1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 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.)
P. O. Box 1220, Glen, Allen, VA 23060-1220
(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 October 31, 1998
Common stock, no par value 12,139,676
(This document contains 14 pages)
HILB, ROGAL AND HAMILTON COMPANY
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Consolidated Income
for the three months and nine months
ended September 30,1998 and 1997 3
Consolidated Balance Sheet,
September 30, 1998 and December
31, 1997 4
Statement of Consolidated Shareholders'
Equity for the nine months ended
September 30, 1998 and 1997 5
Statement of Consolidated Cash Flows
for the nine months ended September
30, 1998 and 1997 6
Notes to Consolidated Financial
Statements 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-13
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
STATEMENT OF CONSOLIDATED INCOME
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997 SEPT. 30, 1998 SEPT. 30, 1997
--------------------------------------------------------------------
Revenues
Commissions and fees $43,204,884 $40,800,479 $134,236,744 $129,752,606
Investment income 387,316 473,621 1,203,785 1,260,210
Other 407,858 575,409 3,181,003 3,072,648
----------- ----------- ------------ ------------
44,000,058 41,849,509 138,621,532 134,085,464
Operating expenses
Compensation and
employee benefits 24,375,114 23,696,665 73,662,581 72,564,190
Other operating expenses 11,818,541 11,212,453 34,553,807 34,133,162
Amortization of
intangibles 1,964,146 1,992,481 5,860,854 6,218,190
Interest expense 533,085 486,627 1,632,147 1,518,797
----------- ----------- ------------ -----------
38,690,886 37,388,226 115,709,389 114,434,339
----------- ----------- ------------ -----------
INCOME BEFORE
INCOME TAXES 5,309,172 4,461,283 22,912,143 19,651,125
Income taxes 2,207,695 1,894,996 9,419,527 8,141,050
----------- ----------- ------------ -----------
NET INCOME $ 3,101,477 $ 2,566,287 $13,492,616 $11,510,075
=========== =========== ============ ===========
NET INCOME PER
COMMON SHARE:
Basic $0.25 $0.20 $1.07 $0.87
===== ===== ===== =====
Diluted $0.25 $0.19 $1.06 $0.87
===== ===== ===== =====
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,552,980 $ 22,314,860
Investments 3,629,756 3,892,533
Receivables:
Premiums, less allowance for
doubtful accounts of
$1,660,000 and $2,299,000,
respectively 46,318,168 41,292,489
Other 8,646,389 5,720,513
------------- ------------
54,964,557 47,013,002
Prepaid expenses and other current
assets 3,423,911 3,612,523
------------- ------------
TOTAL CURRENT ASSETS 84,571,204 76,832,918
INVESTMENTS 2,935,986 5,030,000
PROPERTY AND EQUIPMENT (NET) 11,391,619 11,762,080
INTANGIBLE ASSETS
Expiration rights 77,784,940 75,193,075
Goodwill 34,890,714 33,411,145
Noncompetition agreements 12,079,974 11,636,847
------------ ------------
124,755,628 120,241,067
Less accumulated amortization 43,345,200 38,071,304
------------ ------------
81,410,428 82,169,763
OTHER ASSETS 6,133,346 5,811,797
------------ ------------
$186,442,583 $181,606,558
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $ 70,655,347 $ 67,520,370
Accounts payable and accrued expenses 14,081,844 10,925,646
Premium deposits and credits
due customers 7,303,338 7,752,502
Current portion of long-term debt 2,004,476 2,074,788
------------ ------------
TOTAL CURRENT LIABILITIES 94,045,005 88,273,306
LONG-TERM DEBT 36,590,960 32,457,882
OTHER LONG-TERM LIABILITIES 9,938,580 9,536,771
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized
50,000,000 shares; outstanding
12,137,854 and 12,813,023 shares,
respectively 3,502,929 16,540,461
Retained earnings 42,365,109 34,798,138
------------ ------------
45,868,038 51,338,599
------------ ------------
$186,442,583 $181,606,558
============ ============
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
Common Stock Retained Earnings
-------------------------------------
Balance at January 1, 1998 $ 16,540,461 $34,798,138
Issuance of 135,611 shares of
Common Stock 1,704,521
Purchase of 810,780 shares of
Common Stock (14,307,508)
Payment of dividends (5,925,645)
Other (434,545)
Net income 13,492,616
------------ -----------
Balance at September 30, 1998 $ 3,502,929 $42,365,109
============ ===========
Balance at January 1, 1997 $ 25,266,279 $30,031,992
Issuance of 108,396 shares of
Common Stock 1,440,066
Purchase of 568,164 shares of
Common Stock (8,892,550)
Payment of dividends (6,036,115)
Other (57,280)
Net income 11,510,075
------------ -----------
Balance at September 30, 1997 $ 17,756,515 $35,505,952
============ ===========
See notes to consolidated financial statements.
