive Vice President 41 --
J. Scott Penny Regional Executive Vice President 35 --
Thomas E. Riley Regional Executive Vice President 46 --
Cory T. Walker Vice President, Chief Financial Officer 44 --
and Treasurer
Laurel L. Grammig Vice President, Secretary and General 43 --
Counsel
Thomas M. Donegan, Jr. Vice President, Assistant Secretary and 31 --
Assistant General Counsel
M. Catherine Wellman Vice President, Assistant Secretary and 28 --
Assistant General Counsel
--------------------------------------------------------------------------------------------------------
J. Hyatt Brown. Mr. Brown has been our President and Chief Executive Officer
since 1993, and the Chairman of the Board of Directors since 1994. Mr. Brown was
President and Chief Executive Officer of our predecessor corporation from 1961
to 1993. He was a member of the Florida House of Representatives from 1972 to
1980, and Speaker of the House from 1978 to 1980. Mr. Brown serves on the Board
of Directors of SunTrust Banks, Inc., SunTrust Bank/East Central Florida,
International Speedway Corporation, The FPL Group, Inc., BellSouth Corporation,
Rock-Tenn Company, and SCPIE Holdings Inc., each a publicly held company. He
also serves on the Board of Trustees of Stetson University, of which he is a
past Chairman, and serves as a member of the YMCA Advisory Board, the March of
Dimes Board of Directors, and the Salvation Army Advisory Council. He is also
the Secretary of the Council of Insurance Agents and Brokers.
Jim W. Henderson. Mr. Henderson served as our Senior Vice President from 1993 to
1995, and was elected Executive Vice President in 1995. He served as Senior Vice
President of our predecessor corporation from 1989 to 1993, and as Chief
Financial Officer from 1985 to 1989.
Samuel P. Bell, III. Mr. Bell has been a shareholder of the law firm of
Pennington, Moore, Wilkinson, Bell & Dunbar, P.A. since January 1, 1998 and also
serves as Of Counsel to the law firm of Cobb Cole & Bell. Prior to that, he was
a shareholder and managing partner of Cobb Cole & Bell. He has served as counsel
to us and our predecessor corporation since 1964. Mr. Bell was a member of the
Florida House of Representatives from 1974 to 1988.
S-28
Bradley Currey, Jr. Mr. Currey served as Chief Executive Officer of Rock-Tenn
Company, a manufacturer of packaging and recycled paperboard products, from 1989
to 1999 and as Chairman of the Board of Rock-Tenn Company from 1993 to January
31, 2000, when he retired. He also previously served as President (1978-1995)
and Chief Operating Officer (1978-1989) of Rock-Tenn Company. Mr. Currey is a
member of the Board of Directors and the Executive Committee of Rock-Tenn
Company; the Board of Directors, the Executive Committee and the Compensation
Committee of Genuine Parts Company; and the Board of Directors of Enzymatic
Deinking Technologies, Inc. Mr. Currey is Trustee Emeritus and a past Chairman
of the Board of Trustees of Emory University. He is also a past Chairman of the
Federal Reserve Bank of Atlanta.
Theodore J. Hoepner. Mr. Hoepner has been Vice Chairman of SunTrust Banks, Inc.
since 2000. From 1995 to 2000, Mr. Hoepner served as Chairman of the Board,
President and Chief Executive Officer of SunTrust Banks, Inc. f/k/a SunTrust
Banks of Florida, Inc. From 1990 through 1995, he served as Chairman of the
Board, President and Chief Executive Officer of SunBank, N.A. From 1983 through
1990, he was the Chairman of the Board and Chief Executive Officer of
SunBank/Miami, N.A.
David H. Hughes. Mr. Hughes has been Chief Executive Officer of Hughes Supply,
Inc., a publicly held business-to-business distributor of construction and
industrial supplies, since 1974, and has been Chairman of the Board since 1986.
Mr. Hughes is a member of the Board of Directors of SunTrust Banks, Inc. and
Darden Restaurants, Inc., a publicly held company.
Toni Jennings. Ms. Jennings has been President of Jack Jennings & Sons, Inc., a
commercial construction firm based in Orlando, Florida, since 1982. Ms. Jennings
also serves as Secretary and Treasurer of Jennings & Jennings, Inc., an
architectural millwork firm based in Orlando, Florida. Ms. Jennings was a member
of the Florida Senate from 1980 to 2000, and President of the Florida Senate
from 1996 to 2000. She previously served in the Florida House of Representatives
from 1976 to 1980. She currently serves on the Salvation Army Advisory Board;
the Rollins College Board of Trustees and the Board of Directors of SunTrust
Bank/Central Florida, Hughes Supply, Inc. and the Florida Chamber of Commerce.
John R. Riedman. Mr. Riedman was elected to our Board of Directors in January
2001. He has served as Chairman of Riedman Corporation, based in Rochester, New
York, since 1992. In January 2001, we acquired the insurance agency operations
of Riedman Corporation, at which time Mr. Riedman joined us as an Executive Vice
President and was elected as Vice Chairman of Brown & Brown of New York, Inc.,
one of our subsidiaries. Mr. Riedman is a Trustee and Finance Committee member
of ViaHealth, a Rochester-based healthcare services network; an honorary Trustee
of WXXI Public Broadcasting Corporation; and a member of the Executive Committee
of the Greater Rochester Chamber of Commerce. He serves as President of 657 East
Avenue Corp. (a subsidiary of Rochester Museum and Science Center) and of the
Monroe County Sheriff's Foundation, and as Chairman of the Greater Rochester
Sports Authority. He serves on the Board of Directors of High Falls Brewing
Company, Sage, Rutty & Company, Inc., a Rochester-based financial services firm;
the New York State Thruway Authority; and the New York State Canal Corporation.
Mr. Riedman also served as a director and Chairman of the Audit Committee of
Fleet Financial Group, a publicly-held company, from 1988 to 1999.
Jan E. Smith. Mr. Smith has served as President of Jan Smith & Company, a
commercial real estate and business investment firm, since 1978. Mr. Smith is
also the managing general partner of Ramblers Rest Resort, Ltd., a recreational
vehicle park in Venice, Florida, and President of Travel Associates, Inc. Mr.
Smith serves on the Board of Directors of SunTrust Bank/Gulf Coast, and is a
member of the University of South Florida Foundation Board of Trustees. He also
serves as a member of the Florida Education Governance Reorganization Transition
Task Force and as a
S-29
member of the Tampa Bay Business Hall of Fame. He is a past member of the
Advisory Council of the Federal Reserve Bank of Atlanta.
C. Roy Bridges. Mr. Bridges was elected as one of our Regional Executive Vice
Presidents in January 2002. Since 1998, Mr. Bridges has overseen our profit
center operations in northern and Western Florida, as well as in Louisiana and
Oklahoma. Prior to undertaking his current duties, Mr. Bridges served as profit
center manager of our Ft. Myers, Florida retail office from 1993 to 1998. Mr.
Bridges also served as profit center manager of our Tampa, Florida retail office
from 1998 to 2001 and was previously a profit center manager of our Brooksville,
Florida retail office.
Linda S. Downs. Ms. Downs was elected as one of our Regional Executive Vice
Presidents in January 2002. Since 1998, Ms. Downs has overseen various profit
center operations for us, including operations in Tennessee, Virginia, and
Orlando, Florida, as well as our professional and commercial insurance programs.
Prior to undertaking her current duties, Ms. Downs served as profit center
manager of our Orlando, Florida retail office from 1980 to 1998.
Kenneth D. Kirk. Mr. Kirk was elected as one of our Regional Executive Vice
Presidents in January 2002. Since 1995, Mr. Kirk has overseen our profit center
operations in Arizona, California, Colorado, New Mexico, Nevada, Washington and
Wyoming, as well as in El Paso, Texas. Prior to undertaking his current duties,
Mr. Kirk served as profit center manager of our Phoenix, Arizona retail office
from 1995 to 2000.
J. Scott Penny. Mr. Penny was elected as one of our Regional Executive Vice
Presidents in January 2002. Mr. Penny oversees our profit center operations in
Indiana, Iowa, Ohio, Michigan, Minnesota, North Dakota and Wisconsin. Since
1999, Mr. Penny has served as profit center manager of our Indianapolis, Indiana
retail office. Prior to that, Mr. Penny served as profit center manager of our
Jacksonville, Florida retail office from 1997 to 1999.
Thomas E. Riley. Mr. Riley was elected as one of our Regional Executive Vice
Presidents in January 2002. Since 1999, Mr. Riley has overseen our profit center
operations in southeastern Florida, as well as in Connecticut, New Jersey, New
York, and Pennsylvania. Prior to undertaking his current duties, Mr. Riley
served as profit center manager of our Fort Lauderdale, Florida retail office
from 1992 to 2001 and served as Chief Financial Officer from 1990 to 1991.
Cory T. Walker. Mr. Walker has been our Vice President, Treasurer and Chief
Financial Officer since 2000. Mr. Walker previously served as our Vice President
and Chief Financial Officer from 1992 to 1994. Between 1995 and 2000, Mr. Walker
served as profit center manager for our Oakland, California retail office.
Before joining us, Mr. Walker was a Senior Audit Manager for Ernst & Young LLP.
