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, 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 July 31, 1999
- -------------------------- ----------------------------
Common stock, no par value 13,103,048
<PAGE>
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, 1999 and 1998 3
Consolidated Balance Sheet,
June 30, 1999 and December
31, 1998 4
Statement of Consolidated Shareholders'
Equity for the six months ended
June 30, 1999 and 1998 5
Statement of Consolidated Cash Flows
for the six months ended June
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 2. Changes in Securities and Use of Proceeds 14-15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16-17
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED INCOME
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Commissions and fees $54,100,554 $41,665,869 $100,075,678 $88,234,711
Investment income 517,399 440,664 854,514 816,469
Other 267,289 2,428,765 4,208,665 2,773,145
------------ ------------ ------------- ------------
54,885,242 44,535,298 105,138,857 91,824,325
Operating expenses
Compensation and
employee benefits 31,474,490 24,490,568 56,544,431 49,287,468
Other operating expenses 11,960,156 10,016,360 21,901,184 19,938,117
Amortization of
intangibles 2,634,719 1,959,477 4,639,218 3,896,708
Interest expense 1,518,840 535,312 2,205,163 1,099,061
Integration costs 1,900,000 - 1,900,000 -
------------ ------------ ------------- ------------
49,488,205 37,001,717 87,189,996 74,221,354
------------ ------------ ------------- ------------
INCOME BEFORE
INCOME TAXES 5,397,037 7,533,581 17,948,861 17,602,971
Income taxes 2,353,497 3,087,984 7,468,366 7,211,833
------------ ------------ ------------- ------------
NET INCOME $3,043,540 $4,445,597 $10,480,495 $10,391,138
============ ============ ============= ============
NET INCOME PER
COMMON SHARE:
Basic $0.24 $0.35 $0.83 $0.82
===== ===== ===== =====
Diluted $0.23 $0.35 $0.81 $0.80
===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 37,795,859 $ 19,394,958
Investments 2,851,997 3,383,742
Receivables:
Premiums, less allowance for doubtful accounts of
$1,513,000 and $1,505,000, respectively 65,042,640 45,313,620
Other 8,256,725 6,257,370
-------------- --------------
73,299,365 51,570,990
Prepaid expenses and other current assets 3,456,805 3,852,095
-------------- --------------
TOTAL CURRENT ASSETS 117,404,026 78,201,785
INVESTMENTS 2,846,468 3,068,140
PROPERTY AND EQUIPMENT (NET) 15,905,047 12,387,194
INTANGIBLE ASSETS (NET) 184,327,856 87,470,633
OTHER ASSETS 7,596,632 6,938,074
-------------- --------------
$328,080,029 $188,065,826
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $ 99,758,646 $ 65,436,784
Accounts payable and accrued expenses 17,290,945 13,025,426
Premium deposits and credits due customers 10,001,407 7,765,575
Current portion of long-term debt 4,688,689 2,277,479
-------------- --------------
TOTAL CURRENT LIABILITIES 131,739,687 88,505,264
LONG-TERM DEBT 116,280,487 43,658,306
OTHER LONG-TERM LIABILITIES 11,995,880 10,191,881
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized
50,000,000 shares; outstanding 13,098,986
and 12,117,412 shares, respectively 19,823,119 3,831,208
Retained earnings 48,240,856 41,879,167
-------------- --------------
68,063,975 45,710,375
-------------- --------------
$328,080,029 $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 $41,879,167
Issuance of 1,114,174 shares of
Common Stock 18,615,735
Purchase of 132,600 shares of
Common Stock (2,623,824)
Payment of dividends ($.315 per share) (4,118,806)
Net income 10,480,495
----------- -----------
Balance at June 30, 1999 $19,823,119 $48,240,856
=========== ===========
Balance at January 1, 1998 $16,540,461 $34,798,138
Issuance of 98,014 shares of
Common Stock 1,251,975
Purchase of 476,900 shares of
Common Stock (8,270,524)
Payment of dividends ($.31 per share) (3,982,068)
Other (169,262)
Net income 10,391,138
----------- -----------
Balance at June 30, 1998 $ 9,352,650 $41,207,208
=========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,480,495 $ 10,391,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,085,393 1,730,591
Amortization of intangible assets 4,639,218 3,896,708
------------- -------------
Net income plus amortization and depreciation 17,205,106 16,018,437
Provision for losses on accounts receivable 172,840 244,181
Gain on sale of assets (3,667,066) (2,321,176)
Changes in operating assets and liabilities
net of effects from insurance agency
acquisitions and dispositions:
(Increase) decrease in accounts receivable 13,574,103 (89,333)
Decrease in prepaid expenses 2,042,286 1,351,435
Increase (decrease) in premiums payable to
insurance companies (15,226,271) 828,919
Increase (decrease) in premium deposits and
Credits due customers 2,086,984 (373,001)
Increase (decrease) in accounts payable and
accrued expenses (2,395,621) 1,376,447
Other operating activities 284,977 313,528
------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 14,077,338 17,349,437
INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
