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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
[ ] 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
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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 Identification Number)
incorporation or organization)
Two Pierce Place 60143-3141
Itasca, Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (630) 773-3800
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
Common Stock, par value on which registered
$1.00 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported price at which the stock
was sold on February 29, 2000 was $884,627,000.
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of February 29, 2000 was 37,088,000.
Portions of documents incorporated by Part of Form 10-K into which document
reference into this report is incorporated
ARTHUR J. GALLAGHER & CO. PART III
Proxy Statement dated March 30, 2000
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PART I
Item 1. Business.
Arthur J. Gallagher & Co. and its subsidiaries (collectively referred to as
"Gallagher" unless the context otherwise requires) are engaged in providing
insurance brokerage, risk management and related services to clients in the
United States and abroad. Gallagher's principal activity is the negotiation and
placement of insurance for its clients. Gallagher also specializes in
furnishing risk management services. Risk management involves assisting clients
in analyzing risks and determining whether proper protection is best obtained
through the purchase of insurance or through retention of all or a portion of
those risks and the adoption of corporate risk management policies and cost-
effective loss control and prevention programs. Risk management services also
include claims management, loss control consulting and property appraisals.
Gallagher believes that its ability to deliver a comprehensively structured
risk management and brokerage service is one of its major strengths.
Gallagher operates through a network of approximately 200 offices located
throughout the United States and six countries abroad and through a network of
correspondent brokers and consultants in more than 100 countries around the
world. Some of these offices are fully staffed with sales, marketing, claims
and other service personnel; others function as servicing offices for the
brokerage and risk management service operations of Gallagher. Gallagher's
international operations include a Lloyd's of London broker and affiliated
companies in London, England and other facilities in Australia, Bermuda,
Canada, Scotland and Papua New Guinea.
Gallagher was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. Gallagher's executive offices are located at Two Pierce
Place, Itasca, Illinois 60143-3141, and its telephone number is (630) 773-3800.
Stock Split
In January 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
March 15, 2000 to shareholders of record as of March 1, 2000. As a result of
this action, par value of the common stock remains at $1.00 per share. All
information relating to the number of common shares and per common share
amounts appearing in this Annual Report on Form 10-K have been restated to give
retroactive effect to the stock split for all periods presented.
Operating Segments
Gallagher has identified three operating segments in addition to its
corporate operations. Insurance Brokerage Services encompasses operations that,
for commission or fee compensation, place or arrange to place insurance
directly related to the clients' funding of risk. This segment also provides
consulting services for fee compensation. Risk Management Services 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 comprehensive
claims management programs for Gallagher's clients or clients of other brokers.
Financial Services is primarily comprised of Gallagher's investment operations.
Corporate consists primarily of unallocated administrative costs and the
provision for income taxes which is not allocated to Gallagher's operating
segments.
The two major sources of operating revenues for Gallagher are commissions
from insurance brokerage operations and service fees primarily from risk
management operations. Information with respect to all sources of revenue, by
operating segment, for each of the three years in the period ended December 31,
1999, is as follows (in thousands):
1999 1998* 1997*
-------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- -----
Commissions
Insurance Brokerage Services..... $342,922 57 $328,177 59 $305,344 58
Risk Management Services......... -- -- 467 -- 381 --
Fees
Insurance Brokerage Services..... 47,035 8 44,654 8 43,553 8
Risk Management Services......... 187,594 31 167,377 30 141,403 27
Investment income and other
Insurance Brokerage Services..... 7,734 1 8,815 1 9,032 2
Risk Management Services......... 769 -- 996 -- 977 --
Financial Services............... 19,782 3 9,161 2 14,921 3
Non-recurring gains................ -- -- -- -- 8,993 2
-------- --- -------- --- -------- ---
Total revenues................... $605,836 100 $559,647 100 $524,604 100
======== === ======== === ======== ===
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*Restated for six 1999 acquisitions accounted for as poolings of interests.
See Note 2 to the Consolidated Financial Statements for a summary of the
effects of these restatements on the 1998 and 1997 consolidated financial
statements.
See Note 13 to the Consolidated Financial Statements for additional financial
information, including earnings before income taxes and identifiable assets, by
operating segment, for 1999, 1998 and 1997.
Gallagher's revenues vary significantly from quarter to quarter as a result
of the timing of policy inception dates, which traditionally are heaviest in
the third quarter, whereas expenses are fairly uniform throughout the year. See
Note 12 to the Consolidated Financial Statements for unaudited quarterly
operating results for 1999 and 1998.
Insurance Brokerage Services
The Insurance Brokerage Services segment is principally comprised of two
divisions, the Brokerage Services Division (BSD) and Gallagher Benefit Services
(GBS).
BSD places insurance for and services commercial, industrial, institutional,
governmental, religious and personal accounts throughout the United States and
abroad. BSD acts as an agent in soliciting, negotiating and effecting contracts
of insurance through insurance companies worldwide, as a broker in procuring
contracts of insurance on behalf of insureds, and in setting up and managing
self-insured programs. BSD has the capability to handle insurable risks and
related coverages for all forms of property/casualty products. BSD also places
surplus lines coverages, which are coverages for various specialized risks not
available from insurance companies licensed by the states in which the risks
are located. In addition, BSD places reinsurance coverages for its insurance
company clients.
GBS specializes in the management of employee benefit programs through fully
insured and self-insured programs. GBS provides services in connection with the
design, financing, implementation, administration and communication of
compensation and employee benefit programs (including pension and profit-
sharing plans, group life, health, accident and disability insurance programs
and tax deferral plans), and provides other professional services in connection
therewith.
2
The primary source of Gallagher's compensation for its Insurance Brokerage
Services segment is commissions paid by insurance companies which are usually
based upon a percentage of the premium paid by the insured. Commission rates
are dependent on a number of factors including the type of insurance, the
particular insurance company and the capacity in which Gallagher acts. In some
cases, Gallagher is compensated for brokerage or advisory services directly by
fees from clients. Gallagher may also receive contingent commissions which are
based on the profit the underwriting insurance company earns and/or the overall
volume of business placed by Gallagher in a given period of time. Occasionally,
Gallagher shares commissions with other brokers who have participated with
Gallagher in placing insurance or servicing insureds. GBS receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.
Risk Management Services
The Risk Management Services segment is principally comprised of two wholly
owned subsidiaries, Gallagher Bassett Services, Inc. (Gallagher Bassett) and
Gallagher Benefit Administrators, Inc. (GBA).
Gallagher Bassett provides a variety of professional consulting services to
assist clients in analyzing risks and in determining whether proper protection
is best obtained through the purchase of insurance or through retention of all
or a portion of those risks and the adoption of risk management policies and
cost-effective loss control and prevention programs. A full range of risk
management services is offered including claims management, risk control
consulting services, information management, property appraisals and insurance
related investigative services on a totally integrated or select, stand-alone
basis. Gallagher Bassett provides these services for Gallagher's clients
through a network of over 120 service offices located throughout the United
States, Canada, England, Scotland, Australia and Papua New Guinea.
Gallagher believes that Gallagher Bassett's risk management services are an
important factor in securing new and retaining Insurance Brokerage Services'
clients who are interested in risk management related services. Gallagher
Bassett also markets these services directly to clients on an unbundled basis
independent of Gallagher's Insurance Brokerage Services in order to capitalize
on the interest in risk management created by market conditions.
In connection with its risk management services, Gallagher Bassett provides
"self-insurance" programs for large institutions, risk sharing pools and
associations, and large commercial and industrial customers. Self-insurance, as
administered by Gallagher Bassett, is a program in which the client assumes a
manageable portion of its insurance risks, usually (although not always)
placing the less predictable and larger loss exposures with an insurance
carrier that specializes in these less predictable exposures.
GBA is a third-party administrator that serves the self-funded employee
health benefit marketplace by integrating effective managed care and quality
assurance programs with claims administration services. The employee health
benefit services provided by GBA are, in many instances, directly supported by
GBS.
Gallagher Bassett's and GBA's revenues for risk management services are
substantially in the form of fees. These fees are typically negotiated in
advance on an annual basis based upon the estimated value of the services to be
performed.
Financial Services
The Financial Services segment is primarily 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, real estate partnerships and
notes receivable from investees.
3
Tax advantaged investments represent amounts invested by Gallagher in limited
partnerships that operate qualified affordable housing or alternative energy
projects. Gallagher receives tax benefits in the form of tax deductions for
operating losses and tax credits from these investments. Investments in real
estate partnerships primarily represent an investment in a limited partnership
that owns 10,000 acres of land to be developed near Orlando, Florida. Notes
receivable from investees represent secured loans made by Gallagher to several
of its equity and limited partnership investments. Financial Services is
primarily responsible for the management of Gallagher's own investments but is
expanding these investment management services in conjunction with the
insurance products Gallagher markets to its clients. These investments and the
associated returns are for the benefit of Gallagher.
International Operations
Total revenues by geographic area for each of the three years in the period
ended December 31, 1999 are as follows (in thousands):
1999 1998* 1997*
-------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- -----
United States..................... $556,879 92 $514,883 92 $486,438 93
Foreign, principally United
Kingdom and Bermuda.............. 48,957 8 44,764 8 38,166 7
-------- --- -------- --- -------- ---
Total revenues.................. $605,836 100 $559,647 100 $524,604 100
======== === ======== === ======== ===
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*Restated for six 1999 acquisitions accounted for as poolings of interests.
The Insurance Brokerage Services segment's international operations are
principally comprised of a Lloyd's of London broker and an insurance brokerage
and risk management joint venture in the United Kingdom; an insurance brokerage
operation and a rent-a-captive insurance company facility in Bermuda; and a
network of correspondent brokers and consultants in more than 100 countries
around the world.
Arthur J. Gallagher (UK) Limited (AJG UK), a wholly owned Lloyd's of London
brokerage subsidiary of Gallagher based in London, provides brokerage and other
services to clientele primarily located outside of the United Kingdom. The
principal activity of AJG UK is to negotiate and place insurance and
reinsurance with Lloyd's of London underwriters and insurance companies
worldwide. Its brokerage services encompass four major categories: aviation,
marine, reinsurance (treaty and facultative) and property/casualty (risks
predominantly located in North America). Although AJG UK is located in London,
the thrust of its business development has been with non-United Kingdom
brokers, agents and insurers rather than domestic United Kingdom retail
business. Its clients are primarily insurance and reinsurance companies,
underwriters at Lloyd's of London, Gallagher and its non-United Kingdom
subsidiaries, other independent agents and brokers and major business
corporations requiring direct insurance and reinsurance placements.
Risk Management Partners Ltd. (RMP) is a 50% owned joint venture between
Gallagher and Munich-American Re Corporation that markets customized insurance
and risk management products and services to United Kingdom public entities
through offices in England and Scotland. RMP was formed six years ago and
Gallagher believes that RMP is now the third largest provider of insurance
brokerage related services to the public entity market in the United Kingdom.
Arthur J. Gallagher & Co. (Bermuda) Limited provides clients with direct
access to the risk-taking capacity of Bermuda-based insurers for both direct
and reinsurance placements. It also acts as a wholesaler to Gallagher's
marketing efforts by accessing foreign insurance and reinsurance companies in
the placement of United States and foreign risks. In addition, it provides
services relating to the formation and management of offshore captive insurance
companies.
4
Gallagher has ownership interests in two Bermuda-based insurance companies
that operate "rent-a-captive" facilities; Artex Insurance Company Ltd., a
partially owned joint venture, and Protected Insurance Company, a wholly owned
subsidiary. Rent-a-captives enable clients to receive the benefits of owning a
captive insurance company without the disadvantages of ownership. Captive
insurance companies are created to insure risk and capture underwriting profit
and investment income, which is then available for use by the insured generally
for reducing future costs of their insurance programs.
Insurance Brokerage Services also has relationships with a variety of
international brokers in countries where Gallagher does not have a physical
presence. Through a network of correspondent brokers and consultants in more
than 100 countries around the world, Gallagher is able to fully serve its
clients' coverage and service needs wherever their operations are located.
The Risk Management Services segment's international operations are
principally comprised of the following risk management companies in London,
Australia and Papua New Guinea:
Gallagher Bassett International Ltd. (UK) (Gallagher Bassett (UK)), a wholly
owned subsidiary of Gallagher Bassett, provides risk management services for
foreign operations, as well as United States operations that are foreign
controlled. Headquartered in London with offices throughout England and
Scotland, Gallagher Bassett (UK) works with insurance companies, reinsurance
companies, overseas brokers, and risk managers of overseas organizations.
Services include consulting, claims management, information management, loss
control and property valuations.
Wyatt Gallagher Bassett Pty Ltd is a 50% owned joint venture of Gallagher
Bassett that is headquartered in Brisbane, Australia with facilities located
throughout Australia and Papua New Guinea. Wyatt Gallagher Bassett is
principally engaged in providing claims adjusting and risk management services
in Australasia.
Gallagher also has risk management service facilities in Canada that are not
material to Gallagher's Risk Management Services segment.
See Notes 11 and 13 to the Consolidated Financial Statements for additional
financial information related to Gallagher's foreign operations, including
earnings before income taxes and identifiable assets, by operating segment, for
1999, 1998 and 1997.
Markets and Marketing
A large portion of the commission and fee business of Gallagher is derived
from all types of business institutions, not-for-profit organizations,
associations and municipal and other governmental entities. In addition,
Gallagher's clients include large United States and multinational corporations
engaged in a broad range of commercial and industrial businesses. Gallagher
also places insurance for individuals, although this portion of the business is
not material to Gallagher's operations. Gallagher services its clients through
its network of approximately 200 offices in the United States and six countries
abroad. No material part of Gallagher's business is dependent upon a single
customer or on a few customers, the loss of any one or more of which would have
a materially adverse effect on Gallagher. In 1999, the largest single customer
represented less than 2% of total revenues.
