10-Q 1 er496.txt FORM 10-Q 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, 2001 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.) 4951 Lake Brook Drive, Suite 500, Glen Allen, VA 23060 ----------------------------------------------------- ------- (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 November 1, 2001 -------------------------- ------------------------------- Common stock, no par value 14,133,023 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, 2001 and 2000 3 Consolidated Balance Sheet, September 30, 2001 and December 31, 2000 4 Statement of Consolidated Shareholders' Equity for the nine months ended September 30, 2001 and 2000 5 Statement of Consolidated Cash Flows for the nine months ended September 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 12-15 Item 3. Qualitative and Quantitative Disclosures About Market Risk 15 Part II. OTHER INFORMATION 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 NINE MONTHS ENDED SEPT. 30, 2001 SEPT. 30, 2000 SEPT. 30, 2001 SEPT. 30, 2000 -------------- -------------- -------------- -------------- Revenues Commissions and fees $ 86,322,607 $ 64,643,935 $ 237,627,788 $ 191,379,918 Investment income 682,198 744,130 1,978,585 1,801,202 Other 604,672 386,382 3,704,445 1,821,648 -------------- -------------- -------------- -------------- 87,609,477 65,774,447 243,310,818 195,002,768 Operating expenses Compensation and employee benefits 47,362,028 36,139,046 132,885,941 108,070,188 Other operating expenses 17,386,429 13,650,250 48,821,737 40,450,501 Amortization of intangibles 3,490,364 3,080,862 10,260,966 9,063,474 Interest expense 2,392,443 2,111,634 7,052,015 6,137,198 -------------- -------------- -------------- -------------- 70,631,264 54,981,792 199,020,659 163,721,361 -------------- -------------- -------------- -------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 16,978,213 10,792,655 44,290,159 31,281,407 Income taxes 7,300,745 4,640,639 19,044,881 13,451,005 -------------- -------------- -------------- -------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 9,677,468 6,152,016 25,245,278 17,830,402 Cumulative effect of accounting change, net of tax - - - (325,000) -------------- -------------- -------------- -------------- NET INCOME $ 9,677,468 $ 6,152,016 $ 25,245,278 $ 17,505,402 ============== ============== ============== ============== Net Income Per Share - Basic: Income before cumulative effect of accounting change $0.69 $0.47 $1.86 $1.36 Cumulative effect of accounting change, net of tax - - - (0.02) ----- ----- ----- ----- Net income $0.69 $0.47 $1.86 $1.34 ===== ===== ===== ===== Net Income Per Share - Assuming Dilution: Income before cumulative effect of accounting change $0.63 $0.43 $1.69 $1.26 Cumulative effect of accounting change, net of tax - - - (0.02) ----- ----- ----- ----- Net income $0.63 $0.43 $1.69 $1.24 ===== ===== ===== =====
See notes to consolidated financial statements. 3 CONSOLIDATED BALANCE SHEET HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
SEPTEMBER 30, DECEMBER 31, 2001 2000 ---- ---- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 52,632,540 $ 28,880,784 Investments 2,564,064 2,127,404 Receivables: Premiums, less allowance for doubtful accounts of $2,762,000 and $1,878,000, respectively 95,062,476 81,117,359 Other 18,747,390 12,883,269 -------------- -------------- 113,809,866 94,000,628 Prepaid expenses and other current assets 7,618,937 6,469,289 -------------- -------------- TOTAL CURRENT ASSETS 176,625,407 131,478,105 INVESTMENTS 1,534,161 1,653,775 PROPERTY AND EQUIPMENT, NET 19,378,298 16,495,033 INTANGIBLE ASSETS 322,175,551 243,025,280 Less accumulated amortization 56,267,854 46,366,851 -------------- -------------- 265,907,697 196,658,429 OTHER ASSETS 8,204,254 7,085,521 -------------- -------------- $ 471,649,817 $ 353,370,863 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Premiums payable to insurance companies $ 141,742,698 $ 110,399,098 Accounts payable 6,204,722 5,458,152 Accrued expenses 19,266,295 13,606,919 Premium deposits and credits due customers 20,897,192 15,980,901 Current portion of long-term debt 5,301,347 5,555,940 -------------- -------------- TOTAL CURRENT LIABILITIES 193,412,254 151,001,010 LONG-TERM DEBT 130,015,240 103,113,474 OTHER LONG-TERM LIABILITIES 14,353,785 11,034,413 SHAREHOLDERS' EQUITY Common Stock, no par value; authorized 50,000,000 shares; outstanding 14,080,421 and 13,280,468 shares, respectively 51,548,598 22,361,312 Retained earnings 83,978,285 65,860,654 Accumulated other comprehensive earnings (loss) (1,658,345) - -------------- -------------- 133,868,538 88,221,966 -------------- -------------- $ 471,649,817 $ 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 804,953 shares Common Stock 29,398,366 Purchase of 5,000 shares of Common Stock (211,080) Payment of dividends ($.52 per share) (7,127,647) Net income 25,245,278 Cumulative effect of accounting change related to derivatives, net of tax (516,600) Derivative loss arising during 2001, net of tax (1,141,745) -------------- -------------- -------------- Balance at September 30, 2001 $ 51,548,598 $ 83,978,285 $ (1,658,345) ============== ============== ============== Balance at January 1, 2000 $ 18,248,712 $ 52,927,064 $ - Issuance of 213,869 shares of Common Stock 2,256,863 Purchase of 116,700 shares of Common Stock (3,084,911) Payment of dividends ($.505 per share) (6,610,258) Net income 17,505,402 -------------- -------------- -------------- Balance at September 30, 2000 $ 17,420,664 $ 63,822,208 $ - ============== ============== ==============
