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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission file number 0-15981
HILB, ROGAL AND HAMILTON COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1194795
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
4951 Lake Brook Drive, Suite 500, Glen Allen, VA 23060
- ------------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 747-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2002
- ------------------------------- ----------------------------
Common stock, no par value 29,362,646
HILB, ROGAL AND HAMILTON COMPANY
INDEX
-----
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Consolidated Income
for the three months and six months
ended June 30, 2002 and 2001 3
Consolidated Balance Sheet,
June 30, 2002 and December
31, 2001 4
Statement of Consolidated Shareholders'
Equity for the six months ended
June 30, 2002 and 2001 5
Statement of Consolidated Cash Flows
for the six months ended June
30, 2002 and 2001 6
Notes to Consolidated Financial
Statements 7-14
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15-19
Item 3. Qualitative and Quantitative Disclosures
About Market Risk 19
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20-21
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED INCOME
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
Revenues
Commissions and fees $94,739,300 $74,302,275 $193,387,386 $151,305,181
Investment income 459,780 668,604 973,628 1,296,387
Other 518,198 2,818,736 1,210,060 3,099,774
----------- ----------- ------------ ------------
95,717,278 77,789,615 195,571,074 155,701,342
Operating expenses
Compensation and employee
benefits 52,794,699 42,754,692 106,053,719 85,523,913
Other operating expenses 17,717,009 14,035,720 34,555,565 28,414,966
Depreciation 1,729,843 1,538,519 3,440,443 3,020,344
Amortization of intangibles 562,980 3,446,099 1,084,598 6,770,602
Interest expense 1,819,236 2,353,562 3,702,610 4,659,571
----------- ----------- ------------ ------------
74,623,767 64,128,592 148,836,935 128,389,396
----------- ----------- ------------ ------------
INCOME BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING
CHANGE 21,093,511 13,661,023 46,734,139 27,311,946
Income taxes 8,591,021 5,874,240 19,048,411 11,744,137
----------- ----------- ------------ ------------
INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 12,502,490 7,786,783 27,685,728 15,567,809
Cumulative effect of accounting
change, net of tax - - 3,944,484 -
----------- ----------- ------------ ------------
NET INCOME $12,502,490 $ 7,786,783 $ 31,630,212 $ 15,567,809
=========== =========== ============ ============
Net Income Per Share - Basic:
Income before cumulative
effect of accounting change $0.44 $0.29 $0.98 $0.58
Cumulative effect of
accounting change, net of tax - - 0.14 -
----- ----- ----- -----
Net income $0.44 $0.29 $1.12 $0.58
===== ===== ===== =====
Net Income Per Share -
Assuming Dilution:
Income before cumulative
effect of accounting change $0.40 $0.26 $0.88 $0.53
Cumulative effect of
accounting change, net of tax - - 0.12 -
----- ----- ----- -----
Net income $0.40 $0.26 $1.00 $0.53
===== ===== ===== =====
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
JUNE 30, DECEMBER 31,
2002 2001
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,139,354 $ 51,580,095
Investments 2,387,137 3,499,421
Receivables:
Premiums and commissions, less allowance for
doubtful accounts of $3,540,071 and $3,374,285,
respectively 118,107,312 116,219,367
Other 23,795,498 17,672,780
------------ -------------
141,902,810 133,892,147
Prepaid expenses and other current assets 8,500,969 8,435,944
------------ -------------
TOTAL CURRENT ASSETS 211,930,270 197,407,607
INVESTMENTS 1,179,284 1,335,798
PROPERTY AND EQUIPMENT, NET 18,162,909 19,484,705
GOODWILL 301,434,047 286,554,839
OTHER INTANGIBLE ASSETS 33,606,884 33,516,884
Less accumulated amortization 54,754,117 53,821,407
------------ -------------
280,286,814 266,250,316
OTHER ASSETS 9,180,755 9,764,122
------------ -------------
$520,740,032 $494,242,548
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $172,698,354 $169,501,575
Accounts payable 7,865,561 7,303,804
Accrued expenses 18,067,235 20,302,435
Premium deposits and credits due customers 28,125,801 20,940,410
Current portion of long-term debt 5,604,780 6,996,423
------------ -------------
TOTAL CURRENT LIABILITIES 232,361,731 225,044,647
LONG-TERM DEBT 103,270,821 114,443,224
OTHER LONG-TERM LIABILITIES 12,943,973 11,953,338
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized
50,000,000 shares; outstanding 28,591,280
and 28,310,568 shares, respectively 58,084,333 55,542,485
Retained earnings 115,170,830 88,604,274
Accumulated other comprehensive income (loss):
Unrealized loss on derivative contracts, net of
deferred tax benefit of $914,000 and $955,000,
respectively (1,370,530) (1,433,296)
Other 278,874 87,876
------------ -------------
172,163,507 142,801,339
------------ -------------
$520,740,032 $494,242,548
============ =============
See notes to consolidated financial statements.
