-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rq1KsJnqf0OySSOWGGPn4S7E+paiQ/RdXdgboIDQ3MPEZGPCh6YPui/r5QZVNkb3 yxGQCVs845ZlYcNH4G/Wrw== 0000950131-97-001973.txt : 19970327 0000950131-97-001973.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950131-97-001973 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 DATE AS OF CHANGE: 19970326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALLAGHER ARTHUR J & CO CENTRAL INDEX KEY: 0000354190 STANDARD INDUSTRIAL CLASSIFICATION: 6411 IRS NUMBER: 362151613 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09761 FILM NUMBER: 97560823 BUSINESS ADDRESS: STREET 1: TWO PIERCE PL CITY: ITASCA STATE: IL ZIP: 60143 BUSINESS PHONE: 7087733800 10-K 1 FORM 10-K - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- 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, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-9761 --------- ARTHUR J. GALLAGHER & CO. (Exact name of registrant as specified in its charter) DELAWARE 36-2151613 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) Two Pierce Place 60143-3141 Itasca, Illinois (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (630) 773-3800 --------- 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 --------- 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 28, 1997 was $469,762,000. The number of outstanding shares of the registrant's Common Stock, $1.00 par value, as of February 28, 1997 was 16,653,426. 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 28, 1997 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. Arthur J. Gallagher & Co. (the "Registrant") and its subsidiaries (the Registrant and its subsidiaries are collectively referred to as the "Company" unless the context otherwise requires) are engaged in providing insurance brokerage, risk management and employee benefit services and other related services to clients in the United States and abroad. The Company's principal activity is the negotiation and placement of insurance for its clients. The Company 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. The Company believes that its ability to deliver a comprehensively structured risk management and brokerage service is one of its major strengths. The Company operates through a network of approximately 150 offices located throughout the United States and six countries abroad. 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 the Company. The Company's international operations include a Lloyd's broker and affiliated companies in London and facilities in Argentina, Australia, Bermuda, Canada, United Kingdom ("U.K.") and Scotland. The Company was founded in 1927 and was reincorporated as a Delaware corporation in 1972. The Company's executive offices are located at Two Pierce Place, Itasca, Illinois 60143-3141, and its telephone number is (630) 773- 3800. The Company has not presented industry segment information as its operations are predominantly those of insurance brokerage and risk management, employee benefits and other related insurance services. BROKERAGE OPERATIONS The Company places insurance for and services commercial, industrial, institutional, governmental, religious and personal accounts throughout the United States and abroad. The Company acts as an agent in soliciting, negotiating and effecting contracts of insurance through insurance companies world-wide, and also as a broker in procuring contracts of insurance on behalf of insureds. Specific coverages include all forms of property and casualty, marine, employee benefits, pension and life insurance products. The Company places surplus lines coverages (coverages not available from insurance companies licensed by the states in which the risks are located) for various specialized risks. The Company also provides reinsurance services to its clients. RISK MANAGEMENT SERVICES Through its wholly-owned subsidiary, Gallagher Bassett Services, Inc., the Company 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 and property appraisals on a totally integrated or select, stand-alone basis. Gallagher Bassett Services, Inc. provides these services for the Company's clients through a network of over 100 offices throughout the United States. The Company believes that its risk management services are an important factor in securing new brokerage business and retaining brokerage clients. The Company also markets these services directly to the client on an unbundled basis independently of brokerage services in order to capitalize on the interest in self-insurance created by market conditions. These services include consulting on a wide range of risk management needs such as toxic waste disposal, handling of dangerous cargo, workers' compensation, medical cost containment, substance abuse, employment-related background investigations, loss prevention, property appraisals, and liability reserve reviews. In connection with its risk management services, the Company provides self- insurance programs for large institutions, risk sharing pools and associations, and large commercial and industrial customers. Self-insurance, as administered by the Company, 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 excess carrier. The Company's offices are staffed to provide services relating to claims, property appraisals, loss control consulting and computerized record keeping in administering the clients' programs. The Company's Gallagher Benefit Services Division specializes in risk management of human resources through fully insured and self-insured programs. This division provides employee benefit 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. Services are supported by an on-line data processing system provided by an outside vendor. MARKETS AND MARKETING A substantial portion of the commission and fee business of the Company is derived from institutions, not-for-profit organizations, municipal and other governmental entities and associations. In addition, the Company's clients include large United States and multinational corporations engaged in a broad range of commercial and industrial businesses. The Company also places insurance for individuals. The Company services its clients through its network of approximately 150 offices in the United States and six countries abroad. No material part of the Company'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 the Company. In 1996, the largest single customer