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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended: March 31, 2004

Commission file number: 1-31310

(HUB INTL. LOGO)

HUB INTERNATIONAL LIMITED

(Exact name of registrant as specified in its Charter)

     
Ontario, Canada

(State or other jurisdiction of incorporation or organization)
   36-4412416

(I.R.S. Employer Identification No.)
 
55 East Jackson Boulevard, Chicago, Illinois

(Address of principal executive offices)		   60604

(Zip Code)

(877) 402-6601

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes þ          No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     
Class

Common Shares 		  Outstanding at April 30, 2004

30,503,657

 

HUB INTERNATIONAL LIMITED

INDEX

         
Page
PART I. FINANCIAL INFORMATION
        
 
Item 1. Financial Statements (Unaudited)
     3  
 
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003     3  
 
Consolidated Statements of Earnings for the three months ended March 31, 2004 and 2003     4  
 
Consolidated Statements of Retained Earnings for the three months ended March 31, 2004 and 2003     5  
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003     6  
 
Notes to Interim Consolidated Financial Statements     7  
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     20  
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk     31  
 
Item 4. Controls and Procedures     31  
 
PART II. OTHER INFORMATION        
 
Item 1. Legal Proceedings     32  
 
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities     32  
 
Item 5. Other Information     32  
 
Item 6. Exhibits and Reports on Form 8-K     33  
 
SIGNATURE     34  
 
  2   HUB INTERNATIONAL LIMITED INTERIM REPORT MARCH 31, 2004

 

PART I. FINANCIAL INFORMATION

 
Item 1. Financial Statements (Unaudited)

Hub International Limited

Consolidated Balance Sheets

As of March 31, 2004 and December 31, 2003

(in thousands of U.S. dollars)
                 
2004 2003
(Unaudited)
ASSETS
                
Current assets:
                
Cash and cash equivalents
  $ 87,304     $ 82,052  
Trust cash
    43,901       54,534  
Accounts and other receivables
    114,321       163,728  
Income taxes receivable
    4,040       6,768  
Future income taxes
    4,769       2,865  
Prepaid expenses
    4,324       4,449  
     
     
 
Total current assets
     258,659       314,396  
Goodwill
     305,490       305,862  
Other intangible assets
     39,592       42,903  
Property and equipment
     23,816       24,181  
Future income taxes
     6,095       6,458  
Other assets
     6,031       6,803  
     
     
 
Total assets
   $ 639,683     $ 700,603  
     
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable and accrued liabilities
  $ 157,005     $ 226,168  
Contingent consideration payable
    558       —  
Income taxes payable
    2,463       3,804  
Future income taxes
    232       114  
Current portion long-term debt and capital leases
    2,777       3,362  
     
     
 
Total current liabilities
     163,035       233,448  
Long-term debt and capital leases
     75,121       75,437  
Subordinated convertible debentures
     35,000       35,000  
Future income taxes
     13,687       13,928  
     
     
 
Total liabilities
     286,843       357,813  
     
     
 
Commitments and Contingencies
                
Shareholders’ equity
                
Share capital
    255,690       254,845  
Issuable shares
    44       721  
Contributed surplus
    7,882       4,806  
Cumulative translation account
    18,770       20,062  
Retained earnings
    70,454       62,356  
     
     
 
Total shareholders’ equity
     352,840       342,790  
     
     
 
Total liabilities and shareholders’ equity
   $ 639,683     $ 700,603  
     
     
 

(the accompanying notes form an integral part of the interim financial statements)

 
INTERIM REPORT MARCH 31, 2004 HUB INTERNATIONAL LIMITED    3 

 

Hub International Limited

Consolidated Statements of Earnings

For the three months ended March 31, 2004 and 2003

(in thousands of U.S. dollars, except per share amounts)
(Unaudited)
                   
2004 2003
Revenue
                
 
Commission income
  $ 61,629     $ 54,541  
 
Contingent commissions and volume overrides
    15,037       12,377  
 
Other
    2,683       1,959  
     
     
 
