<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report under section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2000 or
[_] Transition report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period from
_________________ to _________________
Commission File Number 1-9761
ARTHUR J. GALLAGHER & CO.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Pierce Place, Itasca, Illinois 60143-3141
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(630) 773-3800
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (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 [X] NO [_]
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of June 30, 2000 was 38,151,261.
<PAGE>
ARTHUR J. GALLAGHER & CO.
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Earnings for the
three-month and six-month periods ended June 30,
2000 and 1999.......................................... 3
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999...................................... 4
Consolidated Statements of Cash Flows for the six-month
period ended June 30, 2000 and 1999.................... 5
Notes to Consolidated Financial Statements.............. 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9-13
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders...... 14
Item 6. Exhibits and Reports on Form 8-K......................... 14
Signatures........................................................ 15
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Operating Results
Revenues:
Commissions $ 86,530 $ 77,952 $170,565 $159,462
Fees 64,350 56,880 128,541 110,169
Investment income and other 7,564 9,902 13,591 14,619
-------- -------- -------- --------
Total revenues 158,444 144,734 312,697 284,250
Expenses:
Salaries and employee benefits 84,791 77,440 167,799 153,584
Other operating expenses 50,971 47,473 98,616 89,869
-------- -------- -------- --------
Total expenses 135,762 124,913 266,415 243,453
-------- -------- -------- --------
Earnings before income taxes 22,682 19,821 46,282 40,797
Provision for income taxes 7,949 6,775 16,199 13,954
-------- -------- -------- --------
Net earnings $ 14,733 $ 13,046 $ 30,083 $ 26,843
======== ======== ======== ========
Net earnings per common share $ .39 $ .35 $ .80 $ .73
Net earnings per common and
common equivalent share .37 .34 .75 .69
Dividends declared per common share .23 .20 .46 .40
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,237 $ 66,238
Restricted cash 116,520 108,867
Premiums and fees receivable 386,009 367,987
Investment strategies - trading 64,949 63,857
Other 44,253 44,343
--------- ---------
Total current assets 674,968 651,292
Marketable securities - available for sale 21,376 20,274
Deferred income taxes and other noncurrent assets 180,949 174,540
Fixed assets 122,050 114,366
Accumulated depreciation and amortization (83,250) (77,618)
--------- ---------
Net fixed assets 38,800 36,748
Intangible assets - net 12,658 12,363
--------- ---------
$ 928,751 $ 895,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $ 513,097 $ 473,259
Accrued salaries and bonuses 8,696 21,818
Accounts payable and other accrued liabilities 88,397 92,306
Unearned fees 17,742 15,537
Income taxes payable 537 8,526
Other 14,275 22,250
--------- ---------
Total current liabilities 642,744 633,696
Other noncurrent liabilities 16,180 18,211
Stockholders' equity:
Common stock - issued and outstanding 38,151 shares
in 2000 and 37,277 shares in 1999 38,151 37,277
Capital in excess of par value 13,700 154
Retained earnings 220,483 208,548
Accumulated other comprehensive earnings (loss) (2,507) (2,669)
--------- ---------
Total stockholders' equity 269,827 243,310
--------- ---------
$ 928,751 $ 895,217
========= =========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-month period ended
June 30,
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 30,083 $ 26,843
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net gain on investments and other (685) (935)
Depreciation and amortization 7,837 7,067
Increase in restricted cash (7,653) (12,930)
Increase in premiums receivable (12,090) (31,626)
Increase in premiums payable 39,838 52,968
Increase in trading investments - net (725) (2,184)
Decrease (increase) in other current assets 90 (4,995)
Decrease in accrued salaries and bonuses (13,122) (13,533)
Decrease in accounts payable and other accrued liabilities (5,697) (7,030)
Decrease in income taxes payable (7,989) (9,150)
Net change in deferred income taxes (320) 1,204
Other 9,874 5,485
-------- --------
Net cash provided by operating activities 39,441 11,184
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (14,566) (27,829)
Proceeds from sales of marketable securities 13,725 24,593
Proceeds from maturities of marketable securities 330 588
Net additions to fixed assets (8,921) (8,746)
Other (21,051) (8,354)
-------- --------
Net cash used by investing activities (30,483) (19,748)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 17,910 10,615
Tax benefit from issuance of common stock 9,699 3,642
Repurchases of common stock (12,821) (13,654)
Dividends paid (15,932) (13,383)
Borrowings on line of credit facilities 30,000 55,000
Repayments on line of credit facilities (40,000) (47,500)
Equity transactions of pooled companies prior to dates of acquisition (815) (2,436)
-------- --------
Net cash used by financing activities (11,959) (7,716)
-------- --------
Net decrease in cash and cash equivalents (3,001) (16,280)
Cash and cash equivalents at beginning of period 66,238 68,932
-------- --------
Cash and cash equivalents at end of period $ 63,237 $ 52,652
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 274 $ 685
Income taxes paid 13,448 16,671
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of Operations and Basis of Presentation
Arthur J. Gallagher & Co. (Gallagher) provides insurance brokerage and
risk management services to a wide variety of commercial, industrial,
institutional and governmental organizations. Commission revenue is
principally generated through the negotiation and placement of
insurance for its clients. Fee revenue is primarily generated by
providing other risk management services including claims management,
information management, risk control services and appraisals in either
the property/casualty market or human resource/employee benefit market.
Gallagher operates in more than 200 offices throughout the United
States and eight countries abroad.
The accompanying unaudited consolidated financial statements have been
prepared by Gallagher pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been
omitted pursuant to such rules and regulations. Gallagher believes the
disclosures are adequate to make the information presented not
misleading. The unaudited consolidated financial statements included
herein are, in the opinion of management, prepared on a basis
consistent with the audited consolidated financial statements for the
year ended December 31, 1999 and include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation
of the information set forth. The quarterly results of operations are
not necessarily indicative of results of operations for subsequent
quarters or the full year. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in Gallagher's 1999
Annual Report on Form 10-K.
2. Business Combinations
During the six-month period ended June 30, 2000, Gallagher acquired
substantially all of the net assets of the following companies in
exchange for its common stock: Universico Group, Ltd., 146,000 shares;
Davis-Poston & Associates, Inc., 75,000 shares; R. L. Youngdahl &
Associates, Inc., 69,000 shares; Bultman/Bell Associates, Inc., 68,000
shares; Rebholz Insurance Agency, Inc., 42,000 shares; Towle Agency,
Inc., 37,000 shares; and Powell Insurance Services, Inc., 19,000
shares. These acquisitions were accounted for as poolings of interests
and, except for one of these acquisitions whose results were not
significant, the consolidated financial statements for all periods
prior to the acquisition dates have been restated to include the
operations of these companies.
The following summarizes the restatement of the 1999 consolidated
financial statements to reflect the operations of the 2000 acquisitions
(in thousands, except per share data):
As Attributable
Three-month period Previously to Pooled
ended June 30, 1999 Reported Companies As Restated
------------------- -------- ------------ -----------
Total revenues $141,671 $ 3,063 $144,734
Net earnings 12,809 237 13,046
Net earnings per common share .35 - .35
Net earnings per common and
common equivalent share .33 .01 .34
-6-
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
2. Business Combinations (Continued)
As Attributable
Six-month period Previously to Pooled
ended June 30, 1999 Reported Companies As Restated
------------------- -------- ------------ -----------
Total revenues $278,124 $ 6,126 $284,250
Net earnings 26,369 474 26,843
Net earnings per common share .72 .01 .73
Net earnings per common and
common equivalent share .69 - .69
Effective February 29, 2000, Gallagher acquired 60% of the net assets
of MBR Pty Limited, an Australian company engaged in the reinsurance
brokerage and services business in exchange for an initial cash payment
of $2,100,000. Effective May 1, 2000, Gallagher acquired substantially
all of the net assets of Joe E. Martin, Inc., an employee benefits
broker and consultant, in exchange for an initial cash payment of
$340,000. These acquisitions were accounted for as purchases and were
not material to the consolidated financial statements.
3. Earnings Per Share
The following table sets forth the computation of net earnings per
common share and net earnings per common and common equivalent share
(in thousands, except per share data):
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings $14,733 $13,046 $30,083 $26,843
======= ======= ======= =======
Weighted average number of
common shares outstanding 37,955 36,868 37,663 36,861
Dilutive effect of stock options
using the treasury stock method 2,381 1,849 2,268 1,850
------- ------- ------- -------
Weighted average number of
common and common equivalent
shares outstanding 40,336 38,717 39,931 38,711
======= ======= ======= =======
Net earnings per common share $ .39 $ .35 $ .80 $ .73
Net earnings per common and
common equivalent share .37 .34 .75 .69
</TABLE>
Options to purchase 116,000 and 190,000 shares of common stock were
outstanding during the three-month period ended June 30, 2000 and 1999,
respectively, but were not included in the computation of the dilutive
effect of stock options. Options to purchase 62,000 and 128,000 shares
of common stock were outstanding during the six-month period ended June
30, 2000, and 1999, respectively, but were not included in the
computation of the dilutive effect of stock options. These options were
excluded from the computations because the options' exercise prices
were greater than the average market price of the common shares during
the respective period and, therefore, would be antidilutive to earnings
per share under the treasury stock method.
-7-
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
4. Comprehensive Earnings
The components of comprehensive earnings and accumulated other
comprehensive earnings (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 14,733 $ 13,046 $ 30,083 $ 26,843
Net change unrealized gain (loss) on
available for sale securities, net of income
taxes of $140, $92, $108 and ($65),
respectively 210 138 162 (98)
-------- -------- -------- --------
Comprehensive earnings $ 14,943 $ 13,184 $ 30,245 $ 26,745
======== ======== ======== ========
Accumulated other comprehensive earnings
(loss) at beginning of period $ (2,717) $ (1,013) $ (2,669) $ (777)
Net change in unrealized gain (loss) on
available for sale securities, net of
income taxes 210 138 162 (98)
-------- -------- -------- --------
Accumulated other comprehensive earnings
(loss) at end of period $ (2,507) $ (875) $ (2,507) $ (875)
======== ======== ======== ========
</TABLE>
5. Effect of New Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities," as
amended, which is effective for fiscal years beginning after June 15,
2000. Because of Gallagher's minimal use of derivatives, management
does not anticipate that the adoption of SFAS 133 will have a
significant effect on Gallagher's consolidated operating results or
financial position.
In March 2000, the FASB issued FASB Interpretation No. 44
(Interpretation 44), "Accounting for Certain Transactions Involving
Stock Compensation," which is effective July 1, 2000. Interpretation 44
clarifies the application of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued To Employees." Because Gallagher
historically has not modified the terms of its outstanding stock option
grants, management does not anticipate the adoption of Interpretation
44 will have a significant effect on Gallagher's consolidated operating
results or financial position.
-8-
<PAGE>
Item 2.
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONSOLIDATED
Fluctuations in premiums charged by insurance companies have a material effect
on the insurance brokerage industry. Commission revenues are primarily based on
a percentage of the premiums paid by insureds and generally follow premium
levels. Gallagher is beginning to see momentum in the insurance marketplace
toward higher premium rates across most lines of coverage. This movement
contributed to the overall revenue growth in the second quarter of 2000.
Commission revenues increased by 11% to $86.5 million in the second quarter of
2000 and by 7% to $170.6 million in the first half of 2000 over the respective
periods in 1999. These increases are due principally to new business production
of $15.7 million in the second quarter of 2000 and $29.4 million in the first
six months of 2000, and renewal increases from increased premiums partially
offset by lost business.
Fee revenues increased by 13% or $7.5 million to $64.4 million in the second
quarter of 2000 and by 17% or $18.4 million to $128.5 million in the first six
months of 2000 over the respective periods in 1999. These increases reflect new
business production of approximately $9.0 million in the second quarter of 2000
and $16.2 million in the first six months of 2000 generated primarily by the
Risk Management Services segment partially offset by lost business.
Investment income and other decreased 24% to $7.6 million in the second quarter
of 2000 from the same period in 1999. The second quarter of 1999 included a gain
of $1.5 million from the sale of interests in limited partnerships that operate
qualified affordable housing projects, and favorable results on funds invested
with outside fund managers and on investments accounted for under the equity
method. Investment income and other decreased by 7% to $13.6 million in the
first half of 2000 from the first half of 1999 due primarily to the gain and
favorable investment results mentioned above partially offset by increased
interest income due to increases in short-term interest rates and favorable cash
flows over the prior year.
Salaries and employee benefits increased by $7.4 million or 9% to $84.8 million
in the second quarter of 2000 and increased by $14.2 million or 9% to $167.8
million in the first six months of 2000 over the respective periods in 1999.
These increases are due primarily to a 4% increase in employee headcount in the
period from June 30, 1999 to June 30, 2000, and to salary increases and
associated employee benefit costs in 2000.
Other operating expenses increased by 7% to $51.0 million in the second quarter
of 2000 and by 10% to $98.6 million in the first six months of 2000 over the
respective periods in 1999. These increases are substantially due to rent and
related expenses, travel, sales, insurance brokerage expenses and temporary
help. Increases in rent are related to new leases, office expansions and
acquisitions done on a purchase basis. Increases in travel, sales and insurance
brokerage expenses are generally a result of increased sales and sales
initiatives. The temporary help increase is mostly related to handling of the
new business in the Risk Management Services segment.
The effective income tax rate was 35% for the second quarter and first six
months of 2000 and 34.2% for the second quarter and first six months of 1999.
These rates are net of the effect of tax benefits generated by investments in
limited partnerships that operate qualified affordable housing and alternative
energy projects, which are substantially offset by state and foreign taxes.
Net earnings per common and common equivalent share for the second quarter of
2000 were $.37 compared to $.34 in 1999, a 9% increase. First half net earnings
per common and common equivalent share increased 9% from $.69 in 1999 to $.75 in
2000. These increases reflect the leverage of the growth in revenues being
higher than the growth in expenses. This is partially offset by the higher
common and common equivalent shares outstanding in 2000.
-9-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - SEGMENT INFORMATION
Financial information relating to Gallagher's operating segments is as follows
(in thousands):
<TABLE>
<CAPTION>
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
-------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Three-month period ended June 30,
---------------------------------
2000
----
Total revenues $ 99,152 $55,645 $ 3,647 $ - $158,444
Earnings (loss) before income taxes 13,888 8,319 1,747 (1,272) 22,682
1999
----
Total revenues 89,463 47,863 7,408 - 144,734
Earnings (loss) before income taxes 9,204 5,511 5,974 (868) 19,821
Six-month period ended June 30,
-------------------------------
2000
----
Total revenues 195,062 110,846 6,789 - 312,697
Earnings (loss) before income taxes 27,178 17,371 3,389 (1,656) 46,282
1999
----
Total revenues 180,433 93,757 10,060 - 284,250
Earnings (loss) before income taxes 23,309 12,371 7,350 (2,233) 40,797
Total Identifiable Assets at June 30,
-------------------------------------
2000 587,051 58,839 241,619 41,242 928,751
----
1999 493,365 45,410 219,011 62,636 820,422
----
</TABLE>
Insurance Brokerage Services
The Insurance Brokerage Services segment includes Gallagher's retail,
reinsurance and wholesale brokerage operations. Total revenues in the three and
six-month periods ended June 30, 2000 increased 11% to $99.2 million and 8% to
$195.1 million, respectively, over the same periods in 1999. These increases are
due primarily to new business production and renewal increases from increased
premiums partially offset by lost business and for the six months, a reduction
in revenue from national insurance revenue sharing programs.
Earnings before income taxes in the three and six-month periods ended June 30,
2000 increased 51% to $13.9 million and 17% to $27.2 million over the same
periods in 1999. These increases are due primarily to increased earnings
leverage related to new business production and renewal increases mentioned
above.
-10-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - SEGMENT INFORMATION (Continued)
Risk Management Services
The Risk Management Services segment includes Gallagher's third party claims
administration operations which are principally engaged in providing claims
management services for Gallagher's clients. Total revenues in the three and
six-month periods ended June 30, 2000 increased 16% to $55.6 million and 18% to
$110.8 million over the respective periods in 1999 due primarily to strong new
business production of approximately $7.7 million in the second quarter of 2000
and $13.7 million in the first six months of 2000.
Earnings before income taxes in the second quarter of 2000 increased over the
second quarter of 1999 by 51% or $2.8 million to $8.3 million. In the first six
months of 2000, earnings before income taxes increased over the same period in
1999 by $5.0 million or 40% to $17.4 million. These increases are due primarily
to the earnings leverage created by the increased revenues discussed above.
Financial Services
The Financial Services segment is responsible for Gallagher's diversified
investment portfolio, which includes investment strategies-trading, marketable
securities-available for sale, tax advantaged investments, investments accounted
for using the equity method of accounting, real estate partnerships and notes
receivable from investees.
In the second quarter and first six months of 2000, revenues decreased by $3.8
million or 51% to $3.6 million and 33% or $3.3 million to $6.8 million from the
respective periods in 1999. Earnings before income taxes decreased $4.2 million
or 71% to $1.7 million and 54% or $4.0 million to $3.4 million from the
respective periods in 1999. These decreases are primarily due to a gain of $1.5
million from the sale of interests in limited partnerships that operate
qualified affordable housing projects and to favorable results on funds invested
with outside fund managers and investments accounted for using the equity method
recorded in the second quarter of 1999.
Corporate
Corporate consists of unallocated administrative costs and the provision for
income taxes which is not allocated to Gallagher's operating entities. Revenues
are not recorded in this segment and all costs are generated in the United
States.
FINANCIAL CONDITION AND LIQUIDITY
The insurance brokerage industry is not capital intensive. Gallagher has
historically been profitable and cash flows from operations and short-term
borrowings under various credit agreements have been sufficient to fund
operating, investment and capital expenditure needs of Gallagher. Cash generated
from operating activities was $39.4 million and $11.2 million for the six months
ended June 30, 2000 and 1999, respectively. Because of the variability related
to the timing of premiums and fees receivable and premiums payable, net cash
flows from operations vary substantially from quarter to
-11-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND LIQUIDITY (Continued)
quarter. Funds restricted as to Gallagher's use, primarily premiums held as
fiduciary funds, have not been included in determining Gallgher's overall
liquidity.
Gallagher maintains a $20.0 million unsecured revolving credit agreement (the
"Credit Agreement") requiring repayment of any loans under the agreement no
later than June 30, 2001. During the six-month period ended June 30, 2000,
Gallagher borrowed and repaid $10.0 million of short-term borrowings under the
Credit Agreement. These borrowings were primarily used to finance a portion of
Gallagher's operating and investment activity. As of June 30, 2000, there were
no borrowings outstanding under this agreement. The Credit Agreement requires
the maintenance of certain financial covenants and Gallagher is currently in
compliance with these covenants.
Gallagher also has three line of credit facilities which total $45.0 million in
the aggregate and expire on April 30, 2001. Periodically, Gallagher will make
short-term borrowings under these facilities to meet short-term cash flow needs.
During the six months ended June 30, 2000, Gallagher borrowed $20.0 million and
repaid $30.0 million of short-term borrowings under these facilities, which was
primarily used on a short-term basis to finance a portion of Gallagher's
operating and investment activity. As of June 30, 2000, there was $5.0 million
outstanding under these facilities.
As of June 30, 2000, Gallagher has contingently committed to invest $7.2 million
related to two letter of credit arrangements with one of its equity investments.
In addition, Gallagher has guaranteed an aggregate of $11.9 million through
letters of credit or other arrangements related to several investments and
insurance programs of Gallagher.
Through the first six months of 2000, Gallagher paid $15.9 million in cash
dividends on its common stock. Gallagher's dividend policy is determined by the
Board of Directors and quarterly dividends are declared after considering
Gallagher's available cash from earnings and its known or anticipated cash
needs. On July 14, 2000, Gallagher paid a second quarter dividend of $.23 per
share to shareholders of record as of June 30, 2000, a 15% increase over the
second quarter dividend per share in 1999.
Net capital expenditures were $8.9 million and $8.7 million for each of the six
month periods ended June 30, 2000 and 1999 respectively. In 2000, Gallagher
expects to make total expenditures for capital improvements of approximately
$17.0 million. Capital expenditures by Gallagher are related primarily to office
moves and expansions and updating computer systems and equipment.
In 1988, Gallagher adopted a plan, that has been extended through June 30, 2001,
to repurchase its common stock. Through the first six months of 2000, Gallagher
repurchased 440,000 shares at a cost of $12.8 million. The repurchased shares
are held for reissuance in connection with exercises of options under its stock
option plans. Under the provisions of the plan, Gallagher is authorized to
repurchase approximately 1,894,000 additional shares through June 30, 2001
Gallagher is under no commitment or obligation to repurchase any particular
amount of common stock and at its discretion may suspend the repurchase plan at
any time.
-12-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains forward-looking statements. Forward-looking
statements made by or on behalf of Gallagher are subject to risks and
uncertainties, including but not limited to the following: Gallagher's
commission revenues are highly dependent on premiums charged by insurers, which
are subject to fluctuation; lower interest rates reduce Gallagher's income
earned on invested funds; the alternative insurance market continues to grow
which could unfavorably impact commission and favorably impact fee revenue;
Gallagher's revenues vary significantly from period to period as a result of the
timing of policy inception dates and the net effect of new and lost business
production; the general level of economic activity can have a substantial impact
on Gallagher's renewal business; Gallagher's operating results, return on
investment and financial position may be adversely impacted by exposure to
various market risks such as interest rate, equity pricing and foreign exchange
rates. Gallagher's ability to grow has been enhanced through acquisitions, which
may or may not be available on acceptable terms in the future and which, if
consummated, may or may not be advantageous to Gallagher. Accordingly, actual
results may differ materially from those set forth in the forward-looking
statements.
-13-
<PAGE>
ARTHUR J. GALLAGHER & CO.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of Arthur J. Gallagher & Co. held
on May 16, 2000, 28,176,763 shares of Gallagher's Common Stock, or
75.7% of the total Common Stock outstanding on the record date for such
meeting, were represented.
Among other things, the Stockholders of Gallagher elected Mr. T.
Kimball Brooker, Ms. Ilene S. Gordon, Mr. J. Patrick Gallagher, Jr.,
and Mr. James R. Wimmer as Class I Directors with terms expiring in
2003, and ratified the appointment of Mr. Robert Ripp as a Class III
Director with a term expiring in 2002. Of the shares voted with respect
to the election of Mr. Brooker, 27,398,311 were voted in favor and
778,452 were withheld. Of the shares voted with respect to Ms. Gordon,
27,353,269 were voted in favor and 823,494 were withheld. Of the shares
voted with respect to the election of Mr. Gallagher, 24,912,423 were
voted in favor and 3,264,340 were withheld. Of the shares voted with
respect to the election of Mr. Wimmer, 27,137,358 were voted in favor
and 1,039,405 were withheld. Of the shares voted with respect to Mr.
Ripp, 27,397,841 were voted in favor and 778,922 were withheld.
Continuing as Class II Directors with terms expiring in 2001 are Peter
J. Durkalski, Robert E. Gallagher, Frank M. Heffernan, Jr., and Walter
F. McClure. In addition to Mr. Ripp, continuing as a Class III Director
with a term expiring in 2002 is Michael J. Cloherty.
The Stockholders of Gallagher also approved an Amendment to Clause (A)
of Article FOURTH of Gallagher's Restated Certificate of Incorporation
increasing Gallagher's authorized Common Stock from 100,000,000 to
200,000,000 shares. Of the shares voted with respect to the amendment,
25,506,222 were voted in favor, 2,612,885 were voted against, and
57,656 were withheld.
The Stockholders of Gallagher also ratified the appointment of Ernst &
Young LLP as independent auditors for the fiscal year ending December
31, 2000.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 3.1.1 - Certificate of Amendment of Restated
Certificate of Incorporation of Arthur J. Gallagher & Co.
(Amended as of May 18, 2000).
Exhibit 10.27.1 - Amendment No. 1 to the Arthur J. Gallagher &
Co. Restated 1988 Nonqualified Stock Option Plan (Amended as
of January 20, 2000).
Exhibit 10.28.1 - Amendment No. 2 to the Arthur J. Gallagher &
Co. Restated 1989 Non-Employee Directors' Stock Option Plan
(Amended as of January 20, 2000).
Exhibit 27.0 - Financial Data Schedule (Unaudited).
b. Reports on Form 8-K. No Reports on Form 8-K were filed during
the three-month period ended June 30, 2000.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 9th day of August,
2000.
ARTHUR J. GALLAGHER & CO.
/s/ Michael J. Cloherty
-------------------------------------
Michael J. Cloherty
Executive Vice President
Chief Financial Officer
/s/ Jack H. Lazzaro
-------------------------------------
Jack H. Lazzaro
Vice President - Finance
Chief Accounting Officer
-15-
