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, 2001 Commission file number 0-15981
HILB, ROGAL AND HAMILTON COMPANY
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(Exact name of registrant as specified in its charter)
Virginia 54-1194795
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
P. O. Box 1220, Glen, Allen, VA 23060-1220
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(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
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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, 2001
------------------------------ ------------------------------
Common stock, no par value 13,564,302
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, 2001 and 2000 3
Consolidated Balance Sheet
March 31, 2001 and December 31,
2000 4
Statement of Consolidated Shareholders'
Equity for the three months ended
March 31, 2001 and 2000 5
Statement of Consolidated Cash Flows
for the three months ended March 31,
2001 and 2000 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 12
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
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, 2001 MARCH 31, 2000
-------------- ---------------
Revenues
Commissions and fees $ 77,002,907 $ 65,613,341
Investment income 627,783 525,762
Other income 281,037 873,430
-------------- --------------
77,911,727 67,012,533
Operating expenses
Compensation and employee benefits 42,769,221 36,393,961
Other operating expenses 15,861,071 13,821,593
Amortization of intangibles 3,324,503 2,987,722
Interest expense 2,306,009 1,989,151
-------------- --------------
64,260,804 55,192,427
-------------- --------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 13,650,923 11,820,106
Income taxes 5,869,897 5,082,848
-------------- --------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 7,781,026 6,737,258
Cumulative effect of accounting change, net of tax - (325,000)
-------------- --------------
NET INCOME $ 7,781,026 $ 6,412,258
============== ==============
Net Income Per Share - Basic:
Income before cumulative effect of accounting change $ 0.58 $ 0.51
Cumulative effect of accounting change, net of tax - (0.02)
-------------- --------------
Net income $ 0.58 $ 0.49
============== ==============
Net Income Per Share - Assuming Dilution:
Income before cumulative effect of accounting change $ 0.53 $ 0.47
Cumulative effect of accounting change, net of tax - (0.02)
-------------- --------------
Net income $ 0.53 $ 0.45
============== ==============
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
MARCH 31, DECEMBER 31,
2001 2000
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 50,921,673 $ 28,880,784
Investments 2,036,297 2,127,404
Receivables:
Premiums, less allowance for doubtful
accounts of $1,872,000 and $1,878,000,
respectively 69,608,286 81,117,359
Other 15,486,549 12,883,269
-------------- --------------
85,094,835 94,000,628
Prepaid expenses and other current assets 6,007,829 6,469,289
-------------- --------------
TOTAL CURRENT ASSETS 144,060,634 131,478,105
INVESTMENTS 1,667,455 1,653,775
PROPERTY AND EQUIPMENT, NET 17,997,409 16,495,033
INTANGIBLE ASSETS 273,362,912 243,025,280
Less accumulated amortization 49,691,443 46,366,851
-------------- --------------
223,671,469 196,658,429
OTHER ASSETS 8,630,409 7,085,521
-------------- --------------
$ 396,027,376 $ 353,370,863
============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $ 114,466,978 $ 110,399,098
Accounts payable 5,956,165 5,458,152
Accrued expenses 11,474,972 13,606,919
Premium deposits and credits due customers 20,626,055 15,980,901
Current portion of long-term debt 4,577,466 5,555,940
-------------- --------------
TOTAL CURRENT LIABILITIES 157,101,636 151,001,010
LONG-TERM DEBT 128,035,841 103,113,474
OTHER LONG-TERM LIABILITIES 12,404,841 11,034,413
SHAREHOLDERS' EQUITY
Common Stock, no par value;
authorized 50,000,000 shares;
outstanding 13,475,639 and 13,280,468 shares,
respectively 28,152,118 22,361,312
Retained earnings 71,352,889 65,860,654
Accumulated other comprehensive earnings (loss) (1,019,949) -
-------------- --------------
98,485,058 88,221,966
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$ 396,027,376 $ 353,370,863
============== ==============
See notes to consolidated financial statements.
