The Company's executive offices and certain subsidiary and branch facilities are located at Two Pierce Place, Itasca, Illinois where the Company leases approximately 200,000 square feet of space. The lease commitment on the above mentioned property expires February 28, 2006. Except for one office building which the Company owns, the Company operates all of its branch and service offices in leased premises. Certain of these leases for office space have options permitting renewals for additional periods. In addition to minimum fixed rentals, a number of leases contain escalation clauses related to increases in the cost of living in future years. See Note 12 of Notes to Consolidated Financial Statements for information with respect to the Company's lease commitments at December 31, 1994.
Fluctuations in premiums charged by insurance companies materially affect the insurance brokerage industry. Commission revenues are based on a percentage of the premiums paid by the insured and generally follow premium levels. Beginning in late 1986 and continuing through the present, price competition has prevailed among property and casualty insurers. This "soft market" (i.e. generally lower premium rates) has generally resulted in flat to reduced renewal commissions during the period.
Commission revenues increased by $21.8 million or 12% in 1994. This increase is the result of new business production of approximately $30.1 million and, to a lesser extent, modest renewal rate increases partially offset by lost business. In 1993, commission revenues increased by $8.6 million or 5% over 1992. This increase is the result of new business production efforts partially offset by lost business and, to a lesser extent, renewal rate decreases.
of funds available for investment. This decrease is partially offset by a gain of $656,000 realized in closing out interest rate exchange agreements related to the retirement of the Company's debt agreement in the fourth quarter of 1994 and by a gain of $800,000 from the sale of two personal lines books of business also recorded in the fourth quarter of 1994. In 1993, investment income and other increased $4.2 million, or 34% over 1992 due primarily to investment gains recorded on limited partnership investment strategies and was partially offset by lower interest rates and a $1.1 million gain from the sale of a personal lines book of business recorded in the second quarter of 1992.
Other operating expenses increased by $1.7 million or 2% in 1994. This increase was due primarily to additional office facilities (rent and utilities, miscellaneous office and supply expenses) resulting from leasing new office space and expanding and upgrading existing facilities, and higher business insurance costs. Travel and entertainment costs also increased due to an increase in both the number of employees and the Company's sales volume. This increase was partially offset by the non-recurring write-off in 1993 of $2.0 million by a 1994 acquisition of certain intangible assets and by a reduction in professional fees related to claims processing, investment management and acquisition costs. Other operating expenses increased by $8.9 million or 9% in 1993. This increase was due primarily to additional office facilities (rent and utilities, miscellaneous office and supply expenses) resulting from leasing new office space and expanding and upgrading existing facilities, the write-off of intangibles mentioned above, and increased professional fees and business insurance. Travel and entertainment costs also increased due to an increase in both the number of employees and the Company's sales volume.
Interest expense of $1.7 million, $2.4 million and $3.0 million in 1994, 1993 and 1992, respectively, relates primarily to the Company's loan obligations discussed in greater detail below.
The Company's overall tax rate of 35% in 1994 approximates the statutory federal rate. For 1994, the net effect of state and foreign taxes were substantially offset by the tax benefits generated by certain investments. The Company's overall tax rates of 39% in 1993 and 35% in 1992 are greater than the statutory federal rates of 35% and 34%, respectively, due primarily to the net effect of state and foreign taxes which are substantially offset by the tax benefits generated by certain investments. Additionally, the increase in the 1993 tax rate over 1992 is due partially to a federal tax rate increase resulting from the Revenue Reconciliation Act of 1993 and the impact of the restatement for a 1994 pooled acquisition. See Note 13 of the Notes to Consolidated Financial Statements.
The Company's foreign operations recorded operating earnings before income taxes of $1.3 million, $7.1 million, and $1.3 million in 1994, 1993, and 1992, respectively. The 1994 decrease is due primarily to the 1993 non-recurring foreign benefit plan gain mentioned above, and a reduction in investment income. The 1993 increase was due primarily to the foreign benefit plan gain mentioned above. See Notes 13 and 14 of the Notes to Consolidated Financial Statements.
The Company paid $12.7 million in cash dividends on its common stock in 1994. The Company's dividend policy is determined by the Board of Directors and payments are fixed after considering the Company's available cash from earnings and its known or anticipated cash needs. In each quarter of 1994, the Company's Board of Directors declared a dividend of $.22 per share which is $.04 or 22% greater than each quarterly dividend in 1993. In January, 1995, the Company announced a first quarter dividend of $.25 per share, a 14% increase over the quarterly dividend in 1994.