4
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME (LOSS)
---------- -------- -------------
Balance at January 1, 2002 $55,542,485 $ 88,604,274 $(1,345,420)
Issuance of 280,712 shares of
Common Stock 2,541,848
Payment of dividends ($.1775 per share) (5,063,656)
Net income 31,630,212
Derivative gain arising during 2002, net of tax 62,766
Other _ _ 190,998
----------- ------------- ------------
Balance at June 30, 2002 $58,084,333 $115,170,830 $(1,091,656)
=========== ============= ============
Balance at January 1, 2001 $22,361,312 $65,860,654 $ -
Issuance of 619,958 shares of
Common Stock 9,647,864
Payment of dividends ($.1725 per share) (4,663,613)
Net income 15,567,809
Cumulative effect of accounting change
related to derivatives, net of tax (516,600)
Derivative loss arising during 2001, net of tax _ _ (342,994)
----------- ----------- -----------
Balance at June 30, 2001 $32,009,176 $76,764,850 $ (859,594)
=========== =========== ===========
See notes to consolidated financial statements.
5
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
------------- -------------
OPERATING ACTIVITIES
Net income $ 31,630,212 $ 15,567,809
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax (3,944,484) -
Depreciation 3,440,443 3,020,344
Amortization of intangible assets 1,084,598 6,770,602
------------ ------------
Net income plus amortization, depreciation and
cumulative effect of accounting change, net of tax 32,210,769 25,358,755
Provision for losses on accounts receivable 584,252 447,709
Provision for deferred income taxes 1,913,655 -
(Gain) loss on sale of assets 209,498 (2,622,580)
Changes in operating assets and liabilities
net of effects from insurance agency
acquisitions and dispositions:
(Increase) decrease in accounts receivable (1,972,808) 7,730,400
(Increase) decrease in prepaid expenses (274,074) 1,060,273
Increase (decrease) in premiums payable to
insurance companies 1,377,091 (2,856,059)
Increase in premium deposits and credits due
customers 7,174,391 3,836,702
Increase in accounts payable 357,267 133,337
Decrease in accrued expense (2,621,379) (5,973,169)
Other operating activities (2,598,126) 1,840,332
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 36,360,536 28,955,700
INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
investments 1,879,064 357,867
Purchase of investments (589,756) (321,465)
Purchase of property and equipment (2,314,310) (2,752,960)
Purchase of insurance agencies, net of cash acquired (11,890,811) (19,270,964)
Proceeds from sale of assets 475,329 4,285,672
Other investing activities 192,005 (134,622)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (12,248,479) (17,836,472)
FINANCING ACTIVITIES
Proceeds from long-term debt - 25,235,950
Principal payments on long-term debt (12,851,039) (9,868,330)
Proceeds from issuance of Common Stock 1,361,897 1,873,823
Dividends (5,063,656) (4,663,614)
------------ ------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (16,552,798) 12,577,829
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 7,559,259 23,697,057
Cash and cash equivalents at beginning of period 51,580,095 28,880,784
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 59,139,354 $ 52,577,841
============ ============
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hilb, Rogal and
Hamilton Company (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 2002, are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended December 31, 2001.
Certain amounts for the prior period have been reclassified to conform to
current year presentation.
