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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: July 1, 2002
(Date of earliest event reported)
HILB, ROGAL AND HAMILTON COMPANY
(Exact Name of Registrant as Specified in its Charter)
Virginia 0-15981 54-1194795
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
4951 Lake Brook Drive, Suite 500
Glen Allen, Virginia 23060
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(804) 747-6500
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Item 2. Acquisition or Disposition of Assets.
On July 1, 2002, Hilb, Rogal and Hamilton Company (the "Company")
acquired (i) all of the issued and outstanding membership interest units of
Hobbs Group, LLC ("Hobbs") other than those owned by Hobbs IRA Corp. ("HIRAC"),
and (ii) all of the issued and outstanding capital stock of HIRAC (collectively,
the "Acquisition") pursuant to a Purchase Agreement (the "Purchase Agreement"),
dated May 10, 2002, by and among the Company, Hobbs, the members of Hobbs (other
than HIRAC) and the shareholders of HIRAC. HIRAC was created by Hobbs to permit
certain of its investors and employees to own interests in Hobbs through
individual retirement accounts.
Hobbs, which is based in Atlanta, Georgia, is one of the nation's
premier independent insurance brokers serving upper middle-market and top-tier
clients and provides property and casualty insurance brokerage, risk management,
executive compensation and employee benefits services. As a result of the
Acquisition, each of Hobbs and HIRAC became a wholly-owned subsidiary of the
Company.
The purchase price that the Company paid in connection with the
Acquisition consists of (i) approximately $114.2 million in cash, which includes
the Company's assumption and retirement of certain debt of Hobbs, and (ii) the
issuance to the members of Hobbs (other than HIRAC) and the shareholders of
HIRAC of an aggregate of 719,729 shares of the Company's common stock ("Common
Stock"). In addition, the Company has agreed to pay up to approximately $101.9
million in cash and shares of Common Stock contingent on Hobbs' achieving
certain financial performance goals within the next two years. The Company has
further agreed to assume and satisfy certain existing earn-out and deferred
compensation obligations of Hobbs from Hobbs' prior acquisitions estimated to
approximate a net present value of $30 million.
The various components of the purchase price were determined by
arms-length negotiations between the parties. Based upon a value for the 719,729
shares of Common Stock of $31.6 million, the aggregate purchase price paid by
the Company to the members of Hobbs (other than HIRAC) and the shareholders of
HIRAC at the closing of the Acquisition was approximately $146.6 million,
excluding potential earn-out and other future payments. For information on the
estimated aggregate acquisition cost to be recorded by the Company for
accounting purposes, see footnote 1 to the Pro Forma Condensed Combined
Financial Statements set forth in "Item 7(b), Pro Forma Financial Information"
below.
In connection with the consummation of the Acquisition, the Company
agreed to increase the size of the Board of Directors from 13 to 14 and to elect
Thomas A. Golub, who serves as President and Chief Executive Officer of Hobbs,
as a director and Executive Vice President of the Company.
As of the close of business on July 1, 2002, the total number of shares
of Common Stock issued and outstanding was 29,311,009. The 719,729 shares of
Common Stock acquired by the members of Hobbs (other than HIRAC) and the
shareholders of HIRAC at the closing of the Acquisition represent approximately
2.45% of the issued and outstanding shares of Common Stock as of that date.
In addition, on July 1, 2002, the Company entered into a Second Amended
and Restated Credit Agreement (the "Amended Credit Agreement"), dated as of July
1, 2002, among the Company, as Borrower; the lenders named therein; Wachovia
Bank, National Association (formerly known as First Union National Bank), as
administrative agent; PNC Bank, National Association, as documentation agent;
and Bank of America Securities, LLC, as syndication agent. The Amended Credit
Agreement amends and restates an Amended and Restated Credit Agreement, dated as
of April 6, 2001, among the parties, and provides for a credit facility of up to
an aggregate of $260.0 million. In particular, the Amended Credit Agreement (i)
maintains the availability to the Company of a revolving credit facility in the
aggregate principal amount of $100.0 million and (ii) increases the availability
to the Company of a term loan facility from an aggregate principal amount of
$60.0 million to an aggregate principal amount of $160.0 million. Pursuant to
the Amended Credit Agreement, the increased term loan facility was made
available (i) to finance the $114.2 million cash payment in connection with the
Acquisition and (ii) for working capital and general corporate purposes.
The Amended Credit Agreement contains certain covenants that restrict,
or may have the effect of restricting, the payment of dividends or
distributions, and the purchase or redemption by the Company of its capital
stock. Management does not believe that the restrictions contained in the
Amended Credit Agreement will, in the foreseeable future, adversely affect the
Company's ability to pay cash dividends at the current dividend rate. However,
there can be no assurance in this regard.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial Statements of Businesses Acquired.
The following financial statements of Hobbs and its subsidiaries are
included in this report:
(i) Report of Independent Auditors
Combined Balance Sheets as of December 31, 2001 and 2000
Combined Statements of Operations for the Years Ended December
31, 2001, 2000 and 1999
Combined Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended December 31, 2001, 2000 and 1999
Combined Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
Notes to Combined Financial Statements
(ii) Combined Balance Sheets as of March 31, 2002 (unaudited) and
December 31, 2001
Combined Statements of Operations for the Quarters Ended March 31,
2002 and 2001 (unaudited)
Combined Statements of Cash Flows for the Quarters Ended March 31,
2002 and 2001 (unaudited)
Notes to Combined Interim Financial Statements (unaudited)
COMBINED FINANCIAL STATEMENTS
Hobbs Group, LLC
Years ended December 31, 2001, 2000 and 1999
with Report of Independent Auditors
Hobbs Group, LLC
Combined Financial Statements
Years ended December 31, 2001, 2000 and 1999
Contents
Report of Independent Auditors.................................................1
Combined Financial Statements
Combined Balance Sheets........................................................2
Combined Statements of Operations..............................................4
Combined Statements of Changes in Shareholders' Equity (Deficit)...............5
Combined Statements of Cash Flows..............................................7
Notes to Combined Financial Statements.........................................8
Report of Independent Auditors
Board of Directors
Hobbs Group, LLC
We have audited the accompanying combined balance sheets as of December 31, 2001
and 2000, of the entities listed in Note 1, and the related combined statements
of operations, changes in shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position at December 31, 2001 and
2000, of the entities listed in Note 1, and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 15, 2002
1
Hobbs Group, LLC
Combined Balance Sheets
December 31
2001 2000
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Assets
Current assets:
Cash and cash equivalents $ 6,155,350 $ 3,134,814
Cash and cash equivalents held in a fiduciary capacity 23,899,571 22,755,903
Premiums and commissions receivable, less allowance for
doubtful accounts - (2001 - $589,000; 2000 - $401,000) 61,027,107 33,143,246
Accounts receivable 987,813 685,849
Prepaid assets 986,015 1,097,149
Income taxes receivable - 76,157
--------------------------------------------
Total current assets 93,055,856 60,893,118
Investments 68,843 68,843
Furniture, equipment and leasehold improvements, less
accumulated depreciation - (2001 - $4,166,000; 2000 -
$2,966,000) 2,567,818 3,041,971
Goodwill and other intangible assets, less accumulated
amortization - (2001 - $16,838,000; 2000 - $11,573,000) 63,355,545 67,203,160
Other assets 555,852 434,754
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Total assets $159,603,914 $131,641,846
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2
December 31
2001 2000
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Liabilities and shareholders' deficit
Current liabilities:
Premiums due to insurance companies $ 69,016,144 $ 49,122,915
Commissions expense payable 3,441,127 1,376,679
Accounts payable and accrued expenses 12,989,980 4,712,177
Income taxes payable 39,292 -
Current portion of long-term debt 6,520,456 335,282
Unearned commission income 2,439,365 1,966,723
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Total current liabilities 94,446,364 57,513,776
Long-term debt, less current portion 36,801,022 52,092,749
Other long-term liabilities 2,536,830 1,167,193
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Total liabilities 133,784,216 110,773,718
Minority interests 436,697 150,843
Commitments and contingencies
Redeemable preferred shares; no par value:
Issued and outstanding shares - (2001 -
363,196; 2000 - 363,196) 25,819,567 20,243,573
Special common shares; no par value:
Issued and outstanding shares - (2001 - 7,867;
2000 - 50,000) 550,690 1,750,000
Shareholders' deficit:
Voting common shares; no par value:
Issued and outstanding shares - (2001 - 346,881; 2000 -
361,829) 4,072,428 3,439,225
Nonvoting common shares, no par value:
Issued and outstanding shares - (2001 - 913,640; 2000 -
876,303) 13,201,914 12,568,006
Texas and Canada common shares, $1 par value:
Issued and outstanding shares - (2001 - 1,029; 2000 -
1,029) 1,029 1,029
Additional paid-in-capital 1,000 1,000
Accumulated other comprehensive income 13,276 84,709
Deferred compensation (1,384,339) (581,258)
Retained earnings (deficit) (16,892,564) (16,788,999)
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Total shareholders' deficit (987,256) (1,276,288)
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Total liabilities and shareholders' deficit $159,603,914 $131,641,846
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See accompanying notes.