Gallagher believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of reinsurance,
is one of its major strengths. Gallagher also believes that its risk management
business enhances and attracts insurance brokerage business due to the nature
and strength of business relationships which it forms with clients when
providing a variety of risk management services on an on-going basis.
Gallagher requires its employees serving in a sales or marketing capacity,
including all executive officers of Gallagher, to enter into agreements with
Gallagher restricting disclosure of confidential information and solicitation
of clients and prospects of Gallagher upon their termination of employment. The
confidentiality and non-solicitation provisions of such agreements terminate in
the event of a hostile change in control of Gallagher, as defined therein.
5
Competition
Gallagher believes it is the fourth largest insurance broker worldwide in
terms of total revenues. The insurance brokerage and service business is highly
competitive and there are many insurance brokerage and service organizations as
well as individuals throughout the world who actively compete with Gallagher in
every area of its business. Three competing firms are significantly larger and
have several times the commission and/or fee revenues of Gallagher. There are
firms in a particular region or locality which are as large or larger than the
particular local office of Gallagher. Gallagher believes that the primary
factors determining its competitive position with other organizations in its
industry are the quality of the services rendered and the overall costs to its
clients.
Gallagher is also in competition with certain insurance companies that write
insurance directly for their customers. Government benefits relating to health,
disability, and retirement are also alternatives to private insurance and hence
indirectly compete with the business of Gallagher. To date, such direct writing
and government benefits have had, in the opinion of Gallagher, relatively
little effect on its business and operations, but Gallagher can make no
prediction as to their effect in the future.
Regulation
In every state and foreign jurisdiction in which Gallagher does business,
Gallagher or an employee is required to be licensed or receive regulatory
approval in order for Gallagher to conduct business. In addition to licensing
requirements applicable to Gallagher, most jurisdictions require that
individuals who engage in brokerage and certain insurance service activities be
personally licensed.
Gallagher's insurance brokerage and risk management operations depend on its
continued good standing under the licenses and approvals pursuant to which it
operates. Licensing laws and regulations vary from jurisdiction to
jurisdiction. In all jurisdictions, the applicable licensing laws and
regulations are subject to amendment or interpretation by regulatory
authorities. Generally such authorities are vested with relatively broad and
general discretion as to the granting, renewing and revoking of licenses and
approvals.
1999 Acquisitions
In 1999, Gallagher acquired five insurance brokerage firms and two benefits
consulting companies.
On November 30, 1999, Gallagher acquired substantially all of the net assets
of Sternfels Insurance Agency, Inc., a Louisiana corporation engaged in the
insurance brokerage and services business in exchange for 96,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Four principals and two key employees entered into three-year
employment agreements with Gallagher.
On August 31, 1999, Gallagher acquired substantially all of the net assets of
Group Benefit Concepts, Inc., a North Carolina corporation engaged in the
benefits consulting business in exchange for 91,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests.
Three principals entered into three-year employment agreements with Gallagher.
On August 31, 1999, Gallagher acquired substantially all of the net assets of
Stanley E. Clark & Associates, Inc., a Washington, D.C. corporation engaged in
the benefits consulting business in exchange for 61,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests. One
employee entered into a two-year employment agreement with Gallagher.
On May 1, 1999, Gallagher acquired substantially all of the net assets of R.
W. Thom & Company, Inc., a California corporation engaged in the insurance
brokerage business in exchange for a cash payment of $250,000. This acquisition
was accounted for as a purchase. The principal entered into a three-year
employment agreement with Gallagher.
6
On February 28, 1999, Gallagher acquired substantially all of the net assets
of Goodman Insurance Agency, Inc., a California corporation engaged in the
insurance brokerage and services business in exchange for 315,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. The principal entered into a three-year employment agreement with
Gallagher.
On February 28, 1999, Gallagher acquired substantially all of the net assets
of Dodson-Bateman & Company, a Texas corporation engaged in the insurance
brokerage and services business in exchange for 295,000 shares of Gallagher's
common stock. This acquisition was accounted for as a pooling of interests. Two
principals and one key employee entered into three-year employment agreements
with Gallagher.
On February 28, 1999, Gallagher acquired substantially all of the net assets
of Associated Risk Managers of California, Insurance Producers, dba ARM of
California, a California corporation engaged in the insurance brokerage and
services business in exchange for 198,000 shares of Gallagher's common stock.
This acquisition was accounted for as a pooling of interests. One principal
entered into a three-year employment agreement with Gallagher.
For the 1999 acquisitions 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. See Note
2 to the Consolidated Financial Statements for a summary of the effects of
these restatements on the 1998 and 1997 consolidated financial statements.
2000 Acquisitions
The following acquisitions have occurred since December 31, 1999:
Effective on 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. This
acquisition was accounted for as a purchase. Eight principals and seven key
employees entered into three-year employment agreements with Gallagher.
Effective on February 29, 2000, Gallagher acquired substantially all of the
net assets of R. L. Youngdahl & Associates, Inc., a Minnesota corporation
engaged in the insurance brokerage and services business in exchange for 69,000
shares of Gallagher's common stock. This acquisition was accounted for as a
pooling of interests. One principal entered into a three-year employment
agreement with Gallagher and one key employee entered into a two-year
employment agreement with Gallagher.
Effective on February 29, 2000, Gallagher acquired substantially all of the
net assets of Rebholz Insurance Agency, Inc., a Missouri corporation engaged in
the insurance brokerage and services business in exchange for 42,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Three principals entered into three-year employment agreements with
Gallagher.
Effective on February 29, 2000, Gallagher acquired substantially all of the
net assets of Towle Agency, Inc., a Minnesota corporation engaged in the
insurance brokerage and services business in exchange for 37,000 shares of
Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. Two principals entered into three-year employment agreements with
Gallagher and one key employee entered into a two-year employment agreement
with Gallagher.
Effective on February 29, 2000, Gallagher acquired substantially all of the
net assets of Powell Insurance Services, Inc., an Illinois corporation engaged
in the insurance brokerage and services business in exchange for 19,000 shares
of Gallagher's common stock. This acquisition was accounted for as a pooling of
interests. One principal entered into a three-year employment agreement with
Gallagher.
7
Gallagher believes that the net effect of its acquisitions has been and will
be to expand the volume of general services rendered by Gallagher and the
geographical areas in which Gallagher renders such services and not to change
substantially the nature of the services performed by Gallagher.
Gallagher is considering and intends to consider from time to time additional
acquisitions and divestitures on terms that it deems advantageous. Gallagher at
this time is engaged in preliminary discussions with a number of candidates for
possible future acquisitions but has no signed contracts or agreements in
principle to make additional acquisitions. No assurances can be given that any
additional acquisitions or divestitures will be consummated, or, if
consummated, will be advantageous to Gallagher.
Employees
As of December 31, 1999, Gallagher employed approximately 4,600 employees,
none of whom are represented by a labor union. Gallagher continuously reviews
benefits and other matters of interest to its employees and considers its
relations with its employees to be satisfactory.
Item 2. Properties.
Gallagher's executive offices and certain subsidiary and branch facilities
are located at Two Pierce Place, Itasca, Illinois, where Gallagher leases
approximately 225,000 square feet of space. The lease commitment on the above
mentioned property expires February 28, 2006. Gallagher generally operates in
leased premises. Certain office space leases have options permitting renewals
for additional periods. In addition to minimum fixed rentals, a number of
leases contain annual escalation clauses generally related to increases in an
inflation index. See Note 10 to the Consolidated Financial Statements for
information with respect to Gallagher's lease commitments at December 31, 1999.
Item 3. Legal Proceedings.
Gallagher is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that none of the litigation will have a
material effect, individually or in the aggregate, on Gallagher's consolidated
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during Gallagher's
fourth fiscal quarter ended December 31, 1999.
Item 4A. Executive Officers of the Registrant.
The executive officers of Gallagher are as follows:
Name Age Position and Year First Elected
---- --- -------------------------------
J. Patrick Gallagher, 48 President since 1990, Chief Executive Officer since 1995
Jr.....................
Michael J. Cloherty..... 52 Executive Vice President since 1996, Chief Financial Officer since 1981
and Vice President--Finance 1981-1996
James J. Braniff III.... 60 Vice President since 1995
Peter J. Durkalski...... 49 Vice President since 1990
James W. Durkin, Jr..... 50 Vice President since 1985
David E. McGurn, Jr..... 46 Vice President since 1993
Each such person has been principally employed by Gallagher in management
capacities for more than the past five years. All executive officers are
elected annually and serve at the pleasure of the Board of Directors.
8
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Gallagher's common stock is listed on the New York Stock Exchange, trading
under the symbol "AJG." The following table sets forth information as to the
price range of Gallagher's common stock for the two-year period January 1, 1998
through December 31, 1999 and the dividends declared per common share for such
period. The table reflects the range of high and low sales prices per share as
reported on the Consolidated Transaction Reporting System for securities listed
on the New York Stock Exchange. All of the information in the table has been
adjusted to reflect a two-for-one stock split, effected in the form of a 100%
stock dividend, that was declared in January 2000 and paid on March 15, 2000.
Dividends
Declared
Per Common
Quarterly Periods High Low Share
- ----------------- -------- --------- ----------
1999
- ----
First........................................... $25 5/16 $21 1/8 $.20
Second.......................................... 25 7/32 23 .20
Third........................................... 28 1/4 24 5/8 .20
Fourth.......................................... 33 1/8 24 5/8 .20
1998
- ----
First........................................... $23 1/16 $16 25/32 $.175
Second.......................................... 23 9/32 20 15/16 .175
Third........................................... 22 7/8 18 5/16 .175
Fourth.......................................... 23 3/8 17 7/16 .175
As of February 29, 2000, there were approximately 650 holders of record of
Gallagher's common stock.
9
Item 6. Selected Financial Data.
ARTHUR J. GALLAGHER & CO.
GROWTH RECORD: 1990-1999(a)(b)
Average
Annual ---------------------------
(in thousands, except per share and Growth 1999 1998 1997
employee data) ------- -------- -------- --------
Revenue Data
Commissions.............................. $342,922 $328,644 $305,725
Fees..................................... 234,629 212,031 184,956
Investment income and other (c).......... 28,285 18,972 33,923
-------- -------- --------
Total revenues........................... $605,836 $559,647 $524,604
Dollar growth............................ $ 46,189 $ 35,043 $ 29,454
Percent growth........................... 8% 8% 7% 6%
------ -------- -------- --------
Pretax Earnings Data
Pretax earnings.......................... $104,235 $ 86,277 $ 85,682
Dollar growth............................ $ 17,958 $ 595 $ 16,502
Percent growth........................... 12% 21% 1% 24%
Pretax earnings as a percentage of total
revenues................................ 17% 15% 16%
------ -------- -------- --------
Net Earnings Data
Net earnings............................. $ 67,753 $ 58,137 $ 57,581
Dollar growth............................ $ 9,616 $ 556 $ 11,298
Percent growth........................... 11% 17% 1% 24%
Net earnings as a percentage of total
revenues................................ 11% 10% 11%
------ -------- -------- --------
Net Earnings Per Share Data
Shares outstanding at year end........... 36,840 36,346 35,390
Net earnings per share (d)............... $ 1.76 $ 1.54 $ 1.59
Percent growth........................... 11% 14% (3%) 25%
------ -------- -------- --------
Employee Data
Number at year end....................... 4,589 4,385 4,134
Number growth............................ 204 251 (122)
Percent growth........................... 5% 5% 6% (3%)
Total revenues per employee (e).......... $ 132 $ 128 $ 127
Net earnings per employee (e)............ $ 15 $ 13 $ 14
------ -------- -------- --------
Common Stock Dividend Data
Dividends declared per common share (f).. $ .80 $ .70 $ .62
Total dividends declared................. $ 29,202 $ 24,218 $ 20,408
Percent of same year net earnings........ 43% 42% 35%
------ -------- -------- --------
Balance Sheet Data
Total assets............................. $884,146 $760,438 $672,435
Long-term debt less current portion...... -- -- --
Total stockholders' equity............... $242,467 $205,487 $172,333
------ -------- -------- --------
Return On Beginning Stockholders' Equity... 33% 34% 41%
Notes:
(a) The financial information for all periods prior to 1999 has been restated
for six 1999 acquisitions accounted for using the pooling of interests
method.
(b) All information relating to shares of common stock of Gallagher has been
adjusted to reflect a two-for-one stock split, effected in the form of a
100% stock dividend, that was declared in January 2000 and paid on March
15, 2000.
(c) Includes non-recurring gains.
(d) Based on the weighted average number of common and common equivalent shares
outstanding during the year.
(e) Based on the number of employees at year end.
(f) Based on the total dividends declared on a share of common stock
outstanding during the entire year.
