SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2001 Commission file number 0-15981
HILB, ROGAL AND HAMILTON COMPANY
--------------------------------------------------------------------------------
(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.)
4951 Lake Brook Drive, Suite 500 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2001
-------------------------- ----------------------------
Common stock, no par value 14,068,878
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 and six months
ended June 30, 2001 and 2000 3
Consolidated Balance Sheet,
June 30, 2001 and December
31, 2000 4
Statement of Consolidated Shareholders'
Equity for the six months ended
June 30, 2001 and 2000 5
Statement of Consolidated Cash Flows
for the six months ended June
30, 2001 and 2000 6
Notes to Consolidated Financial
Statements 7-11
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 12-14
Item 3. Qualitative and Quantitative Disclosures
About Market Risk 15
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED INCOME
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
Revenues
Commissions and fees $ 74,302,275 $ 61,122,642 $ 151,305,181 $ 126,735,982
Investment income 668,604 531,310 1,296,387 1,057,073
Other 2,818,736 561,835 3,099,774 1,435,266
------------- ------------- ------------- -------------
77,789,615 62,215,787 155,701,342 129,228,321
Operating expenses
Compensation and employee
benefits 42,754,692 35,537,180 85,523,913 71,931,142
Other operating expenses 15,574,239 12,978,540 31,435,310 26,800,252
Amortization of intangibles 3,446,099 2,995,010 6,770,602 5,982,613
Interest expense 2,353,562 2,036,412 4,659,571 4,025,563
------------- ------------- ------------- -------------
64,128,592 53,547,142 128,389,396 108,739,570
------------- ------------- ------------- -------------
INCOME BEFORE INCOME
TAXES AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 13,661,023 8,668,645 27,311,946 20,488,751
Income taxes 5,874,240 3,727,518 11,744,137 8,810,365
------------- ------------- ------------- -------------
INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 7,786,783 4,941,127 15,567,809 11,678,386
Cumulative effect of accounting
change, net of tax - - - (325,000)
------------- ------------- ------------- -------------
NET INCOME $ 7,786,783 $ 4,941,127 $ 15,567,809 $ 11,353,386
============= ============= ============= =============
Net Income Per Share - Basic:
Income before cumulative
effect of accounting change $0.58 $0.38 $1.16 $0.89
Cumulative effect of
accounting change, net of tax - - - (0.02)
----- ----- ----- ------
Net income $0.58 $0.38 $1.16 $0.87
===== ===== ===== =====
Net Income Per Share -
Assuming Dilution:
Income before cumulative
effect of accounting change $0.53 $0.35 $1.06 $0.83
Cumulative effect of
accounting change, net of tax - - - (0.02)
----- ----- ----- -----
Net income $0.53 $0.35 $1.06 $0.81
===== ===== ===== =====
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
JUNE 30, DECEMBER 31,
2001 2000
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 52,577,841 $ 28,880,784
Investments 2,037,802 2,127,404
Receivables:
Premiums, less allowance for doubtful
accounts of $1,871,000 and $1,878,000,
respectively 75,292,469 81,117,359
Other 16,558,477 12,883,269
------------- -------------
91,850,946 94,000,628
Prepaid expenses and other current assets 6,085,532 6,469,289
------------- -------------
TOTAL CURRENT ASSETS 152,552,121 131,478,105
INVESTMENTS 1,520,131 1,653,775
PROPERTY AND EQUIPMENT, NET 18,889,245 16,495,033
INTANGIBLE ASSETS 278,268,984 243,025,280
Less accumulated amortization 52,804,927 46,366,851
------------- -------------
225,464,057 196,658,429
OTHER ASSETS 8,366,915 7,085,521
------------- -------------
$ 406,792,469 $ 353,370,863
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $ 120,353,276 $ 110,399,098
Accounts payable 7,419,792 5,458,152
Accrued expenses 9,295,786 13,606,919
Premium deposits and credits due customers 19,817,603 15,980,901
Current portion of long-term debt 5,195,709 5,555,940
------------- -------------
TOTAL CURRENT LIABILITIES 162,082,166 151,001,010
LONG-TERM DEBT 123,766,333 103,113,474
OTHER LONG-TERM LIABILITIES 13,029,538 11,034,413
SHAREHOLDERS' EQUITY
Common Stock, no par value;
authorized 50,000,000 shares;
outstanding 13,590,447 and
13,280,468 shares, respectively 32,009,176 22,361,312