Laurel L. Grammig. Ms. Grammig has been our Vice President, Secretary and
General Counsel since 1994. Before joining us, Ms. Grammig was a partner of the
law firm of Holland & Knight LLP in Tampa, Florida.
Thomas M. Donegan, Jr. Mr. Donegan has been our Vice President, Assistant
Secretary and Assistant General Counsel since 2000. Before joining us, Mr.
Donegan was an associate with the law firm of Smith, Gambrell & Russell, LLP in
Atlanta, Georgia.
M. Catherine Wellman. Ms. Wellman has been our Assistant General Counsel since
2000 and was elected as our Vice President and Assistant Secretary in January
2001. Before joining us, Ms. Wellman was an associate with the law firm of
Meier, Lengauer, Bonner, Muszynski & Doyle, P.A. in Orlando, Florida.
S-30
UNDERWRITING
J.P. Morgan Securities Inc. and SunTrust Capital Markets, Inc. are acting as
representatives of the underwriters.
We and the underwriters named below have entered into an underwriting agreement
covering the common stock to be offered in this offering. Each underwriter has
agreed to purchase the number of shares of common stock set forth opposite its
name in the following table.
--------------------------------------------------------------------------------
NAME NUMBER OF SHARES
--------------------------------------------------------------------------------
J.P. Morgan Securities Inc.................................. 2,500,000
SunTrust Capital Markets, Inc............................... 1,300,000
Legg Mason Wood Walker, Incorporated........................ 350,000
Sandler O'Neill & Partners, L.P............................. 350,000
Dowling & Partners Securities, LLC.......................... 250,000
Ferris, Baker Watts, Incorporated........................... 100,000
Sterne, Agee & Leach, Inc................................... 100,000
Cochran, Caronia Securities LLC............................. 50,000
----------------
Total....................................................... 5,000,000
--------------------------------------------------------------------------------
The underwriting agreement provides that if the underwriters take any of the
shares presented in the table above, then they must take all of these shares. No
underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the prior
sale of shares, and when, as and if such shares are delivered to and accepted by
them. The underwriters will offer to sell the shares to the public at the
offering price shown on the cover page of this prospectus supplement. The
underwriters may sell shares to securities dealers at a discount of up to $0.945
per share from the public offering price. Any such securities dealers may resell
shares to certain other brokers or dealers at a discount of up to $0.10 per
share from the public offering price. After the offering, the underwriters may
vary the public offering price and other selling terms.
If the underwriters sell more shares than the total number shown on the table
above, the underwriters have the option to buy up to an additional 750,000
shares of common stock from us to cover such sales. They may exercise this
option during the 30-day period from the date of this prospectus supplement. If
any shares are purchased with this option, the underwriters will purchase shares
in approximately the same proportion as shown in the table above.
The following table shows the per share and total underwriting discounts that we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
----------------------------------------------------------------------------------------------------
WITHOUT OVER- WITH OVER-
ALLOTMENT EXERCISE ALLOTMENT EXERCISE
----------------------------------------------------------------------------------------------------
Per share $ 1.575 $ 1.575
Total $7,875,000 $9,056,250
----------------------------------------------------------------------------------------------------
The representatives have advised us that, on behalf of the underwriters, they
may make short sales of our common stock in connection with this offering,
resulting in the sale by the underwriters of a greater number of shares than
they are required to purchase pursuant to the underwriting
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agreement. The short position resulting from those short sales will be deemed a
"covered" short position to the extent that it does not exceed the 750,000
shares subject to the underwriters' over-allotment option and will be deemed a
"naked" short position to the extent that it exceeds that number. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the trading price of the common stock in the
open market that could adversely affect investors who purchase shares in this
offering. The underwriters may reduce or close out their covered short position
either by exercising the over-allotment option or by purchasing shares in the
open market. In determining which of these alternatives to pursue, the
underwriters will consider the price at which shares are available for purchase
in the open market as compared with the price at which they may purchase shares
through the over-allotment option. Any naked short position will be closed out
by purchasing shares in the open market. Like the other stabilizing transactions
described below, open market purchases made by the underwriters to cover all or
a portion of their short position may have the effect of preventing or retarding
a decline in the market price of our common stock following this offering. As a
result, our common stock may trade at a price that is higher than the price that
otherwise might prevail in the open market.
The representatives also have advised us that, pursuant to Regulation M under
the Securities Act of 1933, as amended, they may engage in transactions,
including stabilizing bids or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the shares of common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for the purchase of shares of common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "penalty bid" is an arrangement permitting the representatives
to claim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with the offering if the common stock originally
sold by that underwriter or syndicate member is purchased by the representatives
in the open market pursuant to a stabilizing bid or to cover all or part of a
syndicate short position. The representatives have advised us that stabilizing
bids and open market purchases may be effected on the New York Stock Exchange or
otherwise and, if commenced, may be discontinued at any time.
One or more of the underwriters may facilitate the marketing of this offering
online directly or through one of its affiliates. In those cases, prospective
investors may view offering terms and a prospectus supplement and accompanying
prospectus online and, depending upon the particular underwriter, place orders
online or through their financial advisors.
We estimate that the total expenses of this offering, excluding underwriting
discounts, will be approximately $600,000. The underwriters have agreed to pay
us a non-accountable expense allowance of 0.2% of the gross proceeds of the
offering.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
We and our directors and executive officers have agreed with the underwriters
that, subject to limited exceptions, for a period of 90 days following the date
of this prospectus supplement, without the prior written consent of J.P. Morgan
Securities Inc., we and our directors and executive officers will not dispose of
any shares of common stock or any securities convertible into or exchangeable
for common stock. J.P. Morgan Securities Inc. may, at any time without prior
notice, release all or any portion of the shares from these restrictions.
Notwithstanding the foregoing, we are permitted to issue shares of our common
stock in connection with acquisitions and under our stock option plan, stock
purchase plan and stock performance plan.
SunTrust Banks, Inc., the parent company of SunTrust Capital Markets, Inc., is
the lender under two of our credit facilities. Several of our directors are also
directors and officers of affiliates of SunTrust Banks, Inc. J. Hyatt Brown is a
director of SunTrust Banks, Inc. and SunTrust Bank/East
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Central Florida. Theodore J. Hoepner is Vice Chairman of SunTrust Banks, Inc.
David H. Hughes is a director of SunTrust Banks, Inc. Toni Jennings is a
director of SunTrust Bank/Central Florida. Jan E. Smith is a director of
SunTrust Bank/Gulf Coast.
It is expected that delivery of the shares will be made to investors on or about
March 12, 2002.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Holland & Knight LLP, Tampa, Florida. Certain legal matters in connection with
this offering will be passed upon for the underwriters by Cahill Gordon &
Reindel, New York, New York.
INCORPORATION BY REFERENCE
The Securities and Exchange Commission, or Commission, allows us to "incorporate
by reference" the information we file with it, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be a part of this
prospectus supplement, and later information that we file with the Commission
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended, until we sell all of the securities offered hereby. The
documents incorporated by reference are:
- Annual Report on Form 10-K for the year ended December 31, 2001 filed with the
Commission on February 14, 2002.
- All documents subsequently filed by Brown & Brown pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, shall be
deemed to be incorporated by reference in this prospectus supplement and to be
part hereof from the date of filing of such documents.
On request we will provide at no cost to each person, including any beneficial
owner who receives a copy of this prospectus supplement, a copy of any or all of
the documents incorporated in this prospectus supplement by reference. We will
not provide exhibits to any such documents, however, unless such exhibits are
specifically incorporated by reference into those documents. Written or
telephone requests for such copies should be addressed to Brown & Brown's
executive offices located at 401 East Jackson Street, Suite 1700, Tampa, Florida
33602, Attention: Corporate Secretary, telephone number (813) 222-4100.
S-33
INDEX TO THE FINANCIAL STATEMENTS OF BROWN & BROWN
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Report of independent certified public accountants.......... F-2
Consolidated statements of income for the years ended
December 31, 2001, 2000 and 1999.......................... F-3
Consolidated balance sheets as of December 31, 2001 and
2000...................................................... F-4
Consolidated statements of shareholders' equity for the
years ended December 31, 2001, 2000 and 1999.............. F-5
Consolidated statements of cash flows for the years ended
December 31, 2001, 2000 and 1999.......................... F-6
Notes to consolidated financial statements.................. F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Brown & Brown, Inc.
We have audited the accompanying consolidated balance sheets of Brown & Brown,
Inc. and its 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 financial position of Brown & Brown, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the 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.
