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 March 31, 2000 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 May 1, 2000
- -------------------------- --------------------------
Common stock, no par value 13,114,157
HILB, ROGAL AND HAMILTON COMPANY
INDEX
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Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Consolidated Income
for the three months ended
March 31, 2000 and 1999 3
Consolidated Balance Sheet
March 31, 2000 and December 31,
1999 4
Statement of Consolidated Shareholders'
Equity for the three months ended
March 31, 2000 and 1999 5
Statement of Consolidated Cash Flows
for the three months ended March 31,
2000 and 1999 6
Notes to Consolidated Financial
Statements 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-12
Item 3. Qualitative and Quantitative Disclosures
About Market Risk 13
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 6. Exhibits and Reports on Form 8-K 14-15
2
PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED INCOME
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Revenues
Commissions and fees $ 65,613,341 $ 45,975,124
Investment income 525,762 337,115
Other income 873,430 3,941,376
-------------- --------------
67,012,533 50,253,615
Operating expenses
Compensation and employee
benefits 36,393,961 25,069,940
Other operating expenses 13,821,593 9,941,029
Amortization of intangibles 2,987,722 2,004,499
Interest expense 1,989,151 686,323
-------------- --------------
55,192,427 37,701,791
-------------- --------------
INCOME BEFORE INCOME TAXES 11,820,106 12,551,824
Income taxes 5,082,848 5,114,868
-------------- --------------
NET INCOME $ 6,737,258 $ 7,436,956
============== ==============
NET INCOME PER SHARE:
Basic $0.51 $0.61
===== =====
Diluted $0.47 $0.60
===== =====
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,205,355 $ 22,336,722
Investments 3,947,332 2,939,238
Receivables:
Premiums, less allowance for doubtful
accounts of $1,424,000 and $1,456,000,
respectively 61,379,511 61,853,039
Other 10,935,110 13,418,165
------------- -------------
72,314,621 75,271,204
Prepaid expenses and other current assets 6,138,691 10,653,387
------------- -------------
TOTAL CURRENT ASSETS 112,605,999 111,200,551
INVESTMENTS 1,764,138 1,761,463
PROPERTY AND EQUIPMENT, NET 15,180,557 15,412,623
INTANGIBLE ASSETS 229,079,099 229,130,542
Less accumulated amortization 47,650,577 45,082,914
------------- -------------
181,428,522 184,047,628
OTHER ASSETS 6,515,728 5,559,054
------------- -------------
$ 317,494,944 $ 317,981,319
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $ 91,129,065 $ 87,752,334
Accounts payable and accrued expenses 10,919,180 17,496,667
Premium deposits and credits due customers 16,462,222 15,192,499
Current portion of long-term debt 3,202,895 3,865,137
------------- -------------
TOTAL CURRENT LIABILITIES 121,713,362 124,306,637
LONG-TERM DEBT 110,966,212 111,826,434
OTHER LONG-TERM LIABILITIES 10,556,719 10,672,472
SHAREHOLDERS' EQUITY
Common Stock, no par value;
authorized 50,000,000 shares;
outstanding 13,109,757 and
13,058,978 shares, respectively 16,744,091 18,248,712
Retained earnings 57,514,560 52,927,064
------------- -------------
74,258,651 71,175,776
------------- -------------
$ 317,494,944 $ 317,981,319
============= =============
See notes to consolidated financial statements.
4
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
COMMON RETAINED
STOCK EARNINGS
-------------- --------------
Balance at January 1, 2000 $ 18,248,712 $ 52,927,064
Issuance of 122,979 shares of
Common Stock 508,524
Purchase of 72,200 shares of
Common Stock (2,013,145)
Payment of dividends ($.165 per share) (2,149,762)
Net income 6,737,258
-------------- --------------
Balance at March 31, 2000 $ 16,744,091 $ 57,514,560
============== ==============
Balance at January 1, 1999 $ 3,831,208 $ 41,879,167
Issuance of 56,014 shares of
Common Stock 765,145
Payment of dividends ($.016 per share) (1,945,276)
Net income 7,436,956
-------------- --------------
Balance at March 31, 1999 $ 4,596,353 $ 47,370,847
============== ==============
See notes to consolidated financial statements.
