---

 

BROWN & BROWN, INC.

INDEX

 

			PAGE NO.
PART I.  FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited):
		Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006	3
		Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	4
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
	Item 4.	Controls and Procedures	32
PART II.  OTHER INFORMATION
	Item 1.	Legal Proceedings	33
	Item 1A.	Risk Factors	33
	Item 4.	Submission of Matters to a Vote of Security Holders	33
	Item 6.	Exhibits	34
SIGNATURE			34

 

2

---

 

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)			For the three months ended June 30,						For the six months ended June 30,
			2007			2006			2007			2006
REVENUES
Commissions and fees		$	230,476		$	217,427		$	476,035		$	445,342
Investment income			12,990			2,956			24,569			5,165
Other income, net			3,178			424			4,553			882
Total revenues			246,644			220,807			505,157			451,389
EXPENSES
Employee compensation and benefits			112,636			103,180			223,446			203,910
Non-cash stock-based compensation			1,334			1,434			2,836			3,764
Other operating expenses			31,558			30,134			63,481			61,103
Amortization			9,965			8,978			19,467			17,978
Depreciation			3,239			2,785			6,279			5,380
Interest			3,416			3,329			7,050			6,851
Total expenses			162,148			149,840			322,559			298,986
Income before income taxes			84,496			70,967			182,598			152,403
Income taxes			32,484			26,536			70,859			57,946
Net income		$	52,012		$	44,431		$	111,739		$	94,457
Net income per share:
Basic		$	0.37		$	0.32		$	0.80		$	0.68
Diluted		$	0.37		$	0.32		$	0.79		$	0.67
Weighted average number of shares outstanding:
Basic			140,384			139,511			140,303			139,447
Diluted			141,120			141,006			141,170			140,915
Dividends declared per share		$	0.06		$	0.05		$	0.12		$	0.10

See accompanying notes to condensed consolidated financial statements.

 

3

---

CONDENSED CONSOLIDATED STATEMENTS OF

CASH FLOWS

(UNAUDITED)

 

 

		For the six months ended June 30,
(in thousands)			2007			2006
Cash flows from operating activities:
Net income		$	111,739		$	94,457
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization			19,467			17,978
Depreciation			6,279			5,380
Non-cash stock-based compensation			2,836			3,764
Deferred income taxes			5,318			1,544
Net gain on sales of investments, fixed
assets and customer accounts			(22,452	)		(249	)
Changes in operating assets and liabilities, net of effect
from acquisitions and divestitures:
Restricted cash and investments decrease (increase)			1,678			(46,087	)
Premiums, commissions and fees receivable decrease (increase)			11,191			(18,328	)
Other assets decrease			1,809			5,998
Premiums payable to insurance companies (decrease) increase			(13,259	)		55,621
Premium deposits and credits due customers (decrease)			(1,905	)		(5,143	)
Accounts payable increase			11,143			12,481
Accrued expenses (decrease)			(19,098	)		(12,958	)
Other liabilities increase			534			666
Net cash provided by operating activities			115,280			115,124
Cash flows from investing activities:
Additions to fixed assets			(20,000	)		(9,096	)
Payments for businesses acquired, net of cash acquired			(111,820	)		(89,014	)
Proceeds from sales of fixed assets and customer accounts			3,295			612
Purchases of investments			(118	)		(47	)
Proceeds from sales of investments			19,482			12
Net cash used in investing activities			(109,161	)		(97,533	)
Cash flows from financing activities:
Payments on long-term debt			(14,873	)		(71,593	)
Borrowings on revolving credit facility			12,240			-
Payments on revolving credit facility			(12,240	)		-
Income tax benefit from issuance of common stock			4,421			-
Issuances of common stock for employee stock benefit plans			610			514
Cash dividends paid			(16,825	)		(13,944	)
Net cash used in financing activities			(26,667	)		(85,023	)
Net decrease in cash and cash equivalents			(20,548	)		(67,432	)
Cash and cash equivalents at beginning of period			88,490			100,580
Cash and cash equivalents at end of period		$	67,942		$	33,148

 

See accompanying notes to condensed consolidated financial statements.

