FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the transition period from to
Commission file number 0-7201.
BROWN & BROWN, INC.(Exact name of Registrant as specified in its charter)
Florida
59-0864469
220 S. Ridgewood Ave., Daytona Beach, FL
32114
(386) 252-9601(
N/A
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, and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No
The number of shares of the Registrant's common stock, $.10 par value, outstanding as of May 11, 2001, was 29,753,189.
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the
three months ended March 31, 2001 and 2000
3
Condensed Consolidated Balance Sheets as of March 31,
2001 and December 31, 2000
4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2001 and 2000
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
11
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
13
PART II. OTHER INFORMATION
Legal Proceedings
14
Changes in Securities and Use of Proceeds
Item 6.
Exhibits and Reports on Form 8-K
15
SIGNATURE
16
ITEM 1: FINANCIAL STATEMENTSBROWN & BROWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
For the three months
ended March 31,
2001
2000
REVENUES
Commissions and fees
$ 75,828
$54,678
Investment income
1,107
981
Other income
280
553
Total revenues
77,215
56,212
EXPENSES
Employee compensation and benefits
39,544
28,753
Other operating expenses
11,322
9,037
Depreciation
1,422
1,242
Amortization
3,329
2,167
Interest
1,640
216
Total expenses
57,257
41,415
Income before income taxes
19,958
14,797
Income taxes
7,784
5,754
NET INCOME
$ 12,174
$9,043
Net Income per share:
Basic
$ 0.42
$ 0.31
Diluted
$ 0.41
Weighted average number of shares outstanding:
29,173
28,752
29,460
28,765
See notes to condensed consolidated financial statements.
BROWN & BROWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
December 31,
ASSETS
Cash and cash equivalents
$ 69,395
$31,364
Restricted cash
42,774
26,297
Short term investments
400
373
Premiums, commissions and fees receivable
89,892
85,043
Other current assets
7,422
8,039
Total current assets
209,883
151,116
Fixed assets, net
21,932
15,157
Intangible assets, net
196,812
103,850
Investments
6,117
5,784
Deferred income taxes
651
773
Other assets
6,743
6,072
Total assets
$ 442,138
$282,752
LIABILITIES
Premiums payable to insurance companies
$ 139,576
$ 114,443
Premium deposits and credits due customers
8,974
8,347
Accounts payable and accrued expenses
37,439
25,058
Current portion of long-term debt
28,716
2,611
Total current liabilities
214,705
150,459
Long-term debt
87,979
4,458
Other liabilities
8,543
7,596
Total liabilities
311,227
162,513
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share: authorized 70,000
shares; issued 29,181 shares at 2001 and 29,122 at 2000
2,918
2,912
Retained earnings
125,307
114,832
Accumulated other comprehensive income
2,686
2,495
Total shareholders' equity
130,911
120,239
Total liabilities and shareholders' equity
BROWN & BROWN, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED) (In thousands)
For the three months ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$12,174
Adjustments to reconcile net income to net cash
provided by operating activities:
Compensation expense under performance stock plan
488
124
-
(4)
Net gains on sales of investments, fixed assets and
customer accounts
(54)
(610)
Restricted cash, increase
(16,477)
(5,267)
Premiums, commissions and fees receivable, (increase) decrease
(4,849)
2,362
Other assets, (increase) decrease
(104)
2,199
Premiums payable to insurance companies, increase
25,133
11,832
Premium deposits and credits due customers, increase (decrease)
627
(2,151)
Accounts payable and accrued expenses, increase
12,381
2,687
Other liabilities, increase (decrease)
947
(544)
NET CASH PROVIDED BY OPERATING ACTIVITIES
35,017
23,080
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to fixed assets
(4,197)
(1,286)
Payments for businesses acquired, net of cash acquired
(76,846)
(12,585)
Proceeds from sales of fixed assets and customer accounts
54
1,055
Purchases of investments
(3)
Proceeds from sales of investments
7
205
NET CASH USED IN INVESTING ACTIVITIES
( 80,985
(12,614)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on long-term debt
(3,820)
(1,152)
Proceeds from long-term debt
90,000
424
Cash dividends paid
(2,181)
(1,778)
NET CASH USED IN FINANCING ACTIVITIES
83,999
(2,506)
Net increase in cash and cash equivalents
38,031
7,960
Cash and cash equivalents at beginning of period
31,364
25,078
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$33,038
March 31, 2001
Note 1 - Basis of Financial Reporting
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for 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. These unaudited, condensed, and consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto set forth in the Company's Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A filed on March 27, 2001, for the year ended December 31, 2000.
