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 March 31, 2001 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.
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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 March 31, 2001 was 80,651,987.
ARTHUR J. GALLAGHER & CO.
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Earnings for the
three-month periods ended March 31, 2001 and 2000..........3
Consolidated Balance Sheets at
March 31, 2001 and December 31, 2000.......................4
Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2001 and 2000..........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-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three-month period ended March 31,
2001 2000
----------------- -----------------
(in thousands, except per share data)
Operating Results
Revenues:
Commissions $ 107,231 $ 97,679
Fees 76,383 64,386
Investment income and other:
Investment income 5,629 5,145
Income from equity investments, partnerships
and joint ventures 6,758 1,380
Other income 2,811 618
----------------- -----------------
Total investment income and other 15,198 7,143
----------------- -----------------
Total revenues 198,812 169,208
Expenses:
Salaries and employee benefits 105,912 91,330
Other operating expenses 63,573 52,211
----------------- -----------------
Total expenses 169,485 143,541
----------------- -----------------
Earnings before income taxes 29,327 25,667
Provision for income taxes 5,865 8,850
----------------- -----------------
Net earnings $ 23,462 $ 16,817
================= =================
Net earnings per common share $ .29 $ .21
Net earnings per common and common equivalent share .27 .20
Dividends declared per common share .130 .115
See notes to consolidated financial statements.
-3-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2001 2000
------------------------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 95,972 $ 116,897
Restricted cash 157,388 158,228
Premiums and fees receivable 354,441 408,873
Investment strategies - trading 48,702 51,897
Other 51,120 55,158
------------------ ------------------
Total current assets 707,623 791,053
Marketable securities - available for sale 24,810 23,306
Deferred income taxes 47,692 46,775
Other noncurrent assets 188,127 158,620
Fixed assets 124,579 121,288
Accumulated depreciation and amortization (83,622) (81,073)
------------------ ------------------
Net fixed assets 40,957 40,215
Intangible assets - net 17,186 15,931
------------------ ------------------
$ 1,026,395 $ 1,075,900
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $ 532,674 $ 570,948
Accrued salaries and bonuses 18,992 36,403
Accounts payable and other accrued liabilities 98,563 99,408
Unearned fees 17,496 18,983
Income taxes payable 5,898 9,786
Other 4,768 3,165
------------------ ------------------
Total current liabilities 678,391 738,693
Other noncurrent liabilities 24,917 19,175
Stockholders' equity:
Common stock - issued and outstanding 80,652 shares in
2001 and 80,512 shares in 2000 80,652 80,512
Capital in excess of par value - -
Retained earnings 243,811 240,018
Accumulated other comprehensive earnings (loss) (1,376) (2,498)
------------------ ------------------
Total stockholders' equity 323,087 318,032
------------------ ------------------
$ 1,026,395 $ 1,075,900
================== ==================
See notes to consolidated financial statements.
-4-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three-month period ended March 31,
2001 2000
------------- -------------
(in thousands)
Cash flows from operating activities:
Net earnings $ 23,462 $ 16,817
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Net gain on investments and other (521) (286)
Gain on sales of operations (2,375) -
Depreciation and amortization 4,327 3,996
Decrease (increase) in restricted cash 840 (6,099)
Decrease in premiums receivable 57,156 42,564
Decrease in premiums payable (38,274) (26,479)
Decrease (increase) in trading investments - net 3,775 (110)
Decrease in other current assets 4,038 7,102
Decrease in accrued salaries and bonuses (17,411) (8,104)
Decrease in accounts payable and other accrued liabilities (2,186) (1,708)
Decrease in income taxes payable (3,888) (5,005)
Tax benefit from issuance of common stock 4,471 2,970
Net change in deferred income taxes (1,350) (681)
Other (17,101) 11,880
------------- -------------
Net cash provided by operating activities 14,963 36,857
------------- -------------
Cash flows from investing activities:
Purchases of marketable securities (4,469) (8,610)
Proceeds from sales of marketable securities 4,781 7,824
Proceeds from maturities of marketable securities 11 89
Net additions to fixed assets (4,524) (4,220)
Proceeds from sales of operations 2,700 -
Other (11,694) (16,026)
------------- -------------
Net cash used by investing activities (13,195) (20,943)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 4,258 7,110
Repurchases of common stock (12,836) (7,364)
Dividends paid (9,148) (7,368)
Borrowings on line of credit facilities 2,200 20,000
Repayments on line of credit facilities (2,200) (25,000)
Equity transactions of pooled companies prior to dates of
acquisition (4,967) 2,849
------------- -------------
Net cash used by financing activities (22,693) (9,773)
------------- -------------
Net (decrease) increase in cash and cash equivalents (20,925) 6,141
Cash and cash equivalents at beginning of period 116,897 85,380
------------- -------------
Cash and cash equivalents at end of period $ 95,972 $ 91,521
============= =============
Supplemental disclosures of cash flow information:
Interest paid $ 64 $ 232
Income taxes paid 1,894 7,764
See notes to consolidated financial statements.
-5-
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. Investment income and other is
generated from Gallagher's investment portfolio, which includes fiduciary
funds, equity securities, and tax advantaged and other strategic
investments. Gallagher is headquartered in Itasca, Illinois, has more than
200 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, 2000 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 2000 Annual Report on Form 10-K.
2. Per Common Share Information
In November 2000, the Board of Directors declared a two-for-one stock split
of Gallagher's common stock, effected in the form of a 100% stock dividend
paid on January 18, 2001 to shareholders of record as of January 2, 2001. As
a result of this action, par value of the stock remains at $1.00 per share.
All information relating to the number of common shares and per common share
amounts appearing in this Quarterly Report on Form 10-Q have been restated
to give retroactive effect to the stock split for all periods presented.
3. Effect of New Pronouncement
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," as amended, which was
effective for fiscal years beginning after June 15, 2000. Because of
Gallagher's minimal use of derivatives, the effect of the adoption of SFAS
133 in the first quarter of 2001 was not material to Gallagher's
consolidated operating results or financial position.
-6-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
4. Business Combinations
During the three-month period ended March 31, 2001, Gallagher acquired
substantially all of the net assets of the following companies in exchange
for shares of its common stock: MDM Insurance Associates, Inc., 752,000
shares; SKANCO International, Ltd., 263,000 shares; and Madison Scott &
Associates, Inc., 34,000 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 2000 consolidated financial
statements to reflect the operations of the 2001 acquisitions (in thousands,
except per share data):
Attributable
Three-month period ended As Previously to Pooled
March 31, 2000 Reported Companies As Restated
----------------------------- ------------- ------------ -----------
Total revenues $ 165,434 $ 3,774 $ 169,208
Net earnings 16,550 267 16,817
Net earnings per common share .21 - .21
Net earnings per common and
common equivalent share .20 - .20
5. Insurance Company Receivables and Payables
A reinsurance intermediary subsidiary of Gallagher includes only 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 because they are
not assets and liabilities of Gallagher. The excluded amounts are as follows
(in thousands):
March 31, December 31,
2001 2000
------------- --------------
Premiums and claims:
Receivable $ 409,366 $ 373,764
Payable 413,158 378,166
The differences 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.
-7-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
6. 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):
Three-month period ended
March 31,
2001 2000
-------------- ---------------
Net earnings $ 23,462 $ 16,817
============= ==============
Weighted average number of common shares outstanding 80,684 78,319
Dilutive effect of stock options using the treasury stock method 5,379 4,079
------------- --------------
Weighted average number of common and common equivalent
shares outstanding 86,063 82,398
============= ==============
Net earnings per common share $ .29 $ .21
Net earnings per common and common equivalent share .27 .20
Options to purchase 144,000 and 20,000 shares of common stock were
outstanding at March 31, 2001 and 2000, respectively, but were not included
in the computation of the dilutive effect of stock options. These options
were excluded from the computation 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. Comprehensive Earnings
The components of comprehensive earnings and accumulated other comprehensive
earnings (loss) are as follows (in thousands):
Three-month period ended March 31,
2001 2000
-------------- --------------
Net earnings $ 23,462 $ 16,817
Net change unrealized gain (loss) on available for sale securities,
net of income taxes of $748 and ($32), respectively 1,122 (48)
-------------- --------------
Comprehensive earnings $ 24,584 $ 16,769
============== ==============
Accumulated other comprehensive earnings (loss) at beginning of period $ (2,498) $ (2,669)
Net change unrealized gain (loss) on available for sale securities,
net of income taxes 1,122 (48)
-------------- --------------
Accumulated other comprehensive earnings (loss) at end of period $ (1,376) $ (2,717)
============== ==============
-8-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
8. Quarterly Operating Results
Quarterly operating results for 2000 were as follows (in thousands, except
per share data):
1st 2nd 3rd 4th
---------- ---------- ----------- ----------
Revenues:
Commissions $ 97,679 $ 100,174 $ 113,024 $ 121,564
Fees 64,386 64,545 73,491 78,651
Investment income and other:
Investment income 5,145 5,668 8,019 5,486
Income from equity investments,
partnerships and joint ventures 1,380 2,907 5,686 4,212
Other income 618 105 632 2,302
---------- ---------- ----------- ----------
Total investment income and other 7,143 8,680 14,337 12,000
---------- ---------- ----------- ----------
Total revenues 169,208 173,399 200,852 212,215
Expenses:
Salaries and employee benefits 91,330 93,113 97,858 111,865
Other operating expenses 52,211 55,537 58,036 69,267
---------- ---------- ----------- ----------
Total expenses 143,541 148,650 155,894 181,132
---------- ---------- ----------- ----------
Earnings before income taxes 25,667 24,749 44,958 31,083
Provision for income taxes 8,850 8,549 13,350 6,883
---------- ---------- ----------- ----------
Net earnings $ 16,817 $ 16,200 $ 31,608 $ 24,200
========== ========== =========== ==========
Net earnings per common share $ .21 $ .20 $ .40 $ .30
Net earnings per common and common
equivalent share .20 .19 .37 .28
-9-
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 direct and
potentially material effect on the insurance brokerage industry. Commission
revenues are generally based on a percentage of the premiums paid by insureds
and normally follow premium levels. Underwriting losses and the downward turn in
equity markets in 2000 have placed insurers in the situation of having to
replenish depleted reserves. To accomplish this, many carriers began to increase
premium rates throughout 2000 and into 2001 across many sectors of the insurance
market place. These increases are viewed as a "hardening of the market" (i.e.,
higher premium rates), and generally, result in increased commission revenues.
Gallagher is seeing generally higher premium rates in the insurance marketplace.
These higher rates have contributed to the overall revenue growth in the first
quarter of 2001. Although a hardening of the market contributes positively to
Gallagher's results the longevity of a hard market and its effect on Gallagher's
business are difficult to predict.
Because of rising insurance costs, management believes there is a trend for
certain "risk" buyers to move toward the alternative insurance market, which
would tend to have a favorable effect on Gallagher's Risk Management Services
segment. Gallagher anticipates that new sales in areas of risk management,
claims management, insurance captive and self-insurance will continue to be a
major factor in Gallagher's fee revenue growth during 2001.
Gallagher's results of operations for all periods presented prior to 2001 have
been restated for two 2001 acquisitions accounted for as poolings of interests
to include the operations of these companies prior to the acquisition dates.
Gallagher continues to search for merger partners which complement existing
operations, provide entry into new markets, add new products and enhance local
sales and service capabilities. For the effect of these restatements, in the
aggregate on period to period comparisons, see Note 4 to the Consolidated
Financial Statements.
Commission revenues increased by 10% to $107.2 million in the first quarter of
2001 over the respective period in 2000. This increase is due principally to new
business of approximately $17.3 million and renewal rate increases partially
offset by lost business and a flattening in revenue from national insurance
revenue-sharing programs.
Fee revenues increased by 19% or $12.0 million to $76.4 million in the first
quarter of 2001 over the respective period in 2000. This increase, generated
primarily by the Risk Management Services segment, resulted from new business
production of approximately $13.2 million, renewal rate increases and favorable
retention rates on existing business partially offset by lost business.
Investment income and other increased 113% to $15.2 million in the first quarter
of 2001 over the same period in 2000. This increase is due primarily to the
results generated by Gallagher's unconsolidated equity investment portfolio. In
2001, Gallagher recorded $3.0 million of income related to its proportionate
share of income from an equity investment in a real estate partnership that is
currently developing land in Florida. This land development project completed
its first real estate transaction earlier in the year. Gallagher also recognized
gains in 2001 of $800,000 on the sale of an interest in a limited partnership
that operates qualified affordable housing projects and $2.4 million on the sale
of a benefit administration book of business.
Salaries and employee benefits increased by $14.6 million or 16% to $105.9
million in the first quarter of 2001. This increase was higher than usual and
reflects an 8% increase in employee headcount in the period from March 31, 2000
to March 31, 2001, salary increases and associated employee benefit costs and
increases in incentive compensation linked to Gallagher's overall operating
results and the performance of Gallagher's investment portfolio.
-10-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - CONSOLIDATED (Continued)
Other operating expenses increased by 22% to $63.6 million in the first quarter
of 2001. This increase is due primarily to start up, professional services and
ongoing expenses related to the operations of synthetic fuel facilities and to
performance-related investment fees. In addition, Gallagher experienced
increases in expenses in 2001 related to increased leased space, temporary help
needed to service new risk management and claims business, and commissions paid
to sub-brokers.
The effective income tax rate was 20% for the first quarter of 2001 and 34% for
the first quarter 2000. These rates 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 partially offset
by state and foreign taxes. The reduction in the effective income tax rate in
2001 from the prior year reflects an increase in tax credits earned in 2001 from
alternative energy related partnerships that operate synthetic fuel facilities.
Net earnings per common and common equivalent share for the first quarter of
2001 were $.27 compared to $.20 in 2000, a 35% increase. This increase is
primarily due to the decrease in the effective income tax rate in 2001 from the
same period in 2000 and also reflects the previously discussed investment gains.
RESULTS OF OPERATIONS - SEGMENT INFORMATION
Financial information relating to Gallagher's operating segments is as follows
(in thousands):
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
-------- -------- -------- --------- -----
Three-month period ended
- ------------------------
March 31, 2001
- --------------
Total revenues $ 122,219 $ 65,760 $ 10,984 $ (151) $ 198,812
Earnings (loss) before
income taxes 17,270 9,448 3,965 (1,356) 29,327
March 31, 2000
- --------------
Total revenues 110,894 55,203 3,111 - 169,208
Earnings (loss) before
income taxes 15,386 9,054 1,611 (384) 25,667
Total Identifiable Assets at
- ----------------------------
March 31, 2001 608,686 60,366 249,947 107,396 1,026,395
March 31, 2000 584,425 56,722 232,185 42,806 916,138
-11-
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 encompasses operations that, for
commission or fee compensation, place or arrange to place insurance directly
related to the clients' managing of risk. This segment also provides consulting,
for fee compensation related to clients' risk financing programs and includes
Gallagher's retail, reinsurance and wholesale brokerage operations.
Total revenues for this segment in the three-month period ended March 31, 2001
increased 10% to $122.2 million over the same period in 2000. This increase is
due principally to new business of approximately $17.3 million and renewal rate
increases partially offset by lost business and a flattening in revenue from
national insurance revenue-sharing programs. Earnings before income taxes for
this segment in the three-month period ended March 31, 2001 increased 12% to
$17.3 million over the same period in 2000. This increase is 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
administration, loss control and risk management consulting, workers'
compensation investigations and insurance property appraisal operations. Third
party administration is principally claims management programs for Gallagher's
clients or clients of other brokers.
Total revenues for this segment in the three-month period ended March 31, 2001
increased 19% to $65.8 million over the respective period in 2000 due primarily
to new business production of approximately $13.2 million, renewal rate
increases and favorable retention rates on existing business partially offset by
lost business. Earnings before income taxes for this segment in the first
quarter of 2001 increased over the first quarter of 2000 by 4% to $9.4 million.
This increase is due primarily to the earnings leverage created by the increased
revenues discussed above significantly offset by increased costs for personnel
and systems conversions.
Financial Services
The Financial Services segment is responsible for the management of Gallagher's
diversified investment portfolio, which includes fiduciary funds, marketable and
other equity securities, and tax advantaged and other strategic investments. The
invested assets of Gallagher are combined in this segment in order to maximize
the return to the company.
In the first quarter of 2001, revenues for this segment increased by $7.9
million or 253% to $11.0 million over the respective period in 2000. This
increase is due primarily to the results generated by Gallagher's unconsolidated
equity investment portfolio. In 2001, Gallagher recorded $3.0 million of income
related to its proportionate share of income from an equity investment in a real
estate partnership that is currently developing land in Florida. This land
development project completed its first real estate transaction earlier in the
year. Gallagher also recognized gains in 2001 of $800,000 on the sale of an
interest in a limited partnership that operates qualified affordable housing
projects and $2.4 million on the sale of a benefit administration book of
business. Earnings before income taxes for this segment increased $2.4 million
or 146% to $4.0 million in the first quarter of 2001. This increase is due
primarily to the increased revenues discussed above significantly offset by
increases in incentive compensation linked to the performance of Gallagher's
investment portfolio; start up, professional services and ongoing expenses
related to the operations of synthetic fuel facilities; and performance-related
investment fees.
-12-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - SEGMENT INFORMATION (Continued)
Corporate
The Corporate segment consists of unallocated administrative costs and the
provision for income taxes which is not allocated to Gallagher's operating
entities. Only revenues not attributable to one of the three operating segments
are recorded in the Corporate segment. 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 $15.0 million and $36.9 million for the three
months ended March 31, 2001 and 2000, 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.
In 2000, Gallagher and one of its significant subsidiaries entered into an
unsecured revolving credit agreement (the "Revolving Credit Agreement"), which
expires on September 10, 2003, with a group of five financial institutions. The
Revolving Credit Agreement provides for short-term and long-term revolving
credit commitments of $100.0 million and $50.0 million, respectively. The
facility provides for loans and letters of credit. Letter of credits are limited
to $50.0 million under the Revolving Credit Agreement and are applied against
the $50.0 million long-term facility in the determination of net funds available
for future borrowing. As of March 31, 2001, under this credit agreement,
Gallagher has contingently committed to funding $39.3 million through letter of
credit arrangements related to its corporate insurance programs and several of
its equity and other strategic investments. During the three-month period ended
March 31, 2001, Gallagher borrowed and repaid $2.2 million of short-term
borrowings under this facility. These borrowings were used on a short-term basis
to finance a portion of Gallagher's investment activity. As of March 31, 2001,
there were no borrowings outstanding under this credit agreement. The Revolving
Credit Agreement requires the maintenance of certain financial covenants and
Gallagher is in compliance with these covenants.
Through the first three months of 2001, Gallagher paid $9.1 million in cash
dividends on its common stock. Gallagher's dividend policy is determined by the
Board of Directors. Quarterly dividends are declared after considering
Gallagher's available cash from earnings and its anticipated cash needs. On
April 13, 2001, Gallagher paid a first quarter dividend of $.13 per share to
shareholders of record as of March 30, 2001, a 13% increase over the first
quarter dividend per share in 2000.
Net capital expenditures were $4.5 million and $4.2 million for each of the
three-month periods ended March 31, 2001 and 2000, respectively. In 2001,
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 common stock repurchase plan that has been extended
through June 30, 2001. Under the plan, Gallagher has repurchased 470,000 shares
at a cost of $12.8 million through the first three months of 2001. The
repurchased shares are held for reissuance in connection with exercises of
options under its stock option plans. Gallagher is authorized to repurchase,
under the provisions of the plan, approximately 2.7 million 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.
-13-
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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ARTHUR J. GALLAGHER & CO.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 10.15 - Arthur J. Gallagher & Co. Supplemental Savings
and Thrift Plan.
b. Reports on Form 8-K. No Reports on Form 8-K were filed during the
three-month period ended March 31, 2001.
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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 May,
2001.
ARTHUR J. GALLAGHER & CO.
/s/ Michael J. Cloherty
----------------------------------------
Michael J. Cloherty
Executive Vice President
Chief Financial Officer
/s/ Richard C. Cary
----------------------------------------
Richard C. Cary
Controller
Chief Accounting Officer
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