10
Years Ended December 31,
- ----------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
- -------- -------- -------- -------- -------- -------- --------
$295,279 $286,027 $265,004 $238,243 $220,181 $211,656 $203,710
175,274 165,205 146,397 133,685 114,885 95,636 80,399
24,597 23,035 14,461 21,310 17,543 15,010 20,724
- -------- -------- -------- -------- -------- -------- --------
$495,150 $474,267 $425,862 $393,238 $352,609 $322,302 $304,833
$ 20,883 $ 48,405 $ 32,624 $ 40,629 $ 30,307 $ 17,469 $ 34,663
4% 11% 8% 12% 9% 6% 13%
- -------- -------- -------- -------- -------- -------- --------
$ 69,180 $ 69,847 $ 60,428 $ 55,043 $ 40,943 $ 33,908 $ 36,294
$ (667) $ 9,419 $ 5,385 $ 14,100 $ 7,035 $ (2,386) $ 37
(1%) 16% 10% 34% 21% (7%) --%
14% 15% 14% 14% 12% 11% 12%
- -------- -------- -------- -------- -------- -------- --------
$ 46,283 $ 43,815 $ 38,449 $ 32,852 $ 25,692 $ 23,324 $ 24,618
$ 2,468 $ 5,366 $ 5,597 $ 7,160 $ 2,368 $ (1,294) $ 266
6% 14% 17% 28% 10% (5%) 1%
9% 9% 9% 8% 7% 7% 8%
- -------- -------- -------- -------- -------- -------- --------
35,122 35,266 34,678 36,488 35,378 35,898 36,326
$ 1.27 $ 1.18 $ 1.04 $ .86 $ .70 $ .62 $ .66
8% 13% 21% 23% 13% (6%) 2%
- -------- -------- -------- -------- -------- -------- --------
4,256 4,220 3,871 3,692 3,426 3,232 3,109
36 349 179 266 194 123 194
1% 9% 5% 8% 6% 4% 7%
$ 116 $ 112 $ 110 $ 107 $ 103 $ 100 $ 98
$ 11 $ 10 $ 10 $ 9 $ 7 $ 7 $ 8
- -------- -------- -------- -------- -------- -------- --------
$ .58 $ .50 $ .44 $ .36 $ .32 $ .32 $ .30
$ 18,399 $ 15,270 $ 13,209 $ 10,808 $ 8,767 $ 8,439 $ 6,999
40% 35% 34% 33% 34% 36% 28%
- -------- -------- -------- -------- -------- -------- --------
$620,101 $590,286 $538,705 $566,839 $507,574 $488,865 $480,605
1,130 2,260 3,390 28,166 23,888 24,432 24,723
$139,747 $129,264 $108,032 $129,408 $101,670 $ 96,906 $ 95,416
- -------- -------- -------- -------- -------- -------- --------
36% 41% 30% 32% 27% 24% 28%
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
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. For more than a decade, lower premium rates have prevailed
among property/casualty insurance carriers resulting in heavy competition for
market share. This "soft market" (i.e., lower premium rates) has generally
resulted in flat or reduced renewal commissions.
In recent years insured losses have reached into the billions of dollars.
Substantial mergers, both domestically and internationally, have resulted in
fewer insurance companies. Increased underwriting losses and reduced
competition tend to raise premium rates. Historically, increased property
replacement costs and increasingly large litigation awards have caused some
clients to seek higher levels of insurance coverage. These factors generally
have the effect of generating higher premiums to clients and higher commissions
to Gallagher. In spite of these forces, there have been mitigating factors
including a favorable equity market, increased underwriting capital and
improved economies of scale following consolidations, all of which tend to
lower premium rates. The net result is that property/casualty premium rates
have remained low. Although the insurance marketplace has seen "pockets" of
premium rate increases, management believes that competitive conditions will
continue and overall premium pricing will remain under pressure and not improve
significantly in 2000. In recent years, lower rates of inflation and the soft
market have resulted in a highly competitive insurance marketplace and flat to
lower premiums. In general, the downward trend in premium rates has had a
greater effect on Gallagher's revenues than inflation.
Although the property/casualty insurance pricing environment has resulted in
some "risk" buyers returning to first-dollar coverage, management believes the
overall trend will be to continue to move toward the alternative insurance
market, which would tend to have a favorable effect on our Risk Management
Services segment. Gallagher anticipates that new sales in the areas of risk
management, claims management, insurance captive and self-insurance services
will continue to be a major factor in Gallagher's fee revenue growth during
2000.
Gallagher continues to look to the future and to explore not only the core
segments of Insurance Brokerage and Risk Management Services, but also
expansion within the alternative insurance markets and financial and related
investment services. Management believes these areas continue to hold
opportunities for diversification and profitable growth.
Results of Operations--Consolidated
Gallagher's results of operations for periods prior to 1999 have been
restated for six acquisitions as if they had operated as part of Gallagher
prior to the date of merger. Gallagher continues to search for merger partners
who 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 year-to-year comparisons, see Note 2
to the Consolidated Financial Statements.
Commission revenues increased by $14.3 million or 4% in 1999. This increase,
generated by the Insurance Brokerage Services segment, is the result of new
business production partially offset by lost business. Commission revenues
increased by $22.9 million or 7% in 1998. This increase is the result of new
business production partially offset by lost business.
Fee revenues increased by $22.6 million or 11% in 1999. This increase,
generated primarily from the Risk Management Services segment, resulted from
strong new business production of $42.3 million and favorable retention rates
on existing business partially offset by lost business of $22.7 million. Fee
revenues increased by $27.1 million or 15% in 1998. This increase, also
generated primarily from Risk Management Services, resulted from new business
production of $39.0 million and favorable retention rates on existing business
partially offset by lost business of $14.5 million.
12
Investment income and other increased by $9.3 million or 49% in 1999. This
increase is due primarily to higher returns on funds invested with outside fund
managers which were positively affected by robust equity markets during 1999
and a gain of $3.0 million recognized in 1999 which resulted from the sale of a
portion of Gallagher's interests in limited partnerships that operate qualified
affordable housing projects. In 1998, investment income and other decreased
$6.0 million or 24% due primarily to lower returns on funds invested with
outside fund managers which were adversely affected by volatility in global
equity markets during 1998. In addition, Gallagher liquidated a portion of its
investment portfolio, thereby reducing the aggregate value of these portfolios
by $24.0 million during 1998.
In 1997, Gallagher recognized non-recurring pretax gains of $7.2 million on
the sale of underperforming or geographically undesirable operations and $1.8
million on a real estate transaction in the United Kingdom. There were no
material non-recurring pretax gains of this nature recorded in either 1999 or
1998.
Salaries and employee benefits increased by $21.6 million or 7% in 1999 due
primarily to a 5% increase in employee head count, salary increases and the
annualized effect of prior year new hires along with a corresponding increase
in employee benefit expenses. In 1998, salaries and employee benefits increased
by $23.6 million or 9% due to salary increases, the annualized effect of prior
year new hires, a 6% increase in employee head count and the impact of a $4.8
million non-recurring gain recognized in 1997 from the settlement of a defined
benefit pension plan at one of Gallagher's United Kingdom subsidiaries.
Other operating expenses increased by $6.7 million or 4% in 1999 and $10.9
million or 6% in 1998. These increases are due primarily to increases
associated with travel, entertainment and temporary personnel costs for new
business, technology upgrades, office consolidation expenses and commissions
paid to sub-brokers.
Gallagher's effective income tax rates were 35.0%, 32.6% and 32.8% in 1999,
1998 and 1997, respectively. These rates are net of the effect of tax benefits
generated by investments in limited partnerships that operate qualified
affordable housing and alternative energy projects, which are substantially
offset by state and foreign taxes. See Note 11 to the Consolidated Financial
Statements.
Gallagher's foreign operations recorded earnings before income taxes of $5.0
million, $5.3 million and $6.5 million in 1999, 1998 and 1997, respectively.
The decrease in 1999 is due primarily to the write-off of intangible assets
associated with lost business. The decrease in 1998 is due to the non-recurring
gains recognized in 1997 associated with the pension and real estate
transactions mentioned above, substantially offset by growth in operating
results generated by new business. See Notes 11 and 13 to the Consolidated
Financial Statements.
Gallagher's revenues vary from quarter to quarter generally as a result of
the timing of policy inception dates which traditionally are heaviest in the
third quarter. Expenses, on the other hand, are fairly uniform throughout the
year. See Note 12 to the Consolidated Financial Statements.
Results of Operations--Segment Information
As discussed in Note 13 to the Consolidated Financial Statements, Gallagher
has three operating business segments; Insurance Brokerage Services, Risk
Management Services and Financial Services, as well as a Corporate segment.
The Insurance Brokerage Services segment includes Gallagher's retail,
reinsurance and wholesale brokerage operations. Total revenues in 1999 were
$397.7 million, a 4% increase over 1998. This increase is due primarily to new
business production offset by lost business. United States revenues of $364.5
million were up 4% over 1998. Revenues in 1999 from foreign operations,
principally in the United Kingdom and Bermuda, were up 3% or $855,000 over
1998. Earnings before income taxes in 1999 increased 8% over 1998 principally
as a result of increased revenues. Total revenues in 1998 were $381.6 million,
an increase of 7% over 1997. This increase again is due to new business
production partially offset by lost business. United States revenues of $349.3
million were up 7% over 1997 mainly due to new business partially offset by
lost business. Revenues
13
in 1998 from foreign operations, primarily in the United Kingdom and Bermuda,
were up 8% over 1997 mainly due to new business partially offset by lost
business. Earnings before income taxes of $70.0 million in 1998 increased 16%
over 1997 due mainly to increased revenues.
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 1999 were $188.4
million or 12% over 1998 due to strong new business production and favorable
retention rates on existing business. United States revenues of $174.4 million
in 1999 were up 11% over 1998 due primarily to new business. In 1999, foreign
revenues of $13.9 million, principally from the United Kingdom and Australia,
increased 16% over 1998 due to new business production partially offset by lost
business. Earnings before income taxes in 1999 of $22.3 million increased 43%
over 1998 due primarily to revenue increases and moderate increases in
expenses. Total revenues in 1998 were $168.8 million or 18% over 1997 due
mainly to new business production and a significant increase in revenues from
Gallagher's Australian operations for claim work performed as a result of a
pervasive and extended power outage in New Zealand. In 1998, United States
revenues increased 15% over 1997 due primarily to new business partially offset
by lost business. In 1998, foreign revenues of $12.0 million, principally from
the United Kingdom and Australia, increased 107% over 1997 due principally to
the claim work of the Australian operations mentioned above. Earnings before
income taxes in 1998 increased 49% over 1997 due primarily to increased
revenues offset by a moderate increase in expenses.
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, real estate partnerships and notes
receivable from investees. Revenues in 1999 were $19.8 million or 116% more
than revenues in 1998 and earnings before income taxes increased $7.2 million
or 142% over 1998. These increases are due primarily to more favorable returns
on funds invested with outside fund managers and a gain of $3.0 million
recognized in 1999 which resulted from the sale of a portion of Gallagher's
interests in limited partnerships that operate qualified affordable housing
projects. Revenues in 1998 decreased 62% from 1997 and earnings before income
taxes in 1998 decreased 77% from 1997. These decreases relate to $9.0 million
and $13.8 million of non-recurring gains in revenues and earnings before income
taxes, respectively, recognized in 1997 and less favorable returns on funds
invested with outside fund managers due to equity market conditions in 1998.
Financial Services' revenues are generated principally in the United States.
Corporate consists of unallocated administrative costs and the provision for
income taxes which is not allocated to Gallagher's operating entities. Revenues
are not recorded in this segment and all costs are generated in the United
States.
Financial Condition and Liquidity
The insurance brokerage industry is not capital intensive. Gallagher has
historically been profitable, and cash flows from operations and short-term
borrowings under various credit agreements have been sufficient to fund
operating, investment and capital expenditure needs of Gallagher. Cash
generated from operating activities was $63.7 million, $55.4 million and $72.7
million in 1999, 1998 and 1997, 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 year to year. Funds
restricted as to Gallagher's use, primarily premiums held as fiduciary funds,
have not been included in determining Gallagher's overall liquidity.
Gallagher maintains a $20.0 million unsecured revolving credit agreement (the
"Credit Agreement") requiring repayment of any loans under the agreement no
later than June 30, 2001. During 1999, Gallagher borrowed and repaid $20.0
million of short-term borrowings under the Credit Agreement. During 1998,
Gallagher borrowed and repaid $15.0 million of short-term borrowings under the
Credit Agreement. These borrowings were primarily used on a short-term basis to
finance a portion of Gallagher's operations and
14
expanded investment activity. As of December 31, 1999 and 1998, there were no
borrowings outstanding under this agreement. The Credit Agreement requires the
maintenance of certain financial covenants and Gallagher is in compliance with
these covenants.
Gallagher also has three line of credit facilities which total $45.0 million
in the aggregate and expire on April 30, 2000. Periodically, Gallagher will
make short-term borrowings under these credit facilities to meet short-term
cash flow needs. During 1999 and 1998, Gallagher borrowed and repaid $78.5
million and $60.0 million of short-term borrowings, respectively, under these
facilities. As of December 31, 1999 and 1998, $15.0 million was outstanding
under these facilities. These borrowings were primarily used on a short-term
basis to finance a portion of Gallagher's operations and expanded investment
activity.
At December 31, 1999, Gallagher has contingently committed to invest an
additional $7.2 million related to two letter of credit arrangements with one
of its equity investments. In addition, Gallagher has guaranteed an aggregate
$14.6 million of funds through letters of credit or other arrangements related
to several investments and insurance programs of Gallagher.
Gallagher paid $28.0 million in cash dividends on its common stock in 1999.
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. In each quarter of 1999,
Gallagher's Board of Directors declared a dividend of $.20 per share which was
$.025 or 14% greater than each quarterly dividend in 1998. In January 2000,
Gallagher declared a first quarter dividend of $.23 per share, a 15% increase
over the first quarter dividend in 1999.
Net capital expenditures were $16.6 million, $13.3 million and $12.2 million
in 1999, 1998 and 1997, respectively. In 2000, Gallagher expects to make
capital expenditures 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,
2000 to repurchase its common stock. Under the plan, Gallagher repurchased
762,000 shares at a cost of $18.4 million, 430,000 shares at a cost of $8.7
million and 1,044,000 shares at a cost of $17.1 million in 1999, 1998 and 1997,
respectively. The repurchased shares are held for reissuance in connection with
exercises of options under Gallagher's stock option plans. Under the provisions
of the plan, Gallagher is authorized to repurchase approximately 1,540,000
additional shares through June 30, 2000. 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.