5
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
OPERATING ACTIVITIES
Net income $ 6,737,258 $ 7,436,956
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,225,424 973,778
Amortization of intangible assets 2,987,603 2,004,499
-------------- --------------
Net income plus amortization and depreciation 10,950,285 10,415,233
Provisions for losses on accounts receivable 130,577 62,109
Gain on sale of assets (583,174) (3,671,207)
Changes in operating assets and liabilities
net of effects from insurance agency
acquisitions and dispositions:
Decrease in accounts receivable 2,732,158 6,066,245
Decrease in prepaid expenses 4,514,696 808,604
Increase (decrease) in premiums payable
to insurance companies 3,376,731 (7,567,194)
Increase in premium deposits and
credits due customers 1,317,132 2,125,746
Decrease in accounts payable and
accrued expenses (6,517,072) (1,658,419)
Other operating activities (572,833) 161,695
-------------- --------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 15,348,500 6,742,812
INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
investments -- 449,758
Purchase of investments (1,010,769) (2,070,901)
Purchase of property and equipment (1,015,050) (1,589,075)
Purchase of insurance agencies, net of
cash acquired (2,422,155) (1,446,931)
Proceeds from sale of assets 2,244,199 4,490,306
Other investing activities (377,995) (44)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (2,581,770) (166,887)
FINANCING ACTIVITIES
Proceeds from long-term debt 3,000,000 --
Principal payments on long-term debt (4,522,464) (746,501)
Proceeds from issuance of Common Stock 787,273 765,145
Repurchase of Common Stock (2,013,144) --
Dividends (2,149,762) (1,945,276)
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (4,898,097) (1,926,632)
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 7,868,633 4,649,293
Cash and cash equivalents at beginning of
period 22,336,722 19,394,958
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 30,205,355 $ 24,044,251
============== ==============
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
March 31, 2000
(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 three month period ended March 31,
2000, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. 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, 1999.
NOTE B--INCOME TAXES
The Company files a consolidated federal income tax return. 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 C--ACQUISITIONS
On May 3, 1999, the Company acquired all of the issued and outstanding shares of
American Phoenix Corporation, a subsidiary of Phoenix Home Life Mutual Insurance
Company, from Phoenix Home Life Mutual Insurance Company and Martin L. Vaughan,
III. The shares were acquired in exchange for approximately $49 million in cash,
$32 million face value in 5.25% Convertible Subordinated Debentures due 2014,
with a conversion price of $22.75 per share, callable in 2009, and 1,000,000
shares of Common Stock of the Company. The Company funded the cash portion of
the purchase price with a credit facility obtained in connection with the
acquisition. The acquisition has been accounted for by the purchase method of
accounting. Intangible assets of approximately $97 million, created by the
acquisition, will be amortized over 25 years. The assets and liabilities of
American Phoenix Corporation have been revalued to their respective fair market
values. Certain fair value estimates used in the determination of goodwill were
preliminary and are subject to adjustment, which may increase or decrease the
amount of goodwill recorded. The financial statements of the Company reflect the
combined operations of the Company and American Phoenix Corporation from the
closing date of the acquisition.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
March 31, 2000
(UNAUDITED)
NOTE C--ACQUISITIONS-Continued
Pursuant to EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity", the Company recorded a charge of
$1.9 million in the second quarter of 1999 related to employee severance, lease
termination costs and other costs necessary to integrate the operations of
American Phoenix Corporation with the Company. Costs incurred to exit certain
leases and physically merge common locations comprised $950,000 of this amount.
The remaining amount relates to employee severance and other integration costs.
As of March 31, 2000, the Company had paid approximately $671,000 of these
integration costs. These charges have been included in the 1999 pro forma
amounts. Similar costs related to American Phoenix Corporation's severance and
termination costs, which are estimated at $2,200,000, have been capitalized as
part of the purchase price. The following unaudited pro forma results of
operations of the Company give effect to the acquisition of American Phoenix
Corporation as though the transaction had occurred on January 1, 1999.
THREE MONTHS ENDED
MARCH 31, 1999
REVENUES $68,754,000
NET INCOME 7,469,000
NET INCOME PER
COMMON SHARE:
Basic $0.60
=====
Diluted $0.60
=====
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 12,505,000
Diluted 12,942,000
During the first three months of 2000, the Company acquired certain assets and
liabilities of two insurance agencies for $870,000 in cash in purchase
accounting transactions. Proforma revenues and net income are not material to
the consolidated financial statements.