The accompanying financial statements for all periods presented have been restated to give effect to the following acquisitions: Bowers, Schumann & Welch, effective June 2, 2000; The Flagship Group, Ltd., effective November 21, 2000; WMH, Inc. and Huffman & Associates, Inc., effective December 14, 2000; Mangus Insurance & Bonding, Inc., effective December 29, 2000; Huval Insurance Agency, Inc. and its affiliated companies, effective January 13, 2001; and Spencer & Associates, Inc. and SAN of East Central Florida, Inc., effective February 15, 2001.
Results of operations for the three-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.
Note 2 - Basic and Diluted Net Income Per Share
The following table sets forth the computation of basic net income per common share and dilutive net income per common and common equivalent share (in thousands, except per-share data):
$ 9,043
Weighted average number of common shares outstanding
Dilutive effect of stock options using the treasury stock method
287
Weighted average number of common and common equivalent shares outstanding
Basic net income per share
Dilutive net income per common and common equivalent share
Effective January 1, 2001, the Company acquired the insurance agency-related operations and assets of Riedman Corporation ("Riedman"), headquartered in Rochester, New York, which consist of more than 60 offices in 13 states, principally in locations in which the Company did not formerly have an office. The total purchase price, including liabilities assumed, was approximately $92 million and was fully funded by a seven-year term loan with a national banking institution. This acquisition was accounted for using the purchase method of accounting and includes a preliminary purchase price allocation of $4 million allocated to fixed assets, $2.8 million allocated to non-compete agreements and the remaining amounts allocated to purchased customer accounts, acquisition costs and goodwill.
During the first quarter of 2001, the Company also acquired substantially all of the assets of Ayers/Sierra Insurance Associates, LLP, with offices in Tampa and St. Petersburg, Florida. In addition, the Company acquired several books of business.
These acquisitions have been accounted for using the purchase method of accounting. The results of operations for the acquired companies have been combined with those of the Company since their respective acquisition dates.
Pooling-of-Interests
During the first quarter of 2001, the Company issued 327,379 shares of its common stock in exchange for all of the outstanding stock of Huval Insurance Agency, Inc. and its affiliated companies, headquartered in Lafayette, Louisiana. During the quarter, the Company also issued 95,588 shares of its common stock in exchange for all of the outstanding stock of Spencer & Associates, Inc. and SAN of East Central Florida, Inc., with offices in Melbourne and Titusville, Florida .
These acquisitions have been recorded using the pooling-of-interests method of accounting, and the Company's consolidated financial statements have been restated for all prior periods presented.
The Company continues to maintain its credit agreement with a major insurance company under which $3 million (the maximum amount available for borrowings) was outstanding at both December 31, 2000 and March 31, 2001, at an interest rate equal to the prime lending rate plus one percent (9.0% at March 31, 2001). In accordance with the amendment to the loan agreement dated August 1, 1998, the maximum amount available for borrowings will decrease by $1 million each year in August until the facility expires in August 2003.