Retained earnings 76,764,850 65,860,654
Accumulated other comprehensive earnings
(loss) (859,594) -
------------- -------------
107,914,432 88,221,966
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$ 406,792,469 $ 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
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS EARNINGS (LOSS)
------------ ------------ ---------------
Balance at January 1, 2001 $ 22,361,312 $ 65,860,654 $ -
Issuance of 309,979 shares of
Common Stock 9,647,864
Payment of dividends ($.345 per share) (4,663,613)
Net income 15,567,809
Cumulative effect of accounting change
related to derivatives, net of tax - - (516,600)
Derivative loss arising during 2001, net of tax - - (342,994)
------------ ------------ ------------
Balance at June 30, 2001 $ 32,009,176 $ 76,764,850 $ (859,594)
============ ============ ============
Balance at January 1, 2000 $ 18,248,712 $ 52,927,064 $ -
Issuance of 154,697 shares of
Common Stock 1,100,113
Purchase of 116,700 shares of
Common Stock (3,084,911)
Payment of dividends ($.335 per share) (4,373,857)
Net income 11,678,386
------------ ------------ ------------
Balance at June 30, 2000 $ 16,263,914 $ 60,231,593 $ -
============ ============ ============
See notes to consolidated financial statements.
5
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
OPERATING ACTIVITIES
Net income $ 15,567,809 $ 11,353,386
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 3,020,344 2,509,234
Amortization of intangible assets 6,770,602 5,982,613
------------- -------------
Net income plus amortization, depreciation and
cumulative effect of accounting change, net of tax 25,358,755 20,170,233
Provision for losses on accounts receivable 447,709 274,417
Gain on sale of assets (2,622,580) (885,458)
Changes in operating assets and liabilities
net of effects from insurance agency
acquisitions and dispositions:
Decrease in accounts receivable 7,730,400 1,492,201
Decrease in prepaid expenses 1,060,273 2,711,447
Increase (decrease) in premiums payable to
insurance companies (2,856,059) 4,578,376
Increase in premium deposits and credits due
customers 3,836,702 750,384
Increase (decrease) in accounts payable 133,337 (686,682)
Decrease in accrued expense (5,973,169) (3,921,456)
Other operating activities 1,840,332 115,744
------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 28,955,700 24,599,206
INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
investments 357,867 2,469,817
Purchase of investments (321,465) (855,110)
Purchase of property and equipment (2,752,960) (3,077,465)
Purchase of insurance agencies, net of cash acquired (19,270,964) (6,187,773)
Proceeds from sale of assets 4,285,672 3,907,214
Other investing activities (134,622) (1,341,849)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (17,836,472) (5,085,166)
FINANCING ACTIVITIES
Proceeds from long-term debt 25,235,950 3,000,000
Principal payments on long-term debt (9,868,330) (7,982,167)
Proceeds from issuance of Common Stock 1,873,823 1,378,863
Repurchase of Common Stock - (3,084,911)
Dividends (4,663,614) (4,373,857)
------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 12,577,829 (11,062,072)
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 23,697,057 8,451,968
Cash and cash equivalents at beginning of period 28,880,784 22,336,722
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 52,577,841 $ 30,788,690
============= =============
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 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 six month period ended June 30, 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 at fair value.
Gains and losses resulting from changes in fair value must be recognized
currently in earnings unless specific hedge criteria are met. 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 and are structured so
that there would be no ineffectiveness. In connection with the adoption of
Statement 133, the interest rate swaps were marked to market resulting in a
$517,000 adjustment, net of tax, to record the cumulative effect of the
accounting change. The adjustment reduced accumulated other comprehensive
earnings. The adoption of Statement 133 did not have an effect on net income for
the six month period ended June 30, 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
periodically reviews the adequacy of the allowance and adjusts it as necessary.