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30, 1998 SEPT. 30, 1997
--------------------------------------
OPERATING ACTIVITIES
Net income $ 13,492,616 $ 11,510,075
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation and amortization 2,617,589 2,711,765
Amortization of intangible assets 5,860,854 6,218,190
------------ ------------
Net income plus amortization
and depreciation 21,971,059 20,440,030
Provision for losses on
accounts receivable 370,025 578,624
Gain on sale of assets (2,505,644) (2,379,824)
Changes in operating assets
and liabilities net of
effects from insurance
agency acquisitions and
dispositions:
Increase in accounts receivable (8,319,017) (60,371)
Decrease in prepaid expenses 377,514 332,614
Increase in premiums payable
to insurance companies 3,134,977 2,780,618
Increase (decrease) in
premium deposits and credits (449,164) 882,145
Increase in accounts payable
and accrued expenses 1,683,609 701,111
Other operating activities (741,376) 1,603,381
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 15,521,983 24,878,328
INVESTING ACTIVITIES
Proceeds from maturities of held-
to-maturity investments 2,890,604 4,376,174
Purchase of investments (533,815) (2,414,012)
Purchase of property and equipment (2,628,082) (1,589,070)
Purchase of insurance agencies,
net of cash acquired (4,983,257) (7,274,617)
Proceeds from sale of assets 4,434,152 5,778,635
Other investing activities 2,401 114,169
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (817,997) (1,008,721)
FINANCING ACTIVITIES
Proceeds from long-term debt 7,000,000 3,004,220
Principal payments on long-term debt (2,937,234) (3,775,697)
Repurchase of Common Stock (14,307,508) (8,892,550)
Dividends (5,925,645) (6,036,115)
Other 1,704,521 640,066
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (14,465,866) (15,060,076)
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 238,120 8,809,531
Cash and cash equivalents at
beginning of period 22,314,860 19,774,374
------------ ------------
CASH AND CASH EQUIVLENTS AT END OF
PERIOD $ 22,552,980 $ 28,583,905
============ ============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 1998
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with generally
accepted accounting principles 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 nine month period
ended September 30, 1998, are not necessarily indicative of the
results that may be expected for the year ending December 31,
1998. 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, 1997.
NOTE B--ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which is required to be adopted in years
beginning after June 15, 1999. Because of the Company's minimal
use of derivatives, management does not anticipate that the new
Statement will have a significant effect on earnings or financial
position of the Company.
NOTE C--INCOME TAXES
The Company (except for its Canadian subsidiary) files a
consolidated federal income tax return. Deferred taxes result
from temporary differences between the reporting for income tax
and financial statement purposes primarily related to bad debt
expense, depreciation expense, basis differences in intangible
assets, deferred compensation arrangements and the recognition of
net operating loss carryforwards from pooled entities.
NOTE D--ACQUISITIONS
During the first nine months of 1998, the Company acquired
certain assets and liabilities of one insurance agency for
$700,000 in a purchase accounting transaction. Proforma revenues
and net income are not material to the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 1998
(UNAUDITED)
NOTE E--SALE OF ASSETS
During the nine months ended September 30, 1998 and 1997, the Company
sold certain insurance accounts and other assets resulting in gains of
approximately $2,506,000 and $2,380,000, respectively, including
$185,000 and $301,000 in the third quarters of 1998 and 1997,
respectively. These amounts are included in other revenues in the
statement of consolidated income. Revenues, expenses and assets of
these operations were not material to the consolidated financial
statements.
NOTE F--NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
net income per share.
