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, 1996 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) (708) 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, 1996 was 15,280,385.
ARTHUR J. GALLAGHER & CO. INDEX <TABLE> <CAPTION> <S> <C> 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, 1996 and 1995 . . . . . . . . . . . . . . . . . . 3 Consolidated Balance Sheet at June 30, 1996 and December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statement of Cash Flows for the six-month periods ended June 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 7-8 Part II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 9 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 9 Exhibit 3.1 - Restated Certificate of Incorporation of the Company as Amended Exhibit 3.5 - Amendment to the Rights Agreement dated as of May 12, 1987 Exhibit 11.0 - Computation of Net Earnings Per Common and Common Equivalent Share (Unaudited) Exhibit 13.0 - Liquidity and Capital Resources (from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" from Form 10-K for fiscal year ended December 31, 1995) Exhibit 27.0 - Financial Data Schedule Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 </TABLE> -2-
ARTHUR J. GALLAGHER & CO. CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) <TABLE> <CAPTION> Three-month period ended Six-month period ended June 30, June 30, 1996 1995 1996 1995 ---------- ---------- ---------- ---------- (in thousands, except per share data) <S> <C> <C> <C> <C> Revenues: Commissions $ 56,490 $53,702 $114,677 $111,134 Fees 41,432 38,419 79,624 74,823 Investment income and other 4,661 3,472 8,999 6,326 -------- ------- -------- -------- Total revenues 102,583 95,593 203,300 192,283 Expenses: Salaries and employee benefits 57,171 54,240 112,546 108,441 Other operating expenses 34,713 32,582 67,617 64,753 -------- ------- -------- -------- Total expenses 91,884 86,822 180,163 173,194 -------- -------- -------- -------- Earnings before income taxes 10,699 8,771 23,137 19,089 Provision for income taxes 3,638 3,184 7,867 6,774 -------- ------- -------- -------- Net earnings $ 7,061 $ 5,587 $ 15,270 $ 12,315 ======== ======= ======== ======== Net earnings per common and common equivalent share $ .43 $ .34 $ .92 $ .75 Dividends declared per common share $ .29 $ .25 $ .58 $ .50 Weighted average number of common and common equivalent shares outstanding 16,921 16,420 17,057 16,324 </TABLE> See accompanying notes. -3-
ARTHUR J. GALLAGHER & CO. CONSOLIDATED BALANCE SHEET (UNAUDITED) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1996 1995 ---------- ------------- (In thousands) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 47,962 $ 53,764 Restricted cash 56,330 69,043 Premiums and fees receivable 205,855 194,330 Investment strategies - trading 52,127 46,123 Other 23,804 20,615 -------- -------- Total current assets 386,078 383,875 Marketable securities - available for sale 40,589 41,712 Other noncurrent assets 40,384 42,223 Fixed assets 70,960 67,569 Accumulated depreciation and amortization (47,282) (44,850) -------- -------- Net fixed assets 23,678 22,719 Intangible assets - net 6,926 7,576 -------- -------- $497,655 $498,105 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Premiums payable to insurance companies $276,627 $265,181 Accrued salaries and bonuses 5,857 13,468 Accounts payable and other accrued liabilities 60,176 57,160 Unearned fees 13,880 12,746 Income taxes payable 8,509 10,409 Other 11,427 6,907 -------- -------- Total current liabilities 376,476 365,871 Deferred income taxes and other noncurrent accounts 10,562 13,801 Stockholders' equity: Common stock - issued and outstanding 15,280 shares in 1996 and 15,538 shares in 1995 15,280 15,538 Retained earnings 95,563 102,861 Unrealized holding (loss) gain on available for sale securities - net of income taxes (226) 34 -------- -------- Total stockholders' equity 110,617 118,433 -------- -------- $497,655 $498,105 ======== ======== </TABLE> See accompanying notes. -4-
ARTHUR J. GALLAGHER & CO. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six-month period ended June 30, 1996 1995 ------- -------- (in thousands) <S> <C> <C> Cash flows from operating activities: Net earnings $ 15,270 $ 12,315 Adjustments to reconcile net earnings to net cash provided by operating activities: Net gain on investments (2,054) (187) Depreciation and amortization 4,766 4,755 Decrease (increase) in restricted cash 12,713 (5,646) Increase in premiums receivable (7,653) (15,724) Increase in premiums payable 11,446 30,077 Increase in trading investments - net (4,274) (2,648) (Increase) decrease in other current assets (3,189) 51 Decrease in accrued salaries and bonuses (7,611) (4,726) Increase in accounts payable and other accrued liabilities 2,180 694 Decrease in income taxes payable (1,900) (5,722) (Decrease increase in deferred taxes (896) 646 Other 2,081 9,702 -------- -------- Net cash provided by operating activities 20,879 23,587 -------- -------- Cash flows from investing activities: Purchases of marketable securities (14,009) (9,276) Proceeds from the sale of marketable securities 13,999 7,680 Proceeds from maturities of marketable securities 1,024 1,127 Additions to fixed assets (5,075) (5,539) Other 63 204 -------- -------- Net cash used by investing activities (3,998) (5,804) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 5,825 4,886 Tax benefit from issuance of common stock 1,364 1,193 Repurchase of common stock (19,887) (5,224) Dividends paid (8,391) (7,005) Retirement of long-term debt (630) (1,130) Equity transactions of pooled companies prior to dates of acquisition (964) 211 -------- -------- Net cash used by financing activities (22,683) (7,069) -------- -------- Net (decrease) increase in cash and cash equivalents (5,802) 10,714 Cash and cash equivalents at beginning of period 53,764 44,306 -------- -------- Cash and cash equivalents at end of period $ 47,962 $ 55,020 ======== ======== Supplemental disclosures of cash flow information: Interest paid $ 217 $ 270 Income taxes paid $ 9,387 $ 10,746 </TABLE> See accompanying notes. -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, 1995 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 1995 Annual Report to Stockholders. 2. ACQUISITIONS - POOLINGS OF INTERESTS On February 29, 1996, the Company acquired substantially all of the net assets of Levitt/Kristan Company in exchange for approximately 112,000 shares of its Common Stock. This acquisition was accounted for as a pooling of interests. The consolidated financial statements for all periods prior to the acquisition date have been restated to include the operations of this company. The following summarizes the restatement to reflect this acquisition (in thousands): <TABLE> <CAPTION> ATTRIBUTABLE THREE-MONTH PERIOD ARTHUR J. TO POOLED ENDED JUNE 30, 1995 GALLAGHER & CO. COMPANIES AS RESTATED ------------------- --------------- ------------ ----------- <S> <C> <C> <C> Revenues $ 94,893 $ 700 $ 95,593 Net earnings (loss) $ 5,875 $ (288) $ 5,587 ======== ====== ======== SIX-MONTH PERIOD ENDED JUNE 30, 1995 ------------------- Revenues $190,498 $1,785 $192,283 Net earnings (loss) $ 12,511 $ (196) $ 12,315 ======== ====== ======== </TABLE> On May 31, 1996, the Company acquired substantially all of the net assets of Alliance Insurance Group, Inc. in exchange for approximately 64,000 shares of its Common Stock. This acquisition was accounted for as a pooling of interests and was not material to the Company. On July 1, 1996, the Company acquired substantially all of the net assets of Lamberson Koster & Company in exchange for approximately 391,000 shares of its Common Stock. This acquisition will be accounted for as a pooling of interests. -6-
ARTHUR J. GALLAGHER & CO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AND LIQUIDITY Reference is made to the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 1995 Form 10-K Annual Report for a description of the Company's need for and ability to generate capital, which description is hereby incorporated by reference. See Exhibit 13.0. Since the Company filed its 1995 Form 10-K Annual Report, it extended its line of credit facility of $17.5 million to April 30, 1997, and borrowed $10 million against this facility. RESULTS OF OPERATIONS Extremely soft pricing in the insurance marketplace continues, and the Company remains doubtful that price increases will change significantly in the remainder of 1996. Commission revenues increased by 5% to $56.5 million in the second quarter of 1996 and by 3% to $114.7 million in the first half of 1996 over the respective periods in 1995. These increases are due principally to new business production partially offset by lost business. Fee revenues increased by 8% to $41.4 million in the second quarter of 1996 and by 6% to $79.6 million in the first six months over the respective periods in 1995. These increases reflect new business production and to a lesser extent renewal fee increases of self-insurance products generated primarily by Gallagher Bassett Services, Inc. (a Company subsidiary), partially offset by lost business. Investment income and other increased 34% to $4.7 million in the second quarter of 1996 and by 42% to $9.0 million in the first half of 1996 over the respective periods in 1995. These increases were due primarily to significantly higher returns on funds invested with outside fund managers. Total expenses increased by 6% or $5.1 million in the second quarter of 1996 from the same period in 1995 and increased by 4% or $7.0 million in the first half of 1996 over the same period in 1995. Salaries and employee benefits increased