Based on the analysis, the allowance as of December 31, 2000 and June 30, 2001
was $580,000 and $670,000, respectively. For the six months ended June 30, 2001,
the net increase in the cancellation reserve was comprised of
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2001
(UNAUDITED)
NOTE B--CHANGES IN ACCOUNTING METHOD-Continued
$60,000 in new reserves related to acquisitions and $30,000 from higher revenue
levels. The amounts related to acquisitions will be amortized as part of the
purchase price.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets" (the Statements), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002 including the required
impairment tests of goodwill. The Company is currently assessing the impact of
these Statements on its earnings and financial position.
NOTE C--INTEREST RATE SWAPS
The Company enters into interest rate swap agreements to modify the interest
characteristics of its outstanding debt. Each interest rate swap agreement is
designated with all or a portion of the principal balance and term of a specific
debt obligation. These agreements involve the exchange of amounts based on
variable interest rates for amounts based on fixed interest rates over the life
of the agreement without an exchange of the notional amount upon which the
payments are based.
The Company entered into two interest rate swap agreements effective June 17,
1999 to manage interest rate exposure on its long-term debt. The swap agreements
are contracts to exchange floating rate for fixed rate interest payments
periodically over the lives of the agreements without the exchange of the
underlying combined notional amount of $45,000,000, which amortizes quarterly by
$937,500 beginning September 30, 2000 through their maturity on June 30, 2004.
The notional amounts of interest rate agreements are used to measure interest to
be paid or received and do not represent the amount of exposure to credit loss.
The credit risk to the Company would be the counterparties' inability to pay the
differential in the fixed rate and variable rate in a rising interest rate
environment. The Company is exposed to market risk from changes in interest
rates.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2001
(UNAUDITED)
NOTE C--INTEREST RATE SWAPS-Continued
The differential paid or received on the interest rate per the agreements is
recognized as an adjustment to interest expense (the accrual accounting method).
The related amount payable to or receivable from counterparties' is included in
other liabilities or assets. Under the Company's interest rate swap agreements,
the Company contracted with the counterparties to exchange the difference
between the Company's fixed pay rates of 6.43% and 6.46% and the counterparties'
variable LIBOR pay rate. The contracts expire June 30, 2004. The fair market
value of the interest rate swaps at June 30, 2001 resulted in a liability of
$1,432,000 which is included in other long-term liabilities.
NOTE D--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 E--ACQUISITIONS
During the first six months of 2001, the Company acquired certain assets and
liabilities of five insurance agencies for approximately $33,800,000
($23,200,000 in cash, $3,600,000 in guaranteed future payments and approximately
189,000 shares of Common Stock) in purchase accounting transactions. The
purchase price may be increased based on agency profitability per the contracts.
These acquisitions are not material to the consolidated financial statements
individually or in aggregate.
NOTE F--SALE OF ASSETS AND OTHER GAINS
During the six months ended June 30, 2001 and 2000, the Company sold certain
insurance accounts and other assets resulting in gains of approximately
$2,623,000 and $885,000, respectively, including $2,584,000 and $302,000 during
the second quarters of 2001 and 2000, respectively. Revenues, expenses and
assets related to these dispositions were not material to the consolidated
financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2001
(UNAUDITED)
NOTE G--NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Numerator for basic net income
per share - net income $ 7,786,783 $ 4,941,127 $ 15,567,809 $ 11,353,386
Effect of dilutive securities:
5.25% convertible debenture 271,251 269,812 542,134 539,277
------------- ------------- ------------- -------------
Numerator for dilutive net income per
share - net income available after
assumed conversions $ 8,058,034 $ 5,210,939 $ 16,109,943 $ 11,892,663
============= ============= ============= =============
Denominator
Weighted average shares 13,443,755 13,001,817 13,362,156 13,022,388
Effect of guaranteed future shares to be
issued in connection with an agency
acquisition 21,943 44,973 24,686 51,045
------------- ------------- ------------- -------------
Denominator for basic net income per
share 13,465,698 13,046,790 13,386,842 13,073,433
Effect of dilutive securities
Employee stock options 367,023 316,734 354,552 300,310
Employee restricted stock 49,643 11,539 43,951 6,619
Contingent stock - acquisitions 18,268 6,982 12,076 3,491
5.25% convertible debenture 1,406,593 1,406,593 1,406,593 1,406,593
------------- ------------- ------------- -------------
Dilutive potential common shares 1,841,527 1,741,848 1,817,172 1,717,013
------------- ------------- ------------- -------------
Denominator for diluted net income per
share - adjusted weighted average
shares and assumed conversions 15,307,225 14,788,638 15,204,014 14,790,446
============= ============= ============= =============
Net Income per Common Share:
Basic $0.58 $0.38 $1.16 $0.87
===== ===== ===== =====
Diluted $0.53 $0.35 $1.06 $0.81
===== ===== ===== =====
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 2001
(UNAUDITED)
NOTE H--LONG-TERM DEBT
On April 6, 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.