NOTE B--CHANGES IN ACCOUNTING METHOD
Effective January 1, 2002, the Company changed its method of accounting for
commissions on premiums billed and collected directly by insurance carriers on
its middle-market property and casualty business. Prior to 2002, this revenue
was recognized when received. Beginning January 1, 2002, this revenue is
recorded on the later of the billing date or the effective date, consistent with
the revenue recognition policy for agency billed business. This is the
predominant practice followed in the industry. Management believes that this new
methodology is preferable and that it better matches the income with the related
expenses. For the three months ended June 30, 2002, the effect of this change
was to increase net income by $0.9 million ($0.03 per share). For the six months
ended June 30, 2002, the effect of this change was to increase net income by
$5.5 million ($0.17 per share), which included the cumulative effect adjustment
of $3.9 million ($0.12 per share), net of income taxes of $2.6 million. No prior
period pro forma amounts have been presented to reflect the effect of
retroactive application of the change as it is not practical for the Company to
compute prior period pro forma amounts due to the lack of prior period data.
NOTE C--INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (Statement 141),
and No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also included guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after June 30, 2001. Under
Statement 142, goodwill will no
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE C--INTANGIBLE ASSETS-Continued
longer be amortized but will be subject to annual impairment tests. Intangible
assets with finite lives will continue to be amortized over their useful lives.
The Company adopted Statement 142 effective January 1, 2002.
The Company has tested goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
The Company completed the first of the required impairment tests of goodwill as
of January 1, 2002. No impairment charge resulted from this test.
The following table provides a reconciliation of the June 30, 2002 and 2001
reported net income to adjusted net income had Statement 142 been applied as of
January 1, 2001.
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Income - as reported $12,502,490 $ 7,786,783 $31,630,212 $15,567,809
Goodwill amortization, net of tax - 2,080,092 - 4,068,554
----------- ------------ ----------- -------------
Adjusted net income $12,502,490 $ 9,866,875 $31,630,212 $19,636,363
=========== =========== =========== ===========
Net Income Per Share - Basic:
Net income - as reported
$0.44 $0.29 $1.12 $0.58
Goodwill amortization, net of tax - 0.08 - 0.15
------ ------ ----- -----
Adjusted net income $0.44 $0.37 $1.12 $0.73
====== ======= ===== =====
Net Income Per Share - Assuming Dilution:
Net income - as reported
$0.40 $0.26 $1.00 $0.53
Goodwill amortization, net of tax - 0.07 - 0.13
------ ------ ------ -----
Adjusted net income $0.40 $0.33 $1.00 $0.66
====== ====== ====== =====
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE C--INTANGIBLE ASSETS-Continued
Intangible assets consist of the following:
As of June 30, 2002 As of December 31, 2001
------------------- -----------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortizable intangible assets:
Expiration rights $4,950,000 $4,623,000 $5,085,000 $4,601,000
Non-compete agreements 28,157,000 7,055,000 27,932,000 6,138,000
Tradename 500,000 63,000 500,000 53,000
--------- ----------- ----------- ----------- -----------
Total $33,607,000 $11,741,000 $33,517,000 $10,792,000
=========== =========== =========== ===========
Indefinite-lived intangible
assets:
Goodwill, net $258,421,000 $243,526,000
Aggregate amortization expense for the six months ended June 30, 2002 and 2001
was $1,085,000 and $6,771,000, respectively.
Estimated amortization expense:
For year ended December 31, 2002 $2,187,000
For year ended December 31, 2003 1,965,000
For year ended December 31, 2004 1,857,000
For year ended December 31, 2005 1,801,000
For year ended December 31, 2006 1,791,000
For year ended December 31, 2007 1,789,000
The changes in the net carrying amount of goodwill for the six months ended June
30, 2002, are as follows:
Balance as of December 31, 2001 $243,526,000
Goodwill acquired 15,037,000
Goodwill disposed (142,000)
-------------
Balance as of June 30, 2002 $ 258,421,000
=============
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE D--INCOME TAXES
Deferred taxes result from temporary differences between the carrying amounts of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The Company's effective rate varies from the statutory rate
primarily due to state income taxes and non-deductible amortization.
NOTE E--ACQUISITIONS
During the first six months of 2002, the Company acquired certain assets and
liabilities of four insurance agencies for approximately $8,473,000 ($7,986,000
in cash and $487,000 in guaranteed future payments) in purchase accounting
transactions. The purchase price may be increased based on agency profitability
per the contracts. These acquisitions are not material to the consolidated
financial statements individually or in aggregate.