Effective with changes in the United States federal income tax laws in 1997,
Gallagher no longer provides for federal income taxes on the undistributed
earnings of its foreign subsidiaries which are considered permanently invested
outside the United States. At December 31, 1999, Gallagher had $22.0 million of
undistributed earnings from its foreign subsidiaries. See Note 11 to the
Consolidated Financial Statements. Although not considered available for
domestic needs, the undistributed earnings generated by certain foreign
subsidiaries referred to above may be used to finance foreign operations and
acquisitions.
Year 2000
Computer programs that have time sensitive software may have recognized the
date "00" as the Year 1900, rather than the Year 2000, which could have
resulted in system failures or miscalculations causing disruptions of
operations (the "Y2K" problem).
With respect to the Y2K problem, Gallagher completed the necessary
modifications or replacements of its existing software so that its computer
systems would function properly in the Year 2000 and beyond. Generally, these
modifications and replacements and the associated costs were contemplated with
normal enhancements and improvements being made in conjunction with updating
financial reporting and operating
15
systems. It is estimated that Gallagher spent less than $1.0 million in the
aggregate from 1997 through 1999 for specific Y2K "fixes" outside the routine
efforts discussed above.
At the time of change from the Year 1999 to the Year 2000 and forward,
Gallagher has neither experienced major internal system failures nor been
materially affected by compliance problems with the systems of business
partners, vendors or clients. Gallagher believes it has successfully weathered
any Y2K problems, but continues to monitor its internal systems and maintains
an awareness of any problems which could arise with the systems of business
partners, vendors or clients.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Gallagher is exposed to various market risks, including changes in interest
rates and foreign currency exchange rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest and
foreign currrency exchange rates and equity prices. Gallagher does not enter
into derivatives or other similar financial instruments for trading or
speculative purposes. The following analysis presents the hypothetical loss in
fair value of the financial instruments held by Gallagher at December 31, 1999
and 1998, that are sensitive to changes in interest rates and equity prices.
The range of changes in interest rates used in the analysis reflects
Gallagher's view of changes that are reasonably possible over a one year
period. This discussion of market risks related to Gallagher's consolidated
balance sheet includes estimates of future economic environments caused by
changes in market risks. The effect of actual changes in these risk factors may
differ materially from Gallagher's estimates. In the ordinary course of
business, Gallagher also faces risks that are either nonfinancial or
nonquantifiable, including credit risk and legal risk. These are not included
in the following analysis.
Gallagher has a comprehensive and diversified investment portfolio.
Gallagher's invested assets are held as cash and cash equivalents, investment
strategies--trading and marketable securities--available for sale. Accordingly,
these assets are subject to various market risk exposures such as interest rate
risk and equity price risk.
The fair value of Gallagher's cash and cash equivalents investment portfolio
at December 31, 1999 and 1998 approximated its carrying value due to its short-
term duration. Market risk was estimated as the potential decrease in fair
value resulting from a hypothetical one percentage point increase in interest
rates for the instruments contained in the cash and cash equivalents investment
portfolio. The resulting fair value was not materially different from the
carrying values at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, the fair value of Gallagher's investment
strategies--trading portfolio was $63.9 million and $57.4 million,
respectively. From an investment management perspective, this portfolio, which
is managed by several outside fund managers, consists of two different
components; an equity portfolio of $6.2 million and $7.3 million and an
alternative investment strategies portfolio of $57.7 million and $50.1 million
at December 31, 1999 and 1998, respectively.
The equity portfolio is subject to equity price risk. It is not hedged,
consists of common stocks and is primarily managed to produce realized gains
for Gallagher. The estimated potential loss in fair value of this equity
component resulting from a hypothetical decrease in prices quoted by stock
exchanges of 10% would be approximately $620,000 and $730,000 at December 31,
1999 and 1998, respectively.
Gallagher's alternative investment strategies portfolio is also subject to
equity pricing risk. However, these investments are actively managed in order
to minimize Gallagher's exposure to equity pricing risk. The objective of this
portfolio is to maximize the overall return to Gallagher, while minimizing the
downward price risk in order to preserve the investments' underlying principal
balances. The outside fund managers for these alternative investment strategies
hedge their strategies by "selling short" common equity securities in order to
mitigate the effects of changes in equity prices thereby making any such
fluctuations immaterial. Accordingly, hypothetical changes in equity prices
would not cause the resulting fair value to be materially different from the
carrying value for this portfolio at December 31, 1999 and 1998, respectively.
16
The fair value of Gallagher's marketable securities--available for sale
portfolio was $20.3 million ($4.4 million less than its aggregate amortized
cost) and $20.1 million ($1.3 million less than its aggregate amortized costs)
at December 31, 1999 and 1998, respectively. The overall objective of this
portfolio is to provide Gallagher with a stable after tax yield. This
portfolio, which is not hedged, consists primarily of dividend yielding
preferred stocks. Accordingly, this portfolio is more sensitive to interest
rate risk than it is to equity pricing risk. The estimated potential loss in
fair value resulting from a hypothetical one percentage point increase in
short-term interest rates would be approximately $2.2 million at December 31,
1999 and 1998.
At December 31, 1999 and 1998, the fair value of Gallagher's borrowings under
the line of credit facilities approximated the carrying value due to their
short-term duration and variable interest rates. Market risk was estimated as
the potential increase in the fair value resulting from a hypothetical one
percentage point decrease in Gallagher's weighted average short-term borrowing
rate at December 31, 1999 and 1998, and the resulting fair value was not
materially different from the year-end carrying value.
Gallagher is subject to foreign currency exchange rate risk primarily due to
the fact that its United Kingdom based subsidiaries incur expenses denominated
in British pounds while receiving their revenues in United States dollars.
Gallagher does not hedge this foreign currency exchange rate risk. The foreign
currency gains (losses) related to this market risk are recorded in earnings
before income taxes as they are incurred. Assuming a hypothetical adverse
change of 10% in the average foreign currency exchange rate for 1999 and 1998
(a weakening of the U.S. dollar), earnings before income taxes would decrease
by approximately $2.9 million and $2.5 million, respectively. Gallagher is also
subject to foreign currency exchange rate risk associated with the translation
of its foreign subsidiaries into United States dollars. However, it is
management's opinion that this foreign currency exchange risk is not material
to Gallagher's consolidated operating results or financial position. Gallagher
manages the balance sheets of its foreign subsidiaries such that foreign
liabilities are matched with equal foreign assets thereby maintaining a
"balanced book" which minimizes the effects of currency fluctuations.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995
This annual 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; the property/casualty insurance industry continues
to experience a prolonged soft market (low premium rates) thereby holding down
commissions; lower interest rates will reduce Gallagher's income earned on
invested funds; the alternative insurance market continues to grow which could
unfavorably impact commission but 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 and financial
position may be adversely impacted by exposure to various market risks such as
interest rate, equity pricing and foreign exchange rates; and Gallagher's Year
2000 compliance efforts depend upon compliance efforts of Gallagher's business
partners, vendors and clients. 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.
17
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages
-----
Consolidated Financial Statements:
Consolidated Statement of Earnings...................................... 19
Consolidated Balance Sheet.............................................. 20
Consolidated Statement of Cash Flows.................................... 21
Consolidated Statement of Stockholders' Equity.......................... 22
Notes to Consolidated Financial Statements.............................. 23-39
Management's Report....................................................... 40
Report of Independent Auditors............................................ 41
18
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands, except per
share data)
Operating Results
Revenues:
Commissions....................................... $342,922 $328,644 $305,725
Fees.............................................. 234,629 212,031 184,956
Investment income and other....................... 28,285 18,972 24,930
Non-recurring gains............................... -- -- 8,993
-------- -------- --------
Total revenues.................................. 605,836 559,647 524,604
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 312,690 291,130 267,572
Other operating expenses.......................... 188,911 182,240 171,350
-------- -------- --------
Total expenses.................................. 501,601 473,370 438,922
-------- -------- --------
Earnings before income taxes........................ 104,235 86,277 85,682
Provision for income taxes.......................... 36,482 28,140 28,101
-------- -------- --------
Net earnings.................................... $ 67,753 $ 58,137 $ 57,581
======== ======== ========
Net earnings per common share....................... $ 1.85 $ 1.61 $ 1.64
Net earnings per common and common equivalent share. 1.76 1.54 1.59
Dividends declared per common share................. .80 .70 .62
See notes to consolidated financial statements.
19
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
December 31,
------------------
1999 1998
-------- --------
(in thousands)
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 61,088 $ 65,005
Restricted cash.......................................... 108,867 90,560
Premiums and fees receivable............................. 364,854 293,889
Investment strategies--trading........................... 63,857 57,368
Other.................................................... 44,176 37,535
-------- --------
Total current assets................................... 642,842 544,357
Marketable securities--available for sale.................. 20,274 20,089
Deferred income taxes and other noncurrent assets.......... 173,886 151,482
Fixed assets............................................... 112,350 100,368
Accumulated depreciation and amortization.................. (76,101) (68,399)
-------- --------
Net fixed assets....................................... 36,249 31,969
Intangible assets--net..................................... 10,895 12,541
-------- --------
$884,146 $760,438
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Premiums payable to insurance companies.................. $466,747 $381,008
Accrued salaries and bonuses............................. 21,595 21,940
Accounts payable and other accrued liabilities........... 91,607 92,154
Unearned fees............................................ 15,537 13,616
Income taxes payable..................................... 8,530 12,621
Other.................................................... 21,665 20,649
-------- --------
Total current liabilities.............................. 625,681 541,988
Other noncurrent liabilities............................... 15,998 12,963
Stockholders' equity:
Common stock--issued and outstanding 36,840 shares in
1999 and 36,346 shares in 1998.......................... 36,840 36,346
Capital in excess of par value........................... -- (2,770)
Retained earnings........................................ 208,296 172,688
Accumulated other comprehensive earnings (loss).......... (2,669) (777)
-------- --------
Total stockholders' equity............................. 242,467 205,487
-------- --------
$884,146 $760,438
======== ========
See notes to consolidated financial statements.
20
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Cash flows from operating activities:
Net earnings................................... $ 67,753 $ 58,137 $ 57,581
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net gain on investments and other............ (6,011) (4,144) (4,938)
Gain on sales of operations.................. -- -- (7,203)
Gain on real estate transaction.............. -- -- (1,790)
Depreciation and amortization................ 15,300 12,143 11,632
(Increase) decrease in restricted cash....... (18,307) (8,045) 7,887
(Increase) decrease in premiums receivable... (70,010) (58,035) 15,952
Increase (decrease) in premiums payable...... 85,739 51,821 (10,834)
(Increase) decrease in trading investments--
net......................................... (4,021) 6,963 (6,217)
(Increase) decrease in other current assets.. (5,590) 5,620 (6,466)
(Decrease) increase in accrued salaries and
bonuses..................................... (345) 3,328 3,539
(Decrease) increase in accounts payable and
other accrued liabilities................. (1,739) (102) 19,473
(Decrease) increase in income taxes payable.. (4,091) 1,775 5,781
Net change in deferred income taxes.......... 1,112 (4,942) (9,604)
Other........................................ 3,864 (9,075) (2,088)
-------- -------- --------
Net cash provided by operating activities.. 63,654 55,444 72,705
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities............. (44,009) (33,331) (30,170)
Proceeds from sales of marketable securities... 39,778 47,665 30,368
Proceeds from maturities of marketable
securities.................................... 1,495 2,600 1,645
Net additions to fixed assets.................. (16,560) (13,285) (12,228)
Proceeds from sales of operations and other.... -- -- 8,993
Other.......................................... (20,586) (52,299) (34,620)
-------- -------- --------
Net cash used by investing activities...... (39,882) (48,650) (36,012)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 16,029 13,655 10,964
Tax benefit from issuance of common stock...... 5,502 4,273 2,429
Repurchases of common stock.................... (18,428) (8,651) (17,126)
Dividends paid................................. (28,010) (23,185) (19,990)
Retirement of long-term debt................... -- (1,130) (1,130)
Borrowings on line of credit facilities........ 98,500 75,000 30,900
Repayments on line of credit facilities........ (98,500) (75,000) (25,900)
Equity transactions of pooled companies prior
to dates of acquisition....................... (2,782) (7,817) (1,821)
-------- -------- --------
Net cash used by financing activities...... (27,689) (22,855) (21,674)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (3,917) (16,061) 15,019
Cash and cash equivalents at beginning of year... 65,005 81,066 66,047
-------- -------- --------
Cash and cash equivalents at end of year......... $61,088 $ 65,005 $ 81,066
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 1,182 $ 1,390 $ 1,132
Income taxes paid.............................. 26,003 20,410 24,460
See notes to consolidated financial statements.