3
Hobbs Group, LLC
Combined Statements of Operations
Year ended December 31
2001 2000 1999
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Revenues:
Net commissions and fees $94,232,835 $72,281,363 $55,718,035
Interest income 833,802 1,130,075 1,110,224
Other 158,030 200,099 779,156
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95,224,667 73,611,537 57,607,415
Operating expenses:
Employee compensation and benefits 55,614,459 41,209,700 34,153,970
Travel and entertainment expense 4,108,033 4,776,456 3,595,931
Management, legal and accounting services 1,727,702 2,979,412 3,780,214
Office equipment leases and supplies 2,073,261 2,030,691 1,710,525
Rent and utilities 5,293,256 4,566,795 3,489,084
Other 3,448,907 3,667,847 3,276,997
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72,265,618 59,230,901 50,006,721
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22,959,049 14,380,636 7,600,694
Other expenses:
Interest expense 4,316,309 5,848,182 3,520,700
Depreciation 1,200,258 1,179,019 926,135
Amortization of goodwill and other intangible
assets 5,298,460 5,280,064 3,692,618
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Income (loss) before income taxes, extraordinary item and
minority interests 12,144,022 2,073,371 (538,759)
Income tax expense 1,390,191 815,035 643,640
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Income (loss) before extraordinary item and minority
interests 10,753,831 1,258,336 (1,182,399)
Extraordinary item - loss on extinguishment of debt - - 1,380,862
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Income (loss) before minority interests 10,753,831 1,258,336 (2,563,261)
Minority interests 594,882 242,405 378,202
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Net income (loss) $10,158,949 $ 1,015,931 $(2,941,463)
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See accompanying notes.
4
Hobbs Group, LLC
Combined Statements of Changes in Shareholders' Equity (Deficit)
Accumulated Total
Additional Other Retained Shareholders'
Common Shares Paid-In-Capital Comprehensive Deferred Earnings Equity (Deficit)
Income (Loss) Compensation (Deficit)
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Balance at January 1, 1999 $11,043,479 $1,000 $ 9,276 $ - $ (1,733,382) $ 9,320,373
Comprehensive loss net of tax:
Net loss - - - - (2,941,463) (2,941,463)
Foreign currency translation - - 118,191 - - 118,191
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Comprehensive loss (2,823,272)
Issuance of common shares 4,704,220 - - - - 4,704,220
Redemption and forfeiture of
common shares (1,086,180) - - - (3,214,923) (4,301,103)
Redeemable preferred shares
issuance cost amortization - - - - (105,327) (105,327)
Accretion of redeemable preferred
shares - - - - (2,249,999) (2,249,999)
Distributions declared to
shareholders - - - - (1,660,643) (1,660,643)
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Balance at December 31, 1999 14,661,519 1,000 127,467 - (11,905,737) 2,884,249
Comprehensive income net of tax:
Net income - - - - 1,015,931 1,015,931
Foreign currency translation - - (42,758) - - (42,758)
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Comprehensive income 973,173
Issuance of common shares 1,620,041 - - - - 1,620,041
Deferred compensation:
Shares restricted - vesting - - - (915,270) - (915,270)
Amortization - - - 334,012 - 334,012
----------------- ---------------
Deferred compensation (581,258) (581,258)
Redemption and forfeiture of
common shares (273,300) - - - (136,840) (410,140)
Redeemable preferred shares
issuance cost amortization - - - - (140,437) (140,437)
Accretion of redeemable preferred
shares and special common shares
- - - - (4,699,998) (4,699,998)
Distributions declared to
shareholders - - - - (921,918) (921,918)
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Balance at December 31, 2000 16,008,260 1,000 84,709 (581,258) (16,788,999) (1,276,288)
5
Accumulated Total
Additional Other Retained Shareholders'
Common Shares Paid-In-Capital Comprehensive Deferred Earnings Equity (Deficit)
Income (Loss) Compensation (Deficit)
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Comprehensive loss net of tax:
Net income - - - - 10,158,949 10,158,949
Foreign currency translation - - (71,433) - - (71,433)
---------------
Comprehensive income - - - - - 10,087,516
Issuance of common shares 1,692,138 - - - - 1,692,138
Deferred compensation:
Shares restricted - vesting - - - (1,390,133) - (1,390,133)
Amortization - - - 587,052 - 587,052
----------------- ---------------
Deferred compensation - - - (803,081) - (803,081)
Redemption and forfeiture of
common shares (425,027) - - - (671,941) (1,096,968)
Redeemable preferred shares
issuance cost amortization - - - - (140,437) (140,437)
Accretion of redeemable preferred
shares and special common shares
- - - - (5,710,902) (5,710,902)
Redemption of special common
shares - - - - 337,064 337,064
Distributions declared to
shareholders - - - - (4,076,298) (4,076,298)
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Balance at December 31, 2001 $17,275,371 $1,000 $ 13,276 $(1,384,339) $(16,892,564) $ (987,256)
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See accompanying notes.
6
Hobbs Group, LLC
Combined Statements of Cash Flows
Year ended December 31
2001 2000 1999
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Operating activities
Net income (loss) $ 10,158,949 $ 1,015,931 $ (2,941,463)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,498,718 6,459,083 4,618,753
Extraordinary item - loss on extinguishment of debt - - 1,380,862
Minority interests - net of distributions 285,854 1,959 90,310
Expenses related to share issuance 587,052 386,490 2,629,638
Amortization of debt issuance costs 211,762 210,266 135,126
Gain on disposition of business - - (502,242)
Changes in operating assets and liabilities:
Premiums and commissions receivable (27,883,861) (9,730,476) 4,007,154
Prepaid assets 46,633 (306,852) 477,214
Accounts receivable (301,964) 350,830 (641,543)
Premiums due to insurance companies 19,893,229 15,927,939 (1,752,545)
Commissions expense payable 2,064,448 (655,934) 1,474,165
Accounts payable and accrued expenses 7,148,923 (1,147,866) 573,669
Other assets and other liabilities 1,198,892 (2,187,909) 308,789
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Net cash provided by operating activities 19,908,635 10,323,461 9,857,887
Investing activities
Purchase of businesses, net of cash acquired (191,032) (7,755,528) (24,348,776)
Disposition of business 37,296 - 1,253,000
Purchase of investments - - -
Purchase of furniture, equipment and leasehold
improvements (726,105) (1,665,274) (1,049,117)
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Net cash used in investing activities (879,841) (9,420,802) (24,144,893)
Financing activities
Proceeds from issuance of long-term debt 4,000,000 4,764,872 46,704,761
Repayments of long-term debt (13,335,282) (5,266,757) (28,409,437)
Proceeds from issuance of redeemable preferred shares - - 14,297,812
Proceeds from issuance of common shares - - 744,556
Redemption of common shares (1,080,000) (107,020) (4,301,103)
Redemption of special common shares (1,137,591) - -
Distributions to shareholders (3,311,717) (732,087) (1,158,613)
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Net cash (used in) provided by financing activities (14,864,590) (1,340,992) 27,877,976
Net increase (decrease) in cash and cash equivalents 4,164,204 (438,333) 13,590,970
Cash and cash equivalents at beginning of period 25,890,717 26,329,050 12,738,080
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Cash and cash equivalents at end of period $ 30,054,921 $25,890,717 $26,329,050
=============================================================
See accompanying notes.
7
Hobbs Group, LLC
Notes to Combined Financial Statements
December 31, 2001
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The combined financial statements include the accounts of Hobbs Group, LLC and
its majority-owned subsidiaries, Hobbs Group, Inc. (a Texas corporation) and
Hobbs Group (Canada) Insurance Brokers Ltd. (hereafter collectively referred to
as the "Company"). The Company is engaged in the insurance brokerage, risk
management and benefits consulting business. All significant intercompany
accounts and transactions have been eliminated in combination.
Hobbs Group, LLC is a limited liability company formed under the Delaware
Limited Liability Company Act (the "Act") in 1997. Hobbs Group, Inc. is owned by
an employee of that corporation, but controlled by Hobbs Group, LLC through
contractual agreements. A majority of the voting stock of Hobbs Group (Canada)
Insurance Brokers Ltd. ("Hobbs Group (Canada)") is held by a director of Hobbs
Group (Canada). By written agreement, a subsidiary of Hobbs Group, LLC has the
right, among other things, to reacquire the shares of the director at their
original cost to the director and has retained operating control over Hobbs
Group (Canada).
On March 30, 1999, the Company approved a Second Amended and Restated Limited
Liability Company Agreement ("the LLC Agreement") which supersedes the two
previous agreements dated October 20, 1997 and October 24, 1997. The LLC
Agreement established five classes of membership interests, including preferred
shares, with varying voting and economic rights.
Use of Estimates
Preparation of the combined financial statements requires management to make
estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
8
1. Basis of Presentation and Significant Accounting Policies (continued)
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents.
Fiduciary Funds
In its capacity as an insurance broker, the Company may collect premiums from
insureds and, after deducting its commissions, remit the premiums to the
respective insurance underwriters. Premiums which are due from insureds are
reported as assets and as a corresponding liability to the insurance carriers.
Premiums received from insureds but not remitted to the carriers are included in
cash and cash equivalents held in a fiduciary capacity.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are recorded at cost.
Depreciation is computed principally by the straight-line method over the
estimated useful lives (generally three to seven years) of the assets.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets primarily represent the excess of the cost
over the fair value of net assets acquired. Generally, the Company records any
contingent payments to be made in connection with an acquisition at the date of
the contingent payment. Generally, these assets are being amortized using the
straight-line method over a fifteen-year life.
The carrying value of goodwill and other intangible assets is continually
evaluated for impairment. If the undiscounted cash flows estimated to be
generated by these assets are less than the carrying amounts, an impairment loss
is recognized. As of December 31, 2001, the Company has not recorded an
impairment loss.