investments 2,824,317 2,230,206
Purchase of investments (2,070,901) (308,141)
Purchase of property and equipment (3,879,658) (1,645,065)
Purchase of insurance agencies, net of cash acquired (27,097,400) (4,248,804)
Proceeds from sale of assets 4,587,377 4,241,526
Other investing activities (2,468,030) 20,396
------------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (28,104,295) 290,118
FINANCING ACTIVITIES
Proceeds from long-term debt 93,000,000 -
Principal payments on long-term debt (55,513,996) (809,205)
Proceeds from issuance of Common Stock 1,684,484 1,251,975
Repurchase of Common Stock (2,623,824) (8,270,524)
Dividends (4,118,806) (3,982,069)
------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 32,427,858 (11,809,823)
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 18,400,901 5,829,732
Cash and cash equivalents at beginning of period 19,394,958 22,314,860
------------- -------------
CASH AND CASH EQUIVLENTS AT END OF
PERIOD $ 37,795,859 $ 28,144,592
============= =============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 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 six month period ended June 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 reclassified 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
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 1999
(UNAUDITED)
NOTE C--ACQUISITIONS-Continued
assets and liabilities of American Phoenix Corporation have been revalued to
their respective fair market values. Certain fair value estimates used in the
determination of goodwill were preliminary and are subject to adjustment, which
may increase or decrease the amount of goodwill recorded. The financial
statements of the Company reflect the combined operations of the Company and
American Phoenix Corporation from the closing date of the acquisition.
Pursuant to EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity", the Company has recorded a charge
of $1.9 million 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 not 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.
Six Months Ended June 30
1999 1998
---- ----
REVENUES $129,874,908 $126,841,202
NET INCOME 12,917,992 11,050,640
NET INCOME PER
COMMON SHARE:
Basic $0.98 $0.81
===== =====
Diluted $0.91 $0.76
===== =====
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic 13,236,936 13,721,343
========== ==========
Diluted 14,770,881 15,318,403
========== ==========
During the first six 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>
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
June 30, 1999
(UNAUDITED)
NOTE D--SALE OF ASSETS
During the six months ended June 30, 1999 and 1998, the Company sold certain
insurance accounts and other assets resulting in gains of approximately
$3,667,000 and $2,321,000, respectively, including $4,000 of losses and
$2,173,000 of gains during the second quarters of 1999 and 1998, respectively.
These amounts are included in other revenues in the statement of consolidated
income. Revenues, expenses and assets of these operations were not material to
the consolidated financial statements.
NOTE 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 SIX MONTHS ENDED
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator for basic net income
per share - net income $ 3,043,540 $ 4,445,597 $10,480,495 $10,391,138
Effect of dilutive securities:
5.25% convertible debenture 173,082 - 173,082 -
------------- ------------- ------------- -------------
Numerator for dilutive net income per
share - net income available after
assumed conversions $ 3,216,622 $ 4,445,597 $10,653,577 $10,391,138
=========== =========== =========== ===========
Denominator
Weighted average shares 12,796,632 12,651,328 12,466,536 12,710,292
Effect of guaranteed future shares to be
issued in connection with an agency
acquisition 89,385 12,000 103,733 11,051
------------- ------------- ------------- -------------
Denominator for basic net income per
share 12,886,017 12,663,328 12,570,269 12,721,343
Effect of dilutive securities
Employee stock options 144,865 156,873 114,177 181,807
Contingent stock - acquisitions 23,465 17,320 13,175 8,660
5.25% convertible debenture 937,729 - 468,864 -
------------- ------------- ------------- -------------
Dilutive potential common shares 1,106,059 174,193 596,216 190,467
------------- ------------- ------------- -------------
Denominator for diluted net income per
share - adjusted weighted average
shares and assumed conversions 13,992,076 12,837,521 13,166,485 12,911,810
============= ============= ============= =============
Net Income per Common Share:
Basic $0.24 $0.35 $0.83 $0.82
===== ===== ===== =====
Diluted $0.23 $0.35 $0.81 $0.80
===== ===== ===== =====
</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 June 30, 1999 commissions and fees were $54.1
million, an increase of 29.8% from commissions and fees of $41.7 million during
the comparable period of the prior year. Approximately $13.5 million of
commissions were derived from purchase acquisitions of new insurance agencies.