 

 

5

---

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 · Nature of Operations

Brown & Brown, Inc., a Florida corporation, and its subsidiaries (collectively, “Brown & Brown” or the “Company”) is a diversified insurance agency, wholesale brokerage, and services organization that markets and sells to its customers insurance products and services, primarily in the property and casualty arena. Brown & Brown's business is divided into four reportable segments: the Retail Division, which provides a broad range of insurance products and services to commercial, public and quasi-public entities, professional and individual customers; the National Programs Division, which is comprised of two units - Professional Programs, which provides professional liability and related package products for certain professionals delivered through nationwide networks of independent agents, and Special Programs, which markets targeted products and services designed for specific industries, trade groups, governmental entities and market niches; the Wholesale Brokerage Division, which markets and sells excess and surplus commercial and personal lines insurance and reinsurance, primarily through independent agents and brokers; and the Services Division, which provides insurance-related services, including third-party claims administration and comprehensive medical utilization management services in both the workers' compensation and all-lines liability areas, as well as Medicare set-aside services.

 

NOTE 2 · Basis of Financial Reporting

 

          The accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited, condensed, consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2006. 

 

          Results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

 

NOTE 3 · Net Income Per Share

 

Basic net income per share is computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the period. Basic net income per share excludes dilution. Diluted net income per share reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock.

 

The following table sets forth the computation of basic net income per share and diluted net income per share:

		For the three months ended June 30,						For the six months ended June 30,
(in thousands, except per share data)			2007			2006			2007			2006
Net income		$	52,012		$	44,431		$	111,739		$	94,457
Weighted average number of common shares
outstanding			140,384			139,511			140,303			139,447
Dilutive effect of stock options using the
treasury stock method			736			1,495			867			1,468
Weighted average number of shares
outstanding			141,120			141,006			141,170			140,915
Net income per share:
Basic		$	0.37		$	0.32		$	0.80		$	0.68
Diluted		$	0.37		$	0.32		$	0.79		$	0.67

 

6

---

 NOTE 4 · New Accounting Pronouncements

Accounting for Uncertainty in Income Taxes - In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company has adopted the provisions of FIN 48 and there was no significant effect on the financial statements.

As of January 1, 2007, the Company provided a liability in the amount of $591,022 of unrecognized tax benefits related to various federal and state income tax matters.  Of this amount, $591,022 would impact the Company's effective tax rate if recognized. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the years ended December 31, 2003 through 2006. The Company and its subsidiaries state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2002 through 2006. The Company is currently under IRS examination for the tax years ended December 31, 2004 and 2005. In addition, the Company is under an audit by the Department of Revenue for the State of Florida for the tax years ended December 31, 2002 through 2005.

The Company recognizes accrued interest and penalties related to uncertain tax positions in federal and state income tax expense. As of January 1, 2007, the Company accrued $157,787 of interest and penalties related to uncertain tax positions. This amount includes $65,600 in interest and penalties related to the adoption of FIN48 in the first quarter of 2007. 

 

Fair Value Measurements - In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for the measurement of assets and liabilities that uses fair value and expands disclosures about fair value measurements. SFAS 157 will apply whenever another GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years. Accordingly, the Company will be required to adopt SFAS 157 in the first quarter of 2008. The Company is currently evaluating the impact that the adoption of SFAS 157 will have, if any, on its consolidated financial statements and notes thereto.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115”  (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential impact this standard may have on its financial position and results of operations.

 

7

---

 

 

NOTE 5 · Business Combinations

 

Acquisitions in 2007

 

For the six months ended June 30, 2007, Brown & Brown acquired the assets and assumed certain liabilities of nine insurance intermediaries, the stock of three insurance intermediaries and several book of business (customer accounts). The aggregate purchase price of these acquisitions was $122,056,000, including $110,630,000 of net cash payments, the issuance of $4,078,000 in notes payable and the assumption of $7,348,000 of liabilities. All of these acquisitions were acquired primarily to expand Brown & Brown's core businesses and to attract and obtain high-quality individuals. Acquisition purchase prices are typically based on a multiple of average annual operating profits earned over a one- to three-year period within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price, and any subsequent earn-out payment is allocated to goodwill. Acquisitions are initially recorded at preliminary fair values. Subsequently, the Company completes the final fair value allocations and any adjustments to assets or liabilities acquired are recorded in the current period.

