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 September 30, 1999 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, 1999
- -------------------------- -------------------------------
Common stock, no par value 13,120,600
<PAGE>
HILB, ROGAL AND HAMILTON COMPANY
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Consolidated Income
for the three months and nine months
ended September 30, 1999 and 1998 3
Consolidated Balance Sheet,
September 30, 1999 and December
31, 1998 4
Statement of Consolidated Shareholders'
Equity for the nine months ended
September 30, 1999 and 1998 5
Statement of Consolidated Cash Flows
for the nine months ended September
30, 1999 and 1998 6
Notes to Consolidated Financial
Statements 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-14
Item 3. Qualitative and Quantitative Disclosures
About Market Risk 14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1999 SEPT. 30, 1998 SEPT. 30, 1999 SEPT. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Commissions and fees $ 61,374,665 $ 41,470,588 $161,450,343 $129,705,298
Investment income 571,809 387,316 1,426,323 1,203,785
Other 1,260,162 407,858 5,468,827 3,181,003
------------ ------------ ------------ ------------
63,206,636 42,265,762 168,345,493 134,090,086
OPERATING EXPENSES
Compensation and
employee benefits 35,192,027 24,375,114 91,736,458 73,662,581
Other operating expenses 13,284,188 10,084,245 35,185,372 30,022,361
Amortization of
intangibles 2,980,643 1,964,146 7,619,861 5,860,854
Interest expense 2,144,184 533,085 4,349,347 1,632,147
Integration costs - - 1,900,000 -
------------ ------------ ------------ ------------
53,601,042 36,956,590 140,791,038 111,177,943
------------ ------------ ------------ ------------
INCOME BEFORE
INCOME TAXES 9,605,594 5,309,172 27,554,455 22,912,143
Income taxes 3,689,601 2,207,695 11,157,967 9,419,527
------------ ------------ ------------ ------------
NET INCOME $ 5,915,993 $ 3,101,477 $ 16,396,488 $ 13,492,616
============ ============ ============ ============
NET INCOME PER
COMMON SHARE:
Basic $0.45 $0.25 $1.28 $1.07
===== ===== ===== =====
Diluted $0.42 $0.25 $1.23 $1.06
===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 40,302,662 $ 19,394,958
Investments 2,203,611 3,383,742
Receivables:
Premiums, less allowance for doubtful accounts of
$1,584,000 and $1,505,000, respectively 61,624,598 45,313,620
Other 8,389,647 6,257,370
------------ ------------
70,014,245 51,570,990
Prepaid expenses and other current assets 4,295,280 3,852,095
------------ ------------
TOTAL CURRENT ASSETS 116,815,798 78,201,785
INVESTMENTS 2,455,474 3,068,140
PROPERTY AND EQUIPMENT (NET) 15,589,969 12,387,194
INTANGIBLE ASSETS (NET) 182,149,288 87,470,633
OTHER ASSETS 8,063,485 6,938,074
------------ ------------
$325,074,014 $188,065,826
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $100,403,559 $ 65,436,784
Accounts payable and accrued expenses 13,388,319 13,025,426
Premium deposits and credits due customers 12,866,832 7,765,575
Current portion of long-term debt 4,606,710 2,277,479
------------ ------------
TOTAL CURRENT LIABILITIES 131,265,420 88,505,264
LONG-TERM DEBT 109,752,830 43,658,306
OTHER LONG-TERM LIABILITIES 12,231,638 10,191,881
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized
50,000,000 shares; outstanding 13,118,675
and 12,117,412 shares, respectively 19,817,960 3,831,208
Retained earnings 52,006,166 41,879,167
------------ ------------
71,824,126 45,710,375
------------ ------------
$325,074,014 $188,065,826
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Retained Earnings
------------ -----------------
<S> <C> <C>
Balance at January 1, 1999 $ 3,831,208 $ 41,879,167
Issuance of 1,166,163 shares of
Common Stock 19,386,042
Purchase of 164,900 shares of
Common Stock (3,399,290)
Payment of dividends ($.49 per share) (6,269,489)
Net income 16,396,488
------------ ------------
Balance at September 30, 1999 $ 19,817,960 $ 52,006,166
============ ============
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 ($.475 per share) (5,925,645)
Other (434,545)
Net income 13,492,616
------------ ------------
Balance at September 30, 1998 $ 3,502,929 $ 42,365,109
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30, 1999 SEPT. 30, 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,396,488 $ 13,492,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,322,138 2,617,589
Amortization of intangible assets 7,619,861 5,860,854
------------ ------------
Net income plus amortization and depreciation 27,338,487 21,971,059
Provision for losses on accounts receivable 323,661 370,025
Gain on sale of assets (4,683,747) (2,505,644)
Changes in operating assets and liabilities net of
effects from insurance agency acquisitions and
dispositions:
(Increase) decrease in accounts receivable 16,708,403 (8,319,017)
Decrease in prepaid expenses 1,203,811 377,514
Increase (decrease) in premiums payable to
insurance companies (14,581,358) 3,134,977
Increase (decrease) in premium deposits and
credits due customers 4,952,409 (449,164)
Increase (decrease) in accounts payable and
accrued expenses (6,298,247) 1,683,609
Other operating activities 1,212,552 (741,376)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 26,175,971 15,521,983
INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