Net capital expenditures for fixed assets amounted to $7.4 million, $7.6 million and $6.2 million in 1994, 1993 and 1992, respectively. In 1995, the Company intends to make additional capital improvements of approximately $7.5 million to upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30, 1995, to repurchase its common stock. Under the plan, the Company repurchased 1.4 million shares at a cost of $43.8 million, 225,000 shares at a cost of $7.0 million, and 610,000 shares at a cost of $15.9 million in 1994, 1993 and 1992, respectively. The 1994 common stock repurchases, in part, caused the weighted average shares outstanding to decrease by 590,000 shares from 1993 to 1994. The repurchases were funded entirely by internally generated funds and are held for reissuance in connection with exercises of options under its stock option plans. Under the provisions of the plan, the Company is authorized to repurchase approximately 340,000 additional shares through June 30, 1995. The Company is under no commitment or obligation to repurchase any particular amount of common stock and at its discretion may suspend the repurchase plan at any time.
The Company believes that internally generated funds will continue to be sufficient to meet the Company's foreseeable cash needs, including non- operating cash disbursements such as anticipated
Due to changes in the United States federal income tax laws, effective in 1994, the Company began providing for U. S. income taxes on the undistributed earnings of its foreign subsidiaries. Prior to 1994, the Company did not provide for U. S. income taxes on the undistributed earnings of certain foreign subsidiaries ($19.2 million) which are considered permanently invested outside the United States. See Note 13 of the Notes to Consolidated Financial Statements. Although not available for domestic needs, the undistributed earnings generated by the foreign subsidiaries referred to above may be used to finance foreign operations and acquisitions.
In 1994, the Company acquired substantially all the net assets of five insurance brokerage firms in exchange for 819,000 shares of its common stock. In 1993, the Company acquired substantially all the net assets of four insurance brokerage firms in exchange for 707,000 shares of its common stock. These acquisitions were accounted for as poolings of interests and, except for three of the 1994 acquisitions and two of the 1993 acquisitions whose results were not significant, the financial statements for all periods prior to the acquisition dates have been restated to include the operations of these companies.
Substantially all fixed maturity securities mature in 1998 or later. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations.
At December 31, 1994, securities sold under agreements to repurchase the identical securities are collateralized by government backed small business administration loans and government securities with a carrying value of $19,152,000 and a fair value of $19,098,000. The securities collateralizing the agreements were held by two primary dealers.
The Company has line of credit facilities of $17,500,000 which expires on April 30, 1995 and $10,000,000 which expires on February 28, 1996. No borrowings existed under these facilities at December 31, 1994.
The table below summarizes certain information about the Company's capital stock at December 31, 1994:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) common stock at the rate of one Right for each common share held. Under certain conditions, each Right may be exercised to purchase one share of common stock at an exercise price of $100. The Rights become exercisable and transferable apart from the common stock after a public announcement that a person or group 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 the Company is acquired in a merger or business combination, each Right may be exercised to purchase the common stock of the surviving company having a market value of twice the exercise price of each Right. The Rights, which expire May 12, 1997, may be redeemed by the Company at 5 cents per Right at any time prior to the public announcement of the acquisition of 20% of the common stock. At December 31, 1994, 25,000,000 shares of common stock were reserved for potential exercise of the Rights.
In 1989, the Company adopted a non-employee director's stock option plan which currently authorizes 106,000 shares for grant, with Discretionary Options granted at the direction of the Option Committee and Retainer Options granted in lieu of their 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.
Options with respect to 1,780,000 shares were available for grant at December 31, 1994.
Net pension expense for both domestic and foreign plans amounted to $6,343,000 in 1994, $1,444,000 in 1993 and $4,521,000 in 1992.
The following table sets forth the estimated funded status and amounts recognized in the Company's consolidated financial statements:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The assumed healthcare cost trend rate used for the next two years is 9.5%, scaling down to 4.5% after 14 years. A 1% increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefit obligation by $1,599,000 at December 31, 1994 and would increase the net periodic postretirement benefit cost for 1994 by $127,000.
Minimum aggregate rental commitments at December 31, 1994 under noncancelable operating leases having an initial term of more than one year are as follows:
A reconciliation of the provision for income taxes with the U.S. federal income tax rate is as follows:
The consolidated financial statements include liabilities of $58,048,000 at December 31, 1994 ($60,857,000 at December 31, 1993) after elimination of intercompany balances applicable to foreign operations.
Exchange gains (losses) were approximately $106,000 in 1994, ($115,000) in 1993 and ($147,000) in 1992.
The Company 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 upon written policies and procedures, appropriate divisions of responsibility and authority, careful selection and training of personnel and the utilization of an internal audit program and staff. Policies and procedures prescribe that the Company 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.