-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OjpjkeXWgvD/ekINzEbK/91R5eyP3IOlKxbHz4SudfnzcEJ1kKhBZDah2bYKDNEl DXi6FxWWF3eG6Xg4GkKnKg== 0001002105-99-000136.txt : 19991115 0001002105-99-000136.hdr.sgml : 19991115 ACCESSION NUMBER: 0001002105-99-000136 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILB ROGAL & HAMILTON CO /VA/ CENTRAL INDEX KEY: 0000814898 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 541194795 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15981 FILM NUMBER: 99747861 BUSINESS ADDRESS: STREET 1: 4235 INNSLAKE DR CITY: GLEN ALLEN STATE: VA ZIP: 23060 BUSINESS PHONE: 8047476500 MAIL ADDRESS: STREET 1: P O BOX 1220 CITY: GLEN ALLEN STATE: VA ZIP: 23060 10-Q 1 10-Q - HILB, ROGAL AND HAMILTON COMPANY 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 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 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPT. 30, 1999 SEPT. 30, 1998 SEPT. 30, 1999 SEPT. 30, 1998 -------------- -------------- -------------- -------------- 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 ===== ===== ===== =====
See notes to consolidated financial statements. 3 CONSOLIDATED BALANCE SHEET HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ 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 ============ ============
See notes to consolidated financial statements. 4 STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES (UNAUDITED)
Common Stock Retained Earnings ------------ ----------------- 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 ============ ============
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, 1999 SEPT. 30, 1998 -------------- -------------- 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 ============ ============
See notes to consolidated financial statements. 6 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 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 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.
THREE MONTHS ENDED NINE MONTHS ENDED Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998 -------------- -------------- -------------- -------------- 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 ===== ===== ===== =====
9 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 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 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 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 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 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 Exhibit Index ------------- Exhibit No. Document ----------- -------- 27 Financial Data Schedule (filed electronically only)* *Filed Herewith 16 EX-27 2 FDS -- HILB, ROGAL AND HAMILTON COMPANY
5 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. 1 9-MOS DEC-31-1999 SEP-30-1999 40,302,662 4,659,085 71,598,466 (1,584,221) 0 116,815,798 38,421,927 (22,831,958) 325,074,014 131,265,420 109,752,830 0 0 19,817,960 52,006,166 325,074,014 0 168,345,493 0 0 136,441,691 0 4,349,347 27,554,455 11,157,967 16,396,488 0 0 0 16,396,488 1.28 1.23
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