investments 4,063,767 2,890,604
Purchase of investments (2,270,972) (533,815)
Purchase of property and equipment (5,489,904) (2,628,082)
Purchase of insurance agencies, net of cash acquired (27,857,257) (4,983,257)
Proceeds from sale of assets 5,304,771 4,434,152
Other investing activities (2,620,131) 2,401
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (28,869,726) (817,997)
FINANCING ACTIVITIES
Proceeds from long-term debt 93,000,000 7,000,000
Principal payments on long-term debt (62,184,553) (2,937,234)
Proceeds from issuance of Common Stock 2,454,792 1,704,521
Repurchase of Common Stock (3,399,291) (14,307,508)
Dividends (6,269,489) (5,925,645)
------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 23,601,459 (14,465,866)
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 20,907,704 238,120
Cash and cash equivalents at beginning of period 19,394,958 22,314,860
------------ ------------
CASH AND CASH EQUIVLENTS AT END OF
PERIOD $ 40,302,662 $ 22,552,980
============ ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 1999
(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,
1999, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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, 1998.
In accordance with industry practice, the Company has changed its reporting to
state revenues net of commissions paid to outside brokers. Amounts for the prior
period have been classified to conform to current year presentation.
NOTE B--INCOME TAXES
The Company 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 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 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
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 1999
(UNAUDITED)
NOTE C--ACQUISITIONS-Continued
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.
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 related to severance, termination costs and
other restructuring 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.
These charges have been included in the following 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 and 1998, respectively.
Nine Months Ended September 30
1999 1998
---- ----
REVENUES $193,082,000 $191,524,000
NET INCOME 17,694,000 13,587,000
NET INCOME PER
COMMON SHARE:
Basic $1.34 $1.00
===== =====
Diluted $1.23 $0.95
===== =====
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 13,222,112 13,564,083
Diluted 14,796,325 15,186,242
During the first nine months of 1999, the Company also acquired certain assets
and liabilities of one insurance agency for $2,244,000 ($1,450,000 in cash and
$794,000 in guaranteed future payments) in a purchase accounting transaction.
Pro forma revenues and net income are not material to the consolidated financial
statements.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 1999
(UNAUDITED)
NOTE D--SALE OF ASSETS AND OTHER GAINS
During the nine months ended September 30, 1999 and 1998, the Company sold
certain insurance accounts and other assets resulting in gains of approximately
$3,677,000 and $2,506,000, respectively, including $10,000 and $185,000 of gains
during the third quarters of 1999 and 1998, respectively. The Company also
recorded a non-taxable gain of $1,006,000 in the third quarter of 1999 from the
receipt of insurance proceeds on the life of the former president of a
subsidiary. 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 E--NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator for basic net income
per share - net income $ 5,915,993 $ 3,101,477 $16,396,488 $13,492,616
Effect of dilutive securities:
5.25% convertible debenture 268,789 - 441,871 -
----------- ----------- ----------- -----------
Numerator for dilutive net income per
share - net income available after
assumed conversions $ 6,184,782 $ 3,101,477 $16,838,359 $13,492,616
=========== =========== =========== ===========
Denominator
Weighted average shares 13,112,666 12,239,629 12,681,912 12,553,405
Effect of guaranteed future shares to be
issued in connection with an agency
acquisition 79,800 9,934 95,756 10,678
----------- ----------- ----------- -----------
Denominator for basic net income per
share 13,192,466 12,249,563 12,777,668 12,564,083
Effect of dilutive securities
Employee stock options 226,373 186,294 151,576 183,303
Employee non-vested stock 133 - 44 -
Contingent stock - acquisitions 21,649 79,470 15,999 32,263
5.25% convertible debenture 1,406,593 - 781,441 -
----------- ----------- ----------- -----------
Dilutive potential common shares 1,654,748 265,764 949,060 215,566
----------- ----------- ----------- -----------
Denominator for diluted net income per
share - adjusted weighted average
shares and assumed conversions 14,847,214 12,515,327 13,726,728 12,779,649
=========== =========== =========== ===========
Net Income per Common Share:
Basic $0.45 $0.25 $1.28 $1.07
===== ===== ===== =====
Diluted $0.42 $0.25 $1.23 $1.06
===== ===== ===== =====
</TABLE>
9
<PAGE>
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 September 30, 1999 commissions and fees were $61.4
million, an increase of 48.0% from commissions and fees of $41.5 million during
the comparable period of the prior year. Approximately $19.7 million of
commissions were derived from purchase acquisitions of new insurance agencies.