NOTE I--SUBSEQUENT EVENT
Subsequent to June 30, 2001, the Company acquired certain assets and liabilities
of three insurance agencies for approximately $40,300,000 ($18,100,000 in cash,
$3,300,000 in guaranteed future payments and approximately 472,000 shares of
Common Stock). The purchase price may be increased based on agency profitability
per the contracts. The acquired operations, in aggregate, are not material to
the consolidated financial statements. These acquisitions have been accounted
for as purchase transactions.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
---------------------
Three Months Ended June 30, 2001
Net income for the three months ended June 30, 2001 was $7.8 million, or $0.53
per share, compared with $4.9 million, or $0.35 per share. Excluding net
non-recurring gains in both periods, net income was $6.3 million, a 31.5%
increase from $4.8 million last year. Net income per share on the same basis was
$0.43, compared with $0.34, an increase of 26.5%.
Commissions and fees were $74.3 million, an increase of 21.6% from commissions
and fees of $61.1 million during the comparable period of the prior year.
Approximately $12.6 million of commissions were derived from purchase
acquisitions of new insurance agencies. This increase was offset by decreases of
approximately $1.4 million from the sale of certain offices and accounts in 2001
and 2000. Excluding the effect of acquisitions and dispositions, commissions and
fees increased 3.2%. This reflects new business production and modest premium
increases, partly offset by the industry-wide trend of lower non-standard
commissions (contingents, bonuses and overrides) and continued culling of
low-margin business.
Investment income increased $0.1 million, or 25.8% due to higher levels of
invested assets related to purchase acquisitions and improved collections
compared to the same period of the prior year. Other income increased $2.3
million, or 401.7%. Amounts in other income include gains from the sale of an
agency and certain insurance accounts and other assets of $2.6 million in 2001,
compared with gains of $0.3 million in 2000.
Expenses for the quarter increased $10.6 million or 19.8%. Compensation and
benefits and other operating expenses increased $7.2 million and $2.6 million,
respectively, primarily due to purchase acquisitions of insurance agencies and
increased revenue production. Amortization of intangibles increased
approximately $0.5 million due primarily to the aforementioned purchase
acquisitions offset by sales of accounts in 2001 and 2000. Interest expense
increased by $0.3 million due to increased bank borrowings related to 2001
acquisitions partially offset by decreased interest rates.
The Company's overall tax rate for the three months ended June 30, 2001 was
43.0% which was comparable to 43.0% for the same period of the prior year.
Six Months Ended June 30, 2001
For the six months ended June 30, 2001, net income was $15.6 million, or $1.06
per share, compared to $11.4 million, or $0.81 per share last year. Excluding
the effect of gains and the 2000 cumulative effect of an accounting change, net
income was $14.0 million, or $0.96 per share, up from $11.2 million or $0.79 per
share a year ago. The cumulative effect of the
12
accounting change was a non-cash charge to first quarter 2000 income to record a
reserve for the cancellation of policies in accordance with SEC Staff Accounting
Bulletin 101.
Commissions and fees were $151.3 million, an increase of 19.4% from commissions
and fees of $126.7 million during the comparable period of the prior year.
Approximately $22.7 million of commissions were derived from purchase
acquisitions of new insurance agencies. This increase was offset by decreases of
approximately $3.0 million from the sale of certain offices and accounts in 2001
and 2000. Commissions and fees, excluding the effect of acquisitions and
dispositions, increased 3.9% which was tempered by the aforementioned declines
in non-standard commissions and the Company's focus on writing and renewing
profitable accounts.