      79,349       68,877  
     
     
 
Expenses
                
 
Compensation
    40,637       37,012  
 
Selling, occupancy and administration
    15,553       13,106  
 
Depreciation
    1,587       1,394  
 
Interest expense
    1,660       1,367  
 
Intangible asset amortization
    781       801  
 
Loss/(gain) on disposal of property, equipment and other assets
    38       (56 )
 
Loss on write-off of trademarks
    2,587       —  
 
Loss on put option liability
    —       27  
 
Non-cash stock based compensation
    1,614       962  
     
     
 
      64,457       54,613  
     
     
 
Net earnings before income taxes
     14,892       14,264  
     
     
 
Provision for income tax expense (benefit)
                
 
Current
    6,738       5,661  
 
Future
    (1,469 )     (301 )
     
     
 
      5,269       5,360  
     
     
 
Net earnings
   $ 9,623     $ 8,904  
     
     
 
Earnings per share
                
 
Basic
   $ 0.32     $ 0.30  
 
Diluted
   $ 0.29     $ 0.28  
Weighted average shares outstanding — Basic (000’s)
     30,015       29,326  
Weighted average shares outstanding — Diluted (000’s)
     34,258       33,465  

(the accompanying notes form an integral part of the interim financial statements)

 
  4   HUB INTERNATIONAL LIMITED INTERIM REPORT MARCH 31, 2004

 

Hub International Limited

Consolidated Statements of Retained Earnings

For the three months ended March 31, 2004 and 2003

(in thousands of U.S. dollars)
(Unaudited)
                 
2004 2003
Retained earnings — Beginning of period
   $ 62,356     $ 31,915  
Net earnings
    9,623       8,904  
Dividends
    (1,525 )     (1,513 )
     
     
 
Retained earnings — End of period
   $ 70,454     $ 39,306  
     
     
 

(the accompanying notes form an integral part of the interim financial statements)

 
INTERIM REPORT MARCH 31, 2004 HUB INTERNATIONAL LIMITED    5 

 

Hub International Limited

Consolidated Statements of Cash Flows

For the three months ended March 31, 2004 and 2003

(in thousands of U.S. dollars)
(Unaudited)
                   
2004 2003
OPERATING ACTIVITIES
                
Net earnings
  $ 9,623     $ 8,904  
Items not affecting working capital
               
 
Amortization and depreciation
    2,368       2,195  
 
Loss/(gain) on disposal of property, equipment and other assets
    38       (56 )
 
Loss on write-off of trademarks
    2,587       —  
 
Loss on put option liability
    —       27  
 
Non-cash stock based compensation
    1,614       962  
 
Future income taxes
    (1,469 )     (301 )
Non-cash working capital items
               
 
Trust cash
    10,633       15,721  
 
Accounts and other receivables
    50,021       37,080  
 
Prepaid expenses
    125       (1,261 )
 
Accounts payable and accrued liabilities
    (69,049 )     (50,508 )
 
Other assets
    128       —  
 
Income taxes
    1,387       1,962  
     
     
 
Net cash flows from operating activities
    8,006       14,725  
     
     
 
INVESTING ACTIVITIES
                
Property and equipment — purchases
    (1,396 )     (1,493 )
Property and equipment — proceeds on sale
    67       7  
Purchase of subsidiaries, net of cash received
    (257 )     (11,221 )
Sale of subsidiaries
    —       291  
Other assets
    560       (24 )
     
     
 
Net cash flows used for investing activities
    (1,026 )     (12,440 )
     
     
 
FINANCING ACTIVITIES
                
Long-term debt and capital leases — repayments
    (1,015 )     (698 )
Share capital — issued for cash, net of issue costs
    40       (31 )
     
     
 
Net cash flows used for financing activities
    (975 )     (729 )
     
     
 
Effect of exchange rate changes on cash and cash equivalents
     (753 )     1,025  
     