This increase was offset by decreases of approximately $2.9 million from the
sale of certain offices and accounts in 1999 and 1998. Excluding the effect of
acquisitions and dispositions, commissions and fees from operations owned during
both periods increased 6.6%.
Investment income for the quarter increased $0.2 million or 47.6% due primarily
to increased invested assets related to purchase acquisitions of new insurance
agencies. Other income increased $0.9 million or 208.97% from the prior year
primarily due to a $1.0 million nontaxable gain from the receipt of life
insurance proceeds.
Expenses for the quarter increased by $16.6 million or 45.0%. Compensation and
benefits and other operating expenses increased $10.8 million and $3.2 million,
respectively, 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 1999 and 1998. Amortization of intangibles
increased approximately $1.0 million due to the aforementioned purchase
acquisitions. Interest expense increased by $1.6 million due to bank borrowings
and convertible subordinated debentures utilized to finance agency acquisition
and stock repurchase programs.
The Company's overall tax rate for the three months ended September 30, 1999 was
38.4% versus 41.6% for the same period of the prior year. The decrease was due
to the nontaxable life insurance proceeds offset by the nondeductibility of a
portion of the goodwill from the American Phoenix Corporation acquisition.
For the nine months ended September 30, 1999, commissions and fees were $161.5
million, an increase of 24.5% from commissions and fees of $129.7 million during
the comparable period of the prior year. Approximately $35.7 million of
commissions were derived from purchase acquisitions of new insurance agencies.
This increase was offset by decreases of approximately $9.6 million from the
sale of certain offices and accounts in 1999 and 1998. Commissions and fees,
excluding the effect of acquisitions and dispositions, from operations owned
during both periods increased 4.3%.
10
<PAGE>
Investment income for the nine months increased $0.2 million or 18.5% from the
prior year primarily due to increased invested assets related to the impact of
purchase acquisitions of new insurance agencies. Other income increased $2.3
million or 71.9% from the prior year primarily due to the aforementioned life
insurance proceeds and the net impact of nonrecurring gains from the sale of
assets.
Expenses for the nine months increased by $29.6 million or 26.6%. Integration
costs of $1.9 million were charged in the second quarter for the integration of
operations between the Company and American Phoenix Corporation. Increases
include $18.1 million in compensation and benefits and $5.2 million in other
operating expenses, due primarily to purchase acquisitions of new insurance
agencies and increased earnings, offset in part by decreases from the sale of
certain offices and accounts in 1999 and 1998. Amortization of intangibles
increased approximately $1.8 million due primarily to purchase acquisitions.
Interest expense increased by $2.7 million due to increased bank borrowings and
convertible subordinated debentures utilized to finance agency acquisition and
stock repurchase programs.
The Company's overall tax rate of 40.5% for the nine months ended September 30,
1999, decreased from the rate of 41.1% for the nine months ended September 30,
1998 primarily due to nontaxable life insurance proceeds offset by the
nondeductibility of a portion of the goodwill 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 nine
months ended September 30, 1999 should not be considered indicative of the
results that may be expected for the entire year ending December 31, 1999.
Liquidity and Capital Resources:
- -------------------------------
Net cash provided by operations totaled $26.2 million and $15.5 million for the
nine months ended September 30, 1999 and 1998, 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 $5.5 million and $2.6 million for the
nine months ended September 30, 1999 and 1998, 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
$27.9 million and $5.0 million in the nine months ended September 30, 1999 and
1998, 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 $5.3 million and $4.4 million in the nine
11
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months ended September 30, 1999 and 1998, respectively. The Company did not have
any material capital expenditure commitments as of September 30, 1999.