NOTE F--SALE OF ASSETS AND OTHER GAINS
During the six months ended June 30, 2002 and 2001, the Company sold certain
insurance accounts and other assets resulting in a loss of approximately
$209,000 and a gain of $2,623,000, respectively, including a $206,000 loss and a
$2,584,000 gain during the second quarters of 2002 and 2001, respectively.
Revenues, expenses and assets related to these dispositions were not material to
the consolidated financial statements.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE G--NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Numerator for basic net income
per share - net income $12,502,490 $ 7,786,783 $31,630,211 $15,567,809
Effect of dilutive securities:
5.25% convertible debenture 272,785 271,251 545,178 542,134
----------- ----------- ----------- -----------
Numerator for dilutive net income per
share - net income available after
assumed conversions $12,775,275 $ 8,058,034 $32,175,389 $16,109,943
=========== =========== =========== ===========
Denominator
Weighted average shares 28,229,270 26,887,510 28,188,886 26,724,312
Effect of guaranteed future shares to be
issued in connection with agency
acquisitions 25,552 43,886 32,387 49,372
----------- ----------- ----------- -----------
Denominator for basic net income per
share 28,254,822 26,931,396 28,221,273 26,773,684
Effect of dilutive securities:
Employee stock options 1,060,328 734,046 1,045,016 709,104
Employee non-vested stock 165,958 99,286 158,434 87,902
Contingent stock - acquisitions 38,111 36,536 29,869 24,152
5.25% convertible debenture 2,813,187 2,813,186 2,813,187 2,813,186
----------- ----------- ----------- -----------
Dilutive potential common shares 4,077,584 3,683,054 4,046,506 3,634,344
----------- ----------- ----------- -----------
Denominator for diluted net income per
share - adjusted weighted average
shares and assumed conversions 32,332,406 30,614,450 32,267,779 30,408,028
=========== =========== =========== ===========
Net Income Per Share:
Basic $0.44 $0.29 $1.12 $0.58
===== ===== ===== =====
Assuming Dilution $0.40 $0.26 $1.00 $0.53
===== ===== ===== =====
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE H--SUBSEQUENT EVENT
On July 1, 2002 the Company acquired all of the issued and outstanding
membership interest units of Hobbs Group, LLC ("Hobbs") other than those owned
by Hobbs IRA Corp. ("HIRAC"), and all of the issued and outstanding capital
stock of HIRAC pursuant to a Purchase Agreement, dated May 10, 2002, by and
among the Company, Hobbs, the members of Hobbs (other than HIRAC) and the
shareholders of HIRAC.
This acquisition allows the Company to expand its capabilities in the upper
middle-market. In addition, Hobbs will provide the Company with additional
market presence and expertise in the employee benefits services area and an
entrance into executive benefits. Hobbs will also bring increased depth to the
geographic reach of the Company's existing national platform.
The amount the Company paid in connection with the acquisition consisted of
approximately $114.2 million in cash, which included the Company's assumption
and retirement of certain debt of Hobbs, and the issuance to the members of
Hobbs (other than HIRAC) and the shareholders of HIRAC of an aggregate of
719,729 shares of the Company's common stock ("Common Stock"). In addition, the
Company has agreed to pay up to approximately $101.9 million in cash and shares
of Common Stock contingent on Hobbs' achieving certain financial performance
goals within the next two years. The Company has further agreed to assume and
satisfy certain existing earn-out and deferred compensation obligations of Hobbs
from Hobbs' prior acquisitions estimated to approximate a net present value of
$30 million.