/s/ ARTHUR ANDERSEN LLP
Orlando, Florida
January 18, 2002
F-2
BROWN & BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
----------------------------------------------------------------------------------------------
Revenues:
Commissions and fees...................................... $359,697 $258,309 $231,437
Investment income......................................... 3,686 4,887 3,535
Other income.............................................. 1,646 2,209 2,551
--------------------------------
Total revenues.................................... 365,029 265,405 237,523
Expenses:
Employee compensation and benefits........................ 187,653 149,836 131,270
Other operating expenses.................................. 56,815 44,372 41,893
Amortization.............................................. 15,860 9,226 8,343
Depreciation.............................................. 6,536 6,158 5,892
Interest.................................................. 5,703 1,266 1,360
Non-cash stock grant compensation......................... 1,984 483 1,263
--------------------------------
Total expenses.................................... 274,551 211,341 190,021
--------------------------------
Income before income taxes and minority interest............ 90,478 54,064 47,502
Income taxes................................................ 34,834 20,146 18,331
Minority interest, net of income taxes...................... 1,731 1,125 900
--------------------------------
Net income........................................ $ 53,913 $ 32,793 $ 28,271
--------------------------------
Net income per share:
Basic..................................................... $ 0.86 $ 0.53 $ 0.46
--------------------------------
Diluted................................................... $ 0.85 $ 0.53 $ 0.46
--------------------------------
Weighted average number of shares outstanding:
Basic..................................................... 62,563 61,845 61,639
--------------------------------
Diluted................................................... 63,222 62,091 61,655
----------------------------------------------------------------------------------------------
See accompanying notes to our consolidated financial statements.
F-3
BROWN & BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------
AT DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 16,048 $ 37,027
Restricted cash........................................... 50,328 32,017
Short-term investments.................................... 451 2,149
Premiums, commissions and fees receivable................. 101,449 96,952
Other current assets...................................... 8,230 9,007
--------------------
Total current assets...................................... 176,506 177,152
Fixed assets, net........................................... 25,544 17,357
Intangibles, net............................................ 268,311 113,031
Investments................................................. 8,983 6,457
Deferred income taxes, net.................................. 1,519 2,873
Other assets................................................ 7,874 7,807
--------------------
Total assets.............................................. $488,737 $324,677
--------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Premiums payable to insurance companies................... $151,649 $142,183
Premium deposits and credits due clients.................. 12,078 8,347
Accounts payable.......................................... 10,085 5,508
Accrued expenses.......................................... 31,930 27,624
Current portion of long-term debt......................... 20,855 4,387
--------------------
Total current liabilities................................. 226,597 188,049
Long-term debt.............................................. 78,195 10,660
Other liabilities........................................... 6,308 5,937
Commitments and contingencies (Note 13)
Minority interest........................................... 2,352 1,659
Shareholders' equity:
Common stock, par value $0.10 per share; authorized
140,000 shares; issued and outstanding, 63,194 at 2001
and 62,164 at 2000..................................... 6,319 6,216
Additional paid-in capital................................ 11,181 --
Retained earnings......................................... 153,392 109,661
Accumulated other comprehensive income, net of tax effect
of $2,750 at 2001 and $1,595 at 2000................... 4,393 2,495
--------------------
Total shareholders' equity................................ 175,285 118,372
--------------------
Total liabilities and shareholders' equity................ $488,737 $324,677
------------------------------------------------------------------------------------
See accompanying notes to our consolidated financial statements.
F-4
BROWN & BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED
-------------------- ADDITIONAL OTHER TOTAL
(IN THOUSANDS, EXCEPT SHARES PAR PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
PER SHARE DATA) OUTSTANDING VALUE CAPITAL EARNINGS INCOME (LOSS) EQUITY
---------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999............ 61,793 $6,179 $ -- $ 70,353 $ 5,540 $ 82,072
---------------------------------------------------------------------------------------------------------------------
Net income............................ 28,271 28,271
Net decrease in unrealized
appreciation of available-for-sale
securities.......................... (618) (618)
-----------
Comprehensive income.................. 27,653
Common stock issued for employee stock
benefit plans....................... 99 10 2,923 2,933
Common stock purchased for employee
stock benefit plans................. (136) (14) (1,141) (1,155)
Net distributions from pooled
entities............................ (165) (16) (5,752) (5,768)
Principal payments made on ESOP
obligations from pooled entities.... 857 857
Cash dividends paid ($0.115 per
share).............................. (6,237) (6,237)
---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999.......... 61,591 6,159 1,782 87,492 4,922 100,355
---------------------------------------------------------------------------------------------------------------------
Net income............................ 32,793 32,793
Net decrease in unrealized
appreciation of available-for-sale
securities.......................... (2,427) (2,427)
-----------
Comprehensive income.................. 30,366
Common stock issued for employee stock
benefit plans....................... 947 95 2,134 2,229
Common stock purchased for employee
stock benefit plans................. (365) (37) (3,916) (1,583) (5,536)
Net distributions from pooled
entities............................ (9) (1) (1,869) (1,870)
Principal payments made on ESOP
obligations from pooled entities.... 353 353
Cash dividends paid ($0.135 per
share).............................. (7,525) (7,525)
---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000.......... 62,164 6,216 -- 109,661 2,495 118,372
---------------------------------------------------------------------------------------------------------------------
Net income............................ 53,913 53,913
Net increase in unrealized
appreciation of available-for-sale
securities.......................... 1,951 1,951
Net losses on cash-flow hedging
derivatives......................... (53) (53)
-----------
Comprehensive income.................. 55,811
Common stock issued for employee stock
benefit plans....................... 786 79 4,749 4,828
Common stock issued for agency
acquisition......................... 244 24 6,432 6,456
Net distributions from pooled
entities............................ (849) (849)
Adjustment to conform fiscal year-end
for pooled entity................... 385 385
Cash dividends paid ($0.160 per
share).............................. (9,718) (9,718)
---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001.......... 63,194 $6,319 $ 11,181 $153,392 $ 4,393 $ 175,285
---------------------------------------------------------------------------------------------------------------------
See accompanying notes to our consolidated financial statements.
F-5
BROWN & BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 2001 2000 1999
-------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income................................................ $ 53,913 $ 32,793 $ 28,271
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 6,536 6,158 5,892
Amortization............................................ 15,860 9,226 8,343
Non-cash stock grant compensation....................... 1,984 483 1,263
Deferred income taxes................................... 199 (2,721) (495)
Net gains on sales of investments, fixed assets and
customer accounts..................................... (870) (712) (422)
Adjustment to conform fiscal year-end for pooled
entities.............................................. 385 -- --
Restricted cash increase................................ (18,311) (12,051) (1,665)
Premiums, commissions and fees receivable (increase)
decrease.............................................. (2,611) (18,432) 3,996
Other assets decrease (increase)........................ 838 2,343 (905)
Premiums payable to insurance companies increase
(decrease)............................................ 6,308 17,689 (3,066)
Premium deposits and credits due clients increase
(decrease)............................................ 3,731 576 (608)
Accounts payable increase............................... 2,279 (1,660) 2,666
Accrued expenses increase............................... 4,306 7,316 563
Other liabilities decrease.............................. (7,423) (570) (1,107)
Minority interest in earnings........................... 2,814 1,829 1,464
---------------------------------
Net cash provided by operating activities.......... 69,938 42,267 44,190
---------------------------------
Cash Flows from Investing Activities:
Additions to fixed assets................................. (11,017) (5,553) (6,180)
Payments for businesses acquired, net of cash acquired.... (131,039) (17,651) (16,220)
Proceeds from sales of fixed assets and customer
accounts................................................ 1,619 1,755 2,063
Purchases of investments.................................. (3,006) (781) (942)
Proceeds from sales of investments........................ 5,605 1,026 1,502
---------------------------------
Net cash used in investing activities.............. (137,838) (21,204) (19,777)
---------------------------------
Cash Flows from Financing Activities:
Proceeds from long-term debt.............................. 90,062 493 738
Payments on long-term debt................................ (33,297) (4,494) (17,945)
Issuances of common stock for employee stock benefit
plans................................................... 2,844 1,746 1,670
Purchases of common stock for employee stock benefit
plans................................................... -- (5,536) (1,155)
Net distributions from pooled entities.................... (849) (1,870) (5,781)
Cash dividends paid....................................... (9,718) (7,525) (6,237)
Cash distribution to minority interest shareholders....... (2,121) (1,597) (1,318)
---------------------------------
Net cash provided by (used in) financing
activities....................................... 46,921 (18,783) (30,028)
---------------------------------
Net (decrease) increase in cash and cash equivalents........ (20,979) 2,280 (5,615)
Cash and cash equivalents at beginning of year.............. 37,027 34,747 40,362
---------------------------------
Cash and cash equivalents at end of year.................... $ 16,048 $ 37,027 $ 34,747
-------------------------------------------------------------------------------------------------
See accompanying notes to our consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Brown & Brown, Inc., a Florida corporation, and its subsidiaries ("Brown &
Brown") is a diversified insurance agency and brokerage that markets and sells
to its clients insurance products and services, primarily in the property and
casualty area. Brown & Brown's business is divided into four segments: the
Retail Division, which provides a broad range of insurance products and services
to commercial, governmental, professional and individual clients; the National
Programs Division, which is comprised of two units--Professional Programs, which
provides professional liability and related package products for certain
professionals delivered through nationwide networks of independent agents, and
Special Programs, which markets targeted products and services designated for
specific industries, trade groups and market niches; the Services Division,
which provides insurance-related services, including third-party administration,
consulting for the workers' compensation and employee benefit self-insurance
markets, and managed healthcare services; and the Brokerage Division, which
markets and sells excess and surplus commercial insurance and reinsurance,
primarily through independent agents and brokers.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Brown
& Brown, Inc. and its subsidiaries. All significant intercompany account
balances and transactions have been eliminated in consolidation. Outside or
third party interest in Brown & Brown's net income and net assets is reflected
as minority interest in the accompanying consolidated financial statements.