9
1. Basis of Presentation and Significant Accounting Policies (continued)
Income Taxes
Generally, federal or state income taxes are not payable by Hobbs Group, LLC,
because as a limited liability company income taxes are the liability of the
members, and their respective pro rata share of net income or net loss is
included in the members' tax returns. The Company has certain entities which are
C-corporations under the Internal Revenue Code and, accordingly, file and pay
federal and state income taxes. Income taxes for these entities are accounted
for using the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. Accordingly, for these entities, deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using current
enacted tax rates.
Long-Term Debt
In connection with obtaining certain long-term financing, the Company has
incurred certain loan origination costs. The loan origination costs are being
amortized using the effective interest method over the term of the debt.
Revenue Recognition
Commissions are reported net of sub-broker commissions and are recognized as of
the later of the billing date or effective date of the insurance policy except
for commissions on installment premiums which are recognized periodically as
billed. Any subsequent commission adjustments, including policy cancellations,
are recognized upon notification from the insurance carriers. Contingent
commissions represent a profit-sharing commission from the insurance carrier,
the amount of which depends on, among other things, the profitability of the
business produced by the agent/broker. Contingent commissions are recognized
when received. Fee income is recognized when services are rendered.
Interest income from investments is recognized on the accrual basis.
10
1. Basis of Presentation and Significant Accounting Policies (continued)
Equity Compensation
The Company has elected to follow APB 25, Accounting for Stock Issued to
Employees and related Interpretations in accounting for its equity compensation
and adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation.
The Company has issued equity capital securities to key employees for no cash
consideration which contain a base price (the value that does not inure to the
holder of the security). For these equity capital securities granted,
compensation expense is recognized based on the fair value on the measurement
date. The measurement date is the first date both the number of shares that the
employee is entitled to receive the shares and the fair value of the shares is
known. Compensation expense is recognized over the vesting period. Accordingly,
the Company has established a deferred compensation account to record the
unvested compensation expense. The fair value of these equity capital securities
was determined to be from $2.50 per share to $29 per share in 2001, $2.17 per
share in 2000 and $1.50 per share in 1999.
The Company has also issued equity capital securities for no cash consideration
which do not contain a base price ("zero-based capital securities") to key
employees and business advisors. The Company recognizes compensation expense
based on the fair value of the zero-based capital securities issued to the key
employees at the date of grant, and is recognized over the vesting period. The
unvested compensation expense is recorded in the deferred compensation account.
The Company records loan origination fees and equity issuance fees based on the
fair value of the zero-based capital securities issued to business advisors at
the date of grant. The fair value of the zero-based capital securities granted
in 1999 was determined to be $41.30 per share based on the proceeds received by
the Company for the redeemable preferred shares. In 2000, the fair value ranged
from the $40.00 per share to $46.20 per share based on the valuation of the
Company at the time shares were awarded. Using the same valuation technique in
2001, the fair value ranged from $35.00 per share to $40.00 per share at the
time these shares were awarded.
11
1. Basis of Presentation and Significant Accounting Policies (continued)
Common Share Redemptions
The Company has redeemed certain common shares at amounts in accordance with the
LLC Agreement. Common shares are reduced at the stated value of the shares
redeemed using a specific identification method. Redemption amounts differing
from the stated value are reflected in retained earnings.
Redeemable Preferred Shares and Special Common Shares
In connection with the issuance of the redeemable preferred shares, the Company
has incurred certain issuance costs. The issuance costs are being amortized into
retained earnings using the straight-line method over a five-year period.
The redeemable preferred shares are carried at the current redemption amount
less unamortized issuance costs of $316,000 at December 31, 2001 and $457,000 at
December 31, 2000. The special common shares are carried at the current
redemption amount. Adjustments in the redemption amount for the redeemable
preferred shares and special common shares are reflected in retained earnings.
Redemption amounts differing from the stated value are reflected in retained
earnings.
Foreign Currency Translation
In general, foreign revenues and expenses are translated at average exchange
rates. Foreign assets and liabilities are translated at year-end exchange rates.
Net foreign exchange gains and losses on translation are reported in
shareholders' equity.
12
1. Basis of Presentation and Significant Accounting Policies (continued)
Pending Accounting Pronouncements
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. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually. Intangible assets with finite lives will continue to be amortized over
their estimated useful lives.
The Company will apply Statement 142 beginning in the first quarter of 2002. The
Company will test goodwill for impairment using the two-step process prescribed
in Statement 142. The first step is a screen for potential impairment, while the
second step measures the amount of the impairment, if any. The Company expects
to perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002. Any impairment charge resulting
from these transitional impairment tests will be reflected as the cumulative
effect of a change in accounting principle in 2002. The Company has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
13
2. Fair Values
Cash and cash equivalents, premiums and commissions receivable, accounts
receivable, premiums due to insurance companies, accounts payable and accrued
expenses, and long-term debt are considered financial instruments. The carrying
amount for all these items approximates their fair value.
The fair values used to determine the carrying amount of redeemable preferred
shares, special common shares, and the equity capital securities issued as
compensation to key employees and business advisors was determined by a
valuation consulting organization that owns approximately 3% of the Company's
Voting and Nonvoting Common Shares. The fair value of (the Class B Junior Common
Shares) was determined using an option valuation model.
3. Acquisitions, Formations and Dispositions of Subsidiaries
AVA Insurance Agency
On February 1, 1998, the Company purchased certain assets and the business of
AVA Insurance Agency, Inc. ("AVA") for $1,900,000. A contingent payment, not to
exceed $1,000,000, will be payable to AVA should the purchased business exceed
certain financial thresholds over a five-year period.
Westport
On April 1, 1998, the Company acquired 51% of the outstanding membership
interests of Westport Worldwide, LLC ("Westport"). On November 16, 1999,
Westport's 49% minority shareholders exchanged their minority stake for a
contingent payment based upon future operating results of Westport. No goodwill
was recorded related to this step acquisition.
14
3. Acquisitions, Formations and Dispositions of Subsidiaries (continued)
EBG
On November 17, 1999, Westport purchased certain assets and the business of
Executive Benefits Group, Inc. and EBG Insurance Agency, Inc. (together, "EBG").
This executive benefits consulting business was purchased for $16,320,000 in
cash and a contingent payment based upon future operating results. Goodwill
established with this purchase relating to the excess purchase price over the
fair value of tangible net assets acquired amounted to approximately
$16,853,000.
Commencing March 2006 (with provisions for acceleration in certain liquidity
events), the owners of the contingent obligations associated with the purchases
of Westport and EBG have the right to have the contingent payments calculated
and paid based upon a pre-agreed formula. If this right had been exercisable at
December 31, 2001, the contingent payments would have totaled approximately
$13,119,000. The maximum cash obligation associated with these contingent
payments is $13,800,000, with the Company retaining the right to pay the
remaining amount in cash and/or shares of the Company.
OFJ
On December 1, 1998, the Company, through a series of transactions, purchased a
66.625% ownership interest in Hobbs/OFJ Acquisition Corp ("OFJ Acquisition
Corp."), which in turn owns 100% of O'Neill, Finnegan & Jordan Insurance Agency,
Inc. ("OFJ"), a benefits consulting organization.
Commencing December 2003, the non-Company stockholders of OFJ Acquisition Corp.
have the right to require OFJ Acquisition Corp. to purchase their OFJ
Acquisition Corp. stock based on a pre-agreed formula. Additionally, in
connection with certain liquidity events, OFJ Acquisition Corp. has either the
obligation or the option to exchange the non-Company OFJ Acquisition Corp. stock
for the Company's equity based on a pre-agreed formula. If the put option was
exercised or the exchange right was triggered on December 31, 2001, the cost to
the Company to make the purchase or exchange would have been approximately
$10,759,000.
15
3. Acquisitions, Formations and Dispositions of Subsidiaries (continued)
Campbell
On February 1, 1999, OFJ purchased certain assets and the employee benefits
consulting business of David J. Campbell for $533,000. Goodwill established with
this purchase relating to the excess purchase price over the fair value of
tangible net assets acquired amounted to approximately $533,000.
Commencing February 2003, Mr. Campbell has the right to receive a contingent
payment based upon the future operating results of his former business and
calculated using a pre-agreed formula. The contingent payments will be paid over
a three-year period. This contingent amount was calculated to be $1,233,000 and
was recorded during 2001 as goodwill as the contingency was determined to be a
liability to Mr. Campbell beyond a reasonable doubt.
Kirklin
On March 31, 1999, the Company purchased certain assets and the business of
Kirklin and Company, Inc. ("Kirklin") for $1,953,000 in cash. Goodwill
established in conjunction with this purchase relating to the excess of purchase
price over the fair value of tangible net assets acquired amounted to
approximately $2,039,000.
Mills
On April 15, 1999, the Company, through a series of transactions, purchased 100%
of the stock of Timothy S. Mills Insurance Services, Inc. ("Mills") for
$4,189,000 and a contingent obligation based upon future operating results. The
purchase price included cash payments of $3,169,000, two subordinated promissory
notes totaling $770,000 and 6,054 Nonvoting Common Shares. Goodwill established
in conjunction with this purchase relating to the excess purchase price over the
fair value of the tangible net assets acquired amounted to approximately
$3,812,000.
16
3. Acquisitions, Formations and Dispositions of Subsidiaries (continued)
Mills (continued)
Commencing June 2004 (with provision for acceleration in certain liquidity
events), the owner of the contingent obligation associated with the Mills
transaction has the right to have the contingent payment calculated and paid
based upon a pre-agreed formula. If this right had been exercisable at December
31, 2001, the contingent payment would have been approximately $1,200,000. The
maximum cash obligation associated with a contingent payment is $730,000, with
any remaining amount to be paid in shares of the Company.