The Company's statement of consolidated income does not include any results of
operations from Hobbs as the acquisition was consummated on July 1, 2002. The
following unaudited pro forma results of operations of the Company give effect
to the acquisition of Hobbs as though the transaction had occurred on January 1,
2002 and 2001, respectively.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE H--SUBSEQUENT EVENT-Continued
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
Total Revenues $121,864,000 $100,490,000 $246,516,000 $200,284,000
Income before
cumulative effect of
accounting change and
extraordinary item $ 13,318,000 $ 9,297,000 $ 30,146,000 $ 18,117,000
============= ============== ============= =============
Net Income $ 12,907,000 $ 9,297,000 $ 33,680,000 $ 18,117,000
============= ============== ============= =============
Income per share before
cumulative effect of
accounting change
and extraordinary item:
Basic $0.46 $0.34 $1.04 $0.66
===== ===== ===== =====
Assuming Dilution $0.41 $0.31 $0.93 $0.60
===== ===== ===== =====
Net Income Per Share:
Basic $0.45 $0.34 $1.16 $0.66
===== ===== ===== =====
Assuming Dilution $0.40 $0.31 $1.04 $0.60
===== ===== ===== =====
The pro forma results for the three and six months ended June 30, 2002 include
an extraordinary loss of $0.4 million related to Hobbs' debt extinguishment.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2002
(UNAUDITED)
NOTE H--SUBSEQUENT EVENT-Continued
In addition, on July 1, 2002, the Company entered into a Second Amended and
Restated Credit Agreement (the Amended Credit Agreement), dated as of July 1,
2002. The Amended Credit Agreement amends and restates an Amended and Restated
Credit Agreement, dated as of April 6, 2001, and provides for a credit facility
of up to an aggregate of $290.0 million. In particular, the Amended Credit
Agreement maintains the availability to the Company of a revolving credit
facility in the aggregate principal amount of $100.0 million and a term loan
facility with an aggregate principal amount of $190.0 million. Pursuant to the
Amended Credit Agreement, the increased term loan facility was made available to
finance the cash payment in connection with the Hobbs acquisition and for
working capital and general corporate purposes.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
- ---------------------
Three Months Ended June 30, 2002
Net income for the three months ended June 30, 2002 was $12.5 million, or $0.40
per share, compared with $7.8 million, or $0.26 per share for the comparable
period last year. Excluding net non-recurring gains and adjusting amortization
to a pro forma basis in 2001 as if the new accounting standards related to
goodwill had been adopted as of January 1, 2001, net income was $12.6 million
for the quarter, a 51.3% increase from $8.3 million last year. Net income per
share on the same basis was $0.40, compared with $0.28 last year. See "Note C -
Intangible Assets" of Notes to Consolidated Financial Statements.
Commissions and fees were $94.7 million, an increase of 27.5% from commissions
and fees of $74.3 million during the comparable period of the prior year.
Approximately $12.5 million of commissions were derived from purchase
acquisitions of new insurance agencies. This increase was offset by decreases of
approximately $0.5 million from the sale of certain offices and accounts in 2002
and 2001. Excluding the effect of acquisitions and dispositions, commissions and
fees increased 11.3%. This reflects new business production and continued
industry-wide premium increases. Other income decreased $2.3 million primarily
due to the sale of an agency and certain insurance accounts in 2001.
Expenses for the quarter increased $10.5 million or 16.4%. Compensation and
benefits, other operating expenses and depreciation expense increased $10.0
million, $3.7 million and $0.2 million, respectively, primarily due to purchase
acquisitions of insurance agencies and increased revenue production.
Amortization of intangibles decreased approximately $2.9 million due primarily
to the adoption of Statement 142. Interest expense decreased by $0.5 million due
to decreased bank borrowings and decreased interest rates.
The Company's overall tax rate for the three months ended June 30, 2002 was
40.8% compared to 43.0% for the same period of the prior year. The decrease is
primarily related to the non-amortization of goodwill resulting from the
adoption of Statement 142.
Six Months Ended June 30, 2002
For the six months ended June 30, 2002, net income was $31.6 million, or $1.00
per share, compared to $15.6 million, or $0.53 per share last year. Excluding
the effect of gains and the 2002 cumulative effect of an accounting change
relating to revenue recognition and adjusting 2001 amortization to a pro forma
basis, net income was $27.8 million, or $0.88 per share, up from $18.1 million
or $0.61 per share a year ago.
Commissions and fees were $193.4 million, an increase of 27.8% from commissions
and fees of $151.3 million during the comparable period of the prior year.
Approximately $27.9 million of
15
commissions were derived from purchase acquisitions of new insurance agencies.
This increase was offset by decreases of approximately $1.4 million from the
sale of certain offices and accounts in 2002 and 2001. Commissions and fees,
excluding the effect of acquisitions and dispositions, increased 10.3%. This
increase principally reflects new business production, firming premium levels
and higher non-standard commissions.
Investment income decreased $0.3 million, or 24.8%, primarily due to a lower
interest rate environment. Other income decreased $1.9 million or 61.0% from the
prior year primarily due to the net impact of nonrecurring gains from the sale
of an agency, certain insurance accounts and other assets.