21
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
Capital Other
Common Stock In Excess Comprehensive Total
--------------- Of Retained Earnings Stockholders'
Shares Amount Par Value Earnings (Loss) Equity
------ ------- --------- -------- ------------- -------------
(in thousands)
Balance at December 31,
1996 as previously
reported............... 34,066 $34,066 $(11,766) $112,704 $ 889 $ 135,893
Acquisition of pooled
companies............. 1,056 1,056 (936) 3,734 -- 3,854
------ ------- --------- -------- ------------- -------------
Balance at December 31,
1996................... 35,122 35,122 (12,702) 116,438 889 139,747
-------------
Net earnings........... -- -- -- 57,581 -- 57,581
Net change in
unrealized gain (loss)
on available for sale
securities............ -- -- -- -- 769 769
-------------
Comprehensive earnings 58,350
Cash dividends declared
on common stock....... -- -- -- (20,408) -- (20,408)
Common stock issued
under stock option
plans................. 1,114 1,114 9,850 -- -- 10,964
Tax benefit from
issuance of common
stock................. -- -- 2,429 -- -- 2,429
Common stock
repurchases........... (1,044) (1,044) (10,627) (5,455) -- (17,126)
Common stock issued in
two pooling
acquisitions.......... 198 198 -- -- -- 198
Equity transactions of
pooled companies prior
to dates of
acquisition........... -- -- (18) (1,803) -- (1,821)
------ ------- --------- -------- ------------- -------------
Balance at December 31,
1997................... 35,390 35,390 (11,068) 146,353 1,658 172,333
-------------
Net earnings........... -- -- -- 58,137 -- 58,137
Net change in
unrealized gain (loss)
on available for sale
securities............ -- -- -- -- (2,435) (2,435)
-------------
Comprehensive earnings 55,702
Cash dividends declared
on common stock....... -- -- -- (24,218) -- (24,218)
Common stock issued
under stock option
plans................. 1,176 1,176 12,479 -- -- 13,655
Tax benefit from
issuance of common
stock................. -- -- 4,273 -- -- 4,273
Common stock
repurchases........... (430) (430) (8,221) -- -- (8,651)
Common stock issued in
six pooling
acquisitions.......... 210 210 -- -- -- 210
Equity transactions of
pooled companies prior
to dates of
acquisition........... -- -- (233) (7,584) -- (7,817)
------ ------- --------- -------- ------------- -------------
Balance at December 31,
1998................... 36,346 36,346 (2,770) 172,688 (777) 205,487
-------------
Net earnings........... -- -- -- 67,753 -- 67,753
Net change in
unrealized gain (loss)
on available for sale
securities............ -- -- -- -- (1,892) (1,892)
-------------
Comprehensive earnings 65,861
Cash dividends declared
on common stock....... -- -- -- (29,202) -- (29,202)
Common stock issued
under stock option
plans................. 1,256 1,256 14,773 -- -- 16,029
Tax benefit from
issuance of common
stock................. -- -- 5,502 -- -- 5,502
Common stock
repurchases........... (762) (762) (17,666) -- -- (18,428)
Equity transactions of
pooled companies prior
to dates of
acquisition........... -- -- 161 (2,943) -- (2,782)
------ ------- --------- -------- ------------- -------------
Balance at December 31,
1999................... 36,840 $36,840 $ -- $208,296 $ (2,669) $ 242,467
====== ======= ========= ======== ============= =============
See notes to consolidated financial statements.
22
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of operations
Arthur J. Gallagher & Co. (Gallagher) provides insurance brokerage and risk
management services to a wide variety of commercial, industrial, institutional
and governmental organizations. Commission revenue is principally generated
through the negotiation and placement of insurance for its clients. Fee revenue
is primarily generated by providing other risk management services including
claims management, information management, risk control services and appraisals
in either the property/casualty market or human resource/employee benefit
market. Gallagher operates through approximately 200 offices throughout the
United States and six countries abroad.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
Gallagher and all of its majority owned subsidiaries. Investments in partially
owned entities in which ownership is 20% to 50% are accounted for using the
equity method. Accordingly, Gallagher's share of the net earnings of these
entities is included in consolidated net earnings. Investments in partially
owned entities in which ownership is less than 20% are carried at cost. All
material intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior years'
financial statements in order to conform to the current year presentation.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Such estimates and assumptions could change in the
future as more information becomes known which could impact the amounts
reported and disclosed herein.
Revenue recognition
Commission income is generally recognized as of the effective date of
insurance policies except for commissions on installment premiums which are
recognized periodically as billed. Contingent commissions are generally
recognized when received. Fee income is primarily recognized ratably as
services are rendered. The income effects of subsequent premium and fee
adjustments are recorded when the adjustments become known. Premiums and fees
receivable are net of allowance for doubtful accounts of $905,000 and
$1,500,000 at December 31, 1999 and 1998, respectively.
Earnings per share
Earnings per share is computed based on the weighted average number of common
and common equivalent shares outstanding during the respective period. Common
equivalent shares include incremental shares from dilutive stock options, which
are calculated from the date of grant under the treasury stock method using the
average market price for the period.
Consolidated statement of cash flows
Short-term investments, consisting principally of commercial paper and
certificates of deposit which have a maturity of ninety days or less at date of
purchase, are considered cash equivalents.
23
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(Continued)
Restricted cash
In its capacity as an insurance broker, Gallagher collects premiums from
insureds and, after deducting its commissions and/or fees, remits these
premiums to insurance carriers. Unremitted insurance premiums are held in a
fiduciary capacity until disbursed by Gallagher. Various state and foreign
agencies that regulate insurance brokers provide specific requirements that
limit the type of investments that may be made with such funds. Accordingly
Gallagher invests these funds in cash, money market accounts, commercial paper
and certificates of deposit. Gallagher earns interest income on these
unremitted funds, which is reported as investment income and other in the
accompanying consolidated statement of earnings.
Premiums collected from insureds but not yet remitted to insurance carriers
are restricted as to use by laws in certain states and foreign jurisdictions in
which Gallagher's subsidiaries operate. These unremitted amounts are reported
as restricted cash in the accompanying consolidated balance sheet, with the
related liability reported as premiums payable to insurance companies.
Additionally, one of Gallagher's United Kingdom subsidiaries is required by
Lloyd's of London to meet certain liquidity requirements.
Investments
Investment strategies are considered trading securities and consist primarily
of limited partnerships which invest in common stocks. Securities designated as
trading are carried at fair value in the accompanying consolidated balance
sheet, with unrealized gains and losses included in the consolidated statement
of earnings. The fair value of investment strategies is determined by reference
to the fair values of the underlying common stocks which are based on quoted
market prices.
Marketable securities are considered available for sale and consist primarily
of preferred and common stocks. Securities designated as available for sale are
carried at fair value in the accompanying consolidated balance sheet, with
unrealized gains and losses, less related deferred income taxes, excluded from
net earnings and reported as accumulated other comprehensive earnings or loss.
Gains and losses are recognized in net earnings when realized using the
specific identification method. The fair value for marketable securities is
based on quoted market prices.
Fixed assets
Fixed assets are carried at cost in the accompanying consolidated balance
sheet. Furniture and equipment with a cost of $97,762,000 and $88,329,000 at
December 31, 1999 and 1998, respectively, are depreciated using the straight-
line method over the estimated useful lives (three to ten years) of the assets.
Leasehold improvements with a cost of $14,588,000 and $12,039,000 at December
31, 1999 and 1998, respectively, are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease
terms. Gallagher periodically reviews long-lived assets for impairment whenever
events or changes in business circumstances indicate that the carrying value of
the assets may not be recoverable. If the fair value is less than the carrying
amount of the asset, a loss would be recognized for the difference.
Intangible assets
Intangible assets consist of the excess of cost over the value of net
tangible assets of acquired businesses, non-compete agreements and expiration
lists. The excess of cost over the value of net tangible assets is amortized
over fifteen to forty years using the straight-line method. Non-compete
agreements and expiration lists are amortized over three to ten years using the
straight-line method. Accumulated amortization at December 31, 1999 and 1998
was $6,852,000 and $4,640,000, respectively. Amortization expense was
$3,020,000, $1,062,000 and $1,061,000 for 1999, 1998 and 1997, respectively.
Gallagher periodically reviews intangible assets for impairment whenever events
or changes in business circumstances indicate that the carrying value of the
assets may not be recoverable. If the fair value is less than the carrying
amount of the asset, a loss would be recognized for the difference.
24
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(Continued)
Stock based compensation
Gallagher primarily grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of grant. Gallagher accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense for
these stock options granted to employees.
Per common share information
In January 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
March 15, 2000 to shareholders of record as of March 1, 2000. As a result of
this action, par value of the common stock remains at $1.00 per share. All
information relating to the number of common shares and per common share
amounts in the accompanying consolidated financial statements and notes thereto
have been restated to give retroactive effect to the stock split for all
periods presented. Accordingly, $18,420,000 in the aggregate was transferred to
common stock from capital in excess of par value ($15,835,000) and retained
earnings ($2,585,000) in the accompanying December 31, 1999 consolidated
balance sheet.
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
Gallagher's minimal use of derivatives, management does not anticipate that the
adoption of SFAS 133 will have a significant effect on Gallagher's consolidated
operating results or financial position.
In 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, Gallagher expensed all costs
related to software developed or obtained for internal use as incurred. The
effect of adopting SOP 98-1 was not material to Gallagher's consolidated
operating results or financial position.
2. Business Combinations
In 1999, Gallagher acquired substantially all of the net assets of the
following insurance brokerage firms in exchange for its common stock: Goodman
Insurance Agency, Inc., 315,000 shares; Dodson-Bateman & Company, 295,000
shares; Associated Risk Managers of California, Insurance Producers, dba ARM of
California, 198,000 shares; and Sternfels Insurance Agency, Inc., 96,000
shares. In addition, Gallagher acquired substantially all of the net assets of
the following benefit consulting firms in 1999 in exchange for its common
stock: Group Benefit Concepts, Inc., 91,000 shares; and Stanley E. Clarke &
Associates, Inc., 61,000 shares. In 1998, Gallagher acquired substantially all
of the net assets of twelve insurance brokerage firms and one benefits
consulting company in exchange for 1,362,000 shares of its common stock. These
acquisitions were accounted for as poolings of interests and, except for six of
the 1998 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.
25
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Business Combinations--(Continued)
The following summarizes the restatement of the 1998 and 1997 consolidated
financial statements to reflect the operations of the 1999 acquisitions (in
thousands, except per share data):
As Attributable
Previously to Pooled As
1998 Reported Companies Restated
- ---- ---------- ------------ --------
Total revenues................................ $544,432 $ 15,215 $559,647
Net earnings.................................. 56,642 1,495 58,137
Net earnings per common share................. 1.61 -- 1.61
Net earnings per common and common equivalent
share........................................ 1.54 -- 1.54
1997
- ----
Total revenues................................ $511,917 $ 12,687 $524,604
Net earnings.................................. 55,585 1,996 57,581
Net earnings per common share................. 1.63 .01 1.64
Net earnings per common and common equivalent
share........................................ 1.58 .01 1.59
In 1999, Gallagher acquired substantially all of the net assets of R.W. Thom
& Company, Inc., an insurance brokerage firm, in exchange for a cash payment of
$250,000. This acquisition was accounted for as a purchase. In 1998, Gallagher
acquired substantially all of the net assets of three insurance brokerage firms
in exchange for initial cash payments of $1,920,000 and contingent notes
payable of $1,600,000. These acquisitions were also accounted for as purchases.
These purchase acquisitions were not material to either the 1999 or 1998
consolidated financial statements.
3. Investments
The following is a summary of marketable securities--available for sale (in
thousands):
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- --------
Preferred stocks....................... $ 15,583 $ 225 $ 1,997 $ 13,811
Common stocks.......................... 4,975 37 2,567 2,445
Fixed maturities....................... 4,164 26 172 4,018
--------- ---------- ---------- --------
$ 24,722 $ 288 $ 4,736 $ 20,274
========= ========== ========== ========
December 31, 1998
- -----------------
Preferred stocks....................... $ 14,488 $ 528 $ 646 $ 14,370
Common stocks.......................... 4,735 57 1,218 3,574
Fixed maturities....................... 2,161 71 87 2,145
--------- ---------- ---------- --------
$ 21,384 $ 656 $ 1,951 $ 20,089
========= ========== ========== ========
The gross realized gains on sales of marketable securities totaled
$1,579,000, $3,054,000, and $2,257,000 for 1999, 1998 and 1997, respectively.
The gross realized losses totaled $1,051,000, $1,179,000, and $346,000 for
1999, 1998 and 1997, respectively.
26
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments--(Continued)
The cost or amortized cost and fair value of fixed maturities at December 31,
1999, by contractual maturity, are as follows (in thousands):
Cost or
Amortized Fair
Cost Value
--------- --------
Due in 2000................................................. $ 132 $ 130
Due in 2001 through 2004.................................... 1,556 1,507
Due in 2005 through 2009.................................... 115 113
Due in 2010 and thereafter.................................. 2,361 2,268
--------- --------
$ 4,164 $ 4,018
========= ========
The expected maturities may differ from contractual maturities in the
foregoing table because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
The following is a summary of deferred income taxes and other noncurrent
assets (in thousands):
December 31,
------------------
1999 1998
--------- --------
Tax advantaged investments.................................. $ 61,357 $ 51,400
Assets related to equity investments........................ 25,013 20,276
Real estate partnerships.................................... 13,332 10,732
Notes receivable from investees............................. 37,206 33,335
Noncurrent deferred income taxes............................ 21,625 21,669
Other investments........................................... 10,087 9,466
Deferred compensation plan assets........................... 2,419 --
Other....................................................... 2,847 4,604
--------- --------
$173,886 $151,482
========= ========
Tax advantaged investments represent amounts invested by Gallagher in limited
partnerships that operate qualified affordable housing or alternative energy
projects. Gallagher receives tax benefits in the form of tax deductions for
operating losses and tax credits from these investments. The tax advantaged
investments are primarily accounted for using the effective yield method and
are carried at amortized cost in the consolidated balance sheet. Under the
effective yield method, Gallagher recognizes the tax credits as they are
allocated by the partnerships, which are included, net of amortization of the
investment, as a component of the provision for income taxes. During 1999 and
1998, Gallagher received tax benefits related to $37,180,000 and $20,159,000 of
the aggregate amount invested in the tax advantaged investments at December 31,
1999 and 1998, respectively. Investments in real estate partnerships primarily
represent an investment in a limited partnership that owns 10,000 acres of land
to be developed near Orlando, Florida. Investments in real estate partnerships
are carried at cost in the consolidated balance sheet, which approximated fair
value at December 31, 1999 and 1998. Notes receivable from investees represent
secured loans made by Gallagher to several of its equity and limited
partnership investments. Interest rates on the loans at December 31, 1999 and
1998 ranged from 6% to 10.5%. The carrying value of these loans at December 31,
1999 and 1998 approximated fair value.