Financing activities provided (utilized) cash of $23.6 million and $(14.5)
million in the nine months ended September 30, 1999 and 1998, respectively. The
Company has consistently made scheduled debt payments and annually increased its
dividend rate. In addition, during the nine months ended September 30, 1999 and
1998, the Company repurchased 164,900 and 810,780 shares, respectively, of its
Common Stock under a stock repurchase program. The Company is currently
authorized to purchase an additional 612,600 shares and expects to continue to
repurchase shares during the remainder of 1999. The Company anticipates the
continuance of its dividend policy. The Company has a bank credit agreement for
$110.0 million under which loans are due through 2004 and $28.5 million of 5.25%
convertible subordinated debentures due 2014. At September 30, 1999, there were
loans of $75.0 million outstanding under the agreement.
The Company had a current ratio (current assets to current liabilities) of 0.89
to 1.00 as of September 30, 1999. Shareholders' equity of $71.8 million at
September 30, 1999, is increased from $45.7 million at December 31, 1998 and the
debt to equity ratio of 1.53 to 1.00 at September 30, 1999 is increased from the
ratio of 0.96 to 1.00 at December 31, 1998 due to the above mentioned increase
in borrowings under the bank credit agreement, issuance of convertible
subordinated debentures and the issuance of $17.0 million of stock related to
the American Phoenix acquisition offset by the impact of the aforementioned
Common Stock repurchase program.
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.
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.
The Company's technological operations rely primarily on personal computers
("PC's") and off-the-shelf software applications. As such, 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
assessed its year 2000 readiness by (1) performing an inventory of its PC's and
applications software; (2) seeking compliance statements from its agency
management
12
<PAGE>
system and other third party software vendors; and (3) testing PC hardware. As a
result of these assessments, the Company determined that it was necessary to
upgrade or replace 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. The Company
substantially completed the required software replacements during 1998 and
expects hardware replacements 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
has been substantially completed by the end of the third quarter of 1999 with
replacements or upgrades and limited 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 substantially complete. 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.
American Phoenix Corporation also performed similar assessments prior to the
acquisition on May 3, 1999. American Phoenix Corporation has adopted the
Company's year 2000 readiness guidelines and will have substantially completed
any additional procedures by the end of the year.
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 is progressing on its comprehensive contingency planning effort to
ensure that all critical business functions will continue on January 1, 2000.
The plan will outline the procedures to follow for the most likely areas of
risk. The Company expects its contingency plan to create a business continuity
project work group, define triggers for activating contingency plans, assess
business resumption strategies and establish alternative processes for core
business functions, where commercially reasonable. The Company's contingency
planning efforts will be ongoing throughout 1999.
The Company currently estimates that the total costs for addressing the year
2000 issue, including the necessary enhancements, will be approximately $4.4
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, 1999, the
Company had spent approximately $4.1 million. The Company does not expect the
total
13
<PAGE>
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, 1998, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Document
----------- --------
27 Financial Data Schedule (filed
electronically only)*
b) Reports on Form 8-K
None.
*Filed Herewith
14
<PAGE>
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 12, 1999 By: /s/ Andrew L. Rogal
------------------------- --------------------------------
President and Chief Executive
Officer
(Principal Executive Officer)
Date November 12, 1999 By: /s/ Carolyn Jones
------------------------ --------------------------------
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date November 12, 1999 By: /s/ Robert W. Blanton, Jr.
------------------------ --------------------------------
Vice President and Controller
(Chief Accounting Officer)
15
<PAGE>
Exhibit Index
-------------
Exhibit No. Document
----------- --------
27 Financial Data Schedule (filed
electronically only)*
*Filed Herewith
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR HILB, ROGAL AND HAMILTON COMPANY FOR THE QUARTER ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 40,302,662
<SECURITIES> 4,659,085
<RECEIVABLES> 71,598,466
<ALLOWANCES> (1,584,221)
<INVENTORY> 0
<CURRENT-ASSETS> 116,815,798
<PP&E> 38,421,927
<DEPRECIATION> (22,831,958)
<TOTAL-ASSETS> 325,074,014
<CURRENT-LIABILITIES> 131,265,420
<BONDS> 109,752,830
0
0
<COMMON> 19,817,960
<OTHER-SE> 52,006,166
<TOTAL-LIABILITY-AND-EQUITY> 325,074,014
<SALES> 0
<TOTAL-REVENUES> 168,345,493
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 136,441,691
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,349,347
<INCOME-PRETAX> 27,554,455
<INCOME-TAX> 11,157,967
<INCOME-CONTINUING> 16,396,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,396,488
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.23
</TABLE>