See notes to consolidated financial statements. 5 STATEMENT OF CONSOLIDATED CASH FLOWS HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES (UNAUDITED)
NINE MONTHS ENDED SEPT. 30, 2001 SEPT. 30, 2000 -------------- -------------- OPERATING ACTIVITIES Net income $ 25,245,278 $ 17,505,402 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 4,706,904 3,903,409 Amortization of intangible assets 10,260,966 9,063,474 -------------- -------------- Net income plus amortization, depreciation and cumulative effect of accounting change, net of tax 40,213,148 30,797,285 Provision for losses on accounts receivable 817,815 631,709 Gain on sale of assets (2,602,422) (921,674) Changes in operating assets and liabilities net of effects from insurance agency acquisitions and dispositions: Increase in accounts receivable (8,693,132) (14,876,571) Decrease (increase) in prepaid expenses (164,355) 5,041,040 Increase in premiums payable to insurance companies 5,882,996 23,435,463 Increase (decrease) in premium deposits and credits due customers 4,912,293 (934,944) Decrease in accounts payable (1,315,156) (1,461,686) Increase (decrease) in accrued expense 5,945,392 (1,849,671) Other operating activities 4,359,960 761,011 -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 49,356,539 40,621,962 INVESTING ACTIVITIES Proceeds from maturities of held-to-maturity Investments 857,867 2,911,316 Purchase of investments (692,034) (1,961,081) Purchase of property and equipment (3,684,278) (4,920,582) Purchase of insurance agencies, net of cash acquired (38,808,587) (11,770,179) Proceeds from sale of assets 4,400,627 4,660,028 Other investing activities 912,518 (1,327,634) -------------- -------------- NET CASH USED IN INVESTING ACTIVITIES (37,013,887) (12,408,132) FINANCING ACTIVITIES Proceeds from long-term debt 37,074,109 3,000,000 Principal payments on long-term debt (20,810,603) (10,424,816) Proceeds from issuance of Common Stock 2,484,325 2,535,613 Repurchase of Common Stock (211,080) (3,084,911) Dividends (7,127,647) (6,610,258) -------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,409,104 (14,584,372) INCREASE IN CASH AND CASH EQUIVALENTS 23,751,756 13,629,458 Cash and cash equivalents at beginning of period 28,880,784 22,336,722 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 52,632,540 $ 35,966,180 ============== ==============
See notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES September 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 nine month period ended September 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 nine month period ended September 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 September 30, 2001 was $580,000 and $750,000, respectively. For the nine months ended September 30, 2001, the net increase in the cancellation reserve was 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES September 30, 2001 (UNAUDITED) NOTE B--CHANGES IN ACCOUNTING METHOD-Continued comprised of $127,000 in new reserves related to acquisitions and $43,000 from higher revenue levels. 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. Based on the Company's current analysis, the implementation of the Statement will result in an increase in after tax net income of approximately $8.0 million related to acquisitions consummated prior to July 1, 2001. This impact includes a reduction of approximately $11.0 million in amortization expense offset by the elimination of the related tax benefits. 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 September 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 September 30, 2001 resulted in a liability of $2,764,000 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 nine months of 2001, the Company acquired certain assets and liabilities of nine insurance agencies for approximately $77,400,000 ($43,300,000 in cash, $8,100,000 in guaranteed future payments and approximately 665,000 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 nine months ended September 30, 2001 and 2000, the Company sold certain insurance accounts and other assets resulting in gains of approximately $2,600,000 and $922,000, respectively, including a $20,000 loss and a $36,000 gain during the third 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 September 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 