27
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments--(Continued)
Significant components of investment income and other, including non-
recurring gains, are as follows (in thousands):
Years Ended December 31,
------------------------
1999 1998 1997
------- ------- -------
Interest.............................................. $15,889 $11,577 $14,754
Dividends............................................. 2,345 2,809 3,814
Net realized and unrealized gains..................... 6,011 4,144 4,938
Other income.......................................... 1,982 1,187 1,155
Income (loss) from equity investments................. 2,058 (745) 269
Non-recurring gains................................... -- -- 8,993
------- ------- -------
Total investment income and other..................... $28,285 $18,972 $33,923
======= ======= =======
The net change in unrealized gain (loss) on investment strategies included in
the foregoing table amounted to $889,000 in 1999, ($611,000) in 1998 and
($1,813,000) in 1997. In 1999, Gallagher sold a portion of its interests in
limited partnerships that operate qualified affordable housing projects for
cash proceeds of $6,264,000. The gain recognized in 1999 on this sale of
limited partnership interests was $3,015,000, which has been included in net
realized and unrealized gains in the foregoing table. In 1997, Gallagher sold
several underperforming or geographically undesirable operations and recorded
aggregate gains on these sales of $7,203,000. The gains on these sales of
operations have been reported as non-recurring gains. The net assets sold and
the operating results included in the consolidated statement of earnings
related to these operations were not material to the consolidated financial
statements. Also in 1997, Gallagher recorded a gain on a real estate
transaction of $1,790,000, which has also been reported as a non-recurring
gain.
The components of other comprehensive earnings, including the related income
tax effects, consist of the following (in thousands):
Years Ended December 31,
------------------------
1999 1998 1997
------- ------- ------
Change in unrealized gain (loss) on available for
sale securities during the year, net of income
taxes of ($1,251), ($844) and $872, respectively.. $(1,877) $(1,267) $1,308
Reclassification adjustment for gains realized in
net earnings during the year, net of income
taxes of ($10), ($778) and ($360), respectively... (15) (1,168) (539)
------- ------- ------
Net change in unrealized gain (loss) on available
for sale securities during the year, net of income
taxes of ($1,261), ($1,622) and $512,
respectively...................................... $(1,892) $(2,435) $ 769
======= ======= ======
4. Credit Agreements
Gallagher maintains a $20,000,000 variable rate (based on LIBOR plus .4%)
unsecured revolving credit agreement which expires on June 30, 2001. As of
December 31, 1999 and 1998, there were no borrowings outstanding under this
agreement. Terms of the revolving credit agreement include various covenants
which require Gallagher to maintain specified levels of tangible net worth and
restrict the amount of payments on certain expenditures. Gallagher was in
compliance with these covenants as of December 31, 1999 and 1998.
Gallagher also has three variable rate line of credit facilities which total
$45,000,000 in the aggregate and expire on April 30, 2000. Short-term
borrowings under these facilities totaled $15,000,000 at December 31, 1999 and
1998. The weighted average interest rate on the short-term borrowings were 6.1%
and 5.9% during 1999 and 1998, respectively.
28
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Capital Stock and Stockholders' Rights Plan
Capital Stock
The table below summarizes certain information about Gallagher's capital
stock at December 31, 1999 and 1998 (in thousands, except per share data):
Par Authorized
Class Value Shares
- ----- ------ ----------
Preferred stock............................................... No par 1,000
Common stock.................................................. $ 1.00 100,000
Stockholders' Rights Plan
Non-voting Rights, authorized by the Board of Directors on March 10, 1987 and
approved by stockholders on May 12, 1987, are outstanding on each share of
outstanding common stock. The Rights Plan was amended in 1996 to extend the
expiration of the Rights to May 12, 2007. Under certain conditions, each Right
may be exercised to purchase one share of common stock at an exercise price of
$50. The Rights become exercisable and transferable after a public announcement
that a person or group (as defined) has acquired 20% or more of the common
stock or after commencement or public announcement of a tender offer for 30% or
more of the common stock. If Gallagher is acquired in a merger or business
combination, each Right exercised gives the holder the right to purchase $100
of market value of common stock of the surviving company for the $50 exercise
price. The Rights may be redeemed by Gallagher at $.025 per Right at any time
prior to the public announcement of the acquisition of 20% of the common stock.
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):
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
Net earnings........................................ $ 67,753 $ 58,137 $ 57,581
======== ======== ========
Weighted average number of common shares
outstanding........................................ 36,602 36,140 35,116
Dilutive effect of stock options using the treasury
stock method....................................... 1,964 1,608 1,168
-------- -------- --------
Weighted average number of common and common
equivalent shares outstanding...................... 38,566 37,748 36,284
======== ======== ========
Net earnings per common share....................... $ 1.85 $ 1.61 $ 1.64
Net earnings per common and common equivalent share. 1.76 1.54 1.59
Options to purchase 20,000, 40,000 and 1,288,000 shares of common stock were
outstanding during 1999, 1998 and 1997, 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 year
and, therefore, would be antidilutive to earnings per share under the treasury
stock method.
7. Stock Option Plans
Gallagher has incentive and nonqualified stock option plans for officers and
key employees of Gallagher and its subsidiaries. The options are primarily
granted at the fair value of the underlying shares at the date of grant.
Options granted under the nonqualified plan primarily become exercisable at the
rate of 10% per year beginning the calendar year after the date of grant or
earlier in the event of death, disability or retirement. Options expire ten
years from the date of grant, or earlier in the event of termination of the
employee.
29
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stock Option Plans--(Continued)
In addition, Gallagher has a non-employee directors' stock option plan which
currently authorizes 400,000 shares for grant, with Discretionary Options
granted at the direction of the Option Committee and Retainer Options granted
in lieu of the directors' annual retainer. Discretionary Options shall be
exercisable at such rates as shall be determined by the Committee on the date
of grant. Retainer Options shall be cumulatively exercisable at the rate of 25%
of the total Retainer Option at the end of each full fiscal quarter succeeding
the date of grant. The excess of fair value at the date of grant over the
option price for these nonqualified stock options is considered compensation
and is charged against earnings ratably over the vesting period.
Gallagher also has an incentive stock option plan for its officers and key
employees resident in the United Kingdom. The United Kingdom plan is
essentially the same as Gallagher's domestic employee stock option plans, with
certain modifications to comply with United Kingdom law and to provide
potentially favorable tax treatment for grantees resident in the United
Kingdom.
All of the aforementioned stock option plans provide for the immediate
vesting of all outstanding stock option grants in the event of a change in
control of Gallagher. A change in control of Gallagher is defined as the
acquisition by a person (or entity) of the beneficial ownership of 50% or more
of Gallagher's common stock; the cessation, for any reason, of a majority of
directors of Gallagher to serve as directors during any two year period; or the
approval by the stockholders of Gallagher of the sale of substantially all of
the assets of Gallagher.
Gallagher accounts for stock option grants in accordance with APB 25 and,
accordingly, recognizes no compensation expense for stock options that are
granted to employees at the fair value of the underlying shares at the date of
grant. Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," requires disclosure of pro forma
information regarding net earnings and net earnings per share, using pricing
models to estimate the fair value of stock option grants. Had compensation
expense for Gallagher's stock option plans been determined based on the
estimated fair value at the date of grant consistent with the methodology
prescribed under SFAS 123, approximate net earnings and net earnings per share
would have been as follows (in thousands, except per share data):
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
Pro forma net earnings.............................. $ 66,278 $ 57,085 $ 56,690
Pro forma net earnings per common share............. 1.81 1.58 1.61
Pro forma net earnings per common and common
equivalent share................................... 1.74 1.53 1.58
For purposes of the pro forma disclosures, the estimated fair values of the
stock option grants are amortized to expense over the options' expected lives.
The fair value of stock options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
Dividend yield...................................... 3.1% 3.1% 3.0%
Risk-free interest rate............................. 6.6% 4.9% 5.7%
Volatility.......................................... 22.9% 24.1% 23.9%
Expected life (years)............................... 8.0 8.0 8.0
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models
30
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stock Option Plans--(Continued)
require the input of highly subjective assumptions including the expected stock
price volatility. Because Gallagher's employee and director stock options have
characteristics significantly different from those of traded options, and
because changes in the selective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and director stock options.
The pro forma disclosures above only include the effect of options granted
subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS
123 pro forma disclosures to future periods may not be indicative of future
effects.
The following is a summary of all of Gallagher's stock option activity and
related information (in thousands, except exercise price data):
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
------ -------- ------ -------- ------ --------
Beginning balance........ 8,922 $15.26 8,654 $14.13 9,820 $13.59
Granted.................. 472 24.87 1,522 18.96 298 16.59
Exercised................ (1,256) 12.71 (1,176) 11.60 (1,114) 9.85
Canceled................. (238) 16.92 (78) 16.42 (350) 14.72
------ ------- ------ ------- ------ -------
Ending balance........... 7,900 $16.10 8,922 $15.26 8,654 $14.13
====== ======= ====== ======= ====== =======
Exercisable at end of
year.................... 3,368 3,486 3,560
====== ====== ======
Options with respect to 2,422,000 shares were available for grant at December
31, 1999.
Other information regarding stock options outstanding and exercisable at
December 31, 1999 is summarized as follows (in thousands, except exercise price
data):
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Exercise Prices Number Life Exercise Number Exercise
- ------------------------ Outstanding (in years) Price Exercisable Price
----------- ----------- -------- ----------- --------
$ .50 - $14.63.......... 2,410 2.87 $12.02 1,468 $11.72
15.00 - 16.88.......... 2,504 4.94 16.34 1,216 16.43
17.13 - 18.50.......... 2,314 7.17 17.95 628 17.66
18.63 - 27.47.......... 672 9.06 23.52 56 20.99
-------- -------- -------- -------- --------
$ .50 - $27.47.......... 7,900 5.31 $16.10 3,368 $14.68
======== ======== ======== ======== ========
8. Retirement Plans
Gallagher has a noncontributory defined benefit pension plan which covers
substantially all domestic employees who have attained a specified age and one
year of employment. Benefits under the plan are based on years of service and
salary history. Plan assets consist primarily of common stocks and bonds
invested under the terms of a group annuity contract managed by a life
insurance company.
31
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Retirement Plans--(Continued)
Gallagher accounts for the defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers'
Accounting for Pensions." The difference between the present value of the
pension benefit obligation at the date of adoption of SFAS 87 and the fair
value of plan assets at that date is being amortized on a straight-line basis
over the average remaining service period of employees expected to receive
benefits.
A reconciliation of the beginning and ending balances of the pension benefit
obligation and fair value of plan assets and the funded status of the plan is
as follows (in thousands):
Years Ended December 31,
------------------------
1999 1998
-------- --------
Change in pension benefit obligation:
Pension benefit obligation at beginning of year............ $ 65,314 $ 63,747
Service cost............................................... 7,058 7,355
Interest cost.............................................. 5,176 4,560
Net actuarial (gain) loss.................................. 4,355 (9,141)
Benefits paid.............................................. (1,175) (1,207)
-------- --------
Pension benefit obligation at end of year.................. 80,728 65,314
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year............. 55,053 45,560
Actual return on plan assets............................... 9,270 5,832
Company contributions...................................... -- 4,868
Benefits paid.............................................. (1,175) (1,207)
-------- --------
Fair value of plan assets at end of year................... 63,148 55,053
-------- --------
Funded status of the plan (underfunded).................... (17,580) (10,261)
Unrecognized net actuarial gain............................ (13,252) (13,433)
Unrecognized prior service cost............................ 992 1,102
Unrecognized transition obligation......................... 387 443
-------- --------
Accrued pension benefit cost............................... $(29,453) $(22,149)
======== ========
The components of the net periodic pension benefit cost for the plan consists
of the following (in thousands):
Years Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
Service cost--benefits earned during the year........ $ 7,058 $ 7,355 $ 7,046
Interest cost on benefit obligation.................. 5,176 4,560 3,985
Expected return on plan assets....................... (4,897) (4,168) (3,550)
Recognized net actuarial gain........................ (199) -- --
Amortization of prior service cost................... 110 110 110
Amortization of transition obligation................ 56 56 56
Other................................................ 26 26 26
------- ------- -------
Net periodic pension benefit cost.................... $ 7,330 $ 7,939 $ 7,673
======= ======= =======
32
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Retirement Plans--(Continued)
The following assumptions were used in determining the plan's pension benefit
obligation for 1999, 1998 and 1997:
Discount rate.............................................................. 7.5%
Rate of increase in future compensation levels............................. 6.5%
Expected long-term rate of return on assets................................ 9.0%
Gallagher has a qualified contributory savings and thrift (401(k)) plan
covering the majority of its employees. Gallagher matching contributions (up to
a maximum of 2% of eligible compensation) are at the discretion of Gallagher's
Board of Directors and may not exceed the maximum amount deductible for federal
income tax purposes. Gallagher contributed $3,257,000, $3,263,000 and
$3,190,000 in 1999, 1998 and 1997, respectively. Effective January 1, 1999,
Gallagher implemented a nonqualified deferred compensation plan for certain
employees, who due to Internal Revenue Service rules, cannot take full
advantage of the Gallagher matching contributions under the savings and thrift
plan. The plan permits these employees to annually elect to defer a portion of
their compensation until their retirement. Gallagher matching contributions to
this plan are also at the discretion of Gallagher's Board of Directors.