THREE MONTHS ENDED NINE MONTHS ENDED
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1997
--------------------------------------------------------------------
Numerator for basic and
dilutive net income
per share -- net income $ 3,101,477 $ 2,566,287 $13,492,616 $11,510,075
=========== =========== =========== ===========
Denominator
Weighted average shares 12,239,629 12,964,842 12,553,405 13,148,200
Effect of guaranteed
future shares to be
issued in connection
with an agency
acquisition 9,934 20,408 10,678 23,330
----------- ----------- ----------- -----------
Denominator for basic
net income per share 12,249,563 12,985,250 12,564,083 13,171,530
Effect of dilutive
securities:
Employee stock options 186,294 156,391 183,303 74,346
Contingent stock -
acquisitions 79,470 53,247 32,263 18,072
----------- ---------- ---------- -----------
Dilutive potential
common shares 265,764 209,638 215,566 92,418
----------- ---------- ---------- -----------
Denominator for diluted
net income per
share -- adjusted
weighted average
shares and assumed
conversions 12,515,327 13,194,888 12,779,649 13,263,948
=========== =========== =========== ===========
Net Income Per Common Share:
Basic $0.25 $0.20 $1.07 $0.87
Diluted ===== ===== ===== =====
$0.25 $0.19 $1.06 $0.87
===== ===== ===== =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 1998
(UNAUDITED)
NOTE G--SUBSEQUENT EVENTS
Subsequent to September 30, 1998, the Company acquired certain
assets and liabilities of four insurance agencies for $7,337,000
($3,025,000 in cash, $3,312,000 in guaranteed future payments and
113,935 shares of Common Stock) in purchase accounting
transactions. Proforma revenues and net income are not material
to the consolidated financial statements.
HILB, ROGAL AND HAMILTON COMPANY (THE "COMPANY")
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
For the three months ended September 30, 1998 commissions and
fees were $43.2 million, an increase of 5.9% from commissions and
fees of $40.8 million during the comparable period of the prior
year. Approximately $1,531,000 of commissions were derived from
purchase acquisitions of new insurance agencies. This increase
was offset by decreases of approximately $1,167,000 from the sale
of certain offices and accounts in 1998 and 1997. Excluding the
effect of acquisitions and dispositions, commissions and fees
from operations owned during both periods increased 5.3%.
Investment income decreased $0.1 million or 18.2% due to a
decrease in invested assets due to expenditures made under the
Company's stock repurchase and agency acquisition programs. Other
income decreased $0.2 million or 29.1% from the prior year
primarily due to nonrecurring gains from the sale of assets in
1997.
Expenses increased by $1.3 million or 3.5%. Increases include
$0.7 million in compensation and benefits and $0.6 million in
other operating expenses primarily related to purchase
acquisitions of new insurance agencies and increased earnings,
offset in part by decreases from the sale of certain offices and
accounts in 1998 and 1997.
The Company's overall tax rate for the three months ended
September 30, 1998 was 41.6%, relatively comparable to the rate
of 42.5% for the same period of the prior year.
For the nine months ended September 30, 1998, commissions and
fees were $134.2 million, an increase of 3.5% from commissions
and fees of $129.8 million during the comparable period of the
prior year. Approximately $4.4 million of commissions were
derived from purchase acquisitions of new insurance agencies.
This increase was offset by decreases of approximately $5.5
million from the sale of certain offices and accounts in 1997 and
1998. Commissions and fees, excluding the effect of acquisitions
and dispositions, from operations owned during both periods
increased 4.5%.
Investment and other income increased $0.1 million or 1.2% from
the prior year primarily due to the net impact of nonrecurring
gains from the sale of assets.
Expenses remained relatively level with the prior year.
Increases relate to increased earnings and purchase acquisitions
on new insurance agencies offset by the impact of certain offices
sold in 1998 and 1997 and consulting fees of $1.0 million in 1997
related to the Company's strategic plan.
The Company's overall tax rate of 41.1% for the nine months ended
September 30, 1998 was relatively comparable to the rate of 41.4%
for the same period of the prior year.
The timing of contingent commissions, policy renewals and
acquisitions 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 nine months
ended September 30, 1998 should not be considered indicative of
the results that may be expected for the entire year ending
December 31, 1998.
Liquidity and Capital Resources:
Net cash provided by operations totaled $15.5 million and $24.9
million for the nine months ended September 30, 1998 and 1997,
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 $2.6 million and $1.6 million for the nine months
ended September 30, 1998 and 1997, 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 agencies accounted for
under the purchase method of accounting utilized cash of $5.0
million and $7.3 million in the nine months ended September 30,
1998 and 1997, 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
Common Stock and deferred cash payments. Cash proceeds from the
sale of accounts and other assets amounted to $4.4 million and
$5.8 million in the nine months ended September 30, 1998 and
1997, respectively. The Company did not have any material
capital expenditure commitments as of September 30, 1998.