NINE MONTHS ENDED Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000 -------------- -------------- -------------- -------------- Numerator for basic net income per share - net income $ 9,677,468 $ 6,152,016 $ 25,245,278 $ 17,505,402 Effect of dilutive securities: 5.25% convertible debenture 271,626 270,162 813,759 809,439 -------------- -------------- -------------- -------------- Numerator for dilutive net income per share - net income available after assumed conversions $ 9,949,094 $ 6,422,178 $ 26,059,037 $ 18,314,841 ============== ============== ============== ============== Denominator Weighted average shares 13,949,971 13,035,624 13,558,094 13,026,800 Effect of guaranteed future shares to be issued in connection with an agency acquisition 44,604 37,429 31,325 46,507 -------------- -------------- -------------- -------------- Denominator for basic net income per share 13,994,575 13,073,053 13,589,419 13,073,307 Effect of dilutive securities Employee stock options 407,024 401,966 372,043 334,195 Employee restricted stock 59,419 28,674 49,107 13,970 Contingent stock - acquisitions 28,063 16,326 17,405 7,769 5.25% convertible debenture 1,406,593 1,406,593 1,406,593 1,406,593 -------------- -------------- -------------- -------------- Dilutive potential common shares 1,901,099 1,853,559 1,845,148 1,762,527 -------------- -------------- -------------- -------------- Denominator for diluted net income per share - adjusted weighted average shares and assumed conversions 15,895,674 14,926,612 15,434,567 14,835,834 ============== ============== ============== ============== Net Income per Common Share: Basic $0.69 $0.47 $1.86 $1.34 ===== ===== ===== ===== Diluted $0.63 $0.43 $1.69 $1.24 ===== ===== ===== =====
10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES September 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 On November 8, 2001, the Board of Directors of the Company approved a 2-for-1 Common Stock split effected in the form of a 100% share dividend. The distribution of the additional shares will be made on December 31, 2001, to shareholders of record as of December 14, 2001. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: --------------------- Three Months Ended September 30, 2001 Net income for the three months ended September 30, 2001 was $9.7 million, or $0.63 per share, compared with $6.2 million, or $0.43 per share last year. Excluding non-recurring gains in both periods, net income was $9.7 million, a 58.0% increase from $6.1 million last year. Net income per share on the same basis was $0.63, compared with $0.43, an increase of 46.5%. Commissions and fees were $86.3 million, an increase of 33.5% from commissions and fees of $64.6 million during the comparable period of the prior year. Approximately $19.2 million of commissions were derived from purchase acquisitions of new insurance agencies. This increase was offset by decreases of approximately $1.6 million from the sale of certain offices and accounts in 2001 and 2000. Excluding the effect of acquisitions and dispositions, commissions and fees increased 6.3%. This reflects new business production and modest premium increases, partly offset by the continued culling of low-margin business. Investment and other income did not vary materially with the prior year. Expenses for the quarter increased $15.6 million or 28.5%. Compensation and benefits and other operating expenses increased $11.2 million and $3.7 million, respectively, primarily due to purchase acquisitions of insurance agencies and increased revenue production. Amortization of intangibles increased approximately $0.4 million due primarily to the aforementioned purchase acquisitions. 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 September 30, 2001 was 43.0% and was also 43.0% for the same period of the prior year. Nine Months Ended September 30, 2001 For the nine months ended September 30, 2001, net income was $25.2 million, or $1.69 per share, compared to $17.5 million, or $1.24 per share last year. Excluding the effect of gains and the 2000 cumulative effect of an accounting change, net income was $23.7 million, or $1.59 per share, up from $17.3 million or $1.22 per share a year ago. The cumulative effect of the accounting change was a non-cash charge to first quarter 2000 net income to record a reserve for the cancellation of policies in accordance with SEC Staff Accounting Bulletin 101. Commissions and fees were $237.6 million, an increase of 24.2% from commissions and fees of $191.4 million during the comparable period of the prior year. Approximately $41.9 million of commissions were derived from purchase acquisitions of new insurance agencies. This increase was offset by decreases of approximately $4.6 million from the sale of certain offices and 12 accounts in 2001 and 2000. Commissions and fees, excluding the effect of acquisitions and dispositions, increased 4.7% which was tempered