Gallagher contributed $236,000 to the plan in 1999. The fair value of the
plan's assets as of December 31, 1999, including employee contributions and
investment earnings thereon, was $2,419,000 and has been included in other
noncurrent assets and the corresponding liability has been included in other
noncurrent liabilities in the accompanying consolidated balance sheet.
Gallagher also has a foreign defined contribution plan which provides for
basic contributions by Gallagher and voluntary contributions by employees
resident in the United Kingdom which are matched 100% by Gallagher, up to a
maximum of 5% of eligible compensation. Net expense (income) for foreign
retirement plans amounted to $2,253,000 in 1999, $3,128,000 in 1998 and
($2,922,000) in 1997. In 1997, Gallagher settled a foreign defined benefit plan
and enrolled the participants into the foreign defined contribution plan. At
the time of the settlement of the foreign plan, there was a surplus of plan
assets in excess of benefit obligations. Previously vested benefits of the plan
participants were settled by the purchase of annuity policies with a life
insurance company. As a result of the defined benefit plan settlement,
Gallagher recognized a $4,830,000 gain in 1997 which was recorded as a
reduction of salaries and employee benefits expense.
9. Postretirement Benefits Other Than Pensions
In 1992, Gallagher amended its health benefits plan to eliminate retiree
coverage, except for retirees and those employees who had already attained a
specified age and length of service at the time of the amendment. The retiree
health plan is contributory, with contributions adjusted annually and is funded
on a pay-as-you-go basis.
33
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Postretirement Benefits Other Than Pensions--(Continued)
A reconciliation of the beginning and ending balances of the postretirement
benefit obligation and the funded status of the plan is as follows (in
thousands):
Years Ended December 31,
-------------------------
1999 1998
------------ ------------
Change in postretirement benefit obligation:
Postretirement benefit obligation at beginning of
year............................................... $ 11,277 $ 11,280
Service cost........................................ -- --
Interest cost....................................... 563 803
Net actuarial gain.................................. (3,622) (346)
Benefits paid....................................... (335) (460)
----------- ------------
Postretirement benefit obligation at end of year.... 7,883 11,277
Fair value of plan assets at beginning and end of
year............................................... -- --
----------- ------------
Funded status of the plan (underfunded)............. (7,883) (11,277)
Unrecognized net actuarial gain..................... (4,444) (1,075)
Unrecognized prior service cost..................... -- --
Unrecognized transition obligation.................. 6,652 7,164
----------- ------------
Accrued postretirement benefit cost................. $ (5,675) $ (5,188)
=========== ============
The components of the net periodic postretirement benefit cost include the
following (in thousands):
Years Ended December 31,
------------------------
1999 1998 1997
------- ------- -------
Service cost--benefits earned during the year........ $ -- $ -- $ --
Interest cost on benefit obligation.................. 563 803 763
Amortization of transition obligation................ 512 512 512
Amortization of net actuarial gain................... (253) -- (89)
------- ------- -------
Net periodic postretirement benefit cost............. $ 822 $ 1,315 $ 1,186
======= ======= =======
The discount rate used to measure the postretirement benefit obligation was
7.5% at December 31, 1999, 1998 and 1997. The transition obligation is being
amortized over a 20 year period. For measurement purposes, a 7.5% annual rate
of increase in the per capita cost of covered health care benefits was assumed
for 2000. This rate was assumed to gradually scale down to 4.5% for 2009 and
remain at that level thereafter. The assumed health care cost trend rate has a
significant effect on the amounts reported and disclosed herein. A one
percentage point change in the assumed health care cost trend rate would have
the following effects (in thousands):
One Percentage Point
-----------------------
Increase (Decrease)
---------- -----------
Effect on the net periodic postretirement benefit
cost in 1999........................................ $ 65 $ (56)
Effect on the postretirement benefit obligation at
December 31, 1999................................... 930 (799)
10. Commitments and Contingencies
Gallagher is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that none of the litigation will have a
material effect on Gallagher's consolidated financial position or operating
results.
34
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Commitments and Contingencies--(Continued)
Gallagher generally operates in leased premises. Certain office space leases
have options permitting renewals for additional periods. In addition to minimum
fixed rentals, a number of leases contain annual escalation clauses generally
related to increases in an inflation index.
Minimum aggregate rental commitments at December 31, 1999 under noncancelable
operating leases having an initial term of more than one year are as follows
(in thousands):
Total
--------
2000.................................................................. $ 30,840
2001.................................................................. 25,548
2002.................................................................. 21,769
2003.................................................................. 17,584
2004.................................................................. 13,189
Subsequent years...................................................... 36,494
--------
$145,424
========
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $37,308,000 in 1999,
$32,562,000 in 1998 and $31,442,000 in 1997.
At December 31, 1999, Gallagher has contingently committed to invest an
additional $7,200,000 related to two letter of credit arrangements with one of
its equity investments. In addition, Gallagher has guaranteed an aggregate
$14,600,000 of funds through letters of credit or other arrangements related to
several investments and insurance programs of Gallagher.
11. Income Taxes
Significant components of earnings before income taxes and the provision for
income taxes are as follows (in thousands):
Years Ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
Earnings before income taxes:
Domestic........................................... $ 99,261 $81,007 $79,225
Foreign, principally United Kingdom and Bermuda.... 4,974 5,270 6,457
-------- ------- -------
$104,235 $86,277 $85,682
======== ======= =======
Provision for income taxes:
Federal:
Current........................................... $ 31,763 $27,360 $30,764
Deferred.......................................... (1,301) (6,999) (10,204)
-------- ------- -------
30,462 20,361 20,560
-------- ------- -------
State and local:
Current........................................... 5,790 7,097 6,355
Deferred.......................................... (186) (1,007) (1,469)
-------- ------- -------
5,604 6,090 4,886
-------- ------- -------
Foreign:
Current........................................... 1,196 2,629 1,318
Deferred.......................................... (780) (940) 1,337
-------- ------- -------
416 1,689 2,655
-------- ------- -------
Total provision for income taxes.................... $ 36,482 $28,140 $28,101
======== ======= =======
35
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes--(Continued)
A reconciliation of the provision for income taxes with the United States
federal income tax rate is as follows (in thousands):
Years Ended December 31,
-------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------ ------- ------ ------- ------
Federal statutory rate...... $36,482 35.0 $30,197 35.0 $29,989 35.0
State income taxes--net of
federal.................... 3,967 3.8 3,731 4.3 2,925 3.4
Pre-acquisition earnings of
pooled companies taxed to
previous owners............ (200) (0.2) (509) (0.6) (84) (0.1)
Foreign taxes............... (712) (0.7) 349 0.4 592 0.7
Affordable housing and
alternative energy tax
credits.................... (4,990) (4.8) (4,866) (5.6) (2,697) (3.1)
Other--net.................. 1,935 1.9 (762) (0.9) (2,624) (3.1)
------- ------ ------- ------ ------- ------
Provision for income taxes.. $36,482 35.0 $28,140 32.6 $28,101 32.8
======= ====== ======= ====== ======= ======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of Gallagher's deferred tax liabilities and assets are as follows (in
thousands):
December 31,
---------------
1999 1998
------- -------
Deferred tax liabilities:
Investment related partnerships................................ $ 2,808 $ 672
Other.......................................................... 1,816 2,315
------- -------
Deferred tax liabilities...................................... 4,624 2,987
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits........ 21,359 20,706
Accrued liabilities............................................ 10,978 13,305
Unrealized investment loss..................................... 1,779 518
Other.......................................................... 3,517 2,196
------- -------
Total deferred tax assets..................................... 37,633 36,725
Valuation allowance for deferred tax assets................... -- --
------- -------
Deferred tax assets........................................... 37,633 36,725
------- -------
Net deferred tax assets......................................... $33,009 $33,738
======= =======
During the period from 1994 to 1996, Gallagher provided for United States
income taxes on the undistributed earnings of its foreign subsidiaries. Due to
changes in the United States federal income tax laws effective in 1997,
Gallagher no longer provides for United States income taxes on the
undistributed earnings ($22,000,000 at December 31, 1999) of certain foreign
subsidiaries which are considered permanently invested outside of the United
States. The amount of unrecognized deferred tax liability on these
undistributed earnings is $5,500,000 at December 31, 1999.
36
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Quarterly Operating Results (unaudited)
Quarterly operating results for 1999 and 1998 were as follows (in thousands,
except per share data):
1st 2nd 3rd 4th
-------- -------- -------- --------
1999
- ----
Total revenues............................. $136,453 $141,671 $159,872 $167,840
Earnings before income taxes............... 20,706 19,551 35,600 28,378
Net earnings............................... 13,560 12,809 23,108 18,276
Net earnings per common share.............. .37 .35 .63 .50
Net earnings per common and common
equivalent share.......................... .35 .33 .60 .47
1998
- ----
Total revenues............................. $129,810 $128,755 $148,281 $152,801
Earnings before income taxes............... 18,043 14,890 29,563 23,781
Net earnings............................... 12,157 10,093 20,261 15,626
Net earnings per common share.............. .34 .28 .56 .43
Net earnings per common and common
equivalent share.......................... .33 .27 .53 .41
13. Segment Information
Gallagher has identified three operating segments in addition to its
corporate operations. Insurance Brokerage Services encompasses operations that,
for commission or fee compensation, place or arrange to place insurance
directly related to the clients' funding of risk. This segment also provides
consulting, for fee compensation, related to clients' risk financing programs.
Risk Management Services 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 services for Gallagher's clients. Financial
Services includes alternative investment strategies and tax advantaged
investments. It manages Gallagher's own investment portfolio while expanding
these services in conjunction with the insurance products Gallagher markets.
Corporate consists primarily of unallocated administrative costs and the
provision for income taxes which is not allocated to Gallagher's operating
segments.