This increase was offset by decreases of approximately $3.1 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 5.2%.
Investment income was comparable to the same period of the prior year. Other
income decreased $2.2 million or 89.0% from the prior year primarily due to $2.2
million in gains from divestitures in 1998, including the sale of substantially
all of the assets of the Fort Lauderdale, Florida office during June 1998,
compared with net losses of $4,000 in 1999.
Expenses increased by $12.5 million or 33.7%. Integration costs of $1.9 million
were charged in the second quarter of 1999 to integrate the operations of
American Phoenix Corporation with the Company. Compensation and benefits and
other operating expenses increased $7.0 million and $1.9 million, respectively,
primarily due 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
$0.7 million due primarily to the aforementioned purchase acquisitions. Interest
expense increased by $1.0 million due to increased bank borrowings and issuance
of convertible subordinated debentures utilized to finance agency acquisition
and stock repurchase programs.
The Company's overall tax rate for the three months ended June 30, 1999 was
43.6% versus 41.0% for the same period of the prior year. The increase was due
to the nondeductibility of a portion of the goodwill from the American Phoenix
Corporation acquisition.
For the six months ended June 30, 1999, commissions and fees were $100.1
million, an increase of 13.4% from commissions and fees of $88.2 million during
the comparable period of the prior year. Approximately $16.0 million of
commissions were derived from purchase acquisitions of new insurance agencies.
This increase was offset by decreases of approximately $6.6 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 3.2%.
10
<PAGE>
Investment income was comparable to the same period of the prior year. Other
income increased $1.4 million or 51.8% from the prior year primarily due to the
net impact of nonrecurring gains from the sale of assets.
Expenses increased by $13.0 million or 17.5%. 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 $7.2 million in
compensation and benefits and $2.0 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
$0.7 million due primarily to purchase acquisitions. Interest expense increased
by $1.1 due to increased bank borrowings and subordinated convertible debentures
utilized to finance agency acquisition and stock repurchase programs.
The Company's overall tax rate of 41.6% for the six months ended June 30, 1999,
increased from the rate of 41.0% for the six months ended June 30, 1998
primarily due to 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 six months
ended June 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 $14.1 million and $17.3 million for the
six months ended June 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 $3.9 million and $1.6 million for the
six months ended June 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 $27.1
million and $4.2 million in the six months ended June 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 $4.6 million and $4.2 million in the six months ended
June 30, 1999 and 1998, respectively. The Company did not have any material
capital expenditure commitments as of June 30, 1999.
11
<PAGE>
Financing activities provided (utilized) cash of $32.4 million and ($11.8)
million in the six months ended June 30, 1999 and 1998, respectively. The
Company has consistently made scheduled debt payments and annually increased its
dividend rate. In addition, during the six months ended June 30, 1999 and 1998,
the Company repurchased 132,600 and 476,900, respectively, shares of its Common
Stock under a stock repurchase program. The Company is currently authorized to
purchase an additional 644,900 shares. The Company anticipates the continuance
of its current dividend. The Company has a bank credit agreement for $110.0
million under loans due through 2004 and $28.5 million of 5.25% Convertible
Subordinated Debentures due 2014. At June 30, 1999, there were loans of $81.0
million outstanding under the bank credit agreement.
The Company had a current ratio (current assets to current liabilities) of 0.89
to 1.00 as of June 30, 1999. Shareholders' equity of $68.1 million at June 30,
1999, is increased from $45.7 million at December 31, 1998. The debt to equity
ratio of 1.71 to 1.00 is increased from the ratio at December 31, 1998 of 0.96
to 1.00 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 (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.
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 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
12
<PAGE>
also assessing any systems that may contain embedded chips or microcontrollers,
such as elevators, office equipment, telephones or security systems. This
assessment should be substantially completed by the end of the third quarter of
1999 with replacements or upgrades and limited testing to occur during the
remainder 1999.