Expenses increased by $20.4 million or 15.9%. Increases include $20.5 million in
compensation and benefits, $6.1 million in other operating expenses and $0.4
million of depreciation expense, due primarily to purchase acquisitions of new
insurance agencies and increased revenue production. Amortization of intangibles
decreased approximately $5.7 million due primarily to the adoption of Statement
142. Interest expense decreased by $1.0 million due to decreased bank borrowings
and by declines in interest rates.
The Company's overall tax rate was 40.8% for the six months ended June 30, 2002
compared to the rate of 43.0% for the six months ended June 30, 2001. The
decrease was primarily related to the non-amortization of goodwill resulting
from adoption of Statement 142.
For the three months ended June 30, 2002, net income as a percentage of revenues
did not vary significantly from the three months ended March 31, 2002.
Commission income was lower during the second quarter due to lower contingent
commissions, the majority of which are historically received during the first
quarter.
The timing of contingent commissions, policy renewals, acquisitions and
dispositions may cause revenues, expenses and net income to vary significantly
from quarter to quarter. As a result of the factors described above, operating
results for the six months ended June 30, 2002 should not be considered
indicative of the results that may be expected for the entire year ending
December 31, 2002.
Liquidity and Capital Resources:
- -------------------------------
Net cash provided by operations totaled $36.4 million and $29.0 million for the
six months ended June 30, 2002 and 2001, respectively, and is primarily
dependent upon the timing of the collection of insurance premiums from clients
and payment of those premiums to the appropriate insurance underwriters.
The Company has historically generated sufficient funds internally to finance
capital expenditures for property and equipment. Cash expenditures for the
acquisition of property and equipment were $2.3 million and $2.8 million for the
six months ended June 30, 2002 and 2001, respectively. The timing and extent of
the purchase and sale of investments is dependent upon cash needs and yields on
alternate investments and cash equivalents. The purchase of insurance
16
agencies accounted for under the purchase method of accounting utilized cash of
$11.9 million and $19.3 million in the six months ended June 30, 2002 and 2001,
respectively. Cash expenditures for such insurance agency acquisitions have been
primarily funded through operations and long-term borrowings. In addition, a
portion of the purchase price in such acquisitions may be paid through the
Company's Common Stock and deferred cash payments. Cash proceeds from the sale
of accounts and other assets amounted to $0.5 million and $4.3 million in the
six months ended June 30, 2002 and 2001, respectively. The Company did not have
any material capital expenditure commitments as of June 30, 2002.
Financing activities utilized cash of $16.6 million and provided cash of $12.6
million in the six months ended June 30, 2002 and 2001, respectively. The
Company has consistently made scheduled debt payments and annually increased its
dividend rate. The Company is currently authorized to purchase an additional
748,200 shares. The Company anticipates the continuance of its dividend policy.
As of June 30, 2002, the Company had a bank credit agreement for $140.0 million
under which loans are due in various amounts through 2004 and 5.25% Convertible
Subordinated Debentures with a $32.0 million face value due 2014. At June 30,
2002, there were loans of $70.0 million outstanding under the bank agreement,
with $70.0 million available under the revolving portion of the facility for
future borrowings.
Subsequent to the end of the quarter, the Company signed the Second Amended and
Restated Credit Agreement (Amended Credit Agreement). The new agreement amends
and restates an Amended and Restated Credit Agreement dated April 6, 2001. The
new agreement provides a $190.0 million term loan facility under which
borrowings are due in various amounts through 2007 including $152.4 million due
2007. The Amended Credit Agreement also maintains the availability to the
Company of a revolving credit facility in the aggregate principal amount of
$100.0 million. The proceeds were used in part, to fund the cash portion of the
Hobbs Group, LLC acquisition. Subsequent to amending the credit agreement and
closing the acquisition of Hobbs Group, LLC, the Company had loans of $190.0
million outstanding under the Amended Credit Agreement, with $100.0 million
available under the revolving portion of the facility.
The Amended Credit Agreement contains certain covenants that restrict, or may
have the effect of restricting, the payment of dividends or distributions, and
the purchase or redemption by the Company of its capital stock. Management does
not believe that the restrictions contained in the Amended Credit Agreement
will, in the foreseeable future, adversely affect the Company's ability to pay
cash dividends at the current dividend rate.