As more fully described in Note 2--Pooling-of-interests acquisitions, the
accompanying consolidated financial statements for all periods presented have
been restated to show the effect of the acquisitions accounted for under the
pooling-of-interests method of accounting.
REVENUE RECOGNITION
Commission income is recognized as of the effective date of the insurance policy
or the date the customer is billed, whichever is later. At that date, the
earnings process has been completed and Brown & Brown can reliably estimate the
impact of policy cancellations for refunds and establish reserves accordingly.
The reserve for policy cancellations is periodically evaluated and adjusted as
necessary. Subsequent commission adjustments are recognized upon notification
from the insurance companies. Commission revenues are reported net of sub-broker
commissions. Contingent commissions from insurance companies are recognized when
determinable, which is when such commissions are received. Fee income is
recognized as services are rendered.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, as
well as disclosures of contingent assets and liabilities, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents principally consist of demand deposits with financial
institutions and highly liquid investments having maturities of three months or
less when purchased.
RESTRICTED CASH, AND PREMIUMS, COMMISSIONS AND FEES RECEIVABLE
In its capacity as an insurance agent or broker, Brown & Brown typically
collects premiums from insureds and, after deducting its authorized commissions,
remits the premiums to the appropriate insurance companies. Accordingly, as
reported in the consolidated balance sheets, "premiums" are receivable from
insureds. Unremitted insurance premiums are held in a fiduciary capacity until
disbursed by Brown & Brown. In certain states where Brown & Brown operates, the
use and investment alternatives for these funds are regulated by various state
agencies. Brown & Brown invests these unremitted funds only in cash, money
market accounts and commercial paper, and reports such amounts as restricted
cash on the consolidated balance sheets. The interest income earned on these
unremitted funds is reported as investment income in the consolidated statements
of income.
In other circumstances, the insurance companies collect the premiums directly
from the insureds and remit the applicable commissions to Brown & Brown.
Accordingly, as reported in the consolidated balance sheets, "commissions" are
receivable from insurance companies. "Fees" are primarily receivable from
clients of Brown & Brown's Services Division.
INVESTMENTS
Brown & Brown's marketable equity securities have been classified as
"available-for-sale" and are reported at estimated fair value, with the
accumulated other comprehensive income (unrealized gains and losses), net of
tax, reported as a separate component of shareholders' equity. Realized gains
and losses and declines in value below cost that are 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 in the consolidated statements of income.
As of December 31, 2001 and 2000, Brown & Brown's marketable equity securities
principally represented a long-term investment in 559,970 shares of common stock
of Rock-Tenn Company. Brown & Brown's President and Chief Executive Officer
serves on the board of directors of Rock-Tenn Company. Brown & Brown has no
current intentions to add to or to sell these shares.
Non-marketable equity securities and certificates of deposit having maturities
of more than three months when purchased are reported at cost and are adjusted
for other-than-temporary market value declines.
Accumulated other comprehensive income reported in shareholders' equity was
$4,393,000 at December 31, 2001 and $2,495,000 at December 31, 2000, net of
deferred income taxes of $2,750,000 and $1,595,000, respectively.
FIXED ASSETS
Fixed assets are stated at cost. Expenditures for improvements are capitalized,
and expenditures for maintenance and repairs are charged to operations as
incurred. Upon sale or retirement, the cost and related accumulated depreciation
and amortization are removed from the accounts and the
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulting gain or loss, if any, is reflected in income. Depreciation has been
determined using the straight-line method over the estimated useful lives of the
related assets, which range from three to ten years. Leasehold improvements are
amortized on the straight-line method over the term of the related lease.
INTANGIBLES
Intangible assets are stated at cost less accumulated amortization and consist
of purchased customer accounts, noncompete agreements, acquisition costs, and
the excess of costs over the fair value of identifiable net assets acquired
(goodwill). Purchased customer accounts, noncompete agreements and acquisition
costs are being amortized on a straight-line basis over the related estimated
lives and contract periods, which range from five to 20 years. The weighted
average life of purchased customer accounts, noncompete agreements and
acquisitions costs is 17.5 years, 7.9 years and 8.0 years as of December 31,
2001, and 15.4 years, 8.1 years and 8.4 years as of December 21, 2000,
respectively. Goodwill is amortized on a straight-line basis over 15 to 40 years
and has a weighted average life of 25.6 years and 32.9 years as of December 31,
2001 and 2000, respectively. Purchased customer accounts are records and files
obtained from acquired businesses that contain information on insurance policies
and the related insured parties that is essential to policy renewals.
The carrying value of intangibles attributable to each agency division
comprising Brown & Brown is periodically reviewed by management to determine if
the facts and circumstances suggest that they may be impaired. In the insurance
agency and brokerage industry, it is common for agencies or customer accounts to
be acquired at a price determined as a multiple of their corresponding revenues.
Accordingly, Brown & Brown assesses the carrying value of its intangibles by
comparison of a reasonable multiple applied to corresponding revenues, as well
as considering the undiscounted cash flows generated by the corresponding agency
division. Any impairment identified through this assessment may require that the
carrying value of related intangibles be adjusted; however, no impairments have
been recorded for the years ended December 31, 2001, 2000 and 1999.
DERIVATIVES
Brown & Brown utilizes a derivative financial instrument to reduce interest rate
risks. Brown & Brown does not hold or issue derivative financial instruments for
trading purposes. In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS Nos. 137 and 138. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments and
hedging activities. These standards require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in the fair value
of those instruments will be reported in earnings or other comprehensive income,
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the resulting effect on the consolidated
financial statements will depend on the derivative's hedge designation and
whether the hedge is highly effective in achieving offsetting changes in the
fair value of cash flows as compared to changes in the fair value of the
liability being hedged.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Brown & Brown files a consolidated federal income tax return. Deferred income
taxes are provided for in the consolidated financial statements and relate
principally to expenses charged to income for financial reporting purposes in
one period and deducted for income tax purposes in other periods, unrealized
appreciation of available-for-sale securities, and basis differences of
intangible assets.
NET INCOME PER SHARE
Basic net income per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Basic net income per share excludes dilution. Diluted net income per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted to common stock.
The following table sets forth the computation of basic net income per common
share and diluted net income per common and common equivalent share:
---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
---------------------------------------------------------------------------------------------
Net income.................................................. $53,913 $32,793 $28,271
-----------------------------
Weighted average number of common shares outstanding........ 62,563 61,845 61,639
Dilutive effect of stock options using the treasury stock
method.................................................... 659 246 16
-----------------------------
Weighted average number of common and common equivalent
shares outstanding........................................ 63,222 62,091 61,655
-----------------------------
Basic net income per share.................................. $ 0.86 $ 0.53 $ 0.46
-----------------------------
Diluted net income per common and common equivalent share... $ 0.85 $ 0.53 $ 0.46
---------------------------------------------------------------------------------------------
All share and per share amounts in the consolidated financial statements have
been restated to give effect to the two-for-one common stock split effected by
Brown & Brown on November 21, 2001 and the two-for-one common stock split
effected by Brown & Brown on August 23, 2000. Each stock split was effected as a
stock dividend.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Brown & Brown's financial assets and liabilities,
including cash and cash equivalents, investments, premiums, commissions and fees
receivable, premiums payable to insurance companies, premium deposits and
credits due clients and accounts payable, at December 31, 2001 and 2000,
approximate fair value because of the short maturity of these instruments. The
carrying amount of Brown & Brown's long-term debt approximates fair value at
December 31, 2001 and 2000 since the debt is at floating rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Brown & Brown has historically used the
pooling-of-interests method to record those acquisitions that met
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the now-superseded APB No. 16, and the purchase method of accounting for other
acquisitions. Acquisitions that met the now-superseded APB No. 16's
pooling-of-interests criteria and that were initiated prior to June 30, 2001
with executed letters of intent outlining the major terms of the acquisition
plan, including the ratio of exchange of stock, were accounted for as
pooling-of-interests transactions. All of Brown & Brown's future acquisitions
will be consummated using the purchase method.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses how intangible assets that are acquired individually or
as a group of other assets should be accounted for in financial statements upon
their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. Goodwill, which historically has been
amortized over a 20-to 40-year time period, will no longer be subject to
amortization. Instead, goodwill will be tested at least annually for impairment
by applying a fair-value-based test. Goodwill and intangible assets acquired
after June 30, 2001 were immediately subject to the provisions of SFAS No. 142;
otherwise, the provisions of this statement became effective January 1, 2002.
Exclusive of non-amortization of goodwill, Brown & Brown does not expect the
adoption of SFAS No. 142 during the first quarter of 2002 to have a material
impact on Brown & Brown's consolidated financial statements.