The Company is also evaluating insurance carriers, financial institutions and
other third party vendors. This process is expected to be complete by the end of
the third quarter 1999. Determining the year 2000 readiness of external parties
requires the collection of compliance statements made by those parties, together
with factual research. Although the Company has taken, and will continue to
take, reasonable efforts to gather information to determine the readiness of
external parties, often such information is not provided voluntarily, is not
available or is not reliable.
American Phoenix Corporation also performed similar assessments prior to the
acquisition on May 3, 1999. American Phoenix Corporation is adopting the
Company's year 2000 readiness guidelines and will have substantially completed
any additional procedures by the end of the third quarter.
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 $4.2
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 June 30, 1999, the Company had
spent approximately $3.4 million. The Company does not expect the total cost of
addressing the year 2000 issue with respect to its internal computer systems and
hardware to be material to its consolidated financial condition or results of
operations.
13
<PAGE>
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 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) On March 29, 1999, the Company entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") with PM Holdings, Inc. ("Holdings"),
Phoenix Home Life Mutual Insurance Company ("Phoenix") and Martin L. Vaughan,
III ("Vaughan"). Pursuant to the Stock Purchase Agreement, the Company agreed to
acquire all of the issued and outstanding capital stock of American Phoenix
Corporation ("American Phoenix") (collectively, the "Acquisition") from Holdings
and Vaughan. As part of the consideration to be paid by the Company in
connection with the Acquisition, the Company agreed to issue to Holdings and
Phoenix an aggregate principal amount of $32,000,000 of the Company's 5.25%
Convertible Subordinated Debentures (Due 2014) (the "Subordinated Debentures").
The closing of the Acquisition and the issuance of the Subordinated Debentures
to Holdings and Phoenix occurred on May 3, 1999. The Subordinated Debentures are
convertible at any time at the option of the holder into shares of the Company's
Common Stock at a conversion price of $22.75 per share of Common Stock (or
1,406,593 shares of Common Stock in the aggregate), subject to certain
anti-dilution adjustments
14
<PAGE>
as provided in the Indenture, dated as of May 3, 1999, between the Company and
Crestar Bank, as trustee (the "Indenture"), relating to the Subordinated
Debentures. For a description of these and other terms of the Subordinated
Debentures, see the Indenture, which is incorporated by reference as Exhibit
10.2.
The offer and sale of the Subordinated Debentures to Holdings and Phoenix were
made pursuant to the exemption from registration under Section 5 of the
Securities Act of 1933, as amended (the "Securities Act"), provided by Section
4(2) of the Securities Act.
(d) Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Shareholders (the "Meeting") of Hilb,
Rogal and Hamilton Company (the "Company") was held on
Tuesday, June 8, 1999.
b) The Shareholders voted for the election of the following
persons to serve as directors of the Company for the term of
three (3) years expiring on the date of the Annual Meeting in
2002. The results of the voting in these elections are set
forth below.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Non-Votes
Withheld
<S> <C> <C> <C> <C>
Theodore L. Chandler, Jr. 10,665,726 0 138,367 1,367,221
Norwood H. Davis, Jr. 10,664,026 0 140,067 1,367,221
Thomas H. O'Brien 10,664,671 0 138,967 1,367,676
</TABLE>
No other matters were voted upon at the Meeting or during the
quarter for which this report is filed.
15
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Document
10.1 Credit Agreement dated as of May 3, 1999, among
the registrant, as Borrower, the lenders named
therein, First Union National Bank, as
administrative agent, PNC Bank, as
documentation agent and NationsBanc Montgomery
Securities LLC, as syndication agent
(incorporated by reference to Exhibit 99.1 to
the Company's Form 8-K dated May 3, 1999, File
No. 0-15981)
10.2 Indenture dated as of May 3, 1999 made by and
among the registrant and Crestar Bank as
Trustee (incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q dated May 14,
1999)
10.3 Risk Management Agreement dated as of May 3,
1999 by and between Phoenix Home Life Mutual
Insurance Company and the registrant
(incorporated by reference to Exhibit 10.3 to
the Company's Form 10-Q dated May 14, 1999)
10.4 Employment Agreement for Martin L. Vaughan, III
(incorporated by reference to Exhibit 10.4 to
the Company's Form 10-Q dated May 14, 1999)
10.5 Voting and Standstill Agreement dated as of May
3, 1999 made by and among the registrant, PM
Holdings, Inc. and Phoenix Home Life Mutual
Insurance Company (incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q dated
May 14, 1999)
10.6 Registration Rights Agreement dated as of May
3, 1999 made between the registrant, PM
Holdings, Inc. and Phoenix Home Life Mutual
Insurance Company (incorporated by reference to
Exhibit 10.6 to the Company's Form 10-Q dated
May 14, 1999)
27 Financial Data Schedule (filed electronically
only)*
*Filed Herewith
16
<PAGE>
b) Reports on Form 8-K
(i) The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on April 1, 1999. The Form 8-K,
which was dated March 30, 1999, reported items 5 and 7 and attached
as an exhibit and incorporated by reference a press release that
announced the signing of a definitive agreement to acquire American
Phoenix Corporation (American Phoenix), the property and casualty
brokerage subsidiary of Phoenix Home Life Mutual Insurance Company,
for approximately $49.0 million in cash, $32.0 million (principal
amount) of convertible notes and 1.0 million shares of Common Stock
for all of American Phoenix's outstanding stock.