Linden
On August 4, 1999, the Company, through a series of transactions, purchased 100%
of the stock of The Linden Company ("Linden") for $5,139,000 and a contingent
obligation based upon future operating results. The purchase price included cash
payments of $2,889,000 and two subordinated promissory notes totaling
$2,250,000. Goodwill established in conjunction with this purchase relating to
the excess purchase price over the fair value of tangible net assets acquired
amounted to approximately $4,967,000.
Commencing December 2002 (with provisions for acceleration in certain liquidity
events), the owner of the contingent obligation associated with the Linden
transaction has the right to have the contingent payment calculated and paid
based upon a pre-agreed formula. If this right had been exercisable at December
31, 2001, the contingent payment would have been approximately $1,767,000. The
maximum cash obligation associated with a contingent payment is $1,100,000, with
the Company retaining the right to pay any remaining amount in cash or shares of
the Company.
Integrated Risk
On September 1, 1999, the Company purchased the remaining 49% ownership interest
of Integrated Risk Solutions Insurance Services, LLC ("Integrated Risk")
previously owned by its joint venture partner for $421,000 in cash. During 2000
and 2001, the Company made additional contingent payments of $300,000 and
$104,000, respectively, to its former joint venture partner pursuant to the
purchase agreement. Goodwill established as a result of this purchase amounted
to approximately $276,000, $300,000 and $104,000 in 1999, 2000, and 2001,
respectively.
17
3. Acquisitions, Formations and Dispositions of Subsidiaries (continued)
Pro-Form
On June 30, 1999, the Company disposed of its 51% majority ownership of Pro-Form
Insurance Services, Inc. for $1,253,000 in cash. The transaction resulted in a
gain totaling $502,000 and is recorded in other revenues.
JTK
On April 1, 2000, the Company purchased certain assets and the business of JTK,
LLC ("JTK"), a benefits consulting organization, for $4,570,000 in cash, 10,811
Nonvoting Common Shares and a contingent obligation based upon future operating
results. Goodwill established with this purchase relating to the excess purchase
price over the fair value of tangible net assets acquired amounted to
approximately $5,249,000.
Commencing March 2007 (with provisions for acceleration in certain liquidity
events), the owner of the contingent obligation associated with the JTK
transaction has the right to have the contingent payment calculated and paid
based upon a pre-agreed formula. If this right had been exercisable at December
31, 2001, the contingent payment would have been approximately $2,109,000. The
maximum cash obligation associated with a contingent payment is $3,380,000, with
the Company retaining the right to pay any remaining amount in cash or shares of
the Company.
Other 2000 Acquisitions
During 2000, the Company made several additional acquisitions. The purchase
prices of these acquisitions totaled $2,629,000 in cash and also included
contingent obligations based upon future operating results. Goodwill established
with these purchases relating to the excess purchase price over the fair value
of tangible net assets acquired amounted to approximately $2,854,000.
The contingent obligations associated with these acquisitions became payable at
various times beginning August 2001. Payments totaling $120,000 were paid in
2001. If the contingent obligations had been payable at December 31, 2001, the
contingent payments would have totaled approximately $792,000.
18
3. Acquisitions, Formations and Dispositions of Subsidiaries (continued)
Other 2000 Acquisitions (continued)
All of the acquisitions have been accounted for as purchases, and the financial
position and results of operations are included in the combined financial
statements from their respective date of purchase. Substantially all of the cash
payments and share issuances required to be made in the future relating to the
contingent obligations will result in additional goodwill at the time of payment
or issuance. Generally, cash payments made in connection with the acquisitions
were financed by long-term debt or redeemable preferred share issuances. The
purchase price allocations were finalized within one year of the acquisition
date.
4. Long-Term Debt
A summary of long-term debt is as follows:
December 31
2001 2000
-----------------------------------------
Term note, final payment April 1, 2002 with interest at prime
plus 2% (6.75% at December 31, 2001)
$ 13,333 $ 53,333
Debentures, due August 4, 2002 with interest at 7%
1,250,000 1,250,000
Debentures, due December 1, 2003 with interest at 10.5%
1,910,000 1,910,000
Debenture, due in quarterly installments through January 31,
2003 with interest at 8% 403,564 698,846
Debentures, due in 2004 with interest at 8% 770,000 770,000
Bank of America revolving credit agreement 39,500,000 48,500,000
Less loan origination costs (525,419) (754,148)
-----------------------------------------
43,321,478 52,428,031
Less current portion 6,520,456 335,282
-----------------------------------------
$36,801,022 $52,092,749
=========================================
19
4. Long-Term Debt (continued)
The 10.5% Debentures are secured by certain current and future assets of a
subsidiary of the Company. Interest is payable monthly on the first of each
month. The Company may pre-pay this debenture at any time prior to maturity at
103% of the face value plus accrued and unpaid interest to the date of
redemption. Additionally, the 10.5% Debentures may be converted by the holders,
at any time before redemption or maturity, into the Company's equity at fair
market value at the date of conversion.
The 8% Debenture is secured by certain current and future assets of a subsidiary
of the Company. Principal and interest are paid in 20 quarterly consecutive
equal installments of $86,000 until maturity. The Company may pre-pay the
principal balance at any time without penalty.
For the remaining debentures, accrued interest is payable quarterly, annually or
at maturity based on the terms of the respective agreements. The Company may
pre-pay these debentures at any time prior to maturity at face value plus
accrued and unpaid interest to the date of redemption.
In August 1999 the Company entered into a new revolving credit facility with
Bank of America and First Union National Bank ("Bank of America") for a total
commitment of $50,000,000. In March 2000, the commitment was increased to
$60,000,000 with the addition of Wachovia Bank, N.A. The total amount
outstanding under this facility at December 31, 2001 and 2000 was $39,500,000
and $48,500,000, respectively. Approximately $29,600,000 of the outstanding
amount was used during 1999 to pre-pay the outstanding balance on a term loan.
This pre-payment resulted in the recognition of a $1,381,000 extraordinary
charge related to unamortized loan origination costs and pre-payment penalties.
Based on the Company's current outstanding balance under the Bank of America
revolving credit facility, quarterly installments are due starting in November
2002, with a final payment due February 2004. The interest rate is determined
either as a function of LIBOR (30, 60, 90 and 120 days) or a base rate published
by Bank of America (resembling the prime rate). The interest rate on the
outstanding balance at December 31, 2001 and 2000 was 5.2% and 10.3%,
respectively.
20
4. Long-Term Debt (continued)
In addition to the interest expense related to the outstanding debt, the Company
also pays a commitment fee ranging from 25 to 75 basis points on any unused
portion of the Bank of America facility. The rate used in determining this fee
ranged from 50 to 75 basis points in 2001, and was 75 basis points in 2000.
The scheduled maturities of debt are as follows:
Long-Term
Debt
---------------------
2002 $ 6,520,456
2003 21,743,941
2004 15,582,500
2005 -
2006 -
---------------------
$43,846,897
=====================
Total interest paid was $4,330,000, $5,332,000 and $3,126,000 in 2001, 2000 and
1999, respectively.
21
5. Income Taxes
The provision for income taxes for the taxpaying entities of the Company is as
follows:
2001 2000 1999
------------------------------------------------------------
Current:
Federal $1,182,000 $ 628,000 $298,000
State 174,000 337,000 45,000
Foreign - - 239,000
Deferred:
Federal 48,000 (132,000) 54,000
State (14,000) (18,000) 8,000
-----------------------------------------------------------
$1,390,000 $ 815,000 $644,000
===========================================================
The following table summarizes the principal elements which cause the effective
tax rate to vary from the statutory corporate rate for the Company's tax-paying
entities:
2001
---------------------------------------
---------------------------------------
Percent of Income
Income Tax Before Income
Expense Taxes
---------------------------------------
Income tax on income before income taxes $ 995,000 34.0%
Effect of state taxes 122,000 4.2%
Effect of permanent items 273,000 9.3%
---------------------------------------
Income tax expense $1,390,000 47.5%
=======================================
22
5. Income Taxes (continued)
2000
---------------------------------------
---------------------------------------
Percent of Income
Income Tax Before Income
Expense Taxes
---------------------------------------
Income tax on income before income taxes $249,000 34.0%
Effect of state taxes 25,000 3.4%
Effect of permanent items 303,000 41.3%
---------------------------------------
Income tax expense $577,000 78.7%
=======================================
1999
---------------------------------------
---------------------------------------
Percent of Income
Income Tax Before Income
Expense Taxes
---------------------------------------
Income tax on income before income taxes $193,000 34.0%
Effect of state taxes 35,000 6.2%
Effect of permanent items 246,000 43.4%
Effect of other items 113,000 19.9%
Effect of foreign taxes 57,000 10.0%
---------------------------------------
Income tax expense $644,000 113.5%
=======================================
In addition to the foregoing, Hobbs Group, LLC recorded $238,000 in tax expense
in 2000 relating to amounts payable to certain states. Total income taxes paid
in 2001, 2000 and 1999 were $1,256,000, $1,258,000 and $303,000, respectively.
23
6. Employee Benefit Plans
At December 31, 2001 and 2000, the Company had one 401(k) Savings Plan (the
"401(k) Plan"), a qualified cash and deferred profit sharing plan covering all
employees meeting certain eligibility requirements. At December 31, 1999, the
Company had five such plans. The Company provides a matching contribution of
100% of the participants' contributions up to a maximum of 4.5% of the
participants' annual compensation.