The Company had a current ratio (current assets to current liabilities) of 0.91
to 1.00 as of June 30, 2002. Shareholders' equity of $172.2 million at June 30,
2002, is improved from $142.8 million at December 31, 2001. The debt to equity
ratio of 0.60 to 1.00 is decreased from the ratio at December 31, 2001 of 0.80
to 1.00 due to the issuance of Common Stock, decreased borrowings and increased
net income.
The Company believes that cash generated from operations, together with proceeds
from borrowings, will provide sufficient funds to meet the Company's short and
long-term funding needs.
17
Business Acquisition
- --------------------
On July 1, 2002 the Company acquired all of the issued and outstanding
membership interest units of Hobbs Group, LLC ("Hobbs") other than those owned
by Hobbs IRA Corp. ("HIRAC"), and all of the issued and outstanding capital
stock of HIRAC pursuant to a Purchase Agreement, dated May 10, 2002, by and
among the Company, Hobbs, the members of Hobbs (other than HIRAC) and the
shareholders of HIRAC.
Hobbs, which is based in Atlanta, Georgia, is one of the nation's premier
independent insurance brokers serving upper middle-market and top-tier clients
and provides property and casualty insurance brokerage, risk management,
executive compensation and employee benefits services. This acquisition allows
the Company to expand its capabilities in the upper middle-market. In addition,
Hobbs will provide the Company with additional market presence and expertise in
the employee benefits services area and an entrance into executive benefits.
Hobbs will also bring increased depth to the geographic reach of the Company's
existing national platform.
The amount the Company paid in connection with the acquisition consisted of
approximately $114.2 million in cash, which included the Company's assumption
and retirement of certain debt of Hobbs, and the issuance to the members of
Hobbs (other than HIRAC) and the shareholders of HIRAC of an aggregate of
719,729 shares of the Company's Common Stock. In addition, the Company has
agreed to pay up to approximately $101.9 million in cash and shares of Common
Stock contingent on Hobbs' achieving certain financial performance goals within
the next two years. The Company has further agreed to assume and satisfy certain
existing earn-out and deferred compensation obligations of Hobbs from Hobbs'
prior acquisitions estimated to approximate a net present value of $30 million.
In addition, on July 1, 2002, the Company granted 625,000 stock options to key
employees of Hobbs. The options have an exercise price equal to the fair market
value at date of grant, expire in seven years and vest at a rate of 25% a year
for four years.
Market Risk
- -----------
The Company has certain investments and utilizes (on a limited basis) derivative
financial instruments which are subject to market risk; however, the Company
believes that exposure to market risk associated with these instruments is not
material.
New Accounting Standard
- -----------------------
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (Statement 142), effective January 1,
2002, which, among other things, ends the practice of amortizing goodwill. Net
income for the quarter ended June 30, 2001 would have increased by $0.07 and
$0.13 per share, respectively, on a pro forma basis, assuming adoption of
Statement 142 as of January 1, 2001. The Company has tested goodwill for
impairment using the
18
two-step process prescribed in Statement 142. The first step is a screen for
potential impairment, while the second step measures the amount of the
impairment, if any. The Company completed the first of the required impairment
tests of goodwill as of January 1, 2002. No impairment charge resulted from this
test.
Change in Accounting Principle
- ------------------------------
Effective January 1, 2002, the Company changed its method of accounting for
commissions on premiums billed and collected directly by insurance carriers on
its middle-market property and casualty business. Prior to 2002, this revenue
was recognized when received. Beginning January 1, 2002, this revenue is
recorded on the later of the billing date or the effective date, consistent with
the revenue recognition policy for agency billed business. This is the
predominant practice followed in the industry. Management believes that this new
methodology is preferable and that it better matches the income with the related
expenses. For the three months ended June 30, 2002, the effect of this change
was to increase net income by $0.9 million ($0.30 per share). For the six months
ended June 30, 2002, the effect of this change was to increase net income by
$5.5 million ($0.17 per share), which included the cumulative effect adjustment
of $3.9 million ($0.12 per share), net of income taxes of $2.6 million. No prior
period pro forma amounts have been presented to reflect the effect of
retroactive application of the change as it is not practical for the Company to
compute prior period pro forma amounts due to the lack of prior period data.