(ii) The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on May 14, 1999. The Form 8-K,
which was dated May 3, 1999, reported items 2 and 7 and announced
the consummation of the acquisition and included as exhibits (i)
the audited financial statements of American Phoenix and (ii)
proforma condensed financial statements of the Company giving
effect to the acquisition, both for the period ended December 31,
1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hilb, Rogal and Hamilton Company
--------------------------------
(Registrant)
Date August 13, 1999 By: /s/ Andrew L. Rogal
----------------------- -----------------------------------
President and Chief Executive
Officer
(Principal Executive Officer)
Date August 13, 1999 By: /s/ Carolyn Jones
---------------------- -----------------------------------
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date August 13, 1999 By: /s/ Robert W. Blanton, Jr.
----------------------- -----------------------------------
Vice President and Controller
(Chief Accounting Officer)
17
<PAGE>
Exhibit Index
-------------
Exhibit No. Document
10.1 Credit Agreement dated as of May 3, 1999,
among the registrant, as Borrower, the lenders
named therein, First Union National Bank, as
administrative agent, PNC Bank, as
documentation agent and NationsBanc Montgomery
Securities LLC, as syndication agent
(incorporated by reference to Exhibit 99.1 to
the Company's Form 8-K dated May 3, 1999, File
No. 0-15981)
10.2 Indenture dated as of May 3, 1999 made by and
among the registrant and Crestar Bank as
Trustee (incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q dated May 14,
1999)
10.3 Risk Management Agreement dated as of May 3,
1999 by and between Phoenix Home Life Mutual
Insurance Company and the registrant
(incorporated by reference to Exhibit 10.3 to
the Company's Form 10-Q dated May 14, 1999)
10.4 Employment Agreement for Martin L. Vaughan,
III (incorporated by reference to Exhibit 10.4
to the Company's Form 10-Q dated May 14, 1999)
10.5 Voting and Standstill Agreement dated as of
May 3, 1999 made by and among the registrant,
PM Holdings, Inc. and Phoenix Home Life Mutual
Insurance Company (incorporated by reference
to Exhibit 10.5 to the Company's Form 10-Q
dated May 14, 1999)
10.6 Registration Rights Agreement dated as of May
3, 1999 made between the registrant, PM
Holdings, Inc. and Phoenix Home Life Mutual
Insurance Company (incorporated by reference
to Exhibit 10.6 to the Company's Form 10-Q
dated May 14, 1999)
27 Financial Data Schedule (filed electronically
only)*
*Filed Herewith
18
<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 JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,795,859
<SECURITIES> 5,698,465
<RECEIVABLES> 74,812,357
<ALLOWANCES> 1,512,992
<INVENTORY> 0
<CURRENT-ASSETS> 117,404,026
<PP&E> 38,251,576
<DEPRECIATION> 22,346,529
<TOTAL-ASSETS> 328,080,029
<CURRENT-LIABILITIES> 131,739,687
<BONDS> 116,280,487
0
0
<COMMON> 19,823,119
<OTHER-SE> 48,240,856
<TOTAL-LIABILITY-AND-EQUITY> 328,080,029
<SALES> 0
<TOTAL-REVENUES> 105,138,857
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 84,984,833
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,205,163
<INCOME-PRETAX> 17,948,861
<INCOME-TAX> 7,468,366
<INCOME-CONTINUING> 10,480,495
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,480,495
<EPS-BASIC> 0.83
<EPS-DILUTED> 0.81
</TABLE>