Certain key executive employees of the Company are eligible to participate in
the Hobbs Group, LLC Executive Officers Non-Qualified Deferred Compensation Plan
(the "Deferred Compensation Plan"). The Deferred Compensation Plan was
established to provide unfunded non-qualified deferred compensation for a select
group of management and other highly compensated employees. Eligible
participants may elect to defer no more than 6% of their compensation in excess
of the compensation limitations of the Internal Revenue Code. The Company
provides a dollar for dollar matching contribution provided that combined
matching contributions under the 401(k) Plan and the Deferred Compensation Plan
do not exceed 5% of the participants' annual compensation.
Expenses recognized by the Company relating to the 401(k) Plans and the Deferred
Compensation Plan were approximately $1,332,000, $1,051,000 and $907,000 for
2001, 2000, and 1999, respectively.
The Company also provides for other post retirement benefits other than pensions
under a terminated plan for 7 employees of the Company that are fully vested
under this plan. The total liability for these post retirement benefits was
$586,000 at December 31, 2001 and $500,000 at December 31, 2000.
24
7. Preferred Equity
Redeemable Preferred Shares
During March 1999, the Company issued 363,196 preferred membership interests
("Redeemable Preferred Shares") at a purchase price of $41.30 per share,
resulting in gross proceeds of $14,999,995. As of December 31, 2001, the holders
of the Redeemable Preferred Shares are entitled to voting privileges equivalent
to approximately 98,670 Voting Common Shares which, when combined with the total
Voting Common Shares represents 22.1% of the voting rights of the Company. These
preferred shares are redeemable no earlier than March 30, 2004 at the request of
at least a majority of the preferred shareholders. The Company is obligated to
redeem these shares not less than 180 days from the date of the request, but
such obligation is subordinate to the Company's debt obligation with Bank of
America. The redemption price, which is to be paid in cash, shall be the greater
of the fair market value per share as of the date of the request or the original
purchase price per share plus a 20% annual compound rate of return. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
preferred shares shall be entitled to be paid first out of the assets of the
Company at an amount equal to the redemption price defined above. The holders of
preferred shares also have conversion rights with respect to the conversion of
preferred shares into voting shares. The number of voting shares a holder of
preferred shares is entitled to receive is the applicable conversion rate, as
defined in the LLC Agreement, multiplied by the number of preferred shares. In
the event of default (noncompliance) as defined in the "Preferred Share Purchase
Agreement" dated March 23, 1999, the preferred shareholders may remove three of
the five management directors, and replace these vacancies with individuals of
their choice. Directors shall then use their best efforts to remedy the event of
noncompliance.
As of March 30 for each of the stated years, the minimum aggregate redemption
amounts are as follows:
2002 $25,920,000
2003 31,104,000
2004 37,325,000
25
7. Preferred Equity (continued)
Special Common Shares
Special Common Shares are entitled to normal distributions in accordance with
the LLC Agreement and do not have the right to vote on any matter except as
required by the Act. Under certain circumstances, the capital account balance
attributable to each Special Common Share will be reduced by a maximum of $5
upon liquidation. On October 24, 1997, 50,000 Special Common Shares were issued
to Bank of America (formerly NationsCredit) representing $500,000 of loan
origination costs.
During 2001, 42,133 of the Special Common Shares were redeemed at $27 per share.
In addition, Bank of America transferred ownership of the remaining 7,867 shares
to two former employees of Bank of America. Commencing October 2002, these two
individuals have the right to require the Company to purchase the 7,867 Special
Common Shares at the fair value (as defined) of the Company's equity.
Additionally, commencing October 2003, the Company has the option to repurchase
the Special Common Shares at 110% of the fair value of the Company's equity.
8. Shareholders' Equity (Deficit)
Under the Company's LLC Agreement, as of December 31, 2001, Hobbs Group, LLC had
three classes of membership interests classified as shareholders' equity in the
accompanying financial statements. The classes are divided between voting and
nonvoting classes. Voting shares are shares directly held by certain employee
Directors of the Company. Voting shares have the right to vote on all matters on
which the members are entitled to vote pursuant to the Act and the LLC
Agreement. The income tax consequences for the shareholders related to each of
the classes of membership equity vary based on the initial capital account
balances at time of issuance.
26
8. Shareholders' Equity (Deficit) (continued)
Common Shares
Common Shares are shares entitled to normal distributions in accordance with the
LLC Agreement, and have been purchased for cash or property at the then current
fair market value. The initial capital account balance of the Common Shares is
equal to the purchase price paid.
Class A Junior Common Shares
Class A Junior Common Shares ("Class A Shares") are entitled to normal
distributions in accordance with the LLC Agreement. The initial capital account
balance of the Class A Shares is zero. During 2001, 52,852 Class A Shares were
transferred from a Director of the Company with voting privileges to a
non-Director without voting privileges pursuant to the LLC Agreement.
Class B Junior Common Shares
Class B Junior Common Shares ("Class B Shares") are entitled to normal
distributions in accordance with the LLC Agreement. The initial capital account
balance of the Class B Shares upon issuance is zero. During 2001, 2,273 Class B
Shares were transferred from a Director of the Company with voting privileges to
a non-Director without voting privileges pursuant to the LLC Agreement.
Hobbs Group, Inc. and Hobbs Group (Canada)
Hobbs Group, Inc. (a Texas corporation) has 1,000 shares of common stock
outstanding with a par value of $1 per share and Hobbs Group (Canada) has 29
shares of common stock outstanding with a par value of $1 per share.
27
8. Shareholders' Equity (Deficit) (continued)
A summary of the activity for each class of membership interest as reported in
the accompanying financial statements as of December 31, 2001, 2000 and 1999
follows:
Common Shares
------------------------------------------------------------------------
Voting Non-Voting
Shares Value Shares Value
------------------------------------------------------------------------
Balance at January 1, 1999 36,799 $ 367,990 558,280 $5,582,800
Issued during 1999 - - 24,082 994,587
Redeemed during 1999 ($41.30/share) (36,799) (367,990) (21,418) (214,180)
------------------------------------------------------------------------
Balance at December 31, 1999 - - 560,944 6,363,207
Issued during 2000 - - 12,433 575,026
Redeemed during 2000 ($27.02/share) - - (2,100) (21,000)
------------------------------------------------------------------------
Balance at December 31, 2000 - - 571,277 6,917,233
Redeemed during 2001 ($27/share) - - (40,000) (400,000)
------------------------------------------------------------------------
Balance at December 31, 2001 - $ - 531,277 $6,517,233
========================================================================
Class A Junior Common Shares
------------------------------------------------------------------------
Voting Non-Voting
Shares Value Shares Value
------------------------------------------------------------------------
Balance at January 1, 1999 379,666 $3,796,660 129,500 $1,295,000
Issued during 1999 - - 87,297 3,605,366
Redeemed during 1999 ($41.30/share) (38,901) (389,010) (6,500) (65,000)
Forfeited during 1999 - - (5,000) (50,000)
------------------------------------------------------------------------
Balance at December 31, 1999 340,765 3,407,650 205,297 4,785,366
Issued during 2000 - - 20,340 937,600
Redeemed during 2000 ($32.38/share) - - (6,211) (100,015)
Forfeited during 2000 - - (3,300) (136,290)
------------------------------------------------------------------------
Balance at December 31, 2000 340,765 3,407,650 216,126 5,486,661
Issued during 2001 - - 12,818 502,005
Transferred during 2001 (52,852) (528,520) 52,852 528,520
Redeemed during 2001 ($28/share) - - (606) (25,027)
------------------------------------------------------------------------
Balance at December 31, 2001 287,913 $2,879,130 281,190 $6,492,159
========================================================================
28
8. Shareholders' Equity (Deficit) (continued)
Class B Junior Common Shares
-------------------------------------------------------------------
Voting Non-Voting
Shares Value Shares Value
-------------------------------------------------------------------
Balance at January 1, 1999 - $ - - $ -
Issued during 1999 21,064 31,575 48,500 72,693
-------------------------------------------------------------------
Balance at December 31, 1999 21,064 31,575 48,500 72,693
Issued during 2000 - - 49,500 107,415
Forfeited during 2000 - - (9,100) (15,996)
-------------------------------------------------------------------
Balance at December 31, 2000 21,064 31,575 88,900 164,112
Issued during 2001 40,177 1,165,133 10,000 25,000
Transferred during 2001 (2,273) (3,410) 2,273 3,410
-------------------------------------------------------------------
Balance at December 31, 2001 58,968 1,193,298 101,173 192,522
-------------------------------------------------------------------
Total all classes at December 31, 2001 346,881 $4,072,428 913,640 $13,201,914
===================================================================
A summary of the impact of the preceding activity on compensation expense,
acquisition costs and equity issuance costs related to membership interest
issuances is as follows:
Year Compensation Acquisition Equity
Expense Costs Issuance Costs
-----------------------------------------------------------------
1999 $2,623,000 $1,130,000 $200,000
2000 539,000 500,000 -
2001 889,000 - -
Share issuances and forfeitures for Class A Shares and Class B Shares relate to
compensation for key employees, except for 26,150 Class A Shares issued in 1999
which relate to acquisition and equity issuance costs.
No member of the Company is obligated personally for any debt, obligation or
liability of the Company or of any other member, solely by reason of being a
member of the Company. No member has any fiduciary or other duty to another
member with respect to the business and affairs of the Company and no member is
liable to the Company or any other member for acting in good faith reliance upon
the provisions of the Company's LLC Agreement. No member has any responsibility
to restore any negative balance in its capital account or to contribute to or in
respect of the liabilities or obligations of the Company or to return
distributions made by the Company.