4
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON RETAINED EARNINGS
STOCK EARNINGS (LOSS)
-------------- -------------- -------------
Balance at January 1, 2001 $ 22,361,312 $ 65,860,654 $ -
Issuance of 195,171 shares of
Common Stock 5,790,806
Payment of dividends ($.17 per share) (2,288,791)
Net income 7,781,026
Cumulative effect of accounting change
related to derivatives, net of tax (516,600)
Derivative loss arising during first
quarter 2001, net of tax (503,349)
-------------- -------------- -------------
Balance at March 31, 2001 $ 28,152,118 $ 71,352,889 $ (1,019,949)
============== ============== =============
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 6,412,258
-------------- -------------- -------------
Balance at March 31, 2000 $ 16,744,091 $ 57,189,560 $ -
============== ============== =============
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, 2001 MARCH 31, 2000
-------------- --------------
OPERATING ACTIVITIES
Net income $ 7,781,026 $ 6,412,258
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change, net of tax - 325,000
Depreciation and amortization 1,481,825 1,225,424
Amortization of intangible assets 3,324,503 2,987,603
-------------- --------------
Net income plus amortization and depreciation and
cumulative effect of accounting change, net of tax 12,587,354 10,950,285
Provision for losses on accounts receivable 194,149 130,577
Gain on sale of assets (38,591) (583,174)
Changes in operating assets and liabilities
net of effects from insurance agency
acquisitions and dispositions:
Decrease in accounts receivable 16,367,519 2,732,158
Decrease in prepaid expenses 957,392 4,514,696
(Decrease) increase in premiums payable
to insurance companies (7,062,917) 3,376,731
Increase in premium deposits and
credits due customers 4,645,154 1,317,132
Decrease in accounts payable (710,005) (654,619)
Decrease in accrued expenses (3,025,476) (5,862,453)
Other operating activities 1,369,952 (572,833)
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NET CASH PROVIDED BY OPERATING
ACTIVITIES 25,284,531 15,348,500
INVESTING ACTIVITIES
Purchase of investments (745,153) (1,010,769)
Purchase of property and equipment (960,305) (1,015,050)
Purchase of insurance agencies, net of
cash acquired (17,512,291) (2,422,155)
Proceeds from sale of assets 18,647 2,244,199
Other investing activities 191,112 (377,995)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (19,007,990) (2,581,770)
FINANCING ACTIVITIES
Proceeds from long-term debt 25,000,000 3,000,000
Principal payments on long-term debt (7,999,266) (4,522,464)
Proceeds from issuance of Common Stock 1,052,405 787,273
Repurchase of Common Stock - (2,013,144)
Dividends (2,288,791) (2,149,762)
-------------- --------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 15,764,348 (4,898,097)
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INCREASE IN CASH AND CASH EQUIVALENTS 22,040,889 7,868,633
Cash and cash equivalents at beginning of
period 28,880,784 22,336,722
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CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 50,921,673 $ 30,205,355
============== ==============
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
March 31, 2001
(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,
2001, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. 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, 2000.
NOTE B--CHANGES IN ACCOUNTING METHOD
As of January 1, 2001, the Company adopted Financial Accounting Standards Board
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement 133). It requires the Company to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
these instruments at fair value recognizing offsetting gains and losses as
adjustments to be reported in net income or other comprehensive income, as
appropriate. The Company's use of derivative instruments is limited to interest
rate swap agreements used to modify the interest characteristics for a portion
of its outstanding debt. These interest rate swaps are designated as cash flow
hedges. The adoption of Statement 133 resulted in a $517,000 cumulative effect
of accounting change, net of tax and was recognized as a decrease to accumulated
other comprehensive income. The adoption of Statement 133 did not have a
material effect on net income for the period ended March 31, 2001.
In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements," effective January 1, 2000, the Company changed its
method of accounting for cancellation of customer insurance policies.
