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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004

or

For the transition period from              to             

Commission File Number 0-7201

BROWN & BROWN, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (386) 252-9601

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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares of the Registrant’s common stock, $.10 par value, outstanding as of August 2, 2004 was 68,904,401.

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BROWN & BROWN, INC.

INDEX

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

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BROWN & BROWN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Basis of Financial Reporting

The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for 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. These unaudited, condensed, and consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

Certain amounts for the prior period have been reclassified to conform to the current period presentation.

Note 2 - Stock-Based Compensation and Incentive Plans

The Company applies the intrinsic value-based method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, to account for its stock plans. Accordingly, the Company presents the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-based Compensation - Transition and Disclosure”, which requires presentation of pro forma net income and earnings per share information under SFAS No. 123 (same title).

Pursuant to the above disclosure requirements, the following table provides an expanded reconciliation for all periods presented that: 1.) adds back to reported net income the recorded expense under APB No. 25, net of related income tax effects; 2.) deducts the total fair value expense under SFAS No. 123, net of related income tax effects; and 3.) shows the reported and pro forma earnings per share amounts (in thousands, except per share data):

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Note 3 - Basic and Diluted Net Income Per Share

The following table sets forth the computation of basic net income per share and diluted net income per share (in thousands, except per-share data):

Note 4 – Acquisitions

On May 1, 2004, the Company acquired the outstanding stock of Proctor Homer Warren, Inc., d/b/a Proctor Financial Insurance (“Proctor”). The purchase price for this acquisition was approximately $33.9 million, including $31.1 million of net cash payments and the assumption of $2.8 million of net liabilities. Additionally, the purchase price may be increased by “earn-out” contingent payments of up to $12.4 million based upon the net operating profits earned by Proctor over a three-year period. This agency provides lender-placed insurance and other specialty insurance products primarily to financial institutions. This acquisition allowed the Company to expand into this new market niche.

Additionally, during the second quarter of 2004, the Company acquired certain assets and liabilities of seven other general insurance agencies, the outstanding stock of one general insurance agency and several books of business (customer accounts). The aggregate purchase price for these acquisitions was approximately $18.1 million, including $14.7 million of net cash payments, the issuance of notes payable of $0.8 million and the assumption of $2.6 million of net liabilities. Additionally, $0.7 million was paid during the quarter on the “earn-out” purchase price agreements of prior acquisitions, which included $1.7 million of cash payments, the issuance of $0.2 million in notes payable, the forgiveness of a note payable obligation of $1.3 million and the assumption of $0.1 million of liabilities.

On February 1, 2004, the Company acquired certain insurance-related assets of Doyle Consulting Group, Inc. and Doyle Consulting Group of New Jersey, Inc. (collectively, “Doyle”). On March 1, 2004, the Company acquired certain insurance-related assets of Waldor Agency, Inc. (“Waldor”) and Statfeld Vantage Insurance Group, L.L.C. (“Statfeld”). The assets acquired from Doyle, Waldor and Statfeld were purchased with cash payments of $10.7 million, $30.4 million and $26.6 million, respectively. Additionally, the purchase price of these acquisitions may be increased by “earn-out” contingent payments of up to $6.7 million, $9.1 million and $7.9 million, respectively, based upon the respective net operating profits earned by the Company from the acquired assets over a two-year period. These three agencies are providers of a broad range of property and casualty, and employee benefits insurance products and services. These acquisitions expanded the Company’s Pennsylvania and New Jersey retail insurance operations.

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Additionally, during the first quarter of 2004, the Company acquired certain assets and liabilities of nine other general insurance agencies and several books of business (customer accounts). The aggregate purchase price for these acquisitions was approximately $26.2 million, including $25.6 million of cash payments, the issuance of notes payable of $0.6 million and the assumption of less then $0.1 million of liabilities. Additionally, $9.1 million was paid during the quarter on the “earn-out” purchase price agreements of prior acquisitions, which included $2.9 million of cash payments and the issuance of 200,000 shares of the Company’s stock with an approximate fair market value of $6.2 million.