by declines in contingent and non-standard commissions, an industry-wide trend this past year, and the Company's focus on writing and renewing profitable accounts. Investment income increased $0.2 million, or 9.8%, primarily due to increased invested assets related to purchase acquisitions partially offset by declining interest rates. Other income increased $1.9 million or 103.4% 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 $35.3 million or 21.6%. Increases include $24.8 million in compensation and benefits and $8.4 million in other operating expenses, due primarily to purchase acquisitions of new insurance agencies and increased revenue production. Amortization of intangibles increased approximately $1.2 million due primarily to purchase acquisitions. Interest expense increased by $0.9 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 nine months ended September 30, 2001 was also 43.0% for the nine months ended September 30, 2000. Other For the three months ended September 30, 2001, net income as a percentage of revenues did not vary significantly from the three months ended June 30, 2001. Commission income was higher during the third quarter due to acquisitions and increased revenue growth. The operating profit margin (before non-recurring items, taxes and interest) also increased from 22.4% in the second quarter to 26.1% in the third quarter. 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 nine months ended September 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 $49.4 million and $40.6 million for the nine months ended September 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. 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 $3.7 million and $4.9 million for the nine months ended September 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 13 cash of $38.8 million and $11.8 million in the nine months ended September 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 $4.4 million and $4.7 million in the nine months ended September 30, 2001 and 2000, respectively. The Company did not have any material capital expenditure commitments as of September 30, 2001. Financing activities provided cash of $11.4 million and utilized cash of $14.6 million in the nine months ended September 30, 2001 and 2000, respectively. The Company has consistently made scheduled debt payments and annually increased its dividend rate. In addition, during the nine months ended September 30, 2001, the Company repurchased 5,000 shares of its Common Stock under a stock repurchase program. The Company is currently authorized to purchase an additional 374,100 shares. The Company anticipates the continuance of its dividend policy. The Company has a bank credit agreement for $152.5 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 September 30, 2001, there were loans of $89.5 million outstanding under the bank agreement. The Company had a current ratio (current assets to current liabilities) of 0.91 to 1.00 as of September 30, 2001. Shareholders' equity of $133.9 million at September 30, 2001, is improved from $88.2 million at December 31, 2000. The debt to equity ratio of .97 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 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. 14 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. Based on the Company's current analysis, the implementation of the Statement will result in an increase in after tax net income of approximately $8.0 million related to acquisitions consummated prior to July 1, 2001. This impact includes a reduction of approximately $11.0 million in amortization expense offset by the elimination of the related tax benefits. 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. 15 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit No. Document ----------- -------- 10.1 Amendment Number One to Employment Agreement with Andrew L. Rogal dated August 2, 2001 by and between Hilb, Rogal and Hamilton Company and Andrew L. Rogal. 10.2 Amendment Number One to Employment Agreement with Martin L. Vaughan, III dated August 2, 2001 by and between Hilb, Rogal and Hamilton Company and Martin L. Vaughan, III. b) Reports on Form 8-K None. 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 November 14, 2001 By: /s/ Andrew L. Rogal ----------------------- -------------------------------- Chairman and Chief Executive Officer (Principal Executive Officer) Date November 14, 2001 By: /s/ Carolyn Jones ----------------------- -------------------------------- Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date November 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 Amendment Number One to Employment Agreement with Andrew L. Rogal dated August 2, 2001 by and between Hilb, Rogal and Hamilton Company and Andrew L. Rogal. 10.2 Amendment Number One to Employment Agreement with Martin L. Vaughan, III dated August 2, 2001 by and between Hilb, Rogal and Hamilton Company and Martin L. Vaughan, III.