Previously, the Company did not record a reserve for such cancellations. Under
the new method of accounting adopted retroactive to January 1, 2000, the Company
now records a reserve for such cancellations. The cumulative effect of the
change on prior years resulted in a charge to income of $325,000 (net of income
taxes of $225,000), for the year ended December 31, 2000. The Company will
periodically review the adequacy of the allowance and adjust it as necessary.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
March 31, 2001
(UNAUDITED)
NOTE C--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 D--ACQUISITIONS
During the first three months of 2001, the Company acquired certain assets and
liabilities of four insurance agencies for approximately $29,200,000
($21,700,000 in cash, $3,400,000 in guaranteed future payments and approximately
106,000 shares of Common Stock) in purchase accounting transactions. These
acquisitions are not material to the consolidated financial statements
individually or in aggregate.
NOTE E--SALE OF ASSETS AND OTHER GAINS
During the three months ended March 31, 2001 and 2000, the Company sold certain
insurance accounts and other assets resulting in gains of approximately $39,000
and $583,000, respectively. Revenues, expenses and assets related to these
dispositions were not material to the consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
March 31, 2001
(UNAUDITED)
NOTE F--NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
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Numerator for basic and dilutive net income
per share - net income $ 7,781,026 $ 6,412,258
Effect of dilutive securities:
5.25% convertible debenture 270,882 269,465
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Numerator for dilutive net income per share - net
income available after assumed conversions $ 8,051,908 $ 6,681,723
============== ==============
Denominator
Weighted average shares 13,280,558 13,042,960
Effect of guaranteed future shares to be issued in
connection with agency acquisitions 27,429 57,117
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Denominator for basic net income per share 13,307,987 13,100,077
Effect of dilutive securities:
Employee stock options 342,081 283,885
Employee restricted stock 38,260 1,698
Contingent stock - acquisitions 5,882 -
5.25% convertible debenture 1,406,593 1,406,593
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Dilutive potential common shares 1,792,816 1,692,176
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Denominator for diluted net income per share -
adjusted weighted average shares and
assumed conversions 15,100,803 14,792,253
============== ==============
Net Income per Common Share:
Basic $0.58 $0.49
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Diluted $0.53 $0.45
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NOTE G--SUBSEQUENT EVENT
Subsequent to March 31, 2001, the Company signed the Amended and Restated Credit
Agreement with seven banks that allows for borrowings of up to $160 million
consisting of a $100 million revolving credit facility and a $60 million term
loan facility, both of which bear interest at variable rates. The term portion
of the facility is payable quarterly beginning June 30, 2001 with the final
payment due June 30, 2004.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
---------------------
Three Months Ended March 31, 2001
Net income for the three months ended March 31, 2001 was $7.8 million, or $0.53
per share, compared with $6.4 million, or $0.45 per share after an accounting
change for the same period last year. Excluding net non-recurring gains in both
periods and the accounting change in 2000, net income was $7.8 million, a 21.4%
increase from $6.4 million last year. Net income per share on the same basis was
$0.53, compared with $0.45, an increase of 17.8%.
Commissions and fees were $77.0 million, an increase of 17.4% from commissions
and fees of $65.6 million during the comparable period of the prior year.
Approximately $10.1 million of commissions were derived from purchase
acquisitions of new insurance agencies. This increase was offset by decreases of
approximately $1.6 million from the sale of certain offices and accounts in 2001
and 2000. Excluding the effect of acquisitions and dispositions, commissions and
fees from operations owned during both periods increased 4.5%. This increase
relates primarily to new business production and modest firming of premium
levels partially offset by continued pruning of low margin business.
Non-standard commissions (contingent, bonus and override commissions), net of
acquisitions, were higher than anticipated but level with last year which
tempered the "organic" revenue growth rate slightly for the quarter.
Investment income increased $0.1 million or 19.4% due primarily to increased
invested assets. Other income decreased $0.6 million or 67.8% primarily due to
the decrease in gains from the sale of insurance accounts and other assets from
$583,000 in 2000 to $39,000 in 2001.