The “earn-out” contingent payments represent the maximum amount of additional consideration that could be paid pursuant to the purchase agreements related to these acquisitions. These contingent obligations are primarily based upon future net operating profits earned by the Company from the acquired entities or assets, and were not included in the purchase price that was recorded for these acquisitions at their respective dates. Future payments made under these agreements, if any, will be recorded as upward adjustments to goodwill when the contingencies are settled. Assuming each acquisition maximizes their total potential earn-out, the aggregated amount of unrecorded contingent payables outstanding as of June 30, 2004 for all consummated acquisitions would be $100.2 million.

The following table summarizes the preliminary allocation of the aggregate purchase price to the fair values of the assets and liabilities acquired, including “earn-out” adjustments on prior acquisitions (in thousands):

The results of operations for the acquisitions completed during 2004 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as of January 1, 2003, the Company’s results of operations would be as shown in the following table (in thousands, except per share data):

These 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.

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Note 5 - Goodwill and Amortizable Intangible Assets

The Company accounts for goodwill under SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 provides for the non-amortization of goodwill. Goodwill is now subject to at least an annual assessment for impairment by applying a fair value-based test. Amortizable intangible assets will be amortized over their useful lives (other than indefinite life assets) and will be subject to a lower of cost or market impairment testing.

SFAS No. 142 requires the Company to compare the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based on multiples of revenues, earnings before interest, income taxes, depreciation and amortization (EBITDA), and discounted cash flows. The Company completed its most recent annual assessment as of November 30, 2003 and identified no impairment as a result of the evaluation.

The changes in goodwill, net of accumulated amortization, by business segment, for the six months ended June 30, 2004 are as follows (in thousands):

Amortizable intangible assets as of June 30, 2004 and December 31, 2003 consisted of the following (in thousands):

Amortization expense for amortizable intangible assets for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 are estimated to be $21.4 million, $21.9 million, $20.6 million, $20.0 million and $19.2 million, respectively.

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Note 6 - Long-Term Debt

In January 2001, the Company entered into a $90.0 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 Offering Rate (LIBOR) plus 0.50% to 1.00%, depending upon the Company’s quarterly ratio of funded debt to earnings before interest, taxes, depreciation and amortization. The 90-day LIBOR was 1.59% as of June 30, 2004. The loan was fully funded on January 3, 2001 and as of June 30, 2004 had an outstanding balance of $45.0 million. This loan is to be repaid in equal quarterly installments of $3.2 million through December 2007.

To hedge the risk of increasing interest rates from January 2, 2002 through the remaining six years of its seven-year $90.0 million term loan, the Company entered into an interest rate swap agreement that effectively converted the floating LIBOR-based interest payments to fixed interest rate payments at 4.53%. This agreement did not affect the required 0.50% to 1.00% credit risk spread portion of the term loan. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, the Company recorded a liability as of June 30, 2004 for the fair value of the interest rate swap of approximately $670,000, net of taxes of approximately $419,000, with the related change in fair value reflected as other comprehensive income. As of December 31, 2003, the Company recorded a liability for the fair value of the interest rate swap of approximately $1,344,000, net of taxes of approximately $824,000. The Company has designated and assessed the derivative as a highly effective cash flow hedge, and accordingly, the effect is reflected in other comprehensive income.

In September 2003, the Company established an unsecured revolving credit facility with a national banking institution that provided for available borrowings of up to $75 million, with a maturity date of October 2008, bearing an interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.625% to 1.625%, depending upon the Company’s quarterly ratio of funded debt to earnings before interest, taxes, depreciation, amortization and non-cash stock grant compensation. A commitment fee of 0.175% to 0.375% per annum is assessed on the unused balance. As of June 30, 2004, there was an outstanding balance of $50.0 million.

Both of these credit agreements require the Company to maintain certain financial ratios and comply with certain other covenants. The Company was in compliance with all such covenants as of June 30, 2004.

Acquisition and other notes payable as of June 30, 2004 were $7.8 million, which primarily represents debt incurred to former owners of certain agencies or customer accounts acquired by the Company. These notes are payable in monthly, quarterly or annual installments through February 2014, including interest ranging from 1.34% to 9.00%.

