HUB INTERNATIONAL LTD - 10-Q Quarterly Report

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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, 2005

Commission file number: 1-31310

HUB INTERNATIONAL LIMITED

(Exact name of registrant as specified in its Charter)


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 May 2, 2005 30,621,865

HUB INTERNATIONAL LIMITED

INDEX


	Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)		3

Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004.		3

Consolidated Statements of Earnings for the three months ended March 31, 2005 and 2004.		4

Consolidated Statements of Retained Earnings for the three months ended March 31, 2005 and 2004		5

Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004.		6

Notes to Interim Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures about Market Risk		29

Item 4. Controls and Procedures		29

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 5. Other Information		30

Item 6. Exhibits		31

SIGNATURE		32
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2


2 HUB INTERNATIONAL LIMITED	QUARTERLY REPORT MARCH 31, 2005

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Hub International Limited

Consolidated Balance Sheets

As of March 31, 2005 and December 31, 2004

(in thousands of U.S. dollars)


	2005		2004

	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	112,892	$	98,204
Trust cash		56,652		71,718
Accounts and other receivables		127,463		162,841
Income taxes receivable		6,967		6,208
Future income taxes		5,568		3,901
Prepaid expenses		5,065		5,835

Total current assets		314,607		348,707
Goodwill		375,013		376,676
Other intangible assets		86,973		88,842
Property and equipment		26,630		27,907
Future income taxes		4,684		4,368
Other assets		8,970		11,035

Total assets	$	816,877	$	857,535


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued liabilities	$	213,363	$	271,843
Income taxes payable		11,428		2,273
Future income taxes		521		34
Current portion long-term debt and capital leases		5,161		5,195

Total current liabilities		230,473		279,345

Long-term debt and capital leases		137,885		146,602
Subordinated convertible debentures		35,000		35,000
Future income taxes		15,229		14,805

Total liabilities		418,587		475,752


Commitments and Contingencies

Shareholders’ equity
Share capital		260,418		259,617
Contributed surplus		14,214		12,681
Cumulative translation account		26,511		26,983
Retained earnings		97,147		82,502

Total shareholders’ equity		398,290		381,783

Total liabilities and shareholders’ equity	$	816,877	$	857,535

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


QUARTERLY REPORT MARCH 31, 2005	HUB INTERNATIONAL LIMITED 3

Hub International Limited

Consolidated Statements of Earnings

For the three months ended March 31, 2005 and 2004

(in thousands of U.S. dollars, except per share amounts)

(Unaudited)


		2005			2004

Revenue
	Commission income	$	88,969		$	61,585
	Contingent commissions and volume overrides		29,160			15,037
	Other		3,568			2,727

			121,697			79,349

Expenses
	Cash compensation		63,853			40,637
	Selling, occupancy and administration		20,053			15,553
	Depreciation		2,081			1,587
	Interest expense		2,403			1,660
	Intangible asset amortization		1,859			781
	Non-cash stock based compensation		8,998			1,614
	Gain on forgiveness of debt		(4,500	)		—
	(Gain)/ loss on disposal of subsidiaries, property, equipment and other assets		(2,412	)		38
	Loss on write-off of trademarks		—			2,587

			92,335			64,457


Net earnings before income taxes			29,362			14,892

Provision for income tax expense (benefit)
	Current		13,854			6,738
	Future		(972	)		(1,469	)

			12,882			5,269

Net earnings		$	16,480		$	9,623


Earnings per share
	Basic	$	0.54		$	0.32
	Diluted	$	0.47		$	0.29
Weighted average shares outstanding — Basic (000’s)			30,368			30,015
Weighted average shares outstanding — Diluted (000’s)			36,397			34,258

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


4 HUB INTERNATIONAL LIMITED	QUARTERLY REPORT MARCH 31, 2005

Hub International Limited

Consolidated Statements of Retained Earnings

For the three months ended March 31, 2005 and 2004

(in thousands of U.S. dollars)