29
9. Equity Compensation
The Company grants Class A Shares and Class B Shares to certain key employees as
compensation. Generally, each class of shares vests over a period ranging from
two to four years and is subject to forfeiture upon termination of service. The
base price for all Class B Shares granted in 2001 was $41.00 per share, in 2000
the range was $40.00 to $46.25 per share and in 1999 was $41.30. The base price
for Class A Shares granted is zero.
At December 31, 2001, 9,949 of the Class A Shares remain subject to forfeiture
with a weighted average remaining contractual life of 2.6 years, and 90,458
Class B Shares remain subject to forfeiture with a weighted average remaining
contractual life of 2.8 years.
The fair value method utilized to account for the Class A Shares and Class B
Shares granted in 2001, 2000, and 1999 approximates the Minimum Value method
prescribed by SFAS No. 123 with the following weighted average assumptions:
risk-free interest rate of 4.46%; expected vesting period of 4 years; and a
dividend yield of 0%.
10. Related Party Transactions
At December 31, 2001 and 2000, the Company had loans receivable due from
officers of the Company totaling $90,000 and $39,000, respectively. Additionally
at December 31, 2001, the Company had $119,000 due from other employees.
30
11. Commitments and Contingencies
The Company is involved in various legal actions incident to the nature of its
business. The Company maintains a program of commercial insurance to lessen its
exposure to such actions. Management is of the opinion that none of the
litigation will have a material effect on the Company's financial position or
operating results.
The Company has entered into various agreements to lease office space and office
equipment using operating leases expiring on various dates through October 2007.
Total rental expense for all operating leases for 2001, 2000 and 1999 was
$3,364,000, $2,941,000 and $2,180,000, respectively. Future minimum lease
payments for all non-cancelable operating leases with initial or remaining terms
in excess of one year are as follows:
2002 $2,922,000
2003 2,297,000
2004 1,761,000
2005 1,067,000
2006 and thereafter 446,000
---------------
$8,493,000
===============
Amounts in the above schedule are shown gross of any sub-leases.
31
Hobbs Group, LLC
Combined Financial Statements
Quarters ended March 31, 2002 and 2001
(Unaudited)
Contents
Combined Balance Sheets....................................................33-34
Combined Statements of Operations.............................................35
Combined Statements of Cash Flows.............................................36
Notes to Combined Financial Statements.....................................37-39
32
Hobbs Group, LLC
Combined Balance Sheets
(Unaudited)
3/31/2002 12/31/2001
---------------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,433,795 $ 6,155,350
Cash and cash equivalents held in a fiduciary capacity 16,948,310 23,899,571
Premiums and commissions receivable, less allowance for
doubtful accounts - (2002 - $609,000; 2001 - $589,000) 46,818,263 61,027,107
Accounts receivable 748,194 987,813
Prepaid assets 1,109,716 986,015
Income taxes receivable - -
-----------------------------------
Total current assets 71,058,278 93,055,856
Investments 68,843 68,843
Furniture, equipment and leasehold improvements, less
accumulated depreciation - (2002 - $4,482,000; 2001 -
$4,166,000) 2,388,864 2,567,818
Goodwill and other intangible assets, less accumulated
amortization - (2002 - $16,845,000; 2001 - $16,838,000) 63,348,986 63,355,545
Other assets 502,916 555,852
-----------------------------------
Total assets $137,367,887 $159,603,914
===================================
33
(Unaudited)
3/31/2002 12/31/2001
---------------------------------
Liabilities and shareholders' deficit
Current liabilities:
Premiums due to insurance companies $ 52,764,915 $ 69,016,144
Commissions expense payable 2,237,513 3,441,127
Accounts payable and accrued expenses 7,993,311 12,989,980
Income taxes payable 183,091 39,292
Current portion of long-term debt 10,704,348 6,520,456
Unearned commission income 2,402,629 2,439,365
-----------------------------------
Total current liabilities 76,285,807 94,446,364
Long-term debt, less current portion 29,586,764 36,801,022
Other long-term liabilities 1,891,067 2,536,830
-----------------------------------
Total liabilities 107,763,638 133,784,216
Minority interests 472,728 436,697
Commitments and contingencies
Redeemable preferred shares; no par value:
Issued and outstanding shares - (2002 -
363,196; 2001 - 363,196) 29,588,327 25,819,567
Special common shares; no par value:
Issued and outstanding shares - (2002 - 7,867;
2001 - 7,867) 629,360 550,690
Shareholders' deficit:
Voting common shares; no par value:
Issued and outstanding shares - (2002 - 359,640; 2001 -
346,881) 4,072,428 4,072,428
Nonvoting common shares, no par value:
Issued and outstanding shares - (2002 - 940,569; 2001 -
913,640) 13,406,943 13,201,914
Texas and Canada common shares, $1 par value:
Issued and outstanding shares - (2002 - 1,029; 2001 -
1,029) 1,029 1,029
Additional paid-in-capital 1,000 1,000
Accumulated other comprehensive income 3,279 13,276
Deferred compensation (1,242,724) (1,384,339)
Retained earnings (deficit) (17,328,121) (16,892,564)
------------------------------------
Total shareholders' deficit (1,086,166) (987,256)
------------------------------------
Total liabilities and shareholders' deficit $137,367,887 $159,603,914
====================================
See accompanying notes.
34
Hobbs Group, LLC
Combined Statements of Operations
(Unaudited)
Quarter ended March 31,
2002 2001
----------------------------------------
Revenues:
Net commissions and fees $24,607,326 $21,490,779
Interest income 138,330 315,045
Other 52,272 76,821
----------------------------------------
24,797,928 21,882,645
Operating expenses:
Employee compensation and benefits 13,994,421 13,175,159
Travel and entertainment expense 1,128,780 1,061,641
Management, legal and accounting services 670,517 565,926
Office equipment leases and supplies 475,704 461,184
Rent and utilities 1,318,234 1,154,724
Other 927,077 715,778
----------------------------------------
18,514,733 17,134,412
----------------------------------------
6,283,195 4,748,233
Other expenses:
Interest expense 815,016 1,280,121
Depreciation 316,255 261,998
Amortization of goodwill
and other intangible assets 6,175 1,274,270
----------------------------------------
Income before income taxes and
minority interests 5,145,749 1,931,844
Income tax expense 174,703 153,229
----------------------------------------
Income before minority interests 4,971,046 1,778,615
Minority interests 36,031 59,752
----------------------------------------
Net income $4,935,015 $1,718,863
========================================
See accompanying notes.
35
Hobbs Group, LLC
Combined Statements of Cash Flows
(Unaudited)
Quarter ended March 31,
2002 2001
----------------------------------------
Operating activities
Net income $ 4,935,015 $ 1,718,863
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 322,430 1,449,560
Minority interests - net of distributions 36,031 59,752
Expenses related to share issuance 141,615 79,374
Amortization of debt issuance costs 57,182 60,957
Changes in operating assets and liabilities:
Premiums and commissions receivable 14,208,843 2,906,203
Prepaid assets (123,701) (208,719)
Accounts receivable 239,620 35,763
Premiums due to insurance companies (16,251,230) (8,522,631)
Commissions expense payable (1,203,613) 490,949
Accounts payable and accrued expenses (5,172,920) 234,542
Other assets and other liabilities (114,736) (307,892)
----------------------------------------
Net cash used in operating activities (2,925,464) (2,003,279)
Investing activities
Purchase of furniture, equipment and leasehold
improvements (137,301) (130,905)
----------------------------------------
Net cash used in investing activities (137,301) (130,905)
Financing activities
Proceeds from issuance of long-term debt - 4,000,000
Repayments of long-term debt (3,087,548) (4,581,642)
Proceeds from issuance of common shares - 60,000
Distributions to shareholders (1,522,503) (70,733)
----------------------------------------
Net cash used in financing activities (4,610,051) (592,375)
Net decrease in cash and cash equivalents (7,672,816) (2,726,559)
Cash and cash equivalents at beginning of period 30,054,921 25,890,717
----------------------------------------
Cash and cash equivalents at end of period $ 22,382,105 $23,164,158
========================================
See accompanying notes.
36
Hobbs Group, LLC
Notes to Combined Quarter Ended Interim Financial Statements
March 31, 2002
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited combined financial statements of Hobbs Group, LLC and
its majority-owned subsidiaries, Hobbs Group, Inc. (a Texas corporation) and
Hobbs Group (Canada) Insurance Brokers Ltd. (the Company) have been prepared in
accordance with generally accepted accounting principles for interim financial
information. 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 three month period ended March 31,
2002, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
NOTE B - INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations (Statement 141)
and No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also included guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after June 30, 2001. Under
Statement 142, goodwill is no longer amortized, but is subject to annual
impairment tests. Intangible assets with finite lives will continue to be
amortized over their useful lives.
The Company adopted Statement 142 effective January 1, 2002.
The Company will test goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
The Company does not anticipate these tests will have a material impact on the
earnings or financial position of the Company as a result of the acquisition of
the Company by Hilb, Rogal and Hamilton Company (see Note C).