37
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Segment Information--(Continued)
Allocations of investment income and certain expenses are based on
assumptions and estimates, and reported operating results by segment would
change if different methods were applied. Certain assets are not individually
identifiable by segment and, accordingly, have been allocated based on
formulas. Financial information relating to Gallagher's operating segments for
1999, 1998 and 1997 is as follows (in thousands):
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
--------- ---------- --------- --------- --------
Year Ended December 31, 1999
- ----------------------------
Revenues:
Commissions....................................... $342,922 $ -- $ -- $ -- $342,922
Fees.............................................. 47,035 187,594 -- -- 234,629
Investment income and other....................... 7,734 769 19,782 -- 28,285
-------- --------- -------- -------- --------
Total revenues.................................. $397,691 $ 188,363 $ 19,782 $ -- $605,836
======== ========= ======== ======== ========
Earnings (loss) before income taxes................. $ 75,412 $ 22,346 $ 12,330 $ (5,853) $104,235
Provision for income taxes.......................... -- -- -- 36,482 36,482
-------- --------- -------- -------- --------
Net earnings (loss)............................. $ 75,412 $ 22,346 $ 12,330 $(42,335) $ 67,753
======== ========= ======== ======== ========
Income from equity investments...................... $ 727 $ -- $ 1,331 $ -- $ 2,058
Depreciation and amortization expense............... 9,614 4,553 -- 1,133 15,300
Interest expense.................................... 114 159 226 683 1,182
Net foreign exchange gain (loss).................... (83) (37) -- 28 (92)
----------------------------------------------------
Revenues:
United States..................................... $364,506 $ 174,419 $ 17,954 $ -- $556,879
Foreign, principally United Kingdom and Bermuda... 33,185 13,944 1,828 -- 48,957
-------- --------- -------- -------- --------
Total revenues.................................. $397,691 $ 188,363 $ 19,782 $ -- $605,836
======== ========= ======== ======== ========
At December 31, 1999
- --------------------
Identifiable assets:
United States..................................... $347,053 $ 36,498 $232,652 $ 52,358 $668,561
Foreign, principally United Kingdom and Bermuda... 198,768 10,466 6,351 -- 215,585
-------- --------- -------- -------- --------
Total identifiable assets....................... $545,821 $ 46,964 $239,003 $ 52,358 $884,146
======== ========= ======== ======== ========
Identifiable assets related to equity investments. $ 629 $ -- $ 24,384 $ -- $ 25,013
38
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Segment Information--(Continued)
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
--------- ---------- --------- --------- ---------
Year Ended December 31, 1998
- ----------------------------
Revenues:
Commissions................ $328,177 $ 467 $ -- $ -- $ 328,644
Fees....................... 44,654 167,377 -- -- 212,031
Investment income and
other..................... 8,815 996 9,161 -- 18,972
-------- --------- --------- --------- ---------
Total revenues........... $381,646 $ 168,840 $ 9,161 $ -- $ 559,647
======== ========= ========= ========= =========
Earnings (loss) before income
taxes....................... $ 70,026 $ 15,584 $ 5,103 $ (4,436) $ 86,277
Provision for income taxes... -- -- -- 28,140 28,140
-------- --------- --------- --------- ---------
Net earnings (loss)...... $ 70,026 $ 15,584 $ 5,103 $ (32,576) $ 58,137
======== ========= ========= ========= =========
Income (loss) from equity
investments................. $ 215 $ -- $ (960) $ -- $ (745)
Depreciation and amortization
expense..................... 8,093 3,732 -- 318 12,143
Interest expense............. 237 88 11 1,054 1,390
Net foreign exchange gain
(loss)...................... (176) 126 -- 2 (48)
------------------------------------------------------
Revenues:
United States.............. $349,316 $ 156,832 $ 8,735 $ -- $ 514,883
Foreign, principally United
Kingdom and Bermuda....... 32,330 12,008 426 -- 44,764
-------- --------- --------- --------- ---------
Total revenues........... $381,646 $ 168,840 $ 9,161 $ -- $ 559,647
======== ========= ========= ========= =========
At December 31, 1998
- --------------------
Identifiable assets:
United States.............. $309,794 $ 33,950 $ 195,302 $ 52,935 $ 591,981
Foreign, principally United
Kingdom and Bermuda....... 156,442 7,373 4,642 -- 168,457
-------- --------- --------- --------- ---------
Total identifiable
assets.................. $466,236 $ 41,323 $ 199,944 $ 52,935 $ 760,438
======== ========= ========= ========= =========
Identifiable assets related
to equity investments..... $ (120) $ -- $ 20,396 $ -- $ 20,276
Year Ended December 31, 1997
- ----------------------------
Revenues:
Commissions................ $305,344 $ 381 $ -- $ -- $ 305,725
Fees....................... 43,553 141,403 -- -- 184,956
Investment income and
other..................... 9,032 977 14,921 -- 24,930
Non-recurring gains........ -- -- 8,993 -- 8,993
-------- --------- --------- --------- ---------
Total revenues........... $357,929 $ 142,761 $ 23,914 $ -- $ 524,604
======== ========= ========= ========= =========
Earnings (loss) before income
taxes....................... $ 60,318 $ 10,480 $ 22,048 $ (7,164) $ 85,682
Provision for income taxes... -- -- -- 28,101 28,101
-------- --------- --------- --------- ---------
Net earnings (loss)...... $ 60,318 $ 10,480 $ 22,048 $ (35,265) $ 57,581
======== ========= ========= ========= =========
Income (loss) from equity
investments................. $ (154) $ -- $ 423 $ -- $ 269
Depreciation and amortization
expense..................... 7,896 3,425 -- 311 11,632
Interest expense............. 292 69 561 210 1,132
Net foreign exchange gain
(loss)...................... 75 (1) -- -- 74
------------------------------------------------------
Revenues:
United States.............. $327,948 $ 136,964 $ 21,526 $ -- $ 486,438
Foreign, principally United
Kingdom and Bermuda....... 29,981 5,797 2,388 -- 38,166
-------- --------- --------- --------- ---------
Total revenues........... $357,929 $ 142,761 $ 23,914 $ -- $ 524,604
======== ========= ========= ========= =========
At December 31, 1997
- --------------------
Identifiable assets:
United States.............. $259,807 $ 29,362 $ 168,907 $ 56,015 $ 514,091
Foreign, principally United
Kingdom and Bermuda....... 148,727 5,054 4,563 -- 158,344
-------- --------- --------- --------- ---------
Total identifiable
assets.................. $408,534 $ 34,416 $ 173,470 $ 56,015 $ 672,435
======== ========= ========= ========= =========
Identifiable assets related
to equity investments..... $ (627) $ -- $ 16,603 $ -- $ 15,976
39
MANAGEMENT'S REPORT
The management of Arthur J. Gallagher & Co. (Gallagher) is responsible for
the preparation and integrity of the consolidated financial statements and the
related financial comments appearing in this annual report. The consolidated
financial statements were prepared in accordance with accounting principles
generally accepted in the United States and include certain amounts based on
management's best estimates and judgments. Other financial information
presented in this annual report is consistent with the consolidated financial
statements.
Gallagher maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed as authorized and are recorded and reported properly. This system
of controls is based on written policies and procedures, appropriate divisions
of responsibility and authority, careful selection and training of personnel
and the utilization of an internal audit function. Policies and procedures
prescribe that Gallagher and all employees are to maintain the highest ethical
standards and that business practices throughout the world are to be conducted
in a manner which is above reproach.
Ernst & Young LLP, independent auditors, has audited Gallagher's consolidated
financial statements and their report is presented herein.
The Board of Directors has an Audit Committee composed entirely of outside
directors. Ernst & Young LLP has direct access to the Audit Committee and
periodically meets with the Committee to discuss accounting, auditing and
financial reporting matters.
Arthur J. Gallagher & Co.
Itasca, Illinois
January 20, 2000
/s/ J. Patrick Gallagher, Jr.
-------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
/s/ Michael J. Cloherty
-------------------------------------
Michael J. Cloherty
Executive Vice President and
Chief Financial Officer
40
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Arthur J. Gallagher & Co.
We have audited the accompanying consolidated balance sheet of Arthur J.
Gallagher & Co. (Gallagher) as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of Gallagher's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Arthur J. Gallagher & Co. at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
-------------------------------------
Ernst & Young LLP
Chicago, Illinois
January 20, 2000
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
42
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding directors and nominees for directors of Gallagher is
included under the caption entitled "Election of Directors" in the Proxy
Statement dated March 30, 2000 and is incorporated herein by reference.
Item 11. Executive Compensation.
Information regarding executive compensation of Gallagher's directors and
executive officers is included in the Proxy Statement dated March 30, 2000
under the caption entitled "Compensation of Executive Officers and Directors,"
and is incorporated herein by reference; provided, however, the report of the
Compensation Committee on executive compensation and the stock performance
graph shall not be deemed to be incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of Gallagher is included under the caption
entitled "Principal Holders of Securities" in the Proxy Statement dated March
30, 2000 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements of Arthur J. Gallagher & Co.
consisting of:
(a) Consolidated Statement of Earnings for each of the three years
in the period ended December 31, 1999.
(b) Consolidated Balance Sheet as of December 31, 1999 and 1998.
(c) Consolidated Statement of Cash Flows for each of the three years
in the period ended December 31, 1999.
(d) Consolidated Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 1999.
(e) Notes to Consolidated Financial Statements.
(f) Report of Independent Auditors.
2. Consolidated Financial Statement Schedules consisting of:
(a) Schedule II--Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included in
the Consolidated Financial Statements or the Notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of Gallagher
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 1996, File No. 1-9761).
43
3.2 By-Laws of Gallagher (incorporated by reference to the same
exhibit number to Gallagher's Form S-1 Registration Statement
No. 33-10447).
3.3 Rights Agreement between Gallagher and Bank of America Illinois
(formerly Continental Illinois National Bank and Trust Company
of Chicago) (incorporated by reference to Exhibits 1 and 2 to
Gallagher's Form 8-A Registration Statement filed May 12, 1987,
File No. 0-13480).
3.4 Assignment and Assumption Agreement of Rights Agreement by and
among Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago), Harris Trust and
Savings Bank and Gallagher (incorporated by reference to the
same exhibit number to Gallagher's Form S-8 Registration
Statement No. 33-38031).
3.5 Amendment No. 1 to Exhibit 3.3 (incorporated by reference to
the same exhibit number to Gallagher's Form 10-Q Quarterly
Report for the quarterly period ended June 30, 1996, File No.
1-9761).
4.1 Instruments defining the rights of security holders (relevant
portions contained in the Restated Certificate of Incorporation
and By-Laws of Gallagher and the Rights Agreement in Exhibits
3.1, 3.2, and 3.3, respectively, hereby incorporated by
reference).
**10.1 Arthur J. Gallagher & Co. Incentive Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Gallagher's Form S-1
Registration Statement No. 2-89195).
**10.1.1 Amendment No. 1 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3 to Gallagher's Form S-8 Registration
Statement No. 33-604).
**10.1.2 Amendment No. 2 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3.1 to Gallagher's Form S-8 Registration
Statement No. 33-14625).
**10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan, Amended and restated as of January 22, 1998 and approved
by the Inland Revenue on June 12, 1998 (incorporated by
reference to the same exhibit number to Gallagher's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1998,
File No. 1-9761).
**10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan,
Amended and restated as of May 19, 1998 (incorporated by
reference to the same exhibit number to Gallagher's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1998,
File No. 1-9761).
**10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan,
Amended and restated as of January 22, 1998 (incorporated by
reference to the same exhibit number to Gallagher's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1998,
File No. 1-9761).
**10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock
Option Plan, Amended and restated as of January 22, 1998
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 1998, File No. 1-9761).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and Itasca
Center III Limited Partnership, a Texas limited partnership,
dated July 26, 1989 (incorporated by reference to the same
exhibit number to Gallagher's Form 10-K Annual Report for 1989,
File No. 1-9761).
10.6 $20.0 million Credit Agreement dated February 16, 1993
(incorporated by reference to Exhibit No. 4.4 to Gallagher's
Form 10-K Annual Report for 1992, File No. 1-9761).
10.7 Letter dated December 31, 1983 from Arthur J. Gallagher & Co.
to Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago) regarding Common
Stock Purchase Financing Program including exhibits thereto and
related letters (incorporated by reference to the same exhibit
number to Gallagher's Form S-1 Registration Statement No. 2-
89195).
44
10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-K Annual Report for 1985, File No.
0-13480).
**10.10 Board of Directors' Resolution from meeting on January 26, 1984
relating to consulting and retirement benefits for certain
directors (incorporated by reference to the same exhibit number
to Gallagher's Form S-1 Registration Statement No. 2-89195).
**10.11 Form of Indemnity Agreement between Gallagher and each of its
directors and corporate officers (incorporated by reference to
Attachment A to the Gallagher's Proxy Statement dated April 10,
1987 for its Annual Meeting of Stockholders, File No.
0-13480).
**10.13 Arthur J. Gallagher & Co. Stock Option Agreements dated May 10,
1988 between Gallagher and each of Robert H. B. Baldwin, Jack
M. Greenberg and James R. Wimmer (incorporated by reference to
the same exhibit number to Gallagher's Form 10-K Annual Report
for 1988, File No. 1-9761).
**10.14 Form of Change in Control Agreement between Gallagher and each
of its Executive Officers (incorporated by reference to the
same exhibit number to Gallagher's Form 10-K Annual Report for
1998, File No. 1-9761).
*10.15 Arthur J. Gallagher & Co. Supplemental Savings and Thrift Plan.
*21.0 Subsidiaries of Gallagher, including state or other
jurisdiction of incorporation or organization and the names
under which each does business.
*23.1 Consent of Ernst & Young LLP, as independent auditors.
*24.0 Powers of Attorney.
*27.0 Financial Data Schedule.
All other exhibits are omitted because they are not applicable, or not
required, or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
- --------
*Filed as exhibits to this Form 10-K with the Securities and Exchange
Commission.
**Such exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this form pursuant
to item 601 of Regulation S-K.
(b) Reports on Form 8-K
Not applicable.
45
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 22nd day of
March, 2000.
Arthur J. Gallagher & Co.
/s/ J. Patrick Gallagher, Jr.
By___________________________________
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 22nd day of March, 2000 by the following
persons on behalf of the Registrant in the capacities indicated.
Name Title
---- -----
*Robert E. Gallagher Chairman and Director
_________________________________________
Robert E. Gallagher
/s/ J. Patrick Gallagher, Jr. President and Director (Chief Executive
___________________________________________ Officer)
J. Patrick Gallagher, Jr.
/s/ Michael J. Cloherty Executive Vice President and Director
___________________________________________ (Chief Financial Officer)
Michael J. Cloherty
/s/ Jack H. Lazzaro Vice President--Finance (Chief Accounting
___________________________________________ Officer)
Jack H. Lazzaro
*T. Kimball Brooker Director
_________________________________________
T. Kimball Brooker
*Peter J. Durkalski Director
_________________________________________
Peter J. Durkalski
*Ilene S. Gordon Director
_________________________________________
Ilene S. Gordon
*Jack M. Greenberg Director
___________________________________________
Jack M. Greenberg
*Frank M. Heffernan, Jr. Director
___________________________________________
Frank M. Heffernan, Jr.
*Walter F. McClure Director
___________________________________________
Walter F. McClure
*Robert Ripp Director
___________________________________________
Robert Ripp
*James R. Wimmer Director
___________________________________________
James R. Wimmer
/s/ John C. Rosengren
*By: ________________________________
John C. Rosengren, Attorney-in-
Fact
46
SCHEDULE II
ARTHUR J. GALLAGHER & CO.
VALUATION AND QUALIFYING ACCOUNTS
Balance Additions
at Charged Balance
Beginning to at End
of Year Expense Adjustments of Year
--------- --------- ----------- -------
(in thousands)
Year ended December 31, 1999
Allowance for doubtful accounts.... $1,500 $ (567) $ (28)(1) $ 905
Accumulated amortization of
goodwill.......................... 3,641 1,111 (850)(2) 3,902
Accumulated amortization of non-
compete agreements and expiration
lists............................. 999 1,909 42 (3) 2,950
Year ended December 31, 1998
Allowance for doubtful accounts.... $ 860 $ 238 $ 402 (1) $1,500
Accumulated amortization of
goodwill.......................... 3,394 397 (150)(2) 3,641
Accumulated amortization of non-
compete agreements and expiration
lists............................. 3,110 665 (2,776)(3) 999
Year ended December 31, 1997
Allowance for doubtful accounts.... $ 896 $ 644 $ (680)(1) $ 860
Accumulated amortization of
goodwill.......................... 3,429 243 (278)(2) 3,394
Accumulated amortization of non-
compete agreements and expiration
lists............................. 3,314 818 (1,022)(3) 3,110
- --------
(1) Bad debt write-offs net of recoveries.
(2) Reversal of fully amortized goodwill.
(3) Reversal of fully amortized non-compete agreements and expiration lists and
intangible asset/amortization reclassifications.