represented approximately 1% of total revenues. The Company believes that its ability to deliver comprehensively structured risk management and brokerage services, including the placement of reinsurance, is one of its major strengths. The Company also believes that its risk management business enhances and attracts other 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. The Company requires its employees serving in a sales or marketing capacity, including certain executive officers of the Company, to enter into agreements with the Company restricting disclosure of confidential information and solicitation of clients and prospects of the Company 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 the Company, as defined therein. COMPETITION The Company believes it is the seventh largest insurance broker in the United States and in the top eight 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 the Company in every area of its business. A number of competing firms are significantly larger and some have many times the commission and/or fee revenues of the Company. There are firms in a particular region or locality which are as large or larger than the particular local office of the Company. The Company believes that the primary factors determining its competitive position with other organizations in its industry are the overall cost and the quality of services rendered. 2 The Company is also in competition with certain insurance companies which 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 the Company. To date, such direct writing and government benefits have had, in the opinion of the Company, relatively little effect on its business and operations, but the Company can make no prediction as to their effect in the future. REGULATION In every state and foreign jurisdiction in which the Company does business, the Company or an employee is required to be licensed or receive regulatory approval in order for the Company to conduct business. In addition to licensing requirements applicable to the Company, most jurisdictions require that individuals who engage in brokerage and certain insurance service activities be personally licensed. The Company's 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, and generally such authorities are vested with relatively broad and general discretion as to the granting, renewing and revoking of licenses and approvals. INTERNATIONAL OPERATIONS Arthur J. Gallagher (UK) Limited, is a wholly-owned Lloyd's brokerage subsidiary of the Company. This subsidiary is a London based insurance broker which provides brokerage services to clientele primarily located outside of the U.K. The principal activity of Arthur J. Gallagher (UK) Limited is to negotiate and place insurance and reinsurance with Lloyd's underwriters and insurance companies worldwide. Its brokerage services encompass four major categories: aviation, direct marine hull and cargo, reinsurance (marine and non-marine) and overseas property and casualty (predominantly North America). Although Arthur J. Gallagher (UK) Limited is located in London, the thrust of its business development has been with non-U.K. brokers, agents and insurers rather than domestic U.K. retail business. Its clients are primarily insurance and reinsurance companies, underwriters at Lloyd's, the Company and its non-U.K. subsidiaries, other independent agents and brokers, and major business corporations requiring direct insurance and reinsurance placement. 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 the Company's marketing efforts by accessing foreign insurance and reinsurance companies in the placing of U.S. and foreign risks. In addition, it provides services relating to the formation and management of offshore captive insurance companies. A Company subsidiary, Arthur J. Gallagher International, Inc., located in Rhode Island, provides brokerage services to and arranges overseas risk management and loss control services for multinational organizations. Gallagher Bassett International LTD. ("GBI"), a subsidiary of Gallagher Bassett Services, Inc., provides risk management services for foreign operations, as well as U.S. operations that are foreign-controlled. Headquartered in London, GBI works with insurance companies, reinsurance companies, overseas brokers, and risk managers of overseas organizations. Services are offered on an unbundled basis wherever applicable and include consulting, claims management, information management, loss control, and property valuations. GBI's service network includes over 120 associate offices throughout the world. The combination of Gallagher Bassett offices and affiliated locations provides one of the most comprehensive worldwide service networks available. Additional information relating to the Company's foreign operations is contained in Note 12 of Notes to Consolidated Financial Statements. 3 COMMISSIONS AND FEES The two major sources of operating revenues are commissions from brokerage and risk management operations and service fees from risk management operations. Information with respect to these two major sources as well as investment income and other revenue for each of the three years in the period ended December 31, 1996 are set forth below:
1996 1995* 1994* -------------- -------------- -------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- (IN THOUSANDS) Commissions........................ $261,471 57% $255,914 58% $237,163 60% Fees............................... 171,515 38 161,868 37 143,238 36 Investment income and other........ 23,693 5 21,748 5 13,571 4 -------- --- -------- --- -------- --- $456,679 100% $439,530 100% $393,972 100% ======== === ======== === ======== ===