by $2.9 million or 5% to $57.2 million in the second quarter of 1996 and by $4.1 million or 4% to $112.5 million in the first six months of 1996 over the respective periods in 1995. These increases are due principally to increased employee head count combined with salary increases and higher employee fringe benefit costs. Other operating expenses increased by $2.1 million or 7% to $34.7 million in the second quarter of 1996 and by 4% to $67.6 million in the first six months of 1996 over the respective periods in 1995. These increases are due primarily to new and expanded offices and costs associated with more rentable space and general office expenses and increased business insurance costs. Travel and other direct employee expenses were up due to the growth in sales volume and employee head count. The effective income tax rate of 34% for the second quarter and first six months of 1996 is less than the statutory federal rate of 35% and is less than the Company's effective tax rate of 36% and 35% for the second quarter and first six months of 1995, respectively. These differences are due primarily to the net effect of state and foreign taxes which are substantially offset by the tax benefits of certain investments. -7-
ARTHUR J. GALLAGHER & CO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Earnings per share for the second quarter of 1996 were $.43 compared to $.34 in 1995, a 26% increase. First half earnings per share increased 23% from $.75 in 1995 to $.92 in 1996. These earnings per share increases reflect the growth in revenues and a smaller growth in expenses noted above. 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 and casualty insurance industry continues to experience a prolonged soft market despite high losses; continued low interest rates will reduce income earned on invested funds; the insurance brokerage and service businesses are extremely competitive with a number of competitors being substantially larger than the Company; the alternative insurance market continues to grow; the Company's revenues vary significantly from quarter to quarter as a result of the timing of policy renewals 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 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. Attention is also directed to other risk factors set forth in documents filed by the Company with the Securities and Exchange Commission. -8-
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 21, 1996, 14,052,568 shares of the Company's Common Stock, or 90.5% of the total Common Stock outstanding on the record date for such meeting, were represented. Among other things, the stockholders of the Company approved an amendment to the Company's 1988 Nonqualified Stock Option Plan increasing the number of shares of Common Stock from 5,500,000 to 6,175,000. Of the shares voted with respect to this proposal, 8,544,184 were voted in favor, 5,155,059 were voted against and 353,325 abstained. The stockholders of the Company approved an amendment to the Company's 1989 Non-Employee Directors' Stock Option Plan increasing the number of shares of Common Stock from 106,000 to 200,000. Of the shares voted with respect to this proposal, 9,231,678 were voted in favor, 4,466,725 were voted against and 354,165 abstained. The stockholders of the Company approved an amendment to the Company's Restated Certificate of Incorporation increasing the authorized Common Stock from 50,000,000 to 100,000,000 shares. Of the shares voted with respect to this proposal, 12,899,891 were voted in favor, 1,108,197 were voted against and 44,480 abstained. ITEM 5. OTHER INFORMATION On July 18, 1996, the Board of Directors of the Company authorized an amendment to the Rights Agreement between the Company and Harris Trust and Savings Bank extending the Agreement until May 12, 2007. The Agreement would have terminated in accordance with its original terms on May 12, 1997. Exhibit 3.5 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibit 3.1 - Restated Certificate of Incorporation of the Company as Amended. Exhibit 3.5 - Amendment to the Rights Agreement dated as of May 12, 1987. Exhibit 11.0 - Computation of Net Earnings Per Common and Common Equivalent Share (Unaudited). Exhibit 13.0 - Liquidity and Capital Resources (from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" from Form 10-K for fiscal year ended December 31, 1995). 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, 1996. -9-
SIGNATURES Pursuant to the requirements 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. ARTHUR J. GALLAGHER & CO. Date: July 29, 1996 /s/Michael J. Cloherty ---------------------------------------- Michael J. Cloherty Executive Vice President - Finance Chief Financial Officer /s/David B. Hoch --------------------------------------- David B. Hoch Controller Chief Accounting Officer -10-