Expenses for the quarter increased $9.1 million or 16.4%. Compensation and
benefits and other operating expenses increased $6.4 million and $2.0 million,
respectively, primarily due to purchase acquisitions of new insurance agencies
and increased revenue production. Amortization of intangibles increased
approximately $0.3 million due primarily to the aforementioned purchase
acquisitions. Interest expense increased $0.3 million due to increased
borrowings.
The Company's overall tax rate for the three months ended March 31, 2001 was
43.0% comparable to 43.0% 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 three
months ended March 31, 2001 should not be considered indicative of the results
that may be expected for the entire year ending December 31, 2001.
10
Liquidity and Capital Resources:
-------------------------------
Net cash provided by operations totaled $25.3 million and $15.3 million for the
three months ended March 31, 2001 and 2000, 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 $1.0 million and $1.0 million for the
three months ended March 31, 2001 and 2000, 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
$17.5 million and $2.4 million in the three months ended March 31, 2001 and
2000, 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 $18,000 and $2.2 million during the three
months ended March 31, 2001 and 2000, respectively. The Company did not have any
material capital expenditure commitments as of March 31, 2001.
Financing activities provided cash of $15.8 million and utilized cash of $4.9
million in the three months ended March 31, 2001 and 2000, respectively. The
Company has consistently made debt payments 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 379,100 shares.
The Company anticipates the continuance of its dividend policy. As of March 31,
2001, the Company had an available bank credit facility of $101.3 million under
which loans are due in various amounts through 2004 and $32.0 million face value
of 5.25% Convertible Subordinated Debentures due 2014. At March 31, 2001, there
were loans of $91.3 million outstanding under the bank agreement.
Subsequent to the end of the quarter, the Company signed the Amended and
Restated Credit Agreement providing for a credit facility of up to $160 million
under which all borrowings are due in various amounts through 2004. The new
agreement consists of a $100 million revolving credit facility and a $60 million
term loan facility.
The Company had a current ratio (current assets to current liabilities) of 0.92
to 1.00 as of March 31, 2001. Shareholders' equity of $98.5 million at March 31,
2001, is improved from $88.2 million at December 31, 2000. The debt to equity
ratio of 1.30 to 1.00 is increased from the ratio at December 31, 2000 of 1.17
to 1.00 due to increased borrowings and by the unrealized loss on interest rate
swaps offset by 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.
11
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.
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, 2000, 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.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Shareholders (the "Meeting") of the
Company was held on Tuesday, May 1, 2001.
c) The Shareholders voted for the election of four (4) directors
to serve for terms of three (3) years expiring on the date of
the Annual Meeting in 2004 and until their successors are
elected. The results of the voting in these elections are set
forth below.
Votes For Votes Non-Votes
Withheld
J. S. M. French 10,925,970 78,073 2,469,247
Anthony F. Markel 10,925,970 78,073 2,469,247
David W. Searfoss 10,925,370 78,673 2,469,247
Robert S. Ukrop 10,922,570 81,473 2,469,247
No other matters were voted upon at the Meeting or during the
quarter for which this report is filed.
12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Document
----------- --------
10.1 Amended and Restated Credit
Agreement dated April 6, 2001
among the Registrant and First
Union National Bank, PNC Bank,
National Association Bank of
America Securities, LLC, Fleet
National Bank, SunTrust Bank,
Branch Banking and Trust Company
and Comerica Bank*
b) Reports on Form 8-K
None.
* Filed Herewith
13
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 11, 2001 By: /s/ Andrew L. Rogal
------------------------ --------------------------------
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date May 11, 2001 By: /s/ Carolyn Jones
------------------------ --------------------------------
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date May 11, 2001 By: /s/ Robert W. Blanton, Jr.
------------------------ --------------------------------
Vice President and Controller
(Chief Accounting Officer)
14