Additionally, in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses the financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. Brown & Brown does not expect the adoption of
SFAS No. 143 to have a material impact on Brown & Brown's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Disposal or
Impairment of Long-Lived Assets," which now requires that a single accounting
impairment model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
Brown & Brown does not expect the adoption of SFAS No. 144 to have a material
impact on Brown & Brown's consolidated financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. POOLING-OF-INTERESTS ACQUISITIONS
In 2001, Brown & Brown acquired all of the outstanding stock of the following
insurance agency or brokerage firms. These transactions have been accounted for
under the pooling-of-interests method of accounting and, accordingly, Brown &
Brown's consolidated financial statements and related notes have been restated
for all periods prior to the dates of acquisition to include the results of
operations, financial positions and cash flows of these companies. The following
table reflects the effects of its 2001 acquisitions on the 2001, 2000 and 1999
individual and combined operating results of Brown & Brown:
---------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
COMMON ------------------------------- ------------------------------- --------
(IN THOUSANDS, EXCEPT SHARES NET NET INCOME NET NET INCOME
SHARE AND PER SHARE DATA) ISSUED REVENUE INCOME PER SHARE REVENUE INCOME PER SHARE REVENUE
---------------------------------------------------------------------------------------------------------------------------
Brown & Brown, as previously
reported for 2000 and 1999...... $307,050 $50,941 $ 0.87 $209,706 $33,186 $ 0.58 $188,391
The Huval Companies.............. 654,758 7,981 458 7,784 147 6,374
Spencer & Associates, Inc. and
SAN of East Central Florida,
Inc. ........................... 191,176 1,971 191 2,050 (67) 1,741
The Young Agency, Inc. .......... 1,142,858 11,784 771 11,207 (606) 9,911
Layne & Associates, Ltd. ........ 482,334 6,707 234 6,808 (1,098) 5,701
Agency of Insurance
Professionals, Inc., CompVantage
Insurance Agency, LLC, and
Agency of Indian Programs
Insurance, LLC.................. 240,268 2,591 257 2,168 24 1,726
Finwall & Associates Insurance,
Inc. ........................... 167,466 1,685 102 1,701 215 1,522
The Connelly Insurance Group,
Inc. ........................... 515,176 5,984 415 5,155 270 4,569
The Benefit Group, Inc. ......... 119,708 865 166 1,066 426 692
Logan Insurance Agency, Inc. and
Automobile Insurance Agency of
Virginia, Inc. ................. 16,736 488 68 459 54 478
Froelich-Paulson-Moore, Inc. and
M&J Buildings, LLC.............. 62,200 1,193 83 1,266 109 1,276
McKinnon & Mooney, Inc........... 42,018 671 (6) 805 19 761
Raleigh, Schwarz & Powell,
Inc............................. 1,130,112 16,059 233 15,230 114 14,381
---------------------------- --------------- --------------- --------
Brown & Brown, as combined....... $365,029 $53,913 $ 0.85 $265,405 $32,793 $ 0.53 $237,523
---------------------------------------------------------------------------------------------------------------------------
--------------------------------- --------------------
1999
--------------------
(IN THOUSANDS, EXCEPT NET NET INCOME
SHARE AND PER SHARE DATA) INCOME PER SHARE
--------------------------------- --------------------
Brown & Brown, as previously
reported for 2000 and 1999...... $26,789 $ 0.47
The Huval Companies.............. 470
Spencer & Associates, Inc. and
SAN of East Central Florida,
Inc. ........................... (93)
The Young Agency, Inc. .......... 289
Layne & Associates, Ltd. ........ (408)
Agency of Insurance
Professionals, Inc., CompVantage
Insurance Agency, LLC, and
Agency of Indian Programs
Insurance, LLC.................. 9
Finwall & Associates Insurance,
Inc. ........................... 129
The Connelly Insurance Group,
Inc. ........................... 194
The Benefit Group, Inc. ......... 128
Logan Insurance Agency, Inc. and
Automobile Insurance Agency of
Virginia, Inc. ................. 58
Froelich-Paulson-Moore, Inc. and
M&J Buildings, LLC.............. 140
McKinnon & Mooney, Inc........... 67
Raleigh, Schwarz & Powell,
Inc............................. 499
---------------------------- -------
Brown & Brown, as combined....... $28,271 $ 0.46
-----------------------------------------------------------------------------------------------
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 2000, Brown & Brown acquired all of the outstanding stock of the following
insurance agency or brokerage firms. These transactions have been accounted for
under the pooling-of-interests method of accounting and, accordingly, Brown &
Brown's consolidated financial statements and related notes have been restated
for all periods prior to the dates of acquisition to include the results of
operations, financial positions and cash flows of these companies. The following
table reflects the effects of its 2000 acquisitions on the 2000, 1999 and 1998
individual and combined operating results of Brown & Brown:
----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ --------
(IN THOUSANDS, COMMON NET NET
EXCEPT SHARE AND SHARES NET INCOME NET INCOME
PER SHARE DATA) ISSUED REVENUE INCOME PER SHARE REVENUE INCOME PER SHARE REVENUE
----------------------------------------------------------------------------------------------------------------------------------
Brown & Brown, as previously reported for
1999 and 1998............................ $197,162 $32,088 $0.58 $176,413 $27,172 $0.50 $158,947
Bowers, Schumann & Welch.................. 1,087,176 5,223 594 5,133 (506) 5,337
The Flagship Group, Ltd................... 379,828 3,931 246 3,850 244 4,316
WMH, Inc. and Huffman & Associates, Inc... 361,660 2,516 169 2,240 154 2,167
Mangus Insurance & Bonding, Inc........... 115,910 874 89 755 (275) 718
------------------------------------ -------------- -------------- --------
Brown & Brown, as combined................ $209,706 $33,186 $0.58 $188,391 $26,789 $0.47 $171,485
----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------ -------------------
1998
-------------------
(IN THOUSANDS, NET
EXCEPT SHARE AND NET INCOME
PER SHARE DATA) INCOME PER SHARE
------------------------------------------ -------------------
Brown & Brown, as previously reported for
1999 and 1998............................ $23,349 $0.42
Bowers, Schumann & Welch.................. (252)
The Flagship Group, Ltd................... 314
WMH, Inc. and Huffman & Associates, Inc... 157
Mangus Insurance & Bonding, Inc........... (6)
------------------------------------ --------
Brown & Brown, as combined................ $23,562 $0.42
----------------------------------------------------------------------------------------------------------------------------------
In 1999, Brown & Brown acquired all of the outstanding stock of the following
insurance agency or brokerage firms. These transactions have been accounted for
under the pooling-of-interests method of accounting and, accordingly, Brown &
Brown's consolidated financial statements and related notes have been restated
for all periods prior to the dates of acquisition to include the results of
operations, financial positions and cash flows of these companies. The following
table reflects the effects of its 1999 acquisitions on the 1999 and 1998
individual and combined operating results of Brown & Brown:
---------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
COMMON NET NET
(IN THOUSANDS, EXCEPT SHARES NET INCOME NET INCOME
SHARE AND PER SHARE DATA) ISSUED REVENUE INCOME PER SHARE REVENUE INCOME PER SHARE
---------------------------------------------------------------------------------------------------------------------------------
Brown & Brown, as previously reported for 1998........ $171,879 $26,737 $0.50 $153,791 $23,053 $0.43
Ampher Insurance Inc. and Ross Insurance of Florida,
Inc.................................................. 669,312 1,730 44 2,994 86
Signature Insurance Group, Inc. and C,S&D General
Partnership.......................................... 421,540 2,804 391 2,162 210
-------------------------------------------------- ---------------- ----------------
Brown & Brown, as combined............................ $176,413 $27,172 $0.50 $158,947 $23,349 $0.42
---------------------------------------------------------------------------------------------------------------------------------
3. PURCHASE ACQUISITIONS
On January 1, 2001, Brown & Brown acquired the insurance-related assets of The
Riedman Corporation ("Riedman"). Riedman was a provider of a broad range of
insurance products and services in 13 states. As a result of the acquisition,
Brown & Brown acquired operations that generated $54,193,000 in commissions and
fees in 2000, and established locations in 12 new states. The aggregate purchase
price was $92,310,000, including $62,398,000 of cash, issuance of $10,546,000 in
notes payable and the assumption of $19,366,000 of liabilities, which was
primarily debt related to prior acquisitions by Riedman. The results of
Riedman's operations have been included in the consolidated financial statements
since January 1, 2001.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 1, 2001, Brown & Brown acquired the insurance-related assets of Parcel
Insurance Plan, Inc. ("PIP"). PIP was a specialty insurance agency providing
insurance coverage to commercial and private shippers for small packages and
parcels with insured values of less than $25,000 each. As a result of the
acquisition, Brown & Brown expanded into a new insurance brokerage niche. The
aggregate purchase price was $23,012,000, including $22,869,000 of cash and the
assumption of $143,000 of liabilities. The results of PIP's operations have been
included in the consolidated financial statements since May 1, 2001.
On October 1, 2001, Brown & Brown acquired the insurance-related assets of Henry
S. Lehr, Inc. and Apollo Financial Corporation ("Lehr"). Lehr was a provider of
a broad range of insurance products and services including targeted insurance
products and services for social-services organizations. As a result of the
acquisition, Brown & Brown expanded its retail insurance presence in the
northeastern United States. The aggregate purchase price was $11,600,000,
consisting entirely of cash. The results of Lehr's operations have been included
in the consolidated financial statements since October 1, 2001.