     
 
Change in cash and cash equivalents
     5,252       2,581  
Cash and cash equivalents — Beginning of period
     82,052       40,642  
     
     
 
Cash and cash equivalents — End of period
   $ 87,304     $ 43,223  
     
     
 

(the accompanying notes form an integral part of the interim financial statements)

 
  6   HUB INTERNATIONAL LIMITED INTERIM REPORT MARCH 31, 2004

 

Hub International Limited

Notes to Interim Consolidated Financial Statements

For the three months ended March 31, 2004 and 2003 (unaudited) (in thousands of U.S. dollars, except per share amounts or as otherwise indicated)

 
1.  Nature of Operations
Hub International Limited (the “Company”) is an international insurance brokerage that provides a variety of property and casualty, life and health, employee benefits, investment and risk management products and services. The Company’s shares are listed on both the New York Stock Exchange (NYSE: HBG) and the Toronto Stock Exchange (TSX: HBG).

2.  Summary of Significant Accounting Policies

The interim consolidated financial statements do not include all disclosures required by Canadian generally accepted accounting principles (Canadian GAAP) for annual financial statements and accordingly, should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2003 as set out on pages 39 to 68 of the Company’s 2003 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for a fair presentation of the accompanying financial statements have been reflected therein. These interim consolidated financial statements of the Company are expressed in United States (U.S.) dollars and have been prepared in accordance with Canadian GAAP using the same accounting principles as were used for the Company’s consolidated financial statements for the year ended December 31, 2003. The results of the operations are not necessarily indicative of the operating results for the fiscal year or any future period. These principles differ in certain respects from United States generally accepted accounting principles (U.S. GAAP) and, to the extent that they affect the Company, the differences are described in note 13 “Reconciliation to U.S. GAAP.”

3.  Intangible Assets

As of March 31, 2004 and December 31, 2003 the gross carrying amount and accumulated amortization of intangible assets other than goodwill were as follows:
                                                   
As of March 31, 2004 As of December 31, 2003
Gross Gross
carrying Accumulated carrying Accumulated
amount amortization Total amount amortization Total
Definite life intangible assets:
                                               
 
Customer relationships
    $43,474       $6,244       $37,230       $43,422     $ 5,480       $37,942  
 
Non-competition covenants
    474       286       188       476       269       207  
 
Trademarks
    —       —       —       2,587       —       2,587  
     
     
     
     
     
     
 
      43,948       6,530       37,418       46,485       5,749       40,736  
     
     
     
     
     
     
 
Indefinite life intangible assets:
                                               
 
Non-competition covenants
    2,174       —       2,174       2,167       —       2,167  
     
     
     
     
     
     
 
Total
    $46,122       $6,530       $39,592       $48,652     $ 5,749       $42,903  
     
     
     
     
     
     
 

During the first quarter 2004 the Company adopted a strategic plan to make use of the “Hub” brand throughout the Company. Certain of the Company’s subsidiaries will change their names and as a result the Company recognized a non-cash loss on the write-off of trademarks of $2,587, before income taxes.

 
INTERIM REPORT MARCH 31, 2004 HUB INTERNATIONAL LIMITED    7 

 

Additions during the three months ended March 31, 2004 and 2003 were as follows:

                   
2004 2003
Definite life intangible assets:
               
 
Customer relationships
  $ 66     $ 370  
Indefinite life intangible assets:
               
 
Non-competition covenants
    8       43  
     
     
 
Total
  $ 74     $ 413  
     
     
 

The Company is unable to estimate the useful life of certain non-competition covenants. These indefinite life intangible assets are reviewed annually for impairment. Once a non-competition covenant is triggered, following the departure of an employee from the Company, the Company’s policy is to amortize the related intangible asset over the period of the contractual obligation.

The changes in the carrying amount of goodwill for the three months ended March 31, 2004 and the year ended December 31, 2003, are as follows:

                         
Operations Operations
in Canada in U.S. Total