(Unaudited)


	2005			2004

Retained earnings — Beginning of period	$	82,502		$	62,356
Net earnings		16,480			9,623
Dividends		(1,835	)		(1,525	)

Retained earnings — End of period	$	97,147		$	70,454

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


QUARTERLY REPORT MARCH 31, 2005	HUB INTERNATIONAL LIMITED 5

Hub International Limited

Consolidated Statements of Cash Flows

For the three months ended March 31, 2005 and 2004

(in thousands of U.S. dollars)

(Unaudited)


		2005			2004

OPERATING ACTIVITIES
Net earnings		$	16,480		$	9,623
Items not affecting cash
	Amortization and depreciation		3,940			2,368
	(Gain)/loss on disposal of subsidiaries, property, equipment and other assets		(2,412	)		38
	Non-cash stock based compensation		8,998			1,614
	Gain on forgiveness of debt		(4,500	)		—
	Loss on write-off of trademarks		—			2,587
	Future income taxes		(972	)		(1,469	)
Non-cash working capital items
	Trust cash		15,066			10,633
	Accounts and other receivables		33,113			50,021
	Prepaid expenses		769			125
	Accounts payable and accrued liabilities		(65,817	)		(69,049	)
	Other assets		129			128
	Income taxes		8,398			1,387

Net cash flows from operating activities			13,192			8,006


INVESTING ACTIVITIES
Property and equipment — purchases			(936	)		(1,396	)
Property and equipment — proceeds on sale			1			67
Purchase of subsidiaries, net of cash received			(18	)		(257	)
Sale of subsidiaries			3,876			—
Other assets			4,399			560

Net cash flows from (used for) investing activities			7,322			(1,026	)


FINANCING ACTIVITIES
Long-term debt and capital leases — repayments			(4,263	)		(1,015	)
Proceeds from exercise of stock options			504			—
Dividends paid			(1,835	)		—
Share capital — issued for cash, net of issue costs			—			40

Net cash flows used for financing activities			(5,594	)		(975	)

Effect of exchange rate changes on cash and cash equivalents			(232	)		(753	)

Change in cash and cash equivalents			14,688			5,252
Cash and cash equivalents — Beginning of period			98,204			82,052

Cash and cash equivalents — End of period		$	112,892		$	87,304

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


6 HUB INTERNATIONAL LIMITED	QUARTERLY REPORT MARCH 31, 2005

Hub International Limited

Notes to Interim Consolidated Financial Statements

For the three months ended March 31, 2005 and 2004 (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, 2004 as set out on pages 43 to 76 of the Company’s 2004 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. Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. 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, 2004. 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 14, “Reconciliation to U.S. GAAP.”

3. Commitments and contingencies

(a)

On July 1, 2004, the Company purchased all of the common shares of Satellite Acquisition Corporation (“Satellite”) a corporation formed by senior management at Talbot Financial Corporation (“Talbot”). In turn, Satellite purchased 100% of Talbot from Safeco Corporation. The Company will purchase special shares of Satellite owned by the management of Talbot using a combination of both restricted and unrestricted common shares of the Company. Payments will be made on September 1, 2005, March 31, 2006 and March 31, 2007 based upon Talbot’s earnings for the 12 month periods ending December 31, 2004, 2005 and 2006, respectively. The contingent payment to Talbot management is recorded by the Company as a charge to earnings in the form of non-cash stock based compensation expense over the period in which the payments are earned. The Company estimates that the aggregate value of compensation which will be recognized under this arrangement will be $45 - $50 million, of which $7.2 million was recognized in the first quarter 2005 and $21.6 million has been recognized in total from the date of acquisition through March 31, 2005 as an expense with an offsetting credit to accounts payable and accrued liabilities. A payment in common shares of the Company of $14.4 million will be paid to Talbot management on September 1, 2005.