Note 5 - Contingencies
Note 6 - Supplemental Disclosures of Cash Flow Information
For the three-month period ended March 31,
(in thousands)
Cash paid during the period for:
$1,630
$ 210
95
881
The Company's significant non-cash investing and financing activities are as follows:
Unrealized holding gain (loss) on available-
for-sale securities net of tax effect of $122
in 2001 and tax benefit of $1,143 in 2000
$191
$(1,787)
Debt issued or assumed for acquisition of
23,446
134
Net change in unrealized holding gain (loss) on Available-for-sale securities
191
Comprehensive income
$12,365
$ 7,256
Accumulated other comprehensive income at beginning of period
$ 2,495
$ 4,922
Net change in unrealized holding gain (loss) on available-for-sale securities, net of tax effect of $122 and tax benefit of $1,143, respectively
(1,787)
Accumulated other comprehensive income at end of period
$ 2,686
$ 3,135
The Company's business is divided into four divisions: the Retail Division, which markets and sells a broad range of insurance products to commercial, professional and individual clients; the National Programs Division, which develops and administers property and casualty insurance and employee benefits coverage solutions for both professional and commercial groups and trade associations nationwide; the Service Division, which provides insurance-related services such as third-party administration and consultation for workers' compensation and employee benefit self-insurance markets; and the Brokerage Division, which markets and sells excess and surplus commercial insurance primarily through non-affiliated independent agents and brokers. The Company conducts all of its operations in the United States.
Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Other" column includes corporate-related items and, as it relates to segment profit, income and expense not allocated to reportable segments.
Three Months Ended March 31, 2001:
Retail
Programs
Service
Brokerage
Other
Total
Total Revenues
$ 59,019
$ 4,793
$ 5,842
$ 8,034
$ (473)
$ 77,215
938
356
86
206
(479)
Interest expense
2,492
8
50
175
(1,085)
936
165
125
71
2,958
40
318
10
Income (loss) before income taxes
13,573
1,399
987
3,135
864
236,517
54,466
7,463
67,465
76,227
442,138
Capital expenditures
1,099
118
103
2,823
4,197
Three Months Ended March 31, 2000:
$40,271
$5,336
$4,714
$5,540
$351
$56,212
587
271
62
176
(115)
359
(150)
747
258
111
57
69
1,756
87
9,730
1,722
503
2,034
808
172,096
54,135
6,059
51,070
(19,291)
264,069
687
117
232
208
42
1,286
Note 9 - Subsequent Events
Effective May 4, 2001, the Company issued 571,429 shares of its common stock in exchange for all of the outstanding stock of The Young Agency, Inc. of Syracuse, New York. This acquisition was accounted for using the pooling-of-interests method of accounting.
The Company also acquired substantially all of the assets of Parcel Insurance Plan, Inc. of St. Louis, Missouri, effective May 1, 2001. This acquisition was accounted for using the purchase method of accounting.
Additionally, the Company acquired all of the outstanding stock of Harris Holdings, Inc., the parent company of The Harris Agency, Inc., of Manassas, Virginia, effective April 1, 2001. This acquisition was accounted for using the purchase method of accounting.
THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN THE COMPANY'S 2000 ANNUAL REPORT ON FORM 10-K, AS AMENDED, AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.
Results of Operations
Net Income. Net income for the first quarter of 2001 was $12,174,000, or $.41 per share, compared with net income in the first quarter of 2000 of $9,043,000, or $.31 per share, a 32% increase on a per-share basis.
Commissions and Fees. Commissions and fees for the first quarter of 2001 increased $21,150,000, or 39%, over the same period in 2000. Approximately $16,720,000 of this increase represents revenues from the acquisition of Riedman and other agencies, with the remainder due to new and renewal business production. Excluding the effects of acquisitions, core commissions and fees increased 9.0% over the first quarter of 2000.
Investment Income.
Other Income. Other income primarily includes gains and losses from the sales of customer accounts and other assets. Other income for the three-month period ended March 31, 2001 decreased $273,000 from the same period in 2000, primarily due to the gain on sale of the building occupied by the Company's Toledo, Ohio office that was sold during the first quarter of 2000.
Employee Compensation and Benefits. Employee compensation and benefits increased 38% during the first quarter of 2001 over the same period in 2000. This increase primarily relates to the addition of new employees as a result of the Riedman purchase and other acquisitions. Employee compensation and benefits as a percentage of total revenue remained constant at 51% for the first quarter of both 2000 and 2001.