- - -------- *Restated for poolings of interests The primary source of the Company's compensation for its brokerage services 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 the Company acts. In some cases the Company is compensated for brokerage or advisory services directly by a fee from a client, particularly when insurers do not pay commissions. The Company may also receive contingent commissions which are based on the profit the insurance company makes on the overall volume of business placed by the Company in a given period of time. Occasionally, the Company shares commissions with other brokers who have participated with the Company in placing insurance or servicing insureds. The Company's compensation for risk management services is in the form of fees and commissions. The Company typically negotiates fees in advance with its risk management clients on an annual basis based upon the estimated value of the services to be performed. In some cases the Company 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. The Company's revenues vary significantly from quarter to quarter as a result of the timing of policy renewals and the net effect of new and lost business, whereas expenses are fairly uniform throughout the year. See Note 13 of Notes to Consolidated Financial Statements for unaudited quarterly operating results for 1996 and 1995. ACQUISITIONS Since January 1, 1992 through December 31, 1996, the Company has acquired twenty-eight insurance services businesses, and disposed of two insurance services businesses. See Note 2 of Notes to Consolidated Financial Statements for further information concerning acquisitions in 1996 and 1995. The following acquisitions have occurred since December 31, 1996: On January 1, 1997, a wholly owned subsidiary of the Company acquired substantially all of the assets of Byerly & Company, Inc., a Colorado corporation engaged in the employee benefits business, in exchange for 164,370 shares of the Company's Common Stock. The acquisition was accounted for as a pooling of interests. Four principals entered into two year employment agreements with the Company. On January 2, 1997, a wholly owned subsidiary of the Company acquired substantially all of the assets of Arnold & Company, Inc., a Michigan corporation engaged in the retirement planning and actuarial services business, in exchange for 41,080 shares of the Company's Common Stock. The acquisition was accounted for as a pooling of interests. One principal entered into a two year employment agreement with the Company. 4 The Company believes that the net effect of these acquisitions has been and will be to expand significantly the volume of general services rendered by the Company and the geographical markets in which the Company renders such services and not to change substantially the nature of the services performed by the Company. The Company is considering and intends to consider from time to time acquisitions and divestitures on terms it deems advantageous. The Company has had preliminary discussions with a number of other candidates for possible future acquisitions. No assurances can be given that any additional acquisitions or divestitures will be consummated, or, if consummated, will be advantageous to the Company. EMPLOYEES As of December 31, 1996, the Company and its subsidiaries employed approximately 3,900 employees, none of whom is represented by a labor union. The Company continuously reviews benefits and other matters of interest to its employees. The Company considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES. 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. 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 10 of Notes to Consolidated Financial Statements for information with respect to the Company's lease commitments at December 31, 1996. ITEM 3. LEGAL PROCEEDINGS. The Company and its subsidiaries are involved in litigation on a number of matters and are subject to certain other claims arising in the normal course of business, none of which, individually or in the aggregate, in the opinion of management, is expected to have a material adverse effect on the Company'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 the Company's fourth fiscal quarter ended December 31, 1996. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company are as follows:
NAME AGE POSITION AND YEAR FIRST ELECTED ---- --- ------------------------------- Robert E. Gallagher..... 74 Chief Executive Officer 1963-1994, Chairman since 1990 J. Patrick Gallagher, 45 President since 1990, Chief Executive Officer since 1995 Jr..................... John G. Campbell........ 59 Vice President since 1978 Michael J. Cloherty..... 49 Vice President--Finance 1981-1995, Executive Vice President since 1996 Peter J. Durkalski...... 46 Vice President since 1990 James W. Durkin, Jr..... 47 Vice President since 1985 Walter F. McClure....... 63 Senior Vice President since 1993 John D. Stancik......... 53 Vice President since 1986 Gary Van der Voort...... 51 Vice President since 1986
Each such person has been principally employed by the Company 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. 5 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company'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 the Company's common stock for the two-year period January 1, 1995 through December 31, 1996 and the dividends declared per 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.
DIVIDENDS DECLARED HIGH LOW PER SHARE ------- ------- --------- 1996 Quarterly Periods First............................................... $39 1/2 $35 7/8 $.29 Second.............................................. 36 3/8 30 .29 Third............................................... 35 31 1/2 .29 Fourth.............................................. 34 1/2 29 1/8 .29 1995 Quarterly Periods First............................................... $ 36 $30 1/8 $.25 Second.............................................. 36 3/8 34 .25 Third............................................... 38 34 5/8 .25 Fourth.............................................. 38 32 1/2 .25
As of February 1, 1997, there were approximately 700 holders of record of the Company's common stock. 6 THIS PAGE INTENTIONALLY LEFT BLANK 7 ITEM 6. SELECTED FINANCIAL DATA. ARTHUR J. GALLAGHER & CO. GROWTH RECORD: 1987-1996
AVERAGE YEARS ENDED DECEMBER 31, ANNUAL ----------------------------- (IN THOUSANDS, EXCEPT PER SHARE AND GROWTH 1996 1995 1994 EMPLOYEE DATA) ------- -------- --------- -------- Revenue Data Commissions........................... $261,471 $ 255,914 $237,163 Fees.................................. 171,515 161,868 143,238 Investment income and other........... 23,693 21,748 13,571 -------- --------- -------- Total revenues...................... $456,679 $ 439,530 $393,972 Dollar growth......................... $ 17,149 $ 45,558 $ 30,613 Percent growth........................ 10% 4% 12% 8% --- -------- --------- -------- Pretax Earnings Data Pretax earnings....................... $ 69,399 $ 68,382 $ 58,852 Dollar growth......................... $ 1,017 $