NOTE D--SALE OF ASSETS
During the three months ended March 31, 2000 and 1999, the Company sold certain
insurance accounts and other assets resulting in gains of approximately $583,000
and $3,671,000 respectively. These amounts are included in other income in the
statement of consolidated income. Revenues, expenses and assets were not
material to the consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
March 31, 2000
(UNAUDITED)
NOTE E--NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Numerator for basic and dilutive net income
per share - net income $ 6,737,258 $ 7,436,956
Effect of dilutive securities:
5.25% convertible debenture 269,465 -
-------------- --------------
Numerator for dilutive net income per share - net
income available after assumed conversions $ 7,006,723 $ 7,436,956
============== ==============
Denominator
Weighted average shares 13,042,960 12,136,440
Effect of guaranteed future shares to be issued in
connection with agency acquisitions 57,117 118,081
-------------- --------------
Denominator for basic net income per share 13,100,077 12,254,521
Effect of dilutive securities:
Employee stock options 283,885 83,488
Employee restricted stock 1,698 -
Contingent stock - acquisitions - 2,885
5.25% convertible debenture 1,406,593 -
-------------- --------------
Dilutive potential common shares 1,692,176 86,373
-------------- --------------
Denominator for diluted net income per share -
adjusted weighted average shares and
assumed conversions 14,792,253 12,340,894
============== ==============
Net Income per Common Share:
Basic $0.51 $0.61
===== =====
Diluted $0.47 $0.60
===== =====
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
- ---------------------
On May 3, 1999, the Company acquired all of the issued and outstanding shares of
common stock of American Phoenix Corporation, a subsidiary of Phoenix Home Life
Mutual Insurance Company, from Phoenix Home Life Mutual Insurance Company and
Martin L. Vaughan, III. The assets and liabilities of American Phoenix
Corporation have been revalued to their respective fair market values. The
financial statements of the Company reflect the combined operations of the
Company and American Phoenix Corporation from the closing date of the
acquisition.
For the three months ended March 31, 2000, commissions and fees were $65.6
million, an increase of 42.7% from commissions and fees of $46.0 million during
the comparable period of the prior year. Approximately $18.5 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 2000 and 1999. Commissions and fees from
operations owned during both periods increased 3.4%.
Investment income for the quarter increased $0.2 million or 56.0%, primarily due
to increased invested assets related to purchase acquisitions. Other income
decreased $3.1 million from the prior year. Amounts in other income include
gains from the sale of certain insurance accounts and other assets of $0.6
million and $3.7 million in 2000 and 1999, respectively.
Expenses for the quarter increased $17.5 million or 46.4%. Compensation and
employee benefits and other operating expenses increased $11.3 million and $3.9
million respectively, primarily related to purchase acquisitions of new
insurance agencies and increased revenues. Amortization of intangibles increased
approximately $1.0 million due to the aforementioned purchase acquisitions.
Interest expense increased by $1.3 million due to bank borrowings and
Convertible Subordinated Debentures utilized to finance the American Phoenix
acquisition and stock repurchase programs.
The Company's overall tax rate of 43.0% for the three months ended March 31,
2000, increased from 40.8% for the same period of the prior year primarily due
to the non-deductibility of a portion of the intangible assets from the American
Phoenix Corporation acquisition.
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 three
months ended March 31, 2000 should not be considered indicative of the results
that may be expected for the entire year ending December 31, 2000.
10
Liquidity and Capital Resources:
- -------------------------------
Net cash provided by operations totaled $15.3 million and $6.7 million for the
three months ended March 31, 2000 and 1999, 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 personal property and equipment. Cash expenditures for
the acquisition of property and equipment were $1.0 million and $1.6 million for
the three months ended March 31, 2000 and 1999, respectively. The timing and
extent of the purchase 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 $2.4
million and $1.4 million in the three months ended March 31, 2000 and 1999,
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, deferred cash payments and, in the case of the American Phoenix
Corporation acquisition, issuance of Convertible Subordinated Debentures. Cash
proceeds from the sale of accounts and other assets amounted to $2.2 million and
$4.5 million in the three months ended March 31, 2000 and 1999, respectively.
The Company did not have any material capital expenditure commitments as of
March 31, 2000.