In addition, Brown & Brown acquired the assets of nine general insurance
agencies, several books of business (customer accounts) and the outstanding
stock of two general insurance agencies. The aggregate purchase price was
$47,174,000, including $36,056,000 of net cash payments, the issuance of notes
payable in the amount of $4,662,000 and the issuance of 244,028 shares of Brown
& Brown's common stock with an approximate fair market value as of the
respective acquisition dates of $6,456,000 based on the average stock price for
the 20 trading days ending three days prior to the respective closing dates. The
results of these operations have been included in the consolidated financial
statements since the dates of each acquisition.
The following table summarizes the estimated fair values of the assets acquired
at the date of each acquisition and are based on preliminary purchase price
allocations:
----------------------------------------------------------------------------------------------
(IN THOUSANDS) RIEDMAN PIP LEHR OTHER TOTAL
----------------------------------------------------------------------------------------------
Current assets............................. $ -- $ -- $ -- $ 4,114 $ 4,114
Fixed assets............................... 2,899 546 174 633 4,252
Purchased customer accounts................ 43,265 10,077 5,513 23,451 82,306
Noncompete agreements...................... 2,800 2,300 400 1,871 7,371
Acquisition costs.......................... 81 12 -- 76 169
Goodwill................................... 43,265 10,077 5,513 22,662 81,517
Other assets............................... -- -- -- 17 17
-------------------------------------------------
Total assets acquired.................... 92,310 23,012 11,600 52,824 179,746
Current liabilities........................ (9,388) (143) -- (5,333) (14,864)
Long-term debt ............................ (8,616) -- -- -- (8,616)
Non-current liabilities.................... (1,362) -- -- (317) (1,679)
-------------------------------------------------
Total liabilities assumed................ (19,366) (143) -- (5,650) (25,159)
-------------------------------------------------
Total net assets acquired................ $ 72,944 $22,869 $11,600 $47,174 $154,587
----------------------------------------------------------------------------------------------
The weighted-average useful lives for the acquired intangible assets are as
follows: purchased customer accounts--20 years; noncompete agreements--5 years;
and acquisition costs--5 years.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill of $81,517,000 was assigned to the Retail and National Programs
Divisions in the amounts of $71,440,000 and $10,077,000, respectively. Of that
total amount, $75,741,000 is expected to be deductible for tax purposes.
The results of operations for the acquisitions completed during 2001 have been
combined with those of Brown & Brown since their respective acquisition dates.
If the acquisitions had occurred at the beginning of the year 2000, Brown &
Brown's results of operations would be as shown in the following table. These
unaudited pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the acquisitions actually been made
at the beginning of the respective periods.
------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
------------------------------------------------------------------------------------
(UNAUDITED)
Total revenues.............................................. $387,805 $358,583
Income before income taxes and minority interest............ 94,479 62,724
Net income.................................................. 56,374 37,449
Net income per share:
Basic..................................................... $ 0.90 $ 0.60
Diluted................................................... $ 0.89 $ 0.60
Weighted average number of shares outstanding:
Basic..................................................... 62,767 62,089
Diluted................................................... 63,426 62,335
------------------------------------------------------------------------------------
The results of operations for the Riedman acquisition were combined with Brown &
Brown effective January 1, 2001. Riedman's unaudited revenues, income before
income taxes and minority interest and net income included in the 2000 pro forma
data summarized above approximate $54,193,000, $1,075,000 and $661,000,
respectively. The impact of Riedman on the 2000 pro forma data on diluted net
income per share approximates $0.01 per share.
Additional consideration paid to sellers or consideration returned to Brown &
Brown by sellers as a result of purchase price adjustment provisions are
recorded as adjustments to intangibles when the contingencies are settled. The
net payments by Brown & Brown as a result of these adjustments totaled
$2,342,000, $1,220,000 and $1,611,000 in 2001, 2000 and 1999, respectively. As
of December 31, 2001, the maximum future contingency payments related to
acquisitions totaled $10,852,000.
In 2000, Brown & Brown acquired the assets of five general insurance agencies,
several books of business (customer accounts) and the outstanding stock of two
general insurance agencies. The aggregate purchase price was $19,669,000,
including $19,058,000 of net cash payments and the issuance of notes payable in
the amount of $611,000. Of that total amount, $12,000 was assigned to goodwill
in the National Programs Division. Each of these acquisitions was accounted for
as a purchase, and substantially the entire cost was assigned to purchased
customer accounts, noncompete agreements and goodwill. The results of these
operations have been included in the consolidated financial statements since the
dates of each acquisition.
In 1999, Brown & Brown acquired the assets of seven general insurance agencies,
several books of business (customer accounts) and the outstanding stock of three
general insurance agencies. The
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate purchase price was $21,011,000, including $18,533,000 of net cash
payments and the issuance of notes payable in the amount of $2,478,000. Of that
total amount, $4,949,000 was assigned to goodwill in the Retail Division. Each
of these acquisitions was accounted for as a purchase, and substantially the
entire cost was assigned to purchased customer accounts, noncompete agreements
and goodwill. The results of these operations have been included in the
consolidated financial statements since the dates of each acquisition.
4. INVESTMENTS
Investments at December 31 consisted of the following:
--------------------------------------------------------------------------------------------------
2001 2000
CARRYING VALUE CARRYING VALUE
----------------- -----------------
NON- NON-
(IN THOUSANDS) CURRENT CURRENT CURRENT CURRENT
--------------------------------------------------------------------------------------------------
Available-for-sale marketable equity securities............ $ 96 $8,064 $1,701 $4,165
Non-marketable equity securities and certificates of
deposit.................................................. 355 919 448 2,292
-------------------------------------
Total investments.......................................... $451 $8,983 $2,149 $6,457
--------------------------------------------------------------------------------------------------
The following table summarizes available-for-sale securities at December 31:
--------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------------------
MARKETABLE EQUITY SECURITIES:
2001................................................ $ 534 $7,637 $(11) $8,160
2000................................................ 2,141 3,738 (13) 5,866
--------------------------------------------------------------------------------------------------
The following table summarizes the proceeds and realized gains/(losses) on
investments for the year ended December 31:
--------------------------------------------------------------------------------------------
GROSS GROSS
REALIZED REALIZED
(IN THOUSANDS) PROCEEDS GAINS LOSSES
--------------------------------------------------------------------------------------------
2001
Available-for-sale marketable equity securities............. $ 1,607 $ -- $ --
Non-marketable equity securities and certificates of
deposit................................................... 3,998 289 --
------------------------------
Total..................................................... $ 5,605 $ 289 $ --
------------------------------
2000
Available-for-sale marketable equity securities............. $ 474 $ 144 $ (15)
Non-marketable equity securities and certificates of
deposit................................................... 552 70 (19)
------------------------------
Total..................................................... $ 1,026 $ 214 $ (34)
------------------------------
1999
Available-for-sale marketable equity securities............. $ 88 $ 14 $ (25)
Non-marketable equity securities and certificates of
deposit................................................... 1,413 140 (42)
------------------------------
Total..................................................... $ 1,501 $ 154 $ (67)
--------------------------------------------------------------------------------------------
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. FIXED ASSETS
Fixed assets at December 31 consisted of the following:
------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
------------------------------------------------------------------------------------
Furniture, fixtures and equipment........................... $ 56,759 $ 48,043
Land, buildings and improvements............................ 3,324 2,680
Leasehold improvements...................................... 3,662 2,538
--------------------
63,745 53,261
Less accumulated depreciation and amortization.............. (38,201) (35,904)
--------------------
$ 25,544 $ 17,357
------------------------------------------------------------------------------------
Depreciation expense amounted to $6,536,000 in 2001, $6,158,000 in 2000 and
$5,892,000 in 1999.
6. INTANGIBLES
Intangibles at December 31 consisted of the following:
------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
------------------------------------------------------------------------------------
Purchased customer accounts................................. $191,272 $108,964
Goodwill.................................................... 123,814 42,298
Noncompete agreements....................................... 29,970 22,839
Acquisition costs........................................... 2,140 1,913
--------------------
347,196 176,014
Less accumulated amortization............................... (78,885) (62,983)
--------------------
$268,311 $113,031
------------------------------------------------------------------------------------
Amortization expense amounted to $15,860,000 in 2001, $9,226,000 in 2000 and
$8,343,000 in 1999.
Amortization of $4,203,000 was expensed in 2001 relating to goodwill. The
consolidated income statements in 2002 will have no goodwill amortization
expense in accordance with SFAS No. 142.
The FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," in June
2001. SFAS No. 142 disallows amortization of goodwill for any acquisition
completed subsequent to June 30, 2001. Brown & Brown completed ten acquisitions
under the purchase method of accounting after June 30, 2001 and as the result of
the application of SFAS No. 142, $274,000 of goodwill that would have been
amortized in 2001 under the pre-SFAS No. 142 rule was not amortized.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses at December 31 consisted of the following:
----------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
----------------------------------------------------------------------------------
Accrued bonuses............................................. $13,230 $ 8,476
Accrued compensation and benefits........................... 8,818 11,880
Other....................................................... 9,882 7,268
------------------
Total....................................................... $31,930 $27,624
----------------------------------------------------------------------------------
8. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
-----------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
-----------------------------------------------------------------------------------
Term loan agreements........................................ $ 79,143 $ 3,000
Revolving credit facility................................... -- --
Notes payable from purchases of common stock................ -- 138
Acquisition notes payable................................... 18,493 4,624
Other notes payable......................................... 1,414 7,285
-------------------
99,050 15,047
Less current portion........................................ (20,855) (4,387)
-------------------
Long-term debt.............................................. $ 78,195 $10,660
-----------------------------------------------------------------------------------
In January 2001, Brown & Brown entered into a $90 million unsecured seven-year
term loan agreement with a national banking institution, bearing an interest
rate based upon the 30-, 60- or 90-day London Interbank Offered Rate (LIBOR)
plus 0.50% to 1.00%, depending upon Brown & Brown's quarterly ratio of funded
debt to earnings before interest, taxes, depreciation and amortization. The
90-day LIBOR was 1.88% as of December 31, 2001. The loan was fully funded on
January 3, 2001 and as of December 31, 2001 had an outstanding balance of $77.1
million. This loan is to be repaid in equal quarterly installments of $3.2
million through December 2007.
In 1991, Brown & Brown entered into a long-term unsecured credit agreement with
a major insurance company that provided for borrowings at an interest rate equal
to the prime rate (4.75% and 9.50% at December 31, 2001 and 2000, respectively)
plus 1.00%. At December 31, 2001, the maximum amount of $2.0 million currently
available for borrowings was outstanding. In accordance with an August 1, 1998
amendment to the credit agreement, the outstanding balance will be repaid in
annual installments of $1.0 million each August through 2003.
Brown & Brown also has a revolving credit facility with a national banking
institution that provides for available borrowings of up to $50 million, with a
maturity date of October 2002, bearing an interest rate based upon the 30-, 60-
or 90-day LIBOR plus 0.45% to 1.00%, depending upon Brown & Brown's quarterly
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization. A commitment fee of 0.15% to 0.25% per annum is assessed on the
unused balance. The 90-day LIBOR was 1.88% as of December 31, 2001. There were
no borrowings against this facility at December 31, 2001 or December 31, 2000.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All three of our credit agreements require Brown & Brown to maintain certain
financial ratios and comply with certain other covenants. Brown & Brown was in
compliance with all such covenants as of December 31, 2001.
Acquisition notes payable represent debt incurred to former owners of certain
agencies acquired by Brown & Brown. These notes, including future contingent
payments, are payable in monthly and annual installments through February 2014,
including interest in the range from 5.0% to 9.0%.
Interest paid in 2001, 2000 and 1999 was $5,324,000, $1,364,000 and $1,301,000,
respectively.
At December 31, 2001, maturities of long-term debt were $20,855,000 in 2002,
$18,198,000 in 2003, $13,518,000 in 2004, $12,060,000 in 2005, $11,464,000 in
2006 and $22,955,000 in 2007 and beyond.
To hedge the risk of increasing interest rates from January 2, 2002 through the
remaining six years of its seven-year $90 million term loan, Brown & Brown
entered into an interest rate swap agreement that effectively converted the
floating rate LIBOR-based interest payments to fixed interest rate payments at
4.53%. This agreement did not impact or change the required 0.5% to 1.00% credit
risk spread portion of the term loan. In accordance with SFAS No. 133, as
amended, Brown & Brown recorded a liability as of December 31, 2001 for the fair
value of the interest rate swap at December 31, 2001 for approximately $53,000,
net of taxes of approximately $33,000. Brown & Brown has designated and assessed
the derivative as a highly effective cash flow hedge, and accordingly, the
effect is reflected in other comprehensive income in the accompanying
Consolidated statements of shareholders' equity.
9. INCOME TAXES
At December 31, 2001, Brown & Brown had a net operating loss carryforward of
$1,900,000 for income tax reporting purposes, portions of which expire in the
years 2011 through 2021. This carryforward was derived from agencies acquired by
Brown & Brown in 2001 and 1998. For financial reporting purposes, a valuation
allowance of $38,000 has been recognized to offset the deferred tax asset
related to this carryforward.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax reporting purposes.
Significant components of Brown & Brown's deferred tax liabilities and assets as
of December 31 are as follows:
----------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
----------------------------------------------------------------------------------
Deferred tax liabilities:
Fixed assets.............................................. $ -- $ 738
Net unrealized appreciation of available-for-sale
securities............................................. 2,750 1,595
Prepaid insurance and pension............................. 616 542
Intangible assets......................................... 1,186 460
------------------
Total deferred tax liabilities.............................. $ 4,552 $ 3,335
Deferred tax assets:
Fixed assets.............................................. $ 57 $ --
Deferred compensation..................................... 2,987 3,440
Accruals and reserves..................................... 2,044 1,394
Net operating loss carryforwards.......................... 731 1,085
Other..................................................... 290 327
Valuation allowance for deferred tax assets............... (38) (38)
------------------
Total deferred tax assets................................... $ 6,071 $ 6,208
------------------
Net deferred tax (asset)/liability.......................... $(1,519) $(2,873)
----------------------------------------------------------------------------------
Significant components of the provision (benefit) for income taxes for the year
ended December 31 are as follows:
---------------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000 1999
---------------------------------------------------------------------------------------------
Current:
Federal................................................... $30,731 $19,642 $16,171
State..................................................... 4,302 3,225 2,655
-----------------------------
Total current provision..................................... $35,033 $22,867 $18,826
-----------------------------
Deferred:
Federal................................................... $ (179) $(2,337) $ (425)
State..................................................... (20) (384) (70)
-----------------------------
Total deferred (benefit) provision.......................... $ (199) $(2,721) $ (495)
-----------------------------
Total tax provision......................................... $34,834 $20,146 $18,331
---------------------------------------------------------------------------------------------
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the differences between the effective tax rate and the
federal statutory tax rate for the year ended December 31 is as follows:
---------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------
Federal statutory tax rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 3.0 3.3 3.7
Interest exempt from taxation and dividend exclusion........ (0.3) (0.4) (0.3)
Non-deductible goodwill amortization........................ 0.4 0.4 0.5
Other, net.................................................. 0.4 (1.0) (0.3)
-----------------------
Effective tax rate.......................................... 38.5% 37.3% 38.6%
---------------------------------------------------------------------------------------
Income taxes paid in 2001, 2000 and 1999 were $33,840,000, $18,740,000, and
$16,132,000, respectively.
10. EMPLOYEE SAVINGS PLAN
Brown & Brown has an Employee Savings Plan (401(k)) under which substantially
all employees with more than 30 days of service are eligible to participate.
Under this plan, Brown & Brown makes matching contributions, subject to a
maximum of 2.5% of each participant's salary. Further, Brown & Brown provides
for a discretionary profit sharing contribution for all eligible employees.
Brown & Brown's contributions to the plan totaled $4,357,000 in 2001, $3,663,000
in 2000 and $3,126,000 in 1999.
11. STOCK-BASED COMPENSATION AND INCENTIVE PLANS
STOCK PERFORMANCE PLAN
Brown & Brown has adopted a stock performance plan, under which up to 3,600,000
shares of Brown & Brown's stock ("Performance Stock") may be granted to key
employees contingent on the employees' future years of service with Brown &
Brown and other criteria established by the Compensation Committee of Brown &
Brown's Board of Directors. Shares must be vested before participants take full
title to Performance Stock. Of the grants currently outstanding, specified
portions will satisfy the first condition for vesting based on increases in the
market value of Brown & Brown's common stock from the initial price specified by
Brown & Brown. Dividends are paid on unvested shares of Performance Stock that
have satisfied the first vesting condition, and participants may exercise voting
privileges on such shares which are considered to be "awarded shares." Awarded
shares are included as issued and outstanding common stock shares and are
included in the calculation of basic and diluted earnings per share. Awarded
shares satisfy the second condition for vesting on the earlier of (i) 15 years
of continuous employment with Brown & Brown from the date shares are granted to
the participants; (ii) attainment of age 64; or (iii) death or disability of the
participant. At December 31, 2001, 2,893,488 shares had been granted under the
plan at initial stock prices ranging from $3.79 to $24.00. As of December 31,
2001, 2,545,702 shares had met the first condition for vesting and had been
awarded; and 59,988 shares had satisfied both conditions for vesting and had
been distributed to participants.
The compensation element for Performance Stock is equal to the fair market value
of the shares at the date the first vesting condition is satisfied and is
expensed over the remainder of the vesting
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period. Compensation expense related to this Plan totaled $1,984,000 in 2001,
$483,000 in 2000 and $1,263,000 in 1999.
EMPLOYEE STOCK PURCHASE PLAN
Brown & Brown has adopted an employee stock purchase plan ("the Stock Purchase
Plan"), which allows for substantially all employees to subscribe to purchase
shares of Brown & Brown's stock at 85% of the lesser of the market value of such
shares at the beginning or end of each annual subscription period. Of the
3,000,000 shares authorized for issuance under the Stock Purchase Plan as of
December 31, 2001, 847,566 shares remained available and reserved for future
issuance.
