<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 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
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Commission File Number 1-9761
ARTHUR J. GALLAGHER & CO.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Pierce Place, Itasca, Illinois 60143-3141
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(Address of principal executive offices) (Zip code)
(630) 773-3800
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(Registrant's telephone number, including area code)
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(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 September 30, 2000 was 39,351,024
<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 nine-month periods ended September 30,
2000 and 1999.............................................3
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999.........................................4
Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 2000
and 1999..................................................5
Notes to Consolidated Financial Statements................6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................10-14
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K...........................15
Signatures..........................................................16
-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 Nine-month period ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Operating Results
Revenues:
Commissions $107,972 $102,371 $295,721 $277,427
Fees 73,293 63,571 201,828 173,764
Investment income and other 14,082 5,141 29,395 20,438
-------- -------- -------- --------
Total revenues 195,347 171,083 526,944 471,629
Expenses:
Salaries and employee benefits 94,441 83,833 272,050 246,369
Other operating expenses 56,707 50,744 161,797 146,685
-------- -------- -------- --------
Total expenses 151,148 134,577 433,847 393,054
-------- -------- -------- --------
Earnings before income taxes 44,199 36,506 93,097 78,575
Provision for income taxes 13,341 12,807 30,722 27,325
-------- -------- -------- --------
Net earnings $30,858 $ 23,699 $ 62,375 $ 51,250
======== ======== ======== ========
Net earnings per common share $ .79 $ .62 $ 1.60 $ 1.35
Net earnings per common and
common equivalent share .73 .59 1.51 1.28
Dividends declared per common share .23 .20 .69 .60
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 92,741 $ 69,624
Restricted cash 151,965 129,194
Premiums and fees receivable 306,287 371,508
Investment strategies - trading 59,878 63,857
Other 43,941 45,633
-------- --------
Total current assets 654,812 679,816
Marketable securities - available for sale 23,274 20,274
Deferred income taxes and other noncurrent assets 204,712 176,719
Fixed assets 122,217 122,158
Accumulated depreciation and amortization (81,505) (82,403)
-------- --------
Net fixed assets 40,712 39,755
Intangible assets - net 14,612 13,624
-------- --------
$938,122 $930,188
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $477,683 $496,073
Accrued salaries and bonuses 17,429 23,050
Accounts payable and other accrued liabilities 93,192 96,684
Unearned fees 17,913 15,537
Income taxes payable 713 9,015
Other 11,821 22,515
-------- --------
Total current liabilities 618,751 662,874
Other noncurrent liabilities 18,409 18,635
Stockholders' equity:
Common stock - issued and outstanding 39,351
shares in 2000 and 38,362 shares in 1999 39,351 38,362
Capital in excess of par value 15,871 (919)
Retained earnings 247,704 213,905
Accumulated other comprehensive earnings (loss) (1,964) (2,669)
-------- --------
Total stockholders' equity 300,962 248,679
-------- --------
$938,122 $930,188
======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-month period ended
September 30,
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 62,375 $ 51,250
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Net gain on investments and other (6,998) (1,884)
Depreciation and amortization 12,393 11,416
Increase in restricted cash (22,771) (38,728)
Decrease in premiums receivable 70,701 452
(Decrease) increase in premiums payable (18,390) 53,460
Decrease (increase) in trading investments - net 5,383 (2,800)
Decrease (increase) in other current assets 1,327 (4,526)
Decrease in accrued salaries and bonuses (5,621) (10,242)
Decrease in accounts payable and other accrued liabilities (5,175) (5,635)
(Decrease) increase in income taxes payable (8,302) 458
Tax benefit from issuance of common stock 11,099 5,166
Net change in deferred income taxes (308) 1,766
Other (2,392) 7,311
-------- --------
Net cash provided by operating activities 93,321 67,464
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (23,551) (37,832)
Proceeds from sales of marketable securities 21,272 33,285
Proceeds from maturities of marketable securities 655 868
Net additions to fixed assets (11,727) (14,060)
Other (21,621) (18,552)
-------- --------
Net cash used by investing activities (34,972) (36,291)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 19,870 15,014
Repurchases of common stock (13,200) (16,774)
Dividends paid (24,708) (20,662)
Borrowings on line of credit facilities 45,000 73,500
Repayments on line of credit facilities (60,000) (77,500)
Equity transactions of pooled companies prior to dates of acquisition (2,194) (2,260)
-------- --------
Net cash used by financing activities (35,232) (28,682)
-------- --------
Net increase in cash and cash equivalents 23,117 2,491
Cash and cash equivalents at beginning of period 69,624 70,662
-------- --------
Cash and cash equivalents at end of period $ 92,741 $ 73,153
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 496 $ 1,181
Income taxes paid 14,191 17,960
</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 is headquartered in
Itasca, Illinois, has offices in nine countries and does business in more
than 100 countries around the world through a network of correspondent
brokers and consultants.
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 nine-month period ended September 30, 2000, Gallagher acquired
substantially all of the net assets of the following companies in exchange
for its common stock: John P. Woods Co., Inc., 908,000 shares; Universico
Group, Ltd., 146,000 shares; Atlantic Risk Management Corp., 104,000
shares; Davis-Poston & Associates, Inc., 75,000 shares; R. L. Youngdahl &
Associates, Inc., 69,000 shares; Bultman/Bell Associates, Inc., 68,000
shares; R. G. Speno, Inc., 44,000 shares; Rebholz Insurance Agency, Inc.,
42,000 shares; Towle Agency, Inc., 37,000 shares; Murphy Consultants,
29,000 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):
<TABLE>
<CAPTION>
Attributable
Three-month period ended As Previously to Pooled
September 30, 1999 Reported Companies As Restated
------------------------ ------------- ------------ -----------
<S> <C> <C> <C>
Total revenues $159,872 $11,211 $171,083
Net earnings 23,108 591 23,699
Net earnings per common share .63 (.01) .62
Net earnings per common and
common equivalent share .60 (.01) .59
</TABLE>
-6-
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
2. Business Combinations (Continued)
<TABLE>
<CAPTION>
Attributable
Nine-month period ended As Previously to Pooled
September 30, 1999 Reported Companies As Restated
----------------------- ------------- ------------ -----------
<S> <C> <C> <C>
Total revenues $437,996 $33,633 $471,629
Net earnings 49,477 1,773 51,250
Net earnings per common share 1.35 - 1.35
Net earnings per common and
common equivalent share 1.29 (.01) 1.28
</TABLE>
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 Nine-month period ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings $30,858 $23,699 $62,375 $51,250
======= ======= ======= =======
Weighted average number of
common shares outstanding 39,284 38,247 38,927 38,047
Dilutive effect of stock options using
the treasury stock method 2,831 2,028 2,498 1,922
------- ------- ------- -------
Weighted average number of common
and common equivalent shares
outstanding 42,115 40,275 41,425 39,969
======= ======= ======= =======
Net earnings per common share $ .79 $ .62 $ 1.60 $ 1.35
Net earnings per common and
common equivalent share .73 .59 1.51 1.28
</TABLE>
Options to purchase 7,000 shares of common stock were outstanding during
the three-month period ended September 30, 1999, but were not included in
the computation of the dilutive effect of stock options. Options to
purchase 67,000 and 33,000 shares of common stock were outstanding during
the nine-month period ended September 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 Nine-month period
ended September 30, ended September 30,
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Net earnings $30,858 $23,699 $62,375 $51,250
Net change unrealized gain (loss) on
available for sale securities, net of
income taxes of $362, ($566), $470
and ($631), respectively 543 (849) 705 (947)
------- ------- ------- -------
Comprehensive earnings $31,401 $22,850 $63,080 $50,303
======= ======= ======= =======
Accumulated other comprehensive
earnings (loss) at beginning of
period $(2,507) $(875) $(2,669) $(777)
Net change in unrealized gain (loss)
on available for sale securities,
net of income taxes 543 (849) 705 (947)
------- ------- ------- -------
Accumulated other comprehensive
earnings (loss) at end of period $(1,964) $(1,724) $(1,964) $(1,724)
======= ======= ======= =======
</TABLE>
5. Insurance Company Receivables and Payables
Gallagher's recently acquired reinsurance intermediary subsidiary only
includes amounts relating to brokerage commission revenue in premiums and
fees receivable in the accompanying consolidated balance sheets. The
premiums and claims receivable and payable, as well as the related excise
taxes payable, associated with the reinsurance brokerage commission
revenue, are not included in the accompanying consolidated balance sheets
since they are not assets and liabilities of Gallagher. The excluded
amounts are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Premiums and claims:
Receivable $376,016 $331,320
Payable 386,902 340,746
</TABLE>
The difference between the receivable and payable balances represents
fiduciary funds received by the reinsurance intermediary subsidiary, which
are included in restricted cash and premiums payable to insurance companies
in the accompanying consolidated balance sheets.
-8-
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
6. 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 anticipates that the
adoption of SFAS 133 will not 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 was 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 anticipates
that the adoption of Interpretation 44 will not have a significant effect
on Gallagher's consolidated operating results or financial position.
-9-
<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 virtually all lines of coverage. This
movement contributed to the overall revenue growth in the third quarter of 2000.
Commission revenues increased by 5% to $108.0 million in the third quarter of
2000 and by 7% to $295.7 million in the first nine months of 2000 over the
respective periods in 1999. These increases are due principally to new business
and rate increases offset by lost business and a reduction in revenue from
national insurance revenue sharing programs for the three-month and nine-month
periods ended September 30, 2000.
Fee revenues increased by 15% or $9.7 million to $73.3 million in the third
quarter of 2000 and by 16% or $28.1 million to $201.8 million in the first nine
months of 2000 over the respective periods in 1999. These increases are
generated primarily by the Risk Management Services segment reflecting new
business production of approximately $12.1 million in the third quarter of 2000
and $28.3 million in the first nine months of 2000 plus rate increases partially
offset by lost business.
Investment income and other increased 174% to $14.1 million in the third quarter
of 2000 from the same period in 1999 due primarily to a $5.4 million net gain on
the installment sale of a synthetic fuel facility and favorable results from
Gallagher's independently managed investment portfolio. The sale of the
synthetic fuel facility provides for an initial nonrefundable down payment of
$7.0 million and aggregate maximum principal and interest payments of $108.0
million over a seven-year period, subject to downward adjustment to reflect
certain production level contingencies, receipt of favorable tax rulings and
satisfactory production tests by end users. Gallagher's pretax gain on the
transaction is estimated to be approximately $80.0 million and will be
recognized ratably over the seven-year period in accordance with the installment
provisions of the sale agreement. Investment income and other increased by 44%
to $29.4 million in the first nine months of 2000 from the first nine months of
1999 due primarily to the gain and favorable investment results mentioned above
partially offset by a $1.5 million gain recorded in the second quarter of 1999
from the sale of interests in limited partnerships that operate affordable
housing projects.
Salaries and employee benefits increased by $10.6 million or 13% to $94.4
million in the third quarter of 2000 and increased by $25.7 million or 10% to
$272.1 million in the first nine months of 2000 over the respective periods in
1999. These increases are due primarily to a 5% increase in employee headcount
in the period from September 30, 1999 to September 30, 2000, salary increases
and associated employee benefit costs and incentive compensation linked to the
performance of a portion of Gallagher's investment portfolio.
Other operating expenses increased by 12% to $56.7 million in the third quarter
of 2000 and by 10% to $161.8 million in the first nine months of 2000 over the
respective periods in 1999, due primarily to increases in Gallagher's overall
lease costs, temporary help necessary to service the new risk management and
claims business, professional services related to acquisition activity during
the quarter as well as increased management fees related to the positive
investment results reported above.
The effective income tax rate was 30% and 33% for the third quarter and first
nine months of 2000, respectively, and 35% for the third quarter and first nine
months of 1999. The reduced rates in 2000 reflect tax credits earned from
partnerships in synthetic coal production. The rates for both years are net of
the effect of tax credits generated by investments in limited partnerships that
operate qualified affordable housing and alternative energy projects, which are
substantially offset by state and foreign taxes.
-10-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - CONSOLIDATED (Continued)
Net earnings per common and common equivalent share for the third quarter of
2000 were $.73 compared to $.59 in 1999, a 24% increase. For the first nine
months, net earnings per common and common equivalent share increased 18% from
$1.28 in 1999 to $1.51 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.
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
------------------------
September 30, 2000
------------------
Total revenues $124,844 $ 60,657 $ 9,846 $ - $195,347
Earnings (loss) before
income taxes 29,341 9,914 5,367 (423) 44,199
September 30, 1999
------------------
Total revenues 117,416 50,604 3,063 - 171,083
Earnings (loss) before
income taxes 28,914 6,848 1,761 (1,017) 36,506
Nine-month period ended
-----------------------
September 30, 2000
------------------
Total revenues 338,806 171,503 16,635 - 526,944
Earnings (loss) before
income taxes 59,135 27,285 8,756 (2,079) 93,097
September 30, 1999
------------------
Total revenues 314,145 144,361 13,123 - 471,629
Earnings (loss) before
income taxes 53,495 19,219 9,111 (3,250) 78,575
Total Identifiable Assets at
----------------------------
September 30, 2000 570,232 58,991 245,111 63,788 938,122
September 30, 1999 541,928 51,448 224,328 43,872 861,576
</TABLE>
-11-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - SEGMENT INFORMATION (Continued)
Insurance Brokerage Services
The Insurance Brokerage Services segment includes Gallagher's retail,
reinsurance and wholesale brokerage operations. Total revenues in the three and
nine-month periods ended September 30, 2000 increased 6% to $124.8 million and
8% to $338.8 million, respectively, over the same periods in 1999. These
increases are due primarily to new business production and rate increases offset
by lost business and a reduction in revenue from national insurance revenue
sharing programs.
Earnings before income taxes in the three and nine-month periods ended September
30, 2000 increased 1% to $29.3 million and 11% to $59.1 million over the same
periods in 1999. These increases are due primarily to the new business
production and rate increases mentioned above.
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
nine-month periods ended September 30, 2000 increased 20% to $60.7 million and
19% to $171.5 million over the respective periods in 1999 due primarily to
strong new business production of $10.0 million in the third quarter of 2000 and
$23.7 million in the first nine months of 2000.
Earnings before income taxes in the third quarter of 2000 increased over the
third quarter of 1999 by 45% or $3.1 million to $9.9 million. In the first nine
months of 2000, earnings before income taxes increased over the same period in
1999 by $8.1 million or 42% to $27.3 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 third quarter and first nine months of 2000, revenues increased by $6.8
million or 221% to $9.8 million and $3.5 million or 27% to $16.6 million over
the respective periods in 1999. Earnings before income taxes increased $3.6
million or 205% to $5.4 million in the third quarter of 2000 and decreased $0.4
million or 4% to $8.8 million for the nine-month period ended September 30,
2000. The increase in the third quarter is substantially due to the $5.4 million
net gain on the installment sale of a synthetic fuel facility offset by
incentive compensation linked to the performance of a portion Gallagher's
investment portfolio. The decrease for the nine-month period is 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.
-12-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 $93.3 million and $67.5 million for the nine
months ended September 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
quarter. Funds restricted as to Gallagher's use, primarily premiums held as
fiduciary funds, have not been included in determining Gallagher's overall
liquidity.
Gallagher had 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 nine-month period ended September 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. In September 2000, Gallagher
terminated this agreement.
Gallagher also had three line of credit facilities that totaled $45.0 million
and were to expire on April 30, 2001. Periodically, Gallagher made short-term
borrowings under these facilities to meet short-term cash flow needs. During the
nine months ended September 30, 2000, Gallagher borrowed $35.0 million and
repaid $50.0 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. During the third quarter 2000, Gallagher paid
the remaining loan balances under these facilities and terminated these
agreements.
As of September 11, 2000, Gallagher and one of its subsidiaries entered into a
three-year Revolving Credit Agreement (the "Revolving Credit Agreement") for
loans and letters of credit with five banks. This agreement replaces the $20.0
million credit agreement and the $45.0 million line of credit facilities
mentioned above. The Revolving Credit Agreement provides for short-term and
long-term revolving credit commitments of $100.0 million and $50.0 million,
respectively. All letter of credit arrangements issued under the Revolving
Credit Agreement are applied against the $50.0 million long-term facility in the
determination of net funds available for future borrowing. As of September 30,
2000, under this agreement, Gallagher has contingently committed to funding
$22.4 million through letter of credit arrangements related to one of its equity
investments and to several of its other investments and insurance programs. The
Revolving Credit Agreement requires the maintenance of certain financial
covenants and Gallagher is in compliance with these covenants.
Through the first nine months of 2000, Gallagher paid $24.7 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 October 13, 2000, Gallagher paid a third quarter dividend of $.23 per
share to shareholders of record as of September 30, 2000, a 15% increase over
the third quarter dividend per share in 1999.
Net capital expenditures were $11.7 million and $14.1 million for each of the
nine-month periods ended September 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 shares of its common stock. Through the first nine months of 2000,
Gallagher repurchased 440,000 shares at a cost of $13.2 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.
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<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, foreign exchange
rates and the competitive environment, and changes in income tax laws.
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.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 10.8 - Credit Agreement Dated as of September 11, 2000
Among Arthur J. Gallagher & Co., AJG Financial
Services, Inc., The Banks Party Hereto, Harris
Trust and Savings Bank, as Agent and Lead
Arranger, Citibank, N.A., as Co-Lead Arranger
and Syndication Agent, and Bank of America, N.A.
as Co-Lead Arranger and Documentation Agent.
Exhibit 10.8.1 - Arthur J. Gallagher & Co. and AJG Financial
Services, Inc. First Amendment to Credit
Agreement Dated as of November 10, 2000.
Exhibit 27.0 - Financial Data Schedule (Unaudited).
b. Reports on Form 8-K. No Reports on Form 8-K were filed during the
nine-month period ended September 30, 2000.
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<PAGE>
ARTHUR J. GALLAGHER & CO.
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 14th day of
November, 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
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