Financing activities utilized cash of $4.9 million and $1.9 million in the three
months ended March 31, 2000 and 1999, respectively. The Company has consistently
made scheduled debt repayments and annually increased its dividend rate. In
addition, during the three months ended March 31, 2000, the Company repurchased
72,200 shares of its Common Stock under a stock repurchase program. The Company
is currently authorized to purchase an additional 464,000 shares and expects to
continue to repurchase shares. The Company anticipates the continuance of its
dividend policy. The Company had a bank credit agreement for $110.0 million
under which loans are due in various amounts through 2004 and approximately
$28.5 of 5.25% Convertible Subordinated Debentures due 2014. At March 31, 2000,
there were loans of $78.0 million outstanding under the bank agreement.
The Company had a current ratio (current assets to current liabilities) of 0.93
to 1.00 as of March 31, 2000. Shareholders' equity of $74.3 million at March 31,
2000, is improved from $71.2 million at December 31, 1999, and the debt to
equity ratio of 1.49 to 1.00 is decreased from the ratio at December 31, 1999 of
1.57 to 1.00 due to scheduled debt payments and 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.
Market Risk
- -----------
The Company has certain investments and utilizes 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.
11
Impact of Year 2000
- -------------------
In prior years, the Company discussed its plans and progress related to
achieving year 2000 readiness. During 1999, the Company completed all phases of
this plan. The Company experienced no significant disruptions from mission
critical systems or third party vendors. The Company is not aware of any
material problems resulting from year 2000 issues, either with its internal
systems or the products and services of third parties. The Company will continue
to monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any year 2000 matters that
may arise are addressed promptly.
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, 1999, 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.
12
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOUSRES 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.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Shareholders (the "Meeting") of Hilb,
Rogal and Hamilton Company (the "Company") was held on
Tuesday, May 2, 2000.
b) The Shareholders voted for the election of six (6) directors,
four (4) to serve for terms of three (3) years expiring on the
date of the Annual Meeting in 2003 and until their successors
are elected, one (1) to serve for a term of two (2) years
expiring as of the Annual Meeting in 2002 and until his
successor is elected and one (1) to serve for a term of one
(1) year expiring as of the Annual Meeting in 2001 and until
his successor is elected. The results of the voting in these
elections are set forth below.
Votes For Votes Non-
Withheld Votes
Robert W. Fiondella 11,739,595 66,320 1,302,074
Robert H. Hilb 11,678,607 127,308 1,302,074
Andrew L. Rogal 11,740,158 65,757 1,302,074
Martin L. Vaughan, III 11,738,997 66,918 1,302,074
Timothy J. Korman 11,740,352 65,563 1,302,074
David W. Searfoss 11,740,352 65,563 1,302,074
At the Meeting, the shareholders voted for the approval of the
2000 Stock Incentive Plan, which has previously been adopted
by the Board. The results of the voting of this proposal are
set forth below:
Votes For Votes Against Votes Non-
Withheld Votes
2000 Stock Incentive Plan 10,260,268 369,353 1,176,294 1,302,074
No other matters were voted upon at the Meeting or during the
quarter for which this report is filed.
13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Document
----------- --------
10.1 Hilb, Rogal and Hamilton Company 2000
Stock Incentive Plan, incorporated by
reference to Exhibit A of the
Registrant's definitive Proxy Statement
for the Annual Meeting of Shareholders
held on May 2, 2000
27 Financial Data Schedule (filed
electronically only)*
b) Reports on Form 8-K
None.
* Filed Herewith
14
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 May 12, 2000 By: /s/ Andrew L. Rogal
---------------------- -----------------------------
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date May 12, 2000 By: /s/ Carolyn Jones
---------------------- -----------------------------
Senior Vice President-Finance
(Principal Financial Officer)
Date May 12, 2000 By: /s/ Robert W. Blanton, Jr.
---------------------- -----------------------------
Vice President and Controller
(Chief Accounting Officer)
15
HILB, ROGAL AND HAMILTON COMPANY
EXHIBIT INDEX
No. Description
- --- -----------
10.1 Hilb, Rogal and Hamilton Company 2000 Stock Incentive Plan,
incorporated by reference to Exhibit A of the Registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders
held on May 2, 2000
27 Financial Data Schedule (filed electronically only)*
* Filed Herewith