INCENTIVE STOCK OPTION PLAN
On April 21, 2000, Brown & Brown adopted a qualified incentive stock option plan
(the "Incentive Stock Option Plan") that provides for the granting of stock
options to certain key employees. The objective of this plan is to provide
additional performance incentives to grow Brown & Brown's pre-tax earnings in
excess of 15% annually. Brown & Brown is authorized to grant options for up to
2,400,000 common shares, of which 1,152,000 were granted on April 21, 2000 at
the most recent trading day's closing market price of $9.67 per share. All of
the outstanding options vest over a one-to-ten-year period, with a potential
acceleration of the vesting period to three to six years based on achievement of
certain performance goals. All of the options expire ten years after the grant
date. As of December 31, 2001, 72,380 option shares were exercisable. During
2001, no additional option shares were granted or exercised, and 20,000 shares
were canceled.
The weighted average fair value of the incentive stock options granted during
2000 estimated on the date of grant using the Black-Scholes option-pricing
model, was $4.73 per share. The fair value of these options granted is estimated
on the date of grant using the following assumptions: dividend yield of 0.86%;
expected volatility of 29.6%; risk-free interest rate of 6.3%; and an expected
life of ten years.
PRO FORMA EFFECT OF PLANS
Brown & Brown accounts for the Stock Purchase Plan and the Incentive Stock
Option Plan using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost is required. Had compensation expense for these plans been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," Brown & Brown's net income and net income per share for the year
ended December 31 would have been reduced to the pro forma amounts indicated
below:
---------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 2001 2000 1999
---------------------------------------------------------------------------------------------
NET INCOME:
As reported............................................... $53,913 $32,793 $28,271
Pro forma................................................. 51,382 31,795 28,090
NET INCOME PER SHARE:
As reported............................................... $ 0.85 $ 0.53 $ 0.46
Pro forma................................................. $ 0.81 $ 0.51 $ 0.46
---------------------------------------------------------------------------------------------
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Brown & Brown's significant non-cash investing and financing activities for the
year ended December 31 are as follows:
-------------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000 1999
-------------------------------------------------------------------------------------------
Unrealized holding gain (loss) on available-for-sale
securities, net of tax effect of $1,188 for 2001; net of
tax benefit of $1,552 for 2000, and $395 for 1999......... $ 1,951 $(2,427) $(618)
Net losses on cash flow-hedging derivatives, net of tax
benefit of $33 for 2001................................... (53) -- --
Notes payable issued or assumed for purchased customer
accounts.................................................. 34,767 611 2,478
Notes received on the sale of fixed assets and customer
accounts.................................................. 192 467 1,305
Common stock issued for acquisitions accounted for under the
purchase method of accounting............................. 6,456 -- --
-------------------------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
Brown & Brown leases facilities and certain items of office equipment under
noncancelable operating lease arrangements expiring on various dates through
2015. The facility leases generally contain renewal options and escalation
clauses based on increases in the lessors' operating expenses and other charges.
Brown & Brown anticipates that most of these leases will be renewed or replaced
upon expiration. At December 31, 2001, the aggregate future minimum lease
payments under all noncancelable lease agreements in excess of one year were as
follows:
----------------------------------------------------------------------
(IN THOUSANDS)
----------------------------------------------------------------------
2002........................................................ $14,253
2003........................................................ 11,851
2004........................................................ 8,996
2005........................................................ 6,062
2006........................................................ 3,705
Thereafter.................................................. 6,000
-------
Total minimum future lease payments......................... $50,867
----------------------------------------------------------------------
Rental expense in 2001, 2000 and 1999 for operating leases totaled $14,608,000,
$11,109,000 and $8,965,000, respectively.
Brown & Brown is not a party to any legal proceedings other than various claims
and lawsuits arising in the normal course of business. Management of Brown &
Brown does not believe that any such claims or lawsuits will have a material
effect on Brown & Brown's financial condition or results of operations.
14. BUSINESS CONCENTRATIONS
Substantially all of Brown & Brown's premiums receivable from clients and
premiums payable to insurance companies arise from policies sold on behalf of
insurance companies. Brown & Brown, as agent and broker, typically collects
premiums, retains its commission and remits the balance to the
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance companies. A significant portion of business written by Brown & Brown
is for clients located in Arizona, Florida and New York. Accordingly, the
occurrence of adverse economic conditions or an adverse regulatory climate in
Arizona, Florida and/or New York could have a material adverse effect on Brown &
Brown's business, although no such conditions have been encountered in the past.
For the years ended December 31, 2001, 2000 and 1999, approximately 5.2%, 6.5%
and 11.2%, respectively, of Brown & Brown's total revenues were derived from
insurance policies underwritten by one insurance company. Should this carrier
seek to terminate its arrangement with Brown & Brown, Brown & Brown believes
other insurance companies are available to underwrite the business, although
some additional expense and loss of market share could possibly result. No other
insurance company accounts for 5% or more of Brown & Brown's total revenues.
15. SEGMENT INFORMATION
Brown & Brown's business is divided into four segments: the Retail Division,
which provides a broad range of insurance products and services to commercial,
professional and individual clients; the National Programs Division, which is
comprised of two units--Professional Programs, which provides professional
liability and related package products for certain professionals delivered
through nationwide networks of independent agents, and Special Programs, which
markets targeted products and services designated for specific industries, trade
groups and market niches; the Services Division, which provides
insurance-related services, including third-party administration, consulting for
the workers' compensation and employee benefit self-insurance markets, and
managed healthcare services; and the Brokerage Division, which markets and sells
excess and surplus commercial insurance and reinsurance, primarily through
independent agents and brokers. Brown & Brown conducts all of its operations
within the United States of America.
The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. Brown & Brown
evaluates the performance of its segments based upon revenues and income before
income taxes and minority interest. Intersegment revenues are not significant.
In 2001, Brown & Brown reclassified two profit centers into the National
Programs Division that were previously reported in the Brokerage Division. Total
revenues for these profit centers in 2000 and 1999 were $15,185,000 and
$8,822,000 respectively. Segment information for 2000 and 1999 has been
reclassified to conform to the current year presentation.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information concerning Brown & Brown's reportable segments
is shown in the following table. The "Other" column includes corporate-related
items and any income and expenses not allocated to reportable segments.
------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001 NATIONAL
(IN THOUSANDS) RETAIL PROGRAMS SERVICES BROKERAGE OTHER TOTAL
------------------------------------------------------------------------------------------------
Total revenues......... $287,555 $ 43,790 $24,968 $ 12,228 $ (3,512) $365,029
Investment income...... 4,383 1,718 365 113 (2,893) 3,686
Interest expense....... 13,345 1,108 277 -- (9,027) 5,703
Depreciation........... 4,627 879 508 178 344 6,536
Amortization........... 13,366 2,334 24 54 82 15,860
Income before income
taxes and minority
interest............. 52,013 17,864 3,969 4,087 12,545 90,478
Total assets........... 417,799 116,257 8,088 25,266 (78,673) 488,737
Capital expenditures... 6,104 299 376 437 3,801 11,017
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000 NATIONAL
(IN THOUSANDS) RETAIL PROGRAMS SERVICES BROKERAGE OTHER TOTAL
------------------------------------------------------------------------------------------------
Total revenues......... $199,527 $ 36,838 $21,643 $ 7,985 $ (588) $265,405
Investment income...... 3,349 2,135 278 118 (993) 4,887
Interest expense....... 2,590 51 28 -- (1,403) 1,266
Depreciation........... 4,141 1,134 518 150 215 6,158
Amortization........... 7,729 1,406 4 55 32 9,226
Income before income
taxes and minority
interest............. 30,114 14,937 3,070 2,697 3,246 54,064
Total assets........... 236,787 96,477 6,277 15,087 (29,951) 324,677
Capital expenditures... 3,682 489 867 266 249 5,553
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 NATIONAL
(IN THOUSANDS) RETAIL PROGRAMS SERVICES BROKERAGE OTHER TOTAL
------------------------------------------------------------------------------------------------
Total revenues......... $182,480 $ 32,644 $17,094 $ 6,409 $ (1,104) $237,523
Investment income...... 2,828 1,452 224 90 (1,059) 3,535
Interest expense....... 1,778 -- 34 -- (452) 1,360
Depreciation........... 3,899 1,237 425 116 215 5,892
Amortization........... 7,172 1,067 -- 64 40 8,343
Income before income
taxes and minority
interest............. 28,199 12,372 2,584 2,118 2,229 47,502
Total assets........... 202,167 80,228 6,484 9,042 (11,505) 286,416
Capital expenditures... 4,043 544 346 153 1,094 6,180
------------------------------------------------------------------------------------------------
F-25
5,000,000 SHARES
(BROWN & BROWN LOGO)
COMMON STOCK
PROSPECTUS SUPPLEMENT
JPMORGAN
SUNTRUST ROBINSON HUMPHREY
LEGG MASON WOOD WALKER
INCORPORATED
SANDLER O'NEILL & PARTNERS, L.P.
March 6, 2002
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY,
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS SUPPLEMENT AND AS
OF THE DATE OF THE ACCOMPANYING PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS OR OF ANY SALE OF
OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT
A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN THAT JURISDICTION.
PERSONS WHO COME INTO POSSESSION OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED
TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING
AND THE DISTRIBUTION OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS APPLICABLE TO THAT JURISDICTION.