Other Operating Expenses. Other operating expenses for the first quarter of 2001 increased $2,285,000, or 25%, over the same period in 2000, primarily due to the acquisitions of Riedman and other agencies. Other operating expenses as a percentage of total revenue for the first quarter of 2001 decreased to 15%, compared with 16% for the same period in 2000.
Depreciation. Depreciation increased $180,000, or 14%, over the same period in 2000, primarily due to fixed assets acquired in connection with the Riedman acquisition.
Amortization. Amortization increased $1,162,000, or 54%, over the same period in 2000, primarily due to increased amortization from the Riedman purchase and other acquisitions since the first quarter of 2000.
Interest. Interest increased $1,424,000, or 659%, over the same period in 2000, primarily due to debt incurred for the Riedman acquisition.
Liquidity and Capital Resources
The Company's cash and cash equivalents of $69,395,000 at March 31, 2001 increased by $38,031,000, from $31,364,000 at December 31, 2000. During the first quarter of 2001, $35,017,000 of cash was provided from operating activities. From this amount, existing cash balances and new long-term debt, $76,846,000 was used to acquire other agencies or books of business, $4,197,000 was used for additions to fixed assets, $3,820,000 was used for payments on long-term debt, and $2,181,000 was used for payment of dividends. The current ratio at March 31, 2001 was 0.98, compared with 1.03 at December 31, 2000.
The Company believes that its existing cash, cash equivalents, short-term investments portfolio, funds generated from operations, and available credit facility borrowings are sufficient to satisfy its normal financial needs.
Forward-Looking Statements
From time to time, the Company may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance of future revenues or earnings, business prospects, projected acquisitions or ventures, new products or services, anticipated market performance, compliance costs, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to: (i) competition from existing insurance agencies and new participants in the insurance agency business that could result in reductions in premium prices and/or the Company's market share; (ii) changes in regulatory requirements that could increase the cost of doing business; (iii) legal developments adversely affecting the litigation experience of the insurance industry; (iv) the volatility of the securities markets; (v) the potential occurrence of a major natural disaster in certain areas of the States of Arizona, Florida and/or New York, where the Company's business is concentrated; and (vi) unfavorable changes in general economic conditions. The Company does not undertake any obligation to publicly update or revise any forward-looking statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest, foreign currency exchange rates, and equity prices. The Company is exposed to market risk related to changes in interest rates. The impact of interest expense on earnings, and the value of market risk-sensitive financial instruments (primarily marketable equity securities and long-term debt) are subject to change as a result of movements in market rates and prices.
The Company's investment portfolio was valued at $6,517,000 as of March 31, 2001. This represents approximately 1.5% of total assets at that date. The majority of the portfolio is comprised of various equity investments. The market value changes are accounted for in Other Comprehensive Income in the equity section of the balance sheet. Earnings on investments are not significant to the Company's results of operations; therefore, any changes in interest rates and dividends would have a minimal effect on future net income.
With respect to the Company's long-term debt, $93,000,000 was subject to variable rates of interest at March 31, 2001. From the total amount of debt, $90,000,000 was funded from a term loan in January 2001 and bears an interest rate between LIBOR plus 0.50% and 1.00%. It is payable in equal quarterly installments over the next seven years beginning in April 2001. The remaining $3,000,000 of variable rate debt comes from a credit agreement with a major insurance company and bears an interest rate of prime plus one percent. It is payable in equal annual installments in August 2001-2003. The remaining $23,695,000 of long-term debt is subject to fixed rates of interest. This fixed rate debt matures in various increments from 2001-2011. These fixed rate liabilities have been discounted at rates that approximate the Company's current borrowing rates, and as a result, the fair value of these liabilities approximates their carrying value at March 31, 2001. Based on a hypothetical 1% change in interest rates, the potential change to future net income would be approximately $930,000. Because of favorable current market conditions, the Company does not use derivatives, such as swaps or caps, to alter the interest characteristics of debt instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As more fully discussed in the Company's report on Form 10-K, as amended, for the year ended December 31, 2000, on January 19, 2000, a complaint was filed in the Superior Court of Henry County, Georgia, captioned Gresham & Associates, Inc. v. Anthony T. Strianese et al. No material developments have occurred in this action since the filing of that Form 10-K, as amended, by the Company.