All of these acquisitions have been accounted for as business combinations and are as follows:

(in thousands)   Name		Business Segment			2007 Date of Acquisition			Net Cash Paid			Notes Payable			Recorded Purchase Price
ALCOS, Inc.			Retail			March 1		$	30,897		$	3,563		$	34,460
Grinspec, Inc.			Retail			April 1			31,930			-			31,930
Sobel Affiliates, Inc.			Retail			April 1			33,038			-			33,038
Other			Various			Various			14,765			515			15,280
Total								$	110,630		$	4,078		$	114,708

 

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:

(in thousands)		ALCOS			Grinspec			Sobel			Other			Total
Fiduciary cash		$	627		$	-		$	-		$	716		$	1,343
Other current assets			1,224			669			286			574			2,753
Fixed assets			720			-			50			110			880
Purchased customer accounts			7,820			9,153			10,850			5,304			33,127
Noncompete agreements			130			-			31			133			294
Goodwill			29,080			22,571			21,923			9,960			83,534
Other Assets			115			-			-			10			125
Total assets acquired			39,716			32,393			33,140			16,807			122,056
Other current liabilities			(2,098	)		(463	)		(102	)		(778	)		(3,441	)
Deferred income taxes			(3,083	)		-			-			(749	)		(3,832	)
Other liabilities			(75	)		-			-			-			(75	)
Total liabilities assumed			(5,256	)		(463	)		(102	)		(1,527	)		(7,348	)
Net assets acquired		$	34,460		$	31,930		$	33,038		$	15,280		$	114,708

 

 The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and noncompete agreements, 4.7 years.

 

Goodwill of $83,534,000, of which $51,491,000 is expected to be deductible for income tax purposes, was assigned to the Retail, National Programs, Wholesale Brokerage and Services Divisions in the amounts of $82,472,000, $374,000, $241,000 and $447,000, respectively.

 

8

---

 

The results of operations for the acquisitions completed during 2007 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as of the beginning of each period, the Company's results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

		For the three months						For the six months
(UNAUDITED)		ended June 30,						ended June 30,
(in thousands, except per share data)			2007			2006			2007			2006
Total revenues		$	246,729		$	233,067		$	515,183		$	477,169
Income before income taxes			84,523			74,630			185,809			160,117
Net income			52,029			46,724			113,704			99,238
Net income per share:
Basic		$	0.37		$	0.33		$	0.81		$	0.71
Diluted		$	0.37		$	0.33		$	0.81		$	0.70
Weighted average number of shares outstanding:
Basic			140,384			139,511			140,303			139,447
Diluted			141,120			141,006			141,170			140,915

 

Additional consideration paid to sellers as a result of purchase price “earn-out” provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2007 as a result of these adjustments totaled $11,590,000, of which $11,542,000 was allocated to goodwill and $48,000 to noncompete agreements. Of the $11,590,000 net additional consideration paid, $2,533,000 was paid in cash, $9,020,000 was issued in notes payable and $37,000 was assumed as net liabilities. As of June 30, 2007, the maximum future contingency payments related to acquisitions totaled $200,571,000.

Acquisitions in 2006

 

For the six months ended June 30, 2006, Brown & Brown acquired the assets and assumed certain liabilities of 11 entities. The aggregate purchase price of these acquisitions was $101,507,000, including $87,023,000 of net cash payments, the issuance of $3,582,000 in notes payable and the assumption of $10,902,000 of liabilities. Substantially all of these acquisitions were acquired primarily to expand Brown & Brown's core businesses and to attract and obtain high-quality individuals. Acquisition purchase prices are based primarily on a multiple of average annual operating profits earned over a one- to three-year period within a minimum and maximum price range. The initial asset allocation of an acquisition is based on the minimum purchase price, and any subsequent earn-out payment is allocated to goodwill.