Note 7 - Contingencies

The Company is involved in numerous pending or threatened proceedings by or against the Company or one or more of its subsidiaries that arise in the ordinary course of business. The damages that may be claimed in these various proceedings are substantial, including in many instances claims for punitive or extraordinary damages. Some of these claims and lawsuits have been resolved, others are in the process of being resolved, and others are still in the investigation or discovery phase. The Company will continue to respond appropriately to these claims and lawsuits, and to vigorously protect its interests.

Although the ultimate outcome of the matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on the Company or its subsidiaries, on the basis of present information, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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Note 8 - Supplemental Disclosures of Cash Flow Information

The Company’s significant non-cash investing and financing activities are as follows (in thousands):

Note 9 - Comprehensive Income

The components of comprehensive income, net of related tax, are as follows (in thousands):

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Note 10 - Segment Information

The Company’s business is divided into four reportable segments: the Retail Division, which provides a broad range of insurance products and services to commercial, governmental, professional and individual customers; 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, governmental entities and market niches; the Brokerage Division, which markets and sells excess surplus commercial insurance and reinsurance, primarily through independent agents and brokers; and 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 Company conducts all of its operations within the United States of America.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the inter-company interest expense charge to the reporting segment (in thousands).

Note 11 – Subsequent Events

On July 15, 2004 the Company completed the first funding of a total issuance of up to $200 million of unsecured senior notes (the “Notes”) through a private placement. The $200 million is divided into two series: Series A, for $100 million due in 2011 and bearing interest at 5.57% per year; and Series B, for $100 million due in 2014 and bearing interest at 6.08% per year. The closing on the Series B Notes occurred on July 15, 2004. The closing on the Series A Notes is expected to occur on September 15, 2004. The Company anticipates using the proceeds from the sales of the Notes for general corporate purposes, including repayment of existing senior debt and acquisitions.

Additionally, from July 1, 2004 through July 31, 2004, the Company acquired the assets and certain liabilities of six general insurance agencies. The aggregate purchase price of these acquisitions was $26.3 million, including $26.2 million of cash payments, and the assumption of $0.1 million of liabilities.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN THE COMPANY’S 2003 ANNUAL REPORT ON FORM 10-K, AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.

General

We are a general insurance agency that commenced business in 1939 and are headquartered in Daytona Beach and Tampa, Florida. We market and sell to our customers insurance products and services, primarily in the property, casualty and the employee benefits area. As an agent and broker, we do not assume underwriting risks. Instead, we provide our customers 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 underwriters and fees paid by customers for certain services. The commission income that we receive 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 “contingent commissions” which are revenue-sharing commissions paid by insurance underwriters based primarily on the overall profitability of the aggregate business written with that underwriter, and/or additional factors such as retention ratios and overall volume of business that we place with such insurance underwriters during the prior year.

The Insurance Market

Premium rates are established by insurance underwriters based upon many factors, including reinsurance rates, none of which we control. Beginning in 1986 and continuing through 1999, commission revenues were adversely influenced by a consistent decline in premium rates resulting from intense competition among property and casualty underwriters 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 was somewhat offset by our substantial merger and acquisition activity and net new business production. As a result of increasing loss ratios, (the comparison of incurred losses plus loss adjustment expenses against earned premium) of insurance underwriters through 1999, there was a general increase in premium rates commencing in the first quarter of 2000 and continuing into the first half of 2003. Starting in the second half of 2003, as underwriting companies began to experience improved loss ratios, they have again become more competitive on selected risks, resulting in a moderation of premium rate increases, and in some cases reductions in premium rates. Based on what the underwriters are saying and the results of our own renewal and new business activity, we anticipate that this market softening will continue through the balance of 2004 and into 2005.

Critical Accounting Policies

The more critical accounting and reporting policies include our accounting for revenue recognition, business acquisitions and purchase price allocations, intangible assets impairments, reserves for litigation and derivative interests. In particular, the accounting for these areas requires significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the “Notes to Consolidated Financial Statements” in our 2003 Annual Report on Form 10-K on file with the Securities and Exchange Commission for details regarding all of our critical and significant accounting policies.

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Results of Operations

The condensed consolidated financial information relating to the three and six month periods ended June 30, 2004 is as follows: