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, 1999 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, 1999 was 18,194,294.
ARTHUR J. GALLAGHER & CO.
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statement of Earnings for the three-month and
six-month periods ended June 30, 1999 and 1998.......... 3
Consolidated Balance Sheet at June 30, 1999 and
December 31, 1998........................................ 4
Consolidated Statement of Cash Flows for
the six-month period ended June 30, 1999 and 1998........ 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-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
Three-month period ended Six-month period ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(In thousands, except per share data)
Revenues:
Commissions $ 74,322 $ 71,573 $152,202 $145,123
Fees 56,193 50,260 108,795 97,975
Investment income and other 9,818 5,629 14,451 12,881
-------- -------- -------- --------
Total revenues 140,333 127,462 275,448 255,979
Expenses:
Salaries and employee benefits 75,010 70,009 148,724 139,395
Other operating expenses 46,060 42,758 87,043 84,041
-------- -------- -------- --------
Total expenses 121,070 112,767 235,767 223,436
-------- -------- -------- --------
Earnings before income taxes 19,263 14,695 39,681 32,543
Provision for income taxes 6,742 4,785 13,888 10,659
-------- -------- -------- --------
Net earnings $ 12,521 $ 9,910 $ 25,793 $ 21,884
======== ======== ======== ========
Net earnings per common share $ .69 $ .55 $ 1.43 $ 1.23
Net earnings per common and
common equivalent share .66 .52 1.36 1.17
Dividends declared per common share .40 .35 .80 .70
See notes to consolidated financial statements.
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
1999 1998
--------- ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 46,851 $ 64,469
Restricted cash 103,490 90,560
Premiums and fees receivable 325,639 292,979
Investment strategies - trading 60,341 57,368
Other 42,179 37,289
-------- --------
Total current assets 578,500 542,665
Marketable securities - available for sale 22,692 20,089
Deferred income taxes and other noncurrent assets 160,626 151,336
Fixed assets 105,985 99,656
Accumulated depreciation and amortization (71,524) (67,852)
-------- --------
Net fixed assets 34,461 31,804
Intangible assets - net 11,926 12,541
-------- --------
$808,205 $758,435
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $432,580 $380,112
Accrued salaries and bonuses 8,534 21,940
Accounts payable and other accrued liabilities 86,626 92,129
Unearned fees 18,319 13,616
Income taxes payable 3,472 12,621
Other 28,518 19,517
-------- --------
Total current liabilities 578,049 539,935
Other noncurrent liabilities 14,495 12,953
Stockholders' equity:
Common stock - issued and outstanding 18,194 shares
in 1999 and 18,049 shares in 1998 18,194 18,049
Capital in excess of par value 13,342 12,885
Retained earnings 185,000 175,390
Accumulated other comprehensive earnings (loss) (875) (777)
-------- --------
Total stockholders' equity 215,661 205,547
-------- --------
$808,205 $758,435
======== ========
See notes to consolidated financial statements.
-4-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six-month period ended
June 30,
1999 1998
-------- --------
(In thousands)
Cash flows from operating activities:
Net earnings $ 25,793 $ 21,884
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Net gain on investments and other (935) (2,695)
Depreciation and amortization 6,892 5,931
Increase in restricted cash (12,930) (14,948)
Increase in premiums receivable (32,499) (35,709)
Increase in premiums payable 52,468 47,876
(Increase) decrease in trading investments - net (2,184) 1,671
Increase in other current assets (4,890) (4,381)
Decrease in accrued salaries and bonuses (13,406) (8,474)
Decrease in accounts payable and other accrued liabilities (6,606) (7,779)
Decrease in income taxes payable (9,149) (10,344)
Net change in deferred income taxes 1,204 (840)
Other 4,923 5,544
-------- --------
Net cash provided (used) by operating activities 8,681 (2,264)
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (27,829) (16,751)
Proceeds from sales of marketable securities 24,593 30,484
Proceeds from maturities of marketable securities 588 1,423
Net additions to fixed assets (8,508) (4,081)
Other (8,166) (29,485)
-------- --------
Net cash used by investing activities (19,322) (18,410)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 10,615 10,068
Tax benefit from issuance of common stock 3,642 2,871
Repurchases of common stock (13,654) (25)
Dividends paid (13,383) (11,091)
Retirement of long-term debt - (1,130)
Borrowings on line of credit facilities 55,000 42,500
Repayments on line of credit facilities (47,500) (35,000)
Equity transactions of pooled companies prior to dates of acquisition (1,697) (1,412)
-------- --------
Net cash (used) provided by financing activities (6,977) 6,781
-------- --------
Net decrease in cash and cash equivalents (17,618) (13,893)
Cash and cash equivalents at beginning of period 64,469 79,711
-------- --------
Cash and cash equivalents at end of period $ 46,851 $ 65,818
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 553 $ 798
Income taxes paid 16,655 17,121
See notes to consolidated financial statements.
-5-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company 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. The Company 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, 1998 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
the Company's amended 1998 Annual Report on Form 10-K/A.
2. Business Combinations
During the six-month period ended June 30, 1999, the Company acquired
substantially all of the net assets of the following companies in exchange
for its common stock: Goodman Insurance Agency, Inc., 157,385 shares;
Dodson-Bateman & Company, 147,480 shares; and Associated Risk Managers of
California, Insurance Producers, dba ARM of California, 99,054 shares.
These acquisitions were accounted for as poolings of interests. The
consolidated financial statements for all periods prior to the acquisition
dates have been restated to include the operations of these companies.
During a review of the Company's 1998 Form 10-K, the SEC staff had
discussions with the Company concerning the application of materiality
guidelines related to the restatement of financial statements for business
combinations accounted for using the pooling of interests method. The
guidelines applied in this instance by the SEC staff differed from those
applied in the past by the Company. The SEC staff applied such materiality
guidelines to all of the Company's 1998, 1997 and 1996 acquisitions
accounted for as poolings of interest for which the previously reported
financial statements were not restated. Based on the former materiality
guidelines applied by the Company, the operations of these acquisitions
were deemed by the Company to be immaterial to the consolidated financial
statements. As a result of this SEC review, the 1998 Annual Report on Form
10-K was amended to restate the financial information included in the
previously filed 1998 Form 10-K to reflect the operations of three
additional 1998 acquisitions. Accordingly, as a result of the amendment to
the previously filed 1998 Form 10-K, the 1998 financial information
included in this Quarterly Report on Form 10-Q has been restated to reflect
the operations of these three acquisitions.
The following summarizes the restatement of the 1998 consolidated financial
statements to reflect the operations of the 1999 acquisitions and the three
additional 1998 acquisitions (in thousands, except per share data):
As Attributable
Three-month period Previously to Pooled
ended June 30, 1998 Reported Companies As Restated
------------------- -------- --------- -----------
Revenues $124,417 $3,045 $127,462
Net earnings 9,892 18 9,910
Net earnings per common share .57 (.02) .55
Net earnings per common and
common equivalent share .54 (.02) .52
-6-
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, 1998 Reported Companies As Restated
------------------- -------- --------- -----------
Revenues $248,119 $7,860 $255,979
Net earnings 21,386 498 21,884
Net earnings per common share 1.24 (.01) 1.23
Net earnings per common and
common equivalent share 1.19 (.02) 1.17
On May 1, 1999, the Company acquired substantially all of the net assets of
R. W. Thom & Company, Inc., a California Corporation engaged in the retail
insurance brokerage business, for an initial cash payment of $250,000.
This acquisition was accounted for as a purchase, which was 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):
Three-month period ended Six-month period ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
Net earnings $12,521 $ 9,910 $25,793 $21,884
======= ======= ======= -------
Weighted average number of
common shares outstanding 18,092 17,998 18,088 17,844
Dilutive effect of stock options
using the treasury stock method 924 887 925 832
------- ------- ------- -------
Weighted average number of
common and common equivalent
shares outstanding 19,016 18,885 19,013 18,676
======= ======= ======= =======
Net earnings per common share $ .69 $ .55 $ 1.43 $ 1.23
Net earnings per common and
common equivalent share .66 .52 1.36 1.17
Options to purchase 95,000 and 8,000 shares of common stock were
outstanding during the three-month period ended June 30, 1999, and 1998,
respectively, but were not included in the computation of the dilutive
effect of stock options. Options to purchase 64,000 and 4,000 shares of
common stock were outstanding during the six-month period ended June 30,
1999, and 1998, 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 and, therefore, would be
antidilutive.
-7-
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):
Three-month period ended Six-month period ended
June 30, June 30,
1999 1998 1999 1998
------- ------ ------- -------
Net earnings $12,521 $9,910 $25,793 $21,884
Net change in unrealized gain (loss) on
available for sale securities, net of income
taxes of $92, ($138), ($65) and ($42),
respectively 138 (207) (98) (63)
------- ------ ------- -------
Comprehensive earnings $12,659 $9,703 $25,695 $21,821
======= ====== ======= =======
Accumulated other comprehensive earnings
(loss) at beginning of period $(1,013) $1,802 $ (777) $ 1,658
Net change in unrealized gain (loss) on
available for sale securities, net of
income taxes 138 (207) (98) (63)
------- ------ ------- -------
Accumulated other comprehensive earnings
(loss) at end of period $ (875) $1,595 $ (875) $ 1,595
======= ====== ======= =======
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," which was effective for
fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, which amends SFAS 133
to defer the effective date to fiscal years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of SFAS 133 will have a significant effect on
the Company's consolidated operating results or financial position.
In 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1, which
has been adopted prospectively as of January 1, 1999, requires the
capitalization of certain costs incurred in connection with developing or
obtaining internal use software. Prior to the adoption of SOP 98-1, the
Company expensed all internal use software related costs as incurred. The
effect of adopting SOP 98-1 was not material to the Company's consolidated
operating results.
-8-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONSOLIDATED
Insurance premiums and risk management income reflect the overall pricing
pressure throughout the insurance premium marketplace, and the Company does not
anticipate any change in the near future in this extremely competitive
environment.
Commission revenues increased by 4% to $74.3 million in the second quarter of
1999 and by 5% to $152.2 million in the first half of 1999 over the respective
periods in 1998. These increases are due principally to new business production
partially offset by lost business.
Fee revenues increased by 12% or $5.9 million to $56.2 million in the second
quarter of 1999 and by 11% or $10.8 million to $108.8 million in the first six
months of 1999 over the respective periods in 1998. These increases reflect new
business production of approximately $10.4 million in the second quarter of 1999
and $20.6 million in the first six months of 1999 generated primarily by the
Risk Management Services segment partially offset by lost business.
Investment income and other increased 74% to $9.8 million in the second quarter
of 1999 over the same period in 1998 due in large part to a $1.5 million gain
from the first installment of a sale of interests in limited partnerships that
operate qualified affordable housing projects. Also contributing are higher
returns on funds invested with outside fund managers and on investments
accounted for using the equity method of accounting. Investment income and
other increased by 12% to $14.5 million in the first half of 1999 over the first
half of 1998 due primarily to the gain mentioned above and to higher returns on
investments accounted for using the equity method of accounting.
Salaries and employee benefits increased by $5.0 million or 7%, to $75.0 million
in the second quarter of 1999 and increased by $9.3 million or 7% to $148.7
million in the first six months of 1999 over the respective periods in 1998.
These increases are due primarily to a 6% increase in employee headcount in the
period from June 30, 1998 to June 30, 1999, and to salary increases and
associated employee benefit costs in 1999.
Other operating expenses increased by 8% to $46.1 million in the second quarter
of 1999 and by 4% to $87.0 million in the first six months of 1999 over the
respective periods in 1998. These increases are associated with rent,
utilities, general office expenses, commissions paid to outside brokers,
professional fees, travel and other direct employee expenses. Increases in
rent, utilities and general office expenses are related to new leases, office
expansions and acquisitions done on a purchase basis. Increases in commissions
paid to outside brokers, professional fees, travel and other direct employee
expenses are generally a result of increased sales efforts and initiatives.
The effective income tax rate of 35% for the second quarter and first six months
of 1999 is equal to the statutory federal rate of 35%. The effective income tax
rate of 32.6% and 32.8% in the second quarter and first six months of 1998 is
less than the federal statutory rate of 35% due primarily to the effects of tax
benefits generated by certain investments which are partially offset by state
and foreign taxes.
Net earnings per common and common equivalent share for the second quarter of
1999 were $.66 compared to $.52 in 1998, a 27% increase. First half net
earnings per common and common equivalent share increased 16% from $1.17 in 1998
to $1.36 in 1999. These increases reflect the leverage of the growth in
revenues being higher than the growth in expenses. This is partially offset by
increases in the tax rate and shares outstanding in 1999.
-9-
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 the Company's operating segments is as follows
(in thousands):
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
--------- ---------- --------- ---------- --------
Three-month period ended June 30,
- ---------------------------------
1999
- ----
Total revenues $ 86,363 $46,509 $ 7,461 $ - $140,333
Earnings (loss) before income taxes 8,839 5,265 6,108 (949) 19,263
1998
- ----
Total revenues 82,969 41,412 3,081 - 127,462
Earnings (loss) before income taxes 8,836 5,035 2,073 (1,249) 14,695
Six-month period ended June 30,
- -------------------------------
1999
- ----
Total revenues 174,249 91,127 10,072 - 275,448
Earnings (loss) before income taxes 22,602 11,950 7,477 (2,348) 39,681
1998
- ----
Total revenues 167,856 80,532 7,591 - 255,979
Earnings (loss) before income taxes 19,668 9,384 5,736 (2,245) 32,543
Total Identifiable assets at June 30,
- -------------------------------------
1999 481,148 45,410 219,011 62,636 808,205
- ----
1998 455,929 40,024 189,434 43,471 728,858
- ----
Insurance Brokerage Services
Insurance Brokerage Services includes the Company's retail, reinsurance and
wholesale brokerage operations. Total revenues in the three and six-month
periods ended June 30, 1999 increased 4% to $86.4 million and 4% to $174.2
million, respectively, over the same periods in 1998. These increases are due
primarily to new business production significantly offset by lost business.
Earnings before income taxes in the second quarter of 1999 were $8.8 million,
which were flat with the same period in 1998. Earnings before income taxes in
the first six months of 1999 increased 15% to $22.6 million over the same period
in 1998. This increase is due primarily to new business production.
-10-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Risk Management Services
Risk Management Services includes the Company's third party claims
administration operations which are principally engaged in providing claims
management services for the Company's clients. Total revenues in the three and
six-month periods ended June 30, 1999 increased 12% to $46.5 million and 13% to
$91.1 million over the respective periods in 1998. These increases are due
primarily to strong new business production and favorable retention rates on
existing business.
Earnings before income taxes in the second quarter of 1999 increased over the
second quarter of 1998 by 5% or $.2 million to $5.3 million. In the first six
months of 1999, earnings before income taxes increased over the same period in
1998 by $2.6 million or 27% to $12.0 million. These increases are due primarily
to increased revenues.
Financial Services
Financial Services is primarily responsible for the Company's investments which
include investment strategies held as trading, marketable securities held as
available for sale, tax advantaged investments, investments on the equity method
of accounting, real estate partnerships and notes receivable from investees.
In the second quarter and first six months of 1999, revenues increased $4.4
million to $7.5 million and $2.5 million to $10.1 million over the respective
periods in 1998. In the second quarter and first six months of 1999, earnings
before income taxes increased $4.0 million to $6.1 million and $1.7 million to
$7.5 million over the respective periods in 1998. These increases are due in
large part to a $1.5 million gain from the first installment of a sale of
interests in limited partnerships that operate qualified affordable housing
projects and to higher returns on funds invested with outside fund managers and
on investments accounted for using the equity method of accounting.
Corporate
Corporate consists of unallocated administrative costs and the provision for
income taxes which is not allocated to the Company's operating entities.
Revenues are not normally recorded in this segment.
FINANCIAL CONDITION AND LIQUIDITY
The insurance brokerage industry is not capital intensive. The Company 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 the Company. Net cash
provided (used) by operating activities was $8.7 million and ($2.3 million) for
the six months ended June 30, 1999 and 1998 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 the Company's use, primarily premiums held as
fiduciary funds, have not been included in determining the Company's overall
liquidity.
The Company 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 months ended June 30, 1999, the Company
borrowed $20.0 million and repaid $5.0 million of short-term borrowings under
this agreement which was primarily used on a short-term basis
-11-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND LIQUIDITY (Continued)
to finance a portion of the Company's operations. As of June 30, 1999, there was
$15.0 million outstanding under this agreement. The Credit Agreement requires
the maintenance of certain financial covenants and the Company is currently in
compliance with these covenants.
The Company also has line of credit facilities of $45.0 million which expire on
April 30, 2000. Periodically, the Company will make short-term borrowings
under these facilities to meet short-term cash flow needs. During the six
months ended June 30, 1999, the Company borrowed $35.0 million and repaid $42.5
million of short-term borrowings under these facilities, which was primarily
used on a short-term basis to finance a portion of the Company's operations. As
of June 30, 1999, there was $7.5 million outstanding under these facilities.
As of June 30, 1999, the Company has committed to invest $7.5 million related to
two letter of credit arrangements with one of its equity investments and has
unconditionally guaranteed $30.0 million of debt that was incurred by another of
its investments. In addition, the Company has guaranteed an aggregate $9.3
million of funds through letters of credit or other arrangements related to
several investments and insurance programs of the Company. No funds have been
expended related to these guarantees.
Through the first six months of 1999, the Company paid $13.4 million in cash
dividends on its common stock. The Company's dividend policy is determined by
the Board of Directors and payments are fixed after considering the Company's
available cash from earnings and its known or anticipated cash needs. On July
15, 1999, the Company paid a second quarter dividend of $.40 per share to
Shareholders of Record as of June 30, 1999, a 14% increase over the second
quarter dividend per share in 1998.
Net capital expenditures were $8.5 million and $4.1 million for each of the six
month periods ended June 30, 1999 and 1998 respectively. The $4.4 million
increase is due primarily to expansion of facilities at the Company's
headquarters building in Itasca, Illinois. In 1999, the Company expects to make
expenditures for capital improvements of approximately $14.5 million. Capital
expenditures by the Company are related primarily to office moves and expansions
and updating computer systems and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
2000, to repurchase its common stock. Through the first six months of 1999, the
Company repurchased 291,000 shares at a cost of $13.7 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, the Company is authorized
to repurchase approximately 880,000 additional shares through June 30, 2000. The
Company 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.
YEAR 2000 COMPLIANCE
Computer programs that have time sensitive software may recognize the date "00"
as the Year 1900, rather than the Year 2000 which could result in system
failures or miscalculations causing disruptions
-12-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
YEAR 2000 COMPLIANCE (Continued)
of operations. With respect to this issue, the Company has completed an
assessment of its computer systems and software and has substantially completed
the necessary modifications or replacements of its existing software so that its
computer systems will function properly in the Year 2000 and beyond. Testing
and live use have taken place and will continue in 1999. Any additional
modifications found necessary will be made at that time. No contingency plans
are deemed necessary.
The Company has evaluated the impact on operations of the Year 2000 on non-
information technology systems and has determined that any potential impact
would not be material to the Company's operations.
Generally, system modifications and replacements and the associated costs were
contemplated with normal enhancements and improvements being made in conjunction
with updating financial reporting and operating systems. To date, the cost of
compliance has not been material and is not expected to be material in the
future.
The Company also has an ongoing program to review the status of Year 2000
compliance efforts of its business partners and vendors. While the Company
believes it is taking the appropriate steps to assure the Company's Year 2000
compliance, it is also dependent on business partner, vendor and client
compliance to some extent. Consequently, any Year 2000 compliance problems that
may be experienced by the Company's business partners, vendors or clients could
have a material adverse effect on the Company's future financial condition and
future operating results. No assurance can be given that the Company's and
these other entities' efforts will completely address the Year 2000 issue.
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 the Company are subject to risks and
uncertainties, including but not limited to the following: the Company's
commission revenues are highly dependent on premiums charged by insurers, which
are subject to fluctuation; the property/casualty insurance industry continues
to experience a prolonged soft market (low premium rates) thereby reducing
commissions; lower interest rates will reduce the Company's income earned on
invested funds; the alternative insurance market continues to grow which could
unfavorably impact commission and favorably impact fee revenue; the Company'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 the
Company's renewal business; the Company's operating results and financial
position may be adversely impacted by exposure to various market risks such as
interest rate, equity pricing and foreign exchange rates; and the Company's Year
2000 compliance efforts depend upon compliance efforts of the Company's business
partners, vendors and clients. The Company'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 the
Company. Accordingly, actual results may differ materially from those set forth
in the forward-looking statements.
-13-
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 18, 1999, 15,380,642 shares of the Company's Common Stock, or 85% of
the total Common Stock outstanding on the record date for such meeting,
were represented.
Among other things, the Stockholders of the Company elected Mr. Michael J.
Cloherty, Mr. Jack M. Greenberg, and Mr. Philip A. Marineau as Class III
directors with terms expiring in 2002. Of the shares voted with respect to
the election of Mr. Cloherty, 15,036,091 were voted in favor and 344,551
were voted against. Of the shares voted with respect to the election of
Mr. Greenberg, 15,095,191 were voted in favor and 285,451 were voted
against. Of the shares voted with respect to the election of Mr. Marineau,
15,095,191 were voted in favor and 285,451 were voted against.
Continuing as Class I Directors with terms expiring in 2000 are T. Kimball
Brooker, J. Patrick Gallagher, Jr., and James R. Wimmer. 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.
The Stockholders of the Company also ratified the appointment of Ernst &
Young LLP as independent auditors for the fiscal year ending December 31,
1999.
Item 6. Exhibits and Reports on Form 8-K
a. 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, 1999.
-14-
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, 1999.
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-