In connection with other various acquisitions completed through March 31, 2005, the Company may be obligated to pay contingent consideration up to a maximum sum of approximately $11.2 million in cash and $4.4 million in common shares of the Company based upon management’s best estimate of acquired brokerages achieving certain targets. The contingent payments are payable on various dates through November 2008 according to the terms and conditions of each purchase agreement. Any additional consideration will be recorded as an adjustment to goodwill once the contingency is resolved. In connection with contingent consideration earned as at March 31, 2005, the financial statements reflect a liability to pay cash of $0.7 million.

(b)

In connection with the Company’s executive share purchase plan, under certain circumstances, the Company may be obligated to purchase loans for certain employees from a Canadian chartered bank totaling $4,062 and $4,287 as of March 31, 2005 and December 31, 2004 respectively, to assist in purchasing common shares of the Company. As collateral, the employees have pledged 414,000 and 431,000 of the Company’s common shares as of March 31, 2005 and December 31, 2004, respectively, which have a market value of $8,002 and


QUARTERLY REPORT MARCH 31, 2005	HUB INTERNATIONAL LIMITED 7

$7,885 as of March 31, 2005 and December 31, 2004, respectively. Interest on the loans in the amount of $49 and $51 for the three months ended March 31, 2005 and 2004, respectively, was paid by the Company and is included in cash compensation expense.

4. Dispositions

During the first quarter 2005, the Company sold assets of certain insurance brokerages for $4,499 resulting in a gain of $2,261. Annual revenue for 2004 of these brokerages was approximately $2,500.

5. Intangible Assets

As of March 31, 2005 and December 31, 2004 the gross carrying amount and accumulated amortization of intangible assets other than goodwill were as follows:


		As of March 31, 2005						As of December 31, 2004

		Gross						Gross
		Carrying		Accumulated				Carrying		Accumulated
		Amount		Amortization		Total		Amount		Amortization		Total

Definite life intangible assets:
	Customer relationships	$	95,973	$	12,605	$	83,368	$	95,982	$	10,802	$	85,180
	Non-competition covenants		809		504		305		791		448		343

			96,782		13,109		83,673		96,773		11,250		85,523
Indefinite life intangible assets:
	Non-competition covenants		3,300		—		3,300		3,319		—		3,319

Total		$	100,082	$	13,109	$	86,973	$	100,092	$	11,250	$	88,842

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, 2005 and the year ended December 31, 2004, are as follows:


	Operations			Operations
	in Canada			in U.S.			Total

Balance as of December 31, 2003.	$	92,079		$	213,783		$	305,862
Goodwill acquired during 2004.		1,005			68,298			69,303
Goodwill disposed during 2004.		(4,604	)		(727	)		(5,331	)
Cumulative translation adjustment		6,842			—			6,842

Balance as of December 31, 2004.		95,322			281,354			376,676
Goodwill acquired during 2005.		—			779			779
Goodwill disposed during 2005.		(1,968	)		—			(1,968	)
Cumulative translation adjustment		(474	)		—			(474	)

Balance as of March 31, 2005.	$	92,880		$	282,133		$	375,013


8 HUB INTERNATIONAL LIMITED	QUARTERLY REPORT MARCH 31, 2005

Changes to goodwill and intangible assets during the first quarter 2005 relate to contingent payments on prior year acquisitions as well as the disposition of assets of certain insurance brokerages in Canada.

For the three months ended March 31, 2005 and 2004 amortization has been comprised of the following:


	2005		2004

Customer relationships	$	1,803	$	764
Non-competition covenants		56		17

Total	$	1,859	$	781

The Company estimates the amortization charges for 2005 through 2009 for all acquisitions consummated through March 31, 2005 will be:


	2005		2006		2007		2008		2009

Year ended December 31,
Customer relationships	$	7,381	$	7,401	$	7,401	$	7,401	$	7,401
Non-competition covenants		173		104		94		13		2

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