All of these acquisitions have been accounted for as business combinations and are as follows:

 

(in thousands)						2006			Net						Recorded
			Business			Date of			Cash			Notes			Purchase
Name			Segment			Acquisition			Paid			Payable			Price
Axiom Intermediaries, LLC			Brokerage			January 1		$	60,292		$	-		$	60,292
Other			Various			Various			26,731			3,582			30,313
Total								$	87,023		$	3,582		$	90,605

 

9

---

 

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:

(in thousands)		Axiom			Other			Total
Fiduciary cash		$	9,598		$	-		$	9,598
Other current assets			372			100			472
Fixed assets			435			361			796
Purchased customer accounts			14,022			16,161			30,183
Noncompete agreements			31			207			238
Goodwill			45,819			14,328			60,147
Other assets			73			-			73
Total assets acquired			70,350			31,157			101,507
Other current liabilities			(10,058	)		(652	)		(10,710	)
Other liabilities			-			(192			(192
Total liabilities assumed			(10,058	)		(844	)		(10,902	)
Net assets acquired		$	60,292		$	30,313		$	90,605

 

 

The results of operations for the acquisitions completed during 2006 have been combined with those of the Company since their respective acquisition dates. If the acquisitions had occurred as of the beginning of each period, the Company's results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.

		For the three months						For the six months
(UNAUDITED)		ended June 30,						ended June 30,
(in thousands, except per share data)		2006			2005			2006			2005
Total revenues		$	222,314		$	203,859		$	456,896		$	414,788
Income before income taxes			71,479			63,089			154,284			136,452
Net income			44,751			38,638			95,623			83,395
Net income per share:
Basic		$	0.32		$	0.28		$	0.69		$	0.60
Diluted		$	0.32		$	0.28		$	0.68		$	0.60
Weighted average number of shares outstanding:
Basic			139,511			138,312			139,447			138,318
Diluted			141,006			139,476			140,915			139,448

 

Additional consideration paid to sellers as a result of purchase price “earn-out” provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2006 as a result of these adjustments totaled $36,921,000, of which $36,840,000 was allocated to goodwill. Of the $36,921,000 net additional consideration paid, $11,591,000 was paid in cash, $24,373,000 was issued in notes payable and $957,000 was assumed as net liabilities. As of June 30, 2006, the maximum future contingency payments related to acquisitions totaled $188,533,000.

 

10

---

 

 NOTE 6 · Goodwill

 

Goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. Brown & Brown completed its most recent annual assessment as of November 30, 2006 and identified no impairment as a result of the evaluation.

 

The changes in goodwill for the six months ended June 30, 2007 are as follows:

 

					National			Wholesale
(in thousands)		Retail			Programs			Brokerage			Service			Total
Balance as of January 1, 2007		$	329,504		$	142,329		$	209,865		$	2,823		$	684,521
Goodwill of acquired businesses			88,847			4,510			1,272			447			95,076
Goodwill disposed of relating to sales of businesses			-			-			-			-			-
Balance as of June 30, 2007		$	418,351		$	146,839		$	211,137		$	3,270		$	779,597

 

NOTE 7 · Amortizable Intangible Assets

 

Amortizable intangible assets at June 30, 2007 and December 31, 2006 consisted of the following:

 

			June 30, 2007												December 31, 2006
												Weighted												Weighted
			Gross						Net			Average			Gross						Net			Average
			Carrying			Accumulated			Carrying			Life			Carrying			Accumulated			Carrying			Life
(in thousands)			Value			Amortization			Value			(years)			Value			Amortization			Value			(years)
Purchased customer accounts		$	574,798		$	(168,073	)	$	406,725			14.9		$	541,967		$	(149,764	)	$	392,203			14.9
Noncompete agreements			25,931			(22,771	)		3,160			7.7			25,589			(21,723	)		3,866			7.7
Total		$	600,729		$	(190,844	)	$	409,885					$	567,556		$	(171,487	)	$	396,069

   

Amortization expense for other amortizable intangible assets for the years ending December 31, 2007, 2008, 2009, 2010 and 2011 is estimated to be $39,270,000, $38,872,000, $38,403,000, $37,723,000, and $36,301,000 respectively.

 

 

 

11

---

 

 

NOTE 8 • Investments

 

Investments consisted of the following:

		June 30, 2007						December 31, 2006
		Carrying Value						Carrying Value
(in thousands)		Current			Non- Current			Current			Non- Current
Available-for-sale marketable equity securities		$	114		$	—		$	240		$	15,181
Non-marketable equity securities and certificates of deposit			2,523			649			2,669			645
Total investments		$	2,637		$	649		$	2,909		$	15,826

 

 

The following table summarizes available-for-sale securities:

(in thousands)		Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Marketable equity securities:
June 30, 2007		$	75		$	39		$	—		$	114
December 31, 2006		$	550		$	14,871		$	—		$	15,421

 

The following table summarizes the proceeds and realized gains/(losses) on non-marketable equity securities and certificates of deposit for the three and six months ended June 30, 2007 and 2006:

(in thousands)		Proceeds			Gross Realized Gains			Gross Realized Losses
For the three months ended:
June 30, 2007		$	10,392		$	9,919		$	—
June 30, 2006		$	—		$	—		$	—
For the six months ended:
June 30, 2007		$	19,482		$	18,759		$	(500	)
June 30, 2006		$	12		$	12		$	—

As of December 31, 2006, our largest security investment was 559,970 common stock shares of Rock-Tenn Company, a New York Stock Exchange listed company, which we have owned for more than 25 years. Our investment in Rock-Tenn Company accounted for 81% of the total value of available-for-sale marketable equity securities, non-marketable equity securities and certificates of deposit as of December 31, 2006. Rock-Tenn Company's closing stock price at June 30, 2007 and December 31, 2006 was $31.72 and $27.11 respectively. In late January 2007, the Board of Directors authorized the sale of half of our investment in Rock-Tenn Company, and subsequently authorized the sale of the balance of the shares. We realized a gain in excess of our original cost basis of $8,840,000 in the first quarter of 2007 and $9,824,000 in the second quarter of 2007. As of June 30, 2007, we have no remaining shares of Rock-Tenn Company.

 

 

12

---

 

NOTE 9 · Long-Term Debt

 

Long-term debt at June 30, 2007 and December 31, 2006 consisted of the following:

 

(in thousands)			2007			2006
Unsecured senior notes		$	225,000		$	225,000
Acquisition notes payable			11,018			6,310
Term loan agreements			6,428			12,857
Revolving credit facility			-			-
Other notes payable			176			167
Total debt			242,622			244,334
Less current portion			(17,190	)		(18,082	)
Long-term debt		$	225,432		$	226,252

 

 

In July 2004, the Company completed a private placement of $200.0 million of unsecured senior notes (the “Notes”). The $200.0 million is divided into two series: Series A, for $100.0 million due in 2011 and bearing interest at 5.57% per year; and Series B, for $100.0 million due in 2014 and bearing interest at 6.08% per year. The closing on the Series B Notes occurred on July 15, 2004. The closing on the Series A Notes occurred on September 15, 2004. Brown & Brown has used the proceeds from the Notes for general corporate purposes, including acquisitions and repayment of existing debt. As of June 30, 2007 and December 31, 2006 there was an outstanding balance of $200.0 million on the Notes.

 

On December 22, 2006, the Company entered into a Master Shelf and Note Purchase Agreement (the “Master Agreement”) with a national insurance company (the “Purchaser”). The Purchaser also purchased Notes issued by the Company in 2004. The Master Agreement provides for a $200.0 million private uncommitted “shelf” facility for the issuance of senior unsecured notes over a three-year period, with interest rates that may be fixed or floating and with such maturity dates, not to exceed ten (10) years, as the parties may determine. The Master Agreement includes various covenants, limitations and events of default similar to the Notes issued in 2004. The initial issuance of notes under the Master Facility Agreement occurred on December 22, 2006, through the issuance of $25.0 million in Series C Senior Notes due December 22, 2016, with a fixed interest rate of 5.66% per annum.

 

Also on December 22, 2006, the Company entered into a Second Amendment to Amended and Restated Revolving and Term Loan Agreement (the “Second Term Amendment”) and a Third Amendment to Revolving Loan Agreement (the “Third Revolving Amendment”) with a national banking institution, amending the existing Amended and Restated Revolving and Term Loan Agreement dated January 3, 2001 (the “Term Agreement”) and the existing Revolving Loan Agreement dated September 29, 2003, as amended (the “Revolving Agreement”), respectively. The amendments provided covenant exceptions for the notes issued or to be issued under the Master Agreement, and relaxed or deleted certain other covenants. In the case of the Third Revolving Amendment, the lending commitment was reduced from $75.0 million to $20.0 million, the maturity date was extended from September 30, 2008 to December 20, 2011, and the applicable margins for advances and the availability fee were reduced. Based on the Company's funded debt to EBITDA ratio, the applicable margin for Eurodollar advances changed from a range of 0.625% to 01.625% to a range of 0.450% to 0.875%. The applicable margin for base rate advances changed from a range of 0.00% to 0.125% to the Prime Rate less 1.000%. The availability fee changed from a range of 0.175% to 0.250% to a range of 0.100% to 0.200%. The 90-day London Interbank Offering Rate (“LIBOR”) was 5.36% and 5.36% as of June 30, 2007 and December 31, 2006, respectively. There were no borrowings against this facility at June 30, 2007 or December 31, 2006.

 

In January 2001, Brown & Brown entered into a $90.0 million unsecured seven-year term loan agreement with a national banking institution, bearing an interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.50% to 1.00%, depending upon Brown & Brown's quarterly ratio of funded debt to earnings before interest, taxes, depreciation, amortization and non-cash stock grant compensation. The 90-day LIBOR was 5.36% and 5.36% as of June 30, 2007 and December 31, 2006, respectively. The loan was fully funded on January 3, 2001 and as of June 30, 2007 had an outstanding balance of $6,428,000. This loan is to be repaid in equal quarterly installments of $3,214,000 through December 31,  2007.

 

All four of these credit agreements require Brown & Brown to maintain certain financial ratios and comply with certain other covenants. Brown & Brown was in compliance with all such covenants as of June 30, 2007 and December 31, 2006.

 

To hedge the risk of increasing interest rates from January 2, 2002 through the remaining six years of its seven-year $90.0 million term loan, Brown & Brown entered into an interest rate swap agreement that effectively converted the floating rate LIBOR-based interest payments to fixed interest rate payments at 4.53%. This agreement did not affect the required 0.50% to 1.00% credit risk spread portion of the term loan. In accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended, the fair value of the interest rate swap of approximately $13,000, net of related income taxes of approximately $7,000, was recorded in other assets as of June 30, 2007, and $37,000, net of related income taxes of approximately $22,000, was recorded in other assets as of December 31, 2006; with the related change in fair value reflected as other comprehensive income. Brown & Brown has designated and assessed the derivative as a highly effective cash flow hedge.

 

Acquisition notes payable represent debt incurred to former owners of certain insurance operations acquired by Brown & Brown. These notes and future contingent payments are payable in monthly, quarterly and annual installments through April 2011, including interest in the range from 0.0% to 8.00%.

 

13

---

 

 

NOTE 10 · Supplemental Disclosures of Cash Flow Information

		For the six months ended June 30,
(in thousands)			2007			2006
Cash paid during the period for:
Interest		$	7,100		$	7,720
Income taxes		$	53,400		$	52,096

Brown & Brown's significant non-cash investing and financing activities are summarized as follows:

 

		For the six months ended June 30,
(in thousands)			2007			2006
Unrealized holding (loss) gain on available-for-sale securities, net of tax benefit of $5,300 for 2007; net of tax effect of $463 for 2006		$	(9,044	)	$	776
Net (loss) gain on cash-flow hedging derivative, net of tax benefit of $15 for 2007, net of tax effect of $35 for 2006		$	(26	)	$	74
Notes payable issued or assumed for purchased customer accounts		$	13,098		$	27,955
Notes received on the sale of fixed assets and customer accounts		$	1,389		$	(1	)

 

NOTE 11 · Comprehensive Income

The components of comprehensive income, net of related income tax effects, are as follows:

 

			For the three months						For the six months
			ended June 30,						ended June 30,
(in thousands)			2007			2006			2007			2006
Net income		$	52,012		$	44,431		$	111,739		$	94,457
Net unrealized holding (loss) gain on available-for-sale securities			(5,845	)		339			(9,044	)		776
Net (loss) gain on cash-flow hedging derivative			(10	)		23			(26	)		74
Comprehensive income		$	46,157		$	44,793		$	102,669		$	95,307

 

 

14

---

 

NOTE 12 · Legal and Regulatory Proceedings

 

Antitrust Actions and Related Matters

 

On May 21, 2007, the named plaintiffs in the Antitrust Actions (defined below) settled with the Company in exchange for the Company’s agreement to waive its claims for sanctions and to reasonably cooperate with plaintiffs in the event that they seek additional information from the Company. As previously disclosed, the Company was one of more than ten insurance intermediaries named together with a number of insurance companies as defendants in putative class action lawsuits purporting to be brought on behalf of policyholders. The Company initially became a defendant in certain of those actions in October and December of 2004. In February 2005, the Judicial Panel on Multi-District Litigation consolidated these cases, together with other putative class action lawsuits in which Brown & Brown, Inc. was not named as a party, to a single jurisdiction, the United States District Court, District of New Jersey, for pre-trial purposes. One of the consolidated actions, In Re: Employee-Benefits Insurance Antitrust Litigation, concerns employee benefits insurance and the other, styled In Re: Insurance Brokerage Antitrust Litigation, involves other lines of insurance. These two consolidated actions are collectively referred to in this report as the “Antitrust Actions.”  On April 5, 2007, the court dismissed the federal claims in the Antitrust Actions against all defendants, including the Company, but allowed the plaintiffs leave to file an amended complaint by May 22, 2007. Subsequently, the Company reached its settlement with the named plaintiffs in the Antitrust Actions and no further litigation has ensued.

 

Related Governmental Investigations

 

As previously reported, governmental agencies in a number of states have looked or are looking into issues related to compensation practices in the insurance industry, and the Company continues to respond to written and oral requests for information and/or subpoenas seeking information related to this topic. To date, requests for information and/or subpoenas have been received from governmental agencies such as attorneys general and departments of insurance. Agencies in Arizona, Virginia and Washington have concluded their respective investigations of subsidiaries of Brown & Brown, Inc. based in those states with no further action as to these entities. As previously disclosed, the Company reached a settlement with the Florida governmental agencies identified above on December 8, 2006, which terminated the joint investigation of those agencies with respect to Brown & Brown, Inc. and its subsidiaries. The settlement involved no finding of wrongdoing, no fines or penalties and no prohibition of profit-sharing compensation. In addition to monetary payments, the settlement created certain affirmative obligations for enhanced disclosures to Florida policyholders concerning compensation received by the Company.

 

As previously disclosed in our public filings, offices of the Company are party to profit-sharing contingent compensation agreements with certain insurance companies, including agreements providing for potential payment of revenue-sharing commissions by insurance companies based primarily on the overall profitability of the aggregate business written with that insurance company, and/or additional factors such as retention ratios and overall volume of business that an office or offices place with the insurance company. Additionally, to a lesser extent, some offices of the Company are party to override commission agreements with certain insurance companies, and these agreements provide for commission rates in excess of standard commission rates to be applied to specific lines of business, such as group health business, based primarily on the overall volume of such business that the office or offices in question place with the insurance company. The Company has not chosen to discontinue receiving profit-sharing contingent compensation or override commissions.

 

The Company cannot currently predict the impact or resolution of the various governmental inquiries and thus cannot reasonably estimate a range of possible loss, which could be material, or whether the resolution of these matters may harm the Company’s business and/or lead to a decrease in or elimination of profit-sharing contingent compensation and override commissions, which could have a material adverse impact on the Company’s consolidated financial condition.

 

Other

 

The Company is involved in numerous pending or threatened proceedings by or against Brown & Brown, Inc. or one or more of its subsidiaries that arise in the ordinary course of business. The damages that may be claimed against the Company in these various proceedings are substantial, including in many instances claims for punitive or extraordinary damages. Some of these claims and lawsuits have been resolved, others are in the process of being resolved, and others are still in the investigation or discovery phase. The Company will continue to respond appropriately to these claims and lawsuits, and to vigorously protect its interests.

 

Among the above-referenced claims, and as previously described in the Company’s public filings, there are several threatened and pending legal claims and lawsuits against Brown & Brown, Inc. and Brown & Brown Insurance Services of Texas, Inc. (BBTX), a subsidiary of Brown & Brown, Inc., arising out of BBTX’s involvement with the procurement and placement of workers’ compensation insurance coverage for entities including several professional employer organizations. One such action, styled Great American Insurance Company, et al. v. The Contractor’s Advantage, Inc., et al., Cause No. 2002-33960, pending in the 189th Judicial District Court in Harris County, Texas, asserts numerous causes of action, including fraud, civil conspiracy, federal Lanham Act and RICO violations, breach of fiduciary duty, breach of contract, negligence and violations of the Texas Insurance Code against BBTX, Brown & Brown, Inc. and other defendants, and seeks recovery of punitive or extraordinary damages (such as treble damages) and attorneys’ fees. Although the ultimate outcome of the matters referenced in this section titled “Other” cannot be ascertained and liabilities in indeterminate amounts may be imposed on Brown & Brown, Inc. or its subsidiaries, on the basis of present information, availability of insurance and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the Company’s consolidated financial position. However, as (i) one or more of the Company’s insurance carriers could take the position that portions of these claims are not covered by the Company’s insurance, (ii) to the extent that payments are made to resolve claims and lawsuits, applicable insurance policy limits are eroded, and (iii) the claims and lawsuits relating to these matters are continuing to develop, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by unfavorable resolutions of these matters.

 

For a more complete discussion of the foregoing matters, please see Item 3 of Part I of our Annual Report on Form 10-K filed with the Securities and Exchange Commission for our fiscal year ended December 31, 2006 and Note 13 to the Consolidated Financial Statements contained in Item 8 of Part II thereof.

15

---

NOTE 13 · Segment Information

 

Brown & Brown's business is divided into four reportable segments: the Retail Division, which provides a broad range of insurance products and services to commercial, governmental, professional and individual customers; the National Programs Division, which is comprised of two units - Professional Programs, which provides professional liability and related package products for certain professionals delivered through nationwide networks of independent agents, and Special Programs, which markets targeted products and services designed for specific industries, trade groups, public and quasi-public entities, and market niches; the Wholesale Brokerage Division, which markets and sells excess and surplus commercial and personal lines insurance, and reinsurance, primarily through independent agents and brokers; and the Services Division, which provides insurance-related services, including third-party administration, consulting for the workers' compensation and employee benefit self-insurance markets, managed healthcare services and Medicare set-aside services. Brown & Brown conducts all of its operations within the United States of America.

Summarized financial information concerning Brown & Brown's reportable segments for the three and six months ended June 30, 2007 and 2006 is shown in the following table. The “Other” column includes any income and expenses not allocated to reportable segments and corporate-related items, including the inter-company interest expense charge to the reporting segment.

 

			For the six months ended June 30, 2007
						National			Wholesale
(in thousands)			Retail			Programs			Brokerage			Services			Other			Total
Total revenues		$	297,375		$	71,475		$	95,250		$	18,155		$	22,902		$	505,157
Investment income			99			241			1,463			17			22,749			24,569
Amortization			10,231			4,520			4,466			231			19			19,467
Depreciation			2,840			1,408			1,261			295			475			6,279
Interest			9,743			5,221			9,382			332			(17,628	)		7,050
Income before income taxes			96,210			17,975			19,401			4,361			44,651			182,598
Total assets			1,280,543			511,571			654,854			37,864			(600,140	)		1,884,692
Capital expenditures			2,925			1,006			2,000			241			13,828			20,000

			For the six months ended June 30, 2006
						National			Wholesale
(in thousands)			Retail			Programs			Brokerage			Services			Other			Total
Total revenues		$	270,928		$	75,579		$	86,645		$	14,719		$	3,518		$	451,389
Investment income			35			194			2,102			25			2,809			5,165
Amortization			9,661			4,326			3,871			97			23			17,978
Depreciation			2,792			1,079			943			239			327			5,380
Interest			9,657			5,144			8,949			111			(17,010	)		6,851
Income before income taxes			81,905			23,648			18,655			3,539			24,656			152,403
Total assets			1,067,518			498,830			608,963			29,522			(489,602	)		1,715,231
Capital expenditures			3,761			2,689			1,048			337			1,261			9,096

 

16

---

 

 

32

---

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		BROWN & BROWN, INC.
		/s/ CORY T. WALKER
Date: August 9, 2007		Cory T. Walker Sr. Vice President, Chief Financial Officer and Treasurer (duly authorized officer, principal financial officer and principal accounting officer)

 

 

 

34

1. I have reviewed this Quarterly Report on Form 10-Q of Brown & Brown, Inc. (Registrant) for the quarter ended June 30, 2007;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

 

4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.

 

5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

 

Date: August 9, 2007

 

	/s/ H. Hyatt Brown
	J. Hyatt Brown
	Chief Executive Officer