Forward-Looking Statements
- --------------------------
The Company cautions readers that the foregoing discussion and analysis includes
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor created by
that Act. These forward-looking statements are believed by the Company to be
reasonable based upon management's current knowledge and assumptions about
future events, but are subject to the uncertainties generally inherent in any
such forward-looking statement, including factors discussed above as well as
other factors that may generally affect the Company's business, financial
condition or operating results. Reference is made to the discussion of
"Forward-Looking Statements" contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001, regarding important
risk factors and uncertainties that could cause actual results, performance or
achievements to differ materially from future results, performance or
achievements expressed or implied in any forward-looking statement made by or on
behalf of the Company.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth under the caption
"Market Risk" in Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.
19
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information required by this item was previously reported in the
Company's Form 10-Q for the quarter ended March 31, 2002.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Document
----------- --------
10.1 Second Amended and Restated Credit Agreement, dated
as of July 1, 2002, among the Company, as Borrower;
the lenders named therein; Wachovia Bank, National
Association (formerly known as First Union National
Bank), as administrative agent; PNC Bank, National
Association, as documentation agent; and Bank of
America Securities, LLC, as syndication agent
(incorporated by reference to Exhibit 99.7 to the
Company's Form 8-K dated July 16, 2002, File No.
0-15981)
10.2 Senior Executive Employment Agreement with Thomas A.
Golub entered into May 10, 2002 (incorporated by
reference to Exhibit 99.3 to the Company's Form 8-K
dated July 16, 2002, File No. 0-15981)
10.3 Amended and Restated Consulting Agreement between the
Company and Robert H. Hilb
99.1 Certification Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350
99.2 Certification Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350
b) Reports on Form 8-K
20
(i) The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on May 13, 2002. The Form
8-K reported items 5 and 7 and attached as an exhibit and
incorporated by reference a press release that announced the
signing of a definitive agreement under which the Company
would acquire Hobbs Group, LLC (Hobbs), for a combination of
cash and stock, with a fixed amount of $142.0 million payable
at closing, up to an additional $102.0 million on Hobbs'
attaining certain financial goals within the next two years
and the assumption of existing earnouts from Hobbs' prior
acquisitions, estimated to be a new present value of $30.0
million.
(ii) The Company filed a current Report on Form 8-K with the
Securities and Exchange Commission on July 16, 2002. The Form
8-K which was dated July 1, 2002, reported items 2 and 7 and
announced the consummation of the Hobbs acquisition and
included as exhibits (i) the audited financial statements of
Hobbs for the years ended December 31, 2001, 2000 and 1999,
(ii) unaudited financial statements of Hobbs as of March 31,
2002 and 2001, (iii) pro forma condensed combined balance
sheet of the Company giving effect to the acquisition as if
the acquisition had occurred on March 31, 2002 and (iv) pro
forma condensed combined statements of income for the three
months ended March 31, 2002 and the year ended December 31,
2001 giving effect to the acquisition as if the acquisition
had occurred January 1, 2001.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hilb, Rogal and Hamilton Company
--------------------------------
(Registrant)
Date August 14, 2002 By: /s/ Andrew L. Rogal
---------------------------- -----------------------------
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date August 14, 2002 By: /s/ Carolyn Jones
---------------------------- -----------------------------
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date August 14, 2002 By: /s/ Robert W. Blanton, Jr.
---------------------------- -----------------------------
Vice President and Controller
(Chief Accounting Officer)
22
HILB, ROGAL AND HAMILTON COMPANY
EXHIBIT INDEX
Exhibit No. Document
----------- --------
10.1 Second Amended and Restated Credit Agreement, dated
as of July 1, 2002, among the Company, as Borrower;
the lenders named therein; Wachovia Bank, National
Association (formerly known as First Union National
Bank), as administrative agent; PNC Bank, National
Association, as documentation agent; and Bank of
America Securities, LLC, as syndication agent
(incorporated by reference to Exhibit 99.7 to the
Company's Form 8-K dated July 16, 2002, File No.
0-15981)
10.2 Senior Executive Employment Agreement with Thomas A.
Golub entered into May 10, 2002 (incorporated by
reference to Exhibit 99.3 to the Company's Form 8-K
dated July 16, 2002, File No. 0-15981)
10.3 Amended and Restated Consulting Agreement between the
Company and Robert H. Hilb
99.1 Certification Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350
99.2 Certification Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350