Investment income increased $0.2 million, or 22.6%, primarily due to increased
invested assets related to purchase acquisitions. Other income increased $1.7
million or 116.0% from the prior year primarily due to the net impact of
nonrecurring gains from the sale of an agency, certain insurance accounts and
other assets.
Expenses increased by $19.6 million or 18.1%. Increases include $13.6 million in
compensation and benefits and $4.6 million in other operating expenses, due
primarily to purchase acquisitions of new insurance agencies and increased
revenue production. Amortization of intangibles increased approximately $0.8
million due primarily to purchase acquisitions. Interest expense increased by
$0.6 million due to increased bank borrowings related to 2001 acquisitions,
partially offset by declines in interest rates.
The Company's overall tax rate of 43.0% for the six months ended June 30, 2001
was comparable to the rate of 43.0% for the six months ended June 30, 2000.
For the three months ended June 30, 2001, net income as a percentage of revenues
did not vary significantly from the three months ended March 31, 2001.
Commission income was lower during the second quarter but was offset by
increased gains from the sales of insurance accounts and other assets.
The timing of contingent commissions, policy renewals, acquisitions and
dispositions may cause revenues, expenses and net income to vary significantly
from quarter to quarter. As a result of the factors described above, operating
results for the six months ended June 30, 2001 should not be considered
indicative of the results that may be expected for the entire year ending
December 31, 2001.
Liquidity and Capital Resources:
-------------------------------
Net cash provided by operations totaled $29.0 million and $24.6 million for the
six months ended June 30, 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.
13
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 $2.8 million and $3.1 million for the
six months ended June 30, 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 $19.3
million and $6.2 million in the six months ended June 30, 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 $4.3 million and $3.9 million in the six months ended
June 30, 2001 and 2000, respectively. The Company did not have any material
capital expenditure commitments as of June 30, 2001.
Financing activities provided cash of $12.6 million and utilized cash of $11.1
million in the six months ended June 30, 2001 and 2000, respectively. The
Company has consistently made scheduled debt payments and annually increased its
dividend rate. In addition, during the six months ended June 30, 2000, the
Company repurchased 116,700 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. The
Company has a bank credit agreement for $156.7 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 June 30, 2001, there were loans
of $87.7 million outstanding under the bank agreement.
The Company had a current ratio (current assets to current liabilities) of 0.94
to 1.00 as of June 30, 2001. Shareholders' equity of $107.9 million at June 30,
2001, is improved from $88.2 million at December 31, 2000. The debt to equity
ratio of 1.15 to 1.00 is decreased from the ratio at December 31, 2000 of 1.17
to 1.00 due to issuance of Common Stock, partially offset by an increase in debt
related to acquisitions 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 (on a limited basis) derivative
financial instruments which are subject to market risk; however, the Company
believes that exposure to market risk associated with these instruments is not
material.
New Accounting Standards
------------------------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other
14
Intangible Assets" (the Statements), effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002, including the required
impairment tests of goodwill. The Company is currently assessing the impact of
these Statements on its earnings and financial position.
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 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
Information required by this item was previously reported in the
Company's Form 10-Q for the quarter ended March 31, 2001.
15
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
(incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q dated May 11,
2001, File No. 0-15981)
b) Reports on Form 8-K
(i) The Company filed a Current Report on Form 8-K with the Securities
and Exchange Commission on June 11, 2001. The Form 8-K, which was
dated June 11, 2001, reported items 5 and 7 and announced the
merger with insurance broker Berwanger Overmyer Associates.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hilb, Rogal and Hamilton Company
-----------------------------------
(Registrant)
Date August 14, 2001 By: /s/ Andrew L. Rogal
--------------------- -------------------------------
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date August 14, 2001 By: /s/ Carolyn Jones
--------------------- -------------------------------
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date August 14, 2001 By: /s/ Robert W. Blanton, Jr.
---------------------- -------------------------------
Vice President and Controller
(Chief Accounting Officer)
17
HILB, ROGAL AND HAMILTON COMPANY
EXHIBIT INDEX
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 (incorporated by
reference to Exhibit 10.1 to the Company's
Form 10-Q dated May 11, 2001, File No.
0-15981)