37
NOTE B--INTANGIBLE ASSETS - Continued
The following table provides a reconciliation of the March 31, 2002 and 2001
reported net income to adjusted net income had Statement 142 been applied as of
January 1, 2001:
For the Three Months Ended March 31,
2002 2001
---- ----
Net income - as reported $4,935,015 $1,718,863
Goodwill amortization, net of tax - 1,255,209
---------------------------------
Adjusted net income $4,935,015 $2,974,072
=================================
Intangible assets consist of the following:
As of March 31, 2002 As of December 31, 2001
-------------------- -----------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Amortizable intangible assets:
Expirations $122,244 $36,539 $122,244 $33,489
Non-compete agreement 50,408 50,408 50,408 47,283
Other intangible assets 1,290,000 1,290,000 1,290,000 1,290,000
Indefinite-lived intangible
assets:
Goodwill, net $63,263,281 $63,263,665
Aggregate amortization expense for the three months ended March 31, 2002 and
2001 was $6,175 and $1,274,000, respectively.
Estimated amortization expense:
For year ended December 31, 2002 $14,451
For year ended December 31, 2003 11,326
For year ended December 31, 2004 11,326
For year ended December 31, 2005 11,326
For year ended December 31, 2006 11,326
The changes in the net carrying amount of goodwill for the three months ended
March 31, 2002 are as follows:
Balance as of December 31, 2001 $63,263,665
Accumulated Amortization adjustment (384)
----------------
Balance as of March 31, 2002 $63,263,281
================
38
NOTE C - SIGNIFICANT CHANGES AND EVENTS
On May 10, 2002, the Company signed a definitive agreement to be acquired by
Hilb, Rogal and Hamilton, Inc. (HRH); a Virginia based insurance brokerage
company. The transaction closed on July 1, 2002. At closing, HRH paid $142
million in a combination of cash and stock for the Company. An additional $102
million will be paid contingent upon the Company attaining certain financial
performance goals within the next two years. Also, HRH assumed certain existing
earnouts from the Company's prior acquisitions, estimated to approximate a net
present value of $30 million. The closing payment of $142 million included HRH's
assumption, and subsequent retirement of, approximately $55 million in debt and
merger related expenses.
NOTE D - COMPREHENSIVE INCOME
The following table identifies the components of comprehensive net income, net
of tax, for the periods ended March 31, 2002 and 2001, respectively.
2002 2001
---- ----
Net income $4,935,015 $1,718,863
Foreign currency translation (9,997) (66,659)
-------------- -------------
Comprehensive income, net of tax $4,925,018 $1,652,204
============== =============
At March 31, 2002 and December 31, 2001, the sole component of accumulated other
comprehensive income is foreign currency translation.
NOTE E - CONTINGENCIES
The Company is involved in various legal actions incident to the nature of its
business. The Company maintains a program of commercial insurance to lessen its
exposure to such actions. Management is of the opinion that none of the
litigation will have a material effect on the Company's financial position or
operating results.
39
(b) Pro Forma Financial Information.
HILB, ROGAL AND HAMILTON COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited Pro Forma Condensed Combined Balance Sheet as
of March 31, 2002 and the unaudited Pro Forma Condensed Combined Statements of
Income for the three months ended March 31, 2002 and the year ended December 31,
2001 (the "Pro Forma Financial Statements") are based upon the respective
financial statements of the Company and of Hobbs. The acquisition of Hobbs will
be accounted for under the purchase method of accounting in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. The estimated fair values contained herein are
preliminary in nature, and may not be indicative of the final purchase price
allocation, which will be based on an assessment of fair value to be performed
by an independent appraiser. Such preliminary estimates of fair values of the
assets and liabilities of Hobbs have been consolidated with the recorded values
of the assets and liabilities of the Company in the Pro Forma Financial
Statements. Since the purchase accounting information is preliminary, it has
been solely prepared for the purpose of developing such unaudited pro forma
combined condensed financial information. SFAS No. 142, "Goodwill and Other
Intangible Assets", provides that goodwill resulting from a business combination
completed subsequent to June 30, 2001 will not be amortized but instead is
required to be tested for impairment at least annually.
The consolidated financial statements of the Company for the three
months ended March 31, 2002 were filed with the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 2002 on May 9, 2002. The
consolidated financial statements of the Company for the year ended December 31,
2001 were filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 on March 29, 2002. The financial statements of Hobbs are
included in this current report. See "Item 7(a), Financial Statements of
Businesses Acquired."
The Pro Forma Condensed Combined Balance Sheet as of March 31, 2002 is
presented as if the Acquisition had occurred on March 31, 2002. The Pro Forma
Condensed Combined Statements of Income for the three months ended March 31,
2002 and the year ended December 31, 2001 are presented as if the Acquisition
had occurred on January 1, 2001.
The Pro Forma Financial Statements are presented for comparative
purposes only and are not necessarily indicative of what the actual financial
position of the Company would have been at March 31, 2002 had the Acquisition
occurred at that date or of what the actual results of the Company would have
been if the Acquisition had occurred on January 1, 2001 nor indicative of the
results of operations in future periods. The Pro Forma Financial Statements
should be read in conjunction with, and are qualified in their entirety by, the
respective historical financial statements and notes thereto of the Company and
of Hobbs for the three months ended March 31, 2002 and for the year ended
December 31, 2001.
The Pro Forma Financial Statements presented do not reflect future
events that may occur after the Acquisition has been consummated. The Company
believes that operating expense
40
synergies of the combined operations of the Company and Hobbs will be realized
post-Acquisition. However, for the purposes of the Pro Forma Financial
Statements presented herein, these synergies have not been reflected because
their realization cannot be assured.
41
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 2002
(Unaudited)
Hilb, Rogal and
Hamilton
Company Hobbs Pro Forma
Historical Historical Adjustments Pro Forma
ASSETS
CURRENT ASSETS
Cash and cash equivalents $56,143,796 $22,382,105 ($62,357,825) (1b) $81,362,172
(3,000,000) (1d)
(51,805,904) (1e)
120,000,000 (3)
Investments 2,887,117 2,887,117
Receivables, net 115,466,210 47,566,457 163,032,667
Prepaid expenses and other current assets 6,946,695 1,109,716 8,056,411
-------------------------------------------------------------------
TOTAL CURRENT ASSETS 181,443,818 71,058,278 2,836,271 255,338,367
INVESTMENTS 1,343,080 68,843 1,411,923
PROPERTY & EQUIPMENT, NET 18,546,207 2,388,864 20,935,071
GOODWILL, NET 250,147,951 63,260,760 (63,260,760) (2) 342,345,131
92,197,180 (2)
INTANGIBLE ASSETS, NET 22,428,864 88,226 (88,226) (2) 77,428,864
55,000,000 (2)
OTHER ASSETS 10,046,576 502,916 10,549,492
------------------------------------------------------------------
TOTAL ASSETS $483,956,496 $137,367,887 $ 86,684,465 $708,008,848
==================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $142,866,676 $52,764,915 195,631,591
Accounts payable 7,865,284 4,039,267 11,656,923 (2) 12,687,602
(10,873,872) (1e, 1f)
Accrued Expenses 18,634,000 8,777,277 4,157,510 (2) 31,568,787
Premiums deposits and credits due customers 27,020,959 27,020,959
Current portion of long-term debt 6,166,779 10,704,348 (10,704,348) (2) 6,166,779
--------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 202,553,698 76,285,807 (5,763,787) 273,075,718
LONG-TERM DEBT 108,260,236 29,586,764 (29,586,764) (2) 228,260,236
120,000,000 (3)
OTHER LONG-TERM LIABILITIES 12,156,835 1,891,067 14,047,902
--------------------------------------------------------------------
TOTAL LIABILITIES 322,970,769 107,763,638 84,649,449 515,383,856
MINORITY INTEREST 472,728 (472,728) (2) 0
REDEEMABLE PREFERRED SHARES - 29,588,327 (29,588,327) (4) 0
SPECIAL COMMON SHARES - 629,360 (629,360) (4) 0
SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock 56,857,748 17,480,400 (17,480,400) (4) 88,497,013
31,639,265 (1a)
Additional paid in capital 1,000 (1,000) (4) 0
Retained earnings 105,238,634 (17,328,121) 28,985,044 (4) 105,238,634
(11,656,923) (2)
Deferred compensation (1,242,724) 1,242,724 (4) 0
Accumulated other comprehensive income (loss) (1,110,655) 3,279 (3,279) (4) (1,110,655)
--------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 160,985,727 (1,086,166) 32,725,431 192,624,992
--------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $483,956,496 $137,367,887 $ 86,684,465 $708,008,848
====================================================================
See notes to the pro forma condensed combined financial statements. Bracketed
numbers to the right of the "Pro Forma Adjustments" column refer to such notes.
42
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Three Months Ended March 31, 2002
(Unaudited)
Hilb, Rogal and
Hamilton
Company Hobbs Pro Forma
Historical Historical Adjustments Pro Forma
REVENUES
Commissions and fees $98,648,085 $24,607,326 $123,255,411
Investment income 513,848 138,330 652,178
Other 691,863 52,272 744,135
--------------------------------------------------------------------
99,853,796 24,797,928 - 124,651,724
OPERATING EXPENSES
Compensation and employee benefits 53,259,020 13,994,421 67,253,441
Other operating expenses 18,549,156 4,836,567 $ (183,540) (6) 23,202,183
Amortization of intangibles 521,618 6,175 1,368,825 (5) 1,896,618
Interest expense 1,883,374 815,016 814,984 (8) 3,513,374
---------------------------------------------------------------------
74,213,168 19,652,179 2,000,269 95,865,616
---------------------------------------------------------------------
INCOME BEFORE INCOME TAXES,
MINORITY INTEREST AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 25,640,628 5,145,749 (2,000,269) 28,786,108
Income Taxes 10,457,391 174,703 1,330,199 (7) 11,962,293
---------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 15,183,237 4,971,046 (3,330,468) 16,823,815
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Minority interest 0 36,031 (36,031) 0
---------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $15,183,237 $ 4,935,015 $ (3,294,437) $ 16,823,815
=====================================================================
NET INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE PER SHARE:
BASIC $0.54 $0.58
=====================================================================
ASSUMING DILUTION $0.48 $0.52
=====================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 28,187,723 719,729 28,907,452
=====================================================================
ASSUMING DILUTION 32,203,151 719,729 32,922,880
=====================================================================
See notes to the pro forma condensed combined financial statements. Bracketed
numbers to the right of the "Pro Forma Adjustments" column refer to such notes.
