FORM 10-Q 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, 1999. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 _______________________________ ______________________________ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 220 S. Ridgewood Ave., Daytona Beach, FL 32114 ________________________________________ _______________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (904) 252-9601 Poe & Brown, Inc. ___________________________________________ (Former Name, If Changed Since Last Report) 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 2, 1999, was 13,489,321. <PAGE 2> <TABLE> <CAPTION> BROWN & BROWN, INC. Index to Form 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 ____________________________________ <S> <C> <C> PAGE ____ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Income for the three months ended March 31, 1999 and 1998 3 Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 12 </TABLE> <PAGE 3> ITEM 1: FINANCIAL STATEMENTS <TABLE> <CAPTION> BROWN & BROWN, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data) <S> <C> <C> For the three months ended March 31, _______________ 1999 1998 ____ _____ REVENUES Commissions and fees $43,270 $36,022 Investment income 572 775 Other income 34 (168) _______ ________ Total revenues 43,876 36,629 EXPENSES Employee compensation and benefits 22,311 18,043 Other operating expenses 7,662 7,067 Amortization 1,782 1,231 Interest 160 110 _______ _______ Total expenses 31,915 26,451 _______ _______ Income before income taxes 11,961 10,178 Income taxes 4,726 4,020 _______ ______ NET INCOME $ 7,235 $ 6,158 Other comprehensive income, net of tax: Unrealized loss on securities: Unrealized holding (loss) arising during period, net of tax benefit of $334 in 1999 and $993 in 1998 $ (522) $(1,553) _______ ________ Comprehensive Income $ 6,713 $ 4,605 ======= ======== Basic and diluted earnings per share $ 0.54 $ 0.47 ======= ======== Dividends declared per share $ .11 $ .10 ======= ======== Diluted shares outstanding 13,493 13,117 </TABLE> See notes to condensed consolidated financial statements. <PAGE 4> <TABLE> <CAPTION> BROWN & BROWN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) <S> <C> <C> (Unaudited) (Audited) March 31, December 31, 1999 1998 ____ ____ ASSETS Cash and cash equivalents $ 40,162 $ 42,174 Short-term investments 794 746 Premiums, commissions and fees receivable 60,486 69,186 Other current assets 9,146 9,840 ________ ________ Total current assets 110,588 121,946 Fixed assets, net 14,226 13,698 Intangible assets, net 88,159 79,483 Investments 9,608 10,483 Other assets 5,119 4,903 ________ ________ Total assets $227,700 $230,513 ======== ======== LIABILITIES Premiums payable to insurance companies $ 93,394 $ 89,405 Premium deposits and credits due customers 7,560 8,379 Accounts payable and accrued expenses 17,663 16,122 Current portion of long-term debt 5,828 4,960 ________ ________ Total current liabilities 124,445 118,866 Long-term debt 4,575 17,207 Deferred income taxes 2,070 2,403 Other liabilities 6,929 7,829 ________ ________ Total liabilities 138,019 146,305 ________ ________ SHAREHOLDERS' EQUITY Common stock, par value $.10 per share: authorized 70,000 shares; issued 13,489 shares at 1999 and 13,498 at 1998 1,349 1,350 Retained earnings 83,314 77,318 Accumulated other comprehensive income 5,018 5,540 ________ _______ Total shareholders' equity 89,681 84,208 ________ _______ Total liabilities and shareholders' equity $227,700 $230,513 ======== ======== See notes to condensed consolidated financial statements. </TABLE> <PAGE 5> <TABLE> <CAPTION> BROWN & BROWN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <S> <C> <C> For the three months ended March 31, ____________________________________ 1999 1998 ____ ____ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,235 $ 6,158 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 994 768 Amortization 1,782 1,231 Compensation expense under stock performance plan 316 170 Net (gains) losses on sales of investments, fixed assets and customer accounts (2) 201 Premiums, commissions and fees receivable, decrease 8,700 6,890 Other assets, decrease 1,118 3,008 Premiums payable to insurance companies, increase 3,989 1,297 Premium deposits and credits due customers, (decrease) increase (819) 394 Accounts payable and accrued expenses, increase (decrease) 1,541 (1,928) Other liabilities, decrease (970) (1,266) ________ _________ NET CASH PROVIDED BY OPERATING ACTIVITIES 23,884 16,923 CASH FLOWS FROM INVESTING ACTIVITIES Additions to fixed assets (1,545) (922) Payments for businesses acquired, net of cash acquired (9,821) (7,984) Proceeds from sales of fixed assets and customer accounts 25 42 Purchases of investments (60) (12) Proceeds from sales of investments 32 174 _________ _________ NET CASH USED IN INVESTING ACTIVITIES (11,369) (8,702) _________ _________ CASH FLOWS FROM FINANCING ACTIVITIES Payment on long-term debt (13,041) (3,827) Exercise of stock options and issuances of stock (1) 12 Purchases of stock for stock option plan, employee stock purchase plan and performance stock plan - (6,892) Cash dividends paid (1,485) (1,316) _________ __________ NET CASH USED IN FINANCING ACTIVITIES (14,527) (12,023) _________ __________ Net decrease in cash and cash equivalents (2,012) (3,802) Cash and cash equivalents at beginning of period 42,174 48,568 _________ __________ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 40,162 $ 44,766 ========= ========== See notes to condensed consolidated financial statements. </TABLE> <PAGE 6> NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. For further information, refer to the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Certain amounts at December 31, 1998 have been reclassified to be consistent with the current period presentation. Results of operations for the three-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Note 2 - Basic and Diluted Earnings Per Share Basic earnings per share is based upon the weighted average number of shares outstanding. Diluted earnings per share is adjusted for the dilutive effect of stock options. Earnings per share for the Company is the same on both a basic and a diluted basis. Note 3 - Acquisitions During the first quarter of 1999, the Company acquired substantially all of the assets of the Daytona Beach, Florida office of Hilb, Rogal & Hamilton Company; The Insurance Center of Roswell, Inc. in Roswell, New Mexico; and Chancy-Stoutamire, Inc., with offices in Monticello and Perry, Florida. The Company also acquired all of the outstanding shares of the Bill Williams Agency, Inc. of St. Petersburg, Florida in the first quarter of 1999. During the first quarter of 1998, the Company acquired substantially all of the assets of Arizona General Insurance of Tucson, Arizona, Boynton Brothers Insurance of Perth Amboy, New Jersey, Great Northern Insurance of Phoenix, Arizona, and the Heine-Miles Insurance Agency of Phoenix, Arizona. These acquisitions have been accounted for using the purchase method of accounting. Pro forma results of operations for the three months ended March 31, 1999 and March 31, 1998 resulting from these acquisitions were not materially different from the results of operations as reported. The results of operations for the acquired companies have been combined with those of the Company since their respective acquisition dates. Additionally, during the first quarter of 1998, the Company issued 22,500 shares of its common stock for all of the outstanding stock of Thim Insurance Agency, Inc., an Arizona <PAGE 7> corporation. This acquisition has been accounted for as a pooling-of- interests; however, due to the immaterial nature of the transaction, the Company's consolidated financial statements have not been restated for all periods prior to the transaction. The separate company operating results of Thim Insurance Agency, Inc. for periods prior to the acquisition are not material to the Company's consolidated operating results. Note 4 - Long-Term Debt The Company continues to maintain its credit agreement with a major insurance company under which $4 million (the maximum amount available for borrowings) was outstanding at March 31, 1999, at an interest rate equal to the prime lending rate plus one percent (8.75% at March 31, 1999). In accordance with the amendment to the loan agreement dated August 1, 1998, the available amount will decrease by $1 million each August beginning in 2000. The Company also has a revolving credit facility with a national banking institution which provides for available borrowings of up to $50 million, with a maturity date of October, 2000. As of March 31, 1999, there were no borrowings against this line of credit. Note 5 - Contingencies The Company is not a party to any legal proceedings other than various claims and lawsuits arising in the normal course of business. Management of the Company does not believe that any such claims or lawsuits will have a material effect on the Company's financial condition or results of operations. Note 6 - Supplemental Disclosures of Cash Flow Information <TABLE> <CAPTION> <S> <C> <C> For the three-month period ended March 31, __________________________________________ (in thousands) 1999 1998 ____ ____ Cash paid during the period for: Interest 206 117 Income taxes 271 379 </TABLE> The Company's significant non-cash investing and financing activities are as follows: <TABLE> <CAPTION> <S> <C> <C> For the three-month period ended March 31, __________________________________________ (in thousands) 1999 1998 Unrealized depreciation of available-for-sale securities net of tax benefit of $334 in 1999 and $993 in 1998 $ (522) $ (1,553) Long-term debt issued for acquisition of customer accounts 1,277 - Notes received on the sale of fixed assets and customer accounts 640 839 Common stock (cancelled)/issued in acquisitions (70) 106 </TABLE> Note 7 - Segment Information 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 <PAGE 8> 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. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> (in thousands) Three Months Ended March 31, 1999: Retail Programs Service Brokerage Other Total _____________________________________________________________________________ Total Revenues $ 30,317 $ 5,923 $ 3,643 $ 4,306 $ (313) $ 43,876 ______________ Interest and other investment income 456 308 54 87 (333) 572 Interest expense 241 - - - (81) 160 Depreciation and amortization 2,025 353 97 236 65 2,776 Income (loss) before income taxes 7,576 1,690 566 1,748 381 11,961 Total assets 138,766 57,963 5,675 32,045 (6,749) 227,700 Capital expenditures 1,071 90 211 76 97 1,545 ______________________________________________________________________________ </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> Three Months Ended March 31, 1998: Retail Programs Service Brokerage Other Total ______________________________________________________________________________ Total Revenues $ 23,072 $ 6,733 $ 3,299 $ 4,036 $ (511) $ 36,629 Interest and other investment income 337 463 49 110 (184) 775 Interest expense 5 - - - 105 110 Depreciation and amortization 1,325 333 78 226 52 2,014 Income (loss) before income taxes 6,296 2,307 573 1,707 (705) 10,178 Total assets 100,196 60,870 4,474 34,353 (5,784) 194,109 Capital expenditures 649 136 78 46 13 922 ______________________________________________________________________________ </TABLE> ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net Income. Net income for the first quarter of 1999 was $7,235,000, or $.54 per share, compared with net income in the first quarter of 1998 of $6,158,000, or $.47 per share, an 18% increase. Commissions and Fees. Commissions and fees for the first quarter of 1999 increased $7,248,000, or 20%, from the same period in 1998. Approximately $6,815,000 of this increase represents revenues from acquired agencies, with the remainder due to new business production. Investment Income. Investment income for the first quarter of 1999 decreased $203,000 from the same period in 1998, primarily due to a reduction in available cash to invest. <PAGE 9> Other Income. Other income primarily includes gains and losses from the sale of customer accounts and other assets. Other income for the three-month period ended March 31, 1999 increased $202,000 over the same period in 1998, primarily due to the disposition of the assets of the Company's Charlotte, North Carolina office in the first quarter of 1998, which resulted in a loss of $518,000. Employee Compensation and Benefits. Employee compensation and benefits increased 24% during the first quarter of 1999 over the same period in 1998. This increase primarily relates to the addition of new employees as a result of acquisitions. Employee compensation and benefits as a percentage of total revenue increased to 51% in the first quarter of 1999, compared with 49% incurred in the same period in 1998. Other Operating Expenses. Other operating expenses for the first quarter of 1999 increased $595,000, or 8%, over the same period in 1998, primarily due to acquisitions. Other operating expenses as a percentage of total revenue declined to 17% in the first quarter of 1999, compared with 19% incurred in the same period in 1998. Amortization. Amortization increased $551,000, or 45%, over the same period in 1998, primarily due to increased amortization from acquisitions. Interest. Interest increased $50,000, or 45%, over the same period in 1998, primarily due to higher levels of incurred debt. Liquidity and Capital Resources The Company's cash and cash equivalents of $40,162,000 at March 31, 1999 decreased by $2,012,000 from $42,174,000 at December 31, 1998. During the first quarter of 1999, $23,884,000 of cash was provided from operating activities. From both this amount and existing cash balances, $13,041,000 was used for payments on long-term debt, $9,821,000 was used to acquire businesses, $1,545,000 was used for additions to fixed assets, and $1,485,000 was used for payment of dividends. The current ratio at March 31, 1999 was 0.89, compared to 1.03 as of December 31, 1998. The Company has a revolving credit agreement with a major insurance company under which up to $4 million presently may be borrowed at an interest rate equal to the prime lending rate plus one percent (8.75% at March 31, 1999). The amount of available credit will decrease by $1 million each year beginning in August 2000 in accordance with the August 1, 1998 amendment to the original loan agreement. As of March 31, 1999, the maximum amount of borrowings was outstanding. The Company also has a revolving credit facility with a national banking institution that provides for available borrowings of up to $50 million, with a maturity date of October, 2000. As of March 31, 1999, there were no borrowings against this line of credit. 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. Year 2000 Date Conversion Year 2000 issues relate to system failures or errors resulting from computer programs and embedded computer chips which utilize dates with only two digits instead of four digits to represent a year. A data field with two digits representing a year may result in an error or failure due to the system's inability to recognize "00" as the Year 2000. The Company is reviewing its computer systems for Year 2000 readiness and is implementing a plan to resolve existing issues. The Company has evaluated and identified the risks of failure of its information and financial <PAGE 10> systems which may be adversely affected by Year 2000 issues. The Company is in the process of making required upgrades and other remedial measures. The Company expects to complete such implementation by September, 1999. To date, approximately $450,000 has been expended in systems upgrades directly relating to Year 2000 issues. Present estimates for further expenditures to address Year 2000 issues are between $100,000 and $350,000. Based on its assessments to date, the Company believes it will not experience any material disruption as a result of Year 2000 issues in processing information, interfacing with key vendors, or with processing orders and billing. However, the Year 2000 issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties on which the Company relies. Accordingly, the Company is requesting assurances from software vendors from which it has purchased or from which it may purchase software that the software sold to the Company will continue to correctly process date information through 2000 and beyond. In addition, the Company is querying its independent brokers and insurance carriers as to their progress in identifying and addressing problems that their computer systems may experience in correctly processing date information as the year 2000 approaches and thereafter. However, there are no assurances that the Company will identify all date-handling problems in its business systems or that the Company will be able to successfully remedy Year 2000 compliance issues that are discovered. To the extent that the Company is unable to resolve its Year 2000 issues prior to January 1, 2000, operating results could be adversely affected. In addition, the Company could be adversely affected if other entities (e.g., insurance carriers and independent agents through which the Company brokers business) not affiliated with the Company do not appropriately address their own Year 2000 compliance issues in advance of their occurrence. There is also risk that insureds may attempt to recover damages from the Company if their insurance policies procured with the assistance of the Company are believed by such insureds to cover Year 2000-related claims, but do not do so. The impact of these potential legal disputes cannot be reasonably estimated. The Company has developed a contingency plan for dealing with Year 2000 issues that could surface in a particular office or offices. That plan involves shifting the information systems functions from the affected office to another Company office that will be specially equipped and staffed to absorb the additional responsibilities. However, there can be no assurance that Year 2000 issues will not have a material adverse effect on the Company's business, results of operation or financial condition. 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 and their effect on pricing of premiums; (ii) changes in regulatory requirements that could affect the cost of doing business; (iii) legal developments 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 State of Florida, where the Company's business is concentrated, and (vi) general economic conditions. The Company does not <PAGE 11> 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 through its revolving credit line and some of its investments; however, such risk is not considered to be material as of March 31, 1999. <PAGE 12> BROWN & BROWN, INC. PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 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 of such pending or threatened proceedings will have a material adverse effect on the Company's financial position or results of operations. <TABLE> <CAPTION> ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K <S> <C> (a) EXHIBITS Exhibit 3a - Amended and Restated Articles of Incorporation (filed herewith) Exhibit 3b - Amended and Restated Bylaws (incorporated by reference to Exhibit 3b to Form 10-K for the year ended December 31, 1996) Exhibit 11 - Statement re: Computation of Basic and Diluted Earnings Per Share Exhibit 27 - Financial Data Schedule (for SEC use only) (b) There were no reports filed on Form 8-K during the quarter ended March 31, 1999. </TABLE> 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. BROWN & BROWN, INC. Date: May 12, 1999 /S/ JEFFREY R. PARO _____________________________________ Jeffrey R. Paro Vice President, Chief Financial Officer and Treasurer (duly authorized officer, principal financial officer and principal accounting officer)