Financing activities utilized cash of $14.5 million and $15.1
million in the nine months ended September 30, 1998 and 1997,
respectively. The Company has consistently made scheduled debt
payments and annually increased its dividend rate. In addition,
during the nine months ended September 30, 1998 and 1997, the
Company repurchased 810,780 and 568,164 shares, respectively, of
its Common Stock under a stock repurchase program. The Company
is currently authorized to purchase an additional 1,012,000
shares and expects to continue to repurchase shares during the
remainder of 1998. The Company anticipates the continuance of
its dividend policy. The Company has a bank credit agreement for
$40.0 million under loans due through 2003. At September 30,
1998, there were loans of $35.0 million outstanding under the
agreement.
The Company had a current ratio (current assets to current
liabilities) of 0.90 to 1.00 as of September 30, 1998.
Shareholders' equity of $45.9 million at September 30, 1998, is
decreased from $51.3 million at December 31, 1997 and the debt to
equity ratio of 0.80 to 1.00 at September 30, 1998 is increased
from the ratio of 0.63 to 1.00 at December 31, 1997 due to net
income offset by the impact of the aforementioned purchase of
Common Stock of the Company and an increase in borrowings under
the bank credit agreement used for the repurchase of Common Stock
and insurance agency acquisitions.
The Company believes that cash generated from operations,
together with proceeds from borrowings, will provide sufficient
funds to meet the Company's short and long-term funding needs.
Impact of Year 2000:
Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and
developed without considering the impact of the upcoming change
in the century. If not corrected, this could result in a system
failure or miscalculations causing disruption of operations, and
could conceivably have a material adverse effect on the Company.
Management is monitoring a program to evaluate external software
relationships and ready its computer systems for the year 2000.
As part of this process, the Company has received compliance
statements from its agency management system vendors and
completed an assessment of its software and computer hardware
systems. As a result, the Company is upgrading or replacing
portions of its existing software and hardware that were not year
2000 compliant. Generally, these modifications and replacements
were contemplated with normal system enhancements and
improvements. Once modifications and replacements are in place,
the Company will be testing the systems for compliance. The
Company plans to substantially complete the required software
replacements in 1998. Hardware replacements are expected to be
completed during 1999. The Company is also assessing any systems
that may contain embedded chips or microcontrollers, such as
elevators, office equipment, telephones or security systems.
This assessment should be completed by early 1999 with
replacements or upgrades and accompanying testing to occur during
the remainder of 1999.
The Company is also evaluating insurance carriers, financial
institutions and other third party vendors. This process is
expected to be complete by early 1999. Determining the year 2000
readiness of external parties requires the collection of
compliance statements made by those parties, together with
factual research. Although the Company has taken, and will
continue to take, reasonable efforts to gather information to
determine the readiness of external parties, often such
information is not provided voluntarily, is not available or is
not reliable.
In assessing the material risks to the Company's business arising
from the year 2000 problem, the Company considers the year 2000
readiness of agency management system vendors, insurance
carriers, financial institutions and other third parties
(including public utilities and telecommunication service
companies) to be the primary risk to its business. The loss of
services from any one of these entities could disrupt operations
and have a material adverse effect on the Company. The year 2000
readiness of third parties is substantially beyond the Company's
knowledge and control, and there can be no assurances that the
Company will not be adversely affected by the failure of a third
party to adequately address the year 2000 problem.
The Company believes its planning efforts are adequate to address
its year 2000 concerns. However, the Company is formulating
contingency plans, where necessary, in an effort to be prepared
should a year 2000 issue arise. These plans should be completed
by mid-1999.
The Company currently estimates that the total costs for
addressing the year 2000 issue, including the necessary
enhancements, will be approximately $3.5 million. Software and
hardware replacements are being capitalized, whereas, the costs
associated with preparing for the year 2000 are expensed as
incurred and are being funded with cash from operations. As of
September 30, 1998, the Company had spent approximately $0.5
million. The Company does not expect the total cost of addressing
the year 2000 issue with respect to its internal computer systems
and hardware to be material to its consolidated financial
condition or results of operations.
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, including but not limited to
statements regarding the impact of the year 2000 issue on the
Company's business and operations, 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, 1997, 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.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit - 27 Financial Data Summary (electronic filing only)
b) No reports on Form 8-K have been filed during the nine
months ended September 30, 1998.
SIGNATURE
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 November 13, 1998 By: /s/ Andrew L. Rogal
President and Chief Executive Officer
(Principal Executive Officer)
Date November 13, 1998 By: /s/ Carolyn Jones
Senior Vice President-Finance
(Principal Financial Officer)
Date November 13, 1998 By: /s/ Robert W. Blanton, Jr.
Vice President and Controller
(Chief Accounting Officer)