The Company is involved in various pending or threatened proceedings by or against the Company or one or more of its subsidiaries which involve routine litigation relating to insurance risks placed by the Company, and other contractual matters. The Company's management does not believe that any such pending or threatened proceedings will have a material adverse effect on the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 13, 2001, the Company issued a total of 327,379 shares of its common stock in exchange for all of the outstanding stock of Huval Insurance Agency, Inc. and its affiliated companies, headquartered in Lafayette, Louisiana. On February 15, 2001, the Company issued a total of 95,588 shares of its common stock in exchange for all of the outstanding stock of Spencer & Associates, Inc. and SAN of East Central Florida, Inc., with offices in Melbourne and Titusville, Florida. These acquisitions have been recorded using the pooling-of-interests method of accounting. These shares of the Company's common stock were not registered under the Securities Act of 1933, as amended. The Company relied in each transaction upon an exemption from registration pursuant to Rule 506 of Regulation D under the Securities Act. This exemption was relied upon because in each transaction, the issuance of the Company's common stock met all of the terms and conditions of Rules 501 and 502 of Regulation D; shares were not issued to more than 35 non-accredited investors; and by virtue of the selling shareholders' representations and warranties, the Company reasonably believed immediately prior to issuance that each non-accredited investor, either alone or with such investor's purchaser representative, had such knowledge and experience in financial and business matters that such investor was capable of evaluating the merits and risks of the prospective investment in the Company's common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
EXHIBITS
Exhibit 3a -
Amended and Restated Articles of Incorporation (incorporated by Reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 1999)
Exhibit 3b -
Amended and Restated Bylaws (incorporated by reference to Exhibit 3b to Form 10-K for the year ended December 31, 1996)
Exhibit 4b -
Rights Agreement, dated as of July 30, 1999, between the Company and First Union National Bank, as Rights Agent (incorporated by reference to Exhibit 4.1 to Form 8-K filed on August 2, 1999)
Exhibit 10(a) -
Amended and Restated Revolving and Term Loan Agreement between the Company and SunTrust Banks dated January 3, 2001 (incorporated by reference to Exhibit 4a on Form 10-K filed on March 14, 2001)
Exhibit 10(b) -
Asset Purchase Agreement, dated September 11, 2000, among the Company, Riedman Corporation and Riedman Corporation's Shareholders (incorporated by reference to the Company's Quarterly Report on Form 10-Q dated November 13, 2000).
Exhibit 10(c) -
First Amendment to Asset Purchase Agreement, dated January 3, 2001, among the Company, Riedman Corporation and Riedman's Corporation's shareholders (incorporated by reference to Exhibit 10(b) on Form 8-K filed on January 18, 2001).
Exhibit 10(d) -
General Assignment and Bill of Sale, dated January 1, 2001, from Riedman Insurance of Wyoming, Inc. to Brown & Brown of Wyoming, Inc. (incorporated by reference to Exhibit 10(c) on Form 8-K filed on January 18, 2001).
(b)
Reports on Form 8-K
The Company filed a current report on Form 8-K dated January 18, 2001. This current report was amended by amendments on Form 8-K/A filed on March 19, 2001 and March 23, 2001, respectively. The Report, as amended, reported (a) Item 2, which announced the completion of the acquisition of all the insurance agency business-related assets of Riedman Corporation, and (b) Item 7, which attached as exhibits (i) audited financial statements of Riedman Insurance (a division of Riedman Corporation), and (ii) pro forma condensed financial statements of the Company giving effect to the acquisition, both for the year ended December 31, 2000.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 15, 2001
/S/ CORY T. WALKER