43
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 2001
(Unaudited)
Hilb, Rogal and
Hamilton
Company Hobbs Pro Forma
Historical Historical Adjustments Pro Forma
REVENUES
Commissions and fees $323,078,357 $94,232,835 $417,311,192
Investment income 2,584,600 833,802 3,418,402
Other 4,604,383 158,030 4,762,413
--------------------------------------------------------------------
330,267,340 95,224,667 - 425,492,007
OPERATING EXPENSES
Compensation and employee benefits 182,397,310 55,614,459 238,011,769
Other operating expenses 68,210,873 17,851,417 $ (629,632) (6) 85,432,658
Amortization of intangibles 13,867,645 5,298,460 201,540 (5) 19,367,645
Interest expense 9,061,585 4,316,309 2,271,691 (8) 15,649,585
--------------------------------------------------------------------
273,537,413 83,080,645 1,843,599 358,461,657
--------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 56,729,927 12,144,022 (1,843,599) 67,030,350
Income Taxes 24,381,412 1,390,191 3,703,731 (7) 29,475,334
--------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 32,348,515 10,753,831 (5,547,330) 37,555,016
Minority interest 0 594,882 (594,882) 0
---------------------------------------------------------------------
NET INCOME $32,348,515 $ 10,158,949 $ (4,952,448) $ 37,555,016
====================================================================
NET INCOME PER SHARE:
BASIC $1.18 $1.33
====================================================================
ASSUMING DILUTION $1.07 $1.21
====================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 27,411,472 719,729 28,131,201
====================================================================
ASSUMING DILUTION 31,160,149 719,729 31,879,878
====================================================================
See notes to the pro forma condensed combined financial statements. Bracketed
numbers to the right of the "Pro Forma Adjustments" column refer to such notes.
44
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Notes to Pro Forma Financial Statements
The unaudited pro forma condensed consolidated balance sheet and unaudited pro
forma consolidated statements of income reflect the acquistion of Hobbs under
the purchase method of accounting. Under the purchase method of account the
preliminary purchase price is allocated to the assets acquired and the
liabilities assumed based on their estimated fair values.
1 This pro forma adjustment reflects the issuance of Common Stock and
Cash in connection with the acquisition of Hobbs by the Company
resulting in:
Preliminary Value
a. The issuance of 719,729 shares of Common Stock at a price of
$43.96 per share. The assumed Common Stock issuance price of
$43.96 per share represents the average closing Common Stock
price on the NYSE calculated in accordance with EITF 99-12. $ 31,639,265
b. The cash payment of the purchase price. 62,357,825
c. The assumption of tangible net worth deficit of Hobbs is
assumed to be zero. 0
d. Estimated transaction costs of $3,000,000. 3,000,000
e. Payment of certain indebtedness ($40,932,032 at July 1, 2002),
transaction costs, severance and other related merger liabilities
incurred by Hobbs 51,805,904
f. Assumed merger liabilities of Hobbs not paid at closing 783,050
--------------
$ 149,586,044
==============
2 The unallocated excess of purchase price over net assets acquired and
estimated identifiable intangible assets has been preliminarily
allocated to goodwill. The Company is in the process of valuing the net
assets acquired, including the identification of intangibles other than
goodwill. Accordingly, the purchase accounting information is
preliminary. The final allocation of purchase price to intangible
assets other than goodwill could result in increased amortization and
decreased income and earnings per share in subsequent period The value
preliminarily assigned to goodwill is calculated as follows:
Total Preliminary Purchase Price $ 149,586,044
Book value of Hobbs (29,131,521)
Record transaction costs, severance and other merger related
liabilities incurred by Hobbs 11,656,923
--------------
Adjusted book value of Hobbs $ (17,474,598)
Adjustments:
Eliminate certain indebtedness, transaction costs, severance and other
related merger liabilities incurred by Hobbs paid or assumed by the Company
(excluding $640,940 of debt incurred subsequent to March 31, 2002) (51,948,034)
Adjust minority interest to contractual buy-out (472,728)
Additional amounts due shareholders under tangible net worth provisions
of the contract 4,157,510
Eliminate historical intangible assets 63,348,986
--------------
Total Adjustments 15,085,734
Identifiable intangible assets 55,000,000
--------------
Goodwill $ 92,197,180
==============
45
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Notes to Pro Forma Financial Statements
3 This pro forma adjustment reflects the new $160,000,000 Senior Term
Loan B under the existing amended bank credit facility used for funding
the acquistion. This new term loan was also used to refinance a portion
of existing bank debt of the Company of $40,000,000. The facility will
mature five years from closing with pricing set at LIBOR + 275bps. Net
new borrowings: $120,000,000
4 This pro forma adjustment eliminates historical preferred equity and
shareholders' equity (deficit) of Hobbs.
March 31, 2002 December 31, 2001
5 This pro forma adjustment reflects the elimination of historical
amortization of Hobbs and the amortization of other identifiable $ 6,175 $ 5,298,460
intangibles acquired at the time of the Acquisition ($55,000,000) over
a period of 10 years. $ 1,375,000 $ 5,500,000
6 This pro forma adjustment reflects the elimination of historical
depreciation expense of Hobbs and recording of depreciation expense
based upon the fair values of property, plant and equipment acquired in
the Acquisition.
7 This pro forma adjustment reflects the income tax effect of the pro
forma adjustments at an effective tax rate of 40.75%, reduced for the
tax impact of nondeductible intangible asset amortization. This
adjustment also eliminates historical Hobbs taxes and adjusts Hobbs'
taxes to the Company's effective tax rate.
8 This pro forma adjustment eliminates historical interest expense of
Hobbs and records interest expense under the new debt structure as
follows: Interest on debt incurred in the acquisition, at an assumed
interest rate of 4.63%, the London Interbank Offered Rate ("LIBOR") at
the acquistion date plus 2.75%. The adjustment also includes additional
loan fee amortization. A change of .125% in the assumed interest rate
would increase or decrease interest expense annually by approximately
March 31, 2002 December 31, 2001 $200,000. $ 1,630,000 $ 6,588,000
9 Contingent Consideration: The transaction is structured with a
two-year earn-out provision of as much as $76,875,000, and $25,000,000
of contingent installment payments to be determined based on future
earnings pursuant to the terms of the purchase agreement. The Hobbs'
two year earn-out provision is due after years 1 and 2 with a combined
payment not to exceed a maximum of $76,875,000. The $25,000,000
contingent installment consists of two payments of $12.5 million each
which are due after years 1 and 2,if minimum EBITDA targets are met. In
addition, the Company has agreed to assume and satisfy certain of
Hobbs' existing earn-outs and deferred compensation liabilities with an
agreed upon value of $30,000,000.
10 Effective January 1, 2002, the Company changed its method of
accounting for commissions on premiums billed and collected directly by
insurance carriers on middle market property and casualty business. For
the three months ended March 31,2002, the cumulative effect adjustment
was $3.9 million, net of tax. No pro forma adjustment has been
presented for the year ended December 31, 2001 to reflect the effect of
the retroactive application as it is not practical for the Company to
compute prior period pro forma amounts due to the lack of prior period
data.
46
(c) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Purchase Agreement, dated May 10, 2002, by
and among the Company, Hobbs, LLC ("Hobbs"),
the members of Hobbs (other than Hobbs IRA
Corp. ("HIRAC")) and the shareholders of
HIRAC.
23.1 Consent of Ernst & Young LLP.
99.1 Second Amended and Restated Credit
Agreement, dated as of July 1, 2002, among
the Company, as Borrower; the lenders named
therein; Wachovia Bank, National Association
(formerly known as First Union National
Bank), as administrative agent; PNC Bank,
National Association, as documentation
agent; and Bank of America Securities, LLC,
as syndication agent.
99.2 Press release dated July 1, 2002.
99.3 Senior Executive Employment Agreement with
Thomas A. Golub entered into May 10, 2002.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
HILB, ROGAL AND HAMILTON COMPANY
(Registrant)
Date: July 16,2002 By: /s/Carolyn Jones
---------------------------------
Carolyn Jones
Senior Vice President and
Chief Financial Officer
48
Exhibit Index
Exhibit No. Description
----------- -----------
2.1 Purchase Agreement, dated May 10, 2002, by and among
the Company, Hobbs, LLC ("Hobbs"), the members of
Hobbs (other than Hobbs IRA Corp. ("HIRAC")) and the
shareholders of HIRAC.
23.1 Consent of Ernst & Young LLP.
99.1 Second Amended and Restated Credit Agreement, dated
as of July 1, 2002, among the Company, as Borrower;
the lenders named therein; Wachovia Bank, National
Association (formerly known as First Union National
Bank), as administrative agent; PNC Bank, National
Association, as documentation agent; and Bank of
America Securities, LLC, as syndication agent.
99.2 Press release dated July 1, 2002.
99.3 Senior Executive Employment Agreement with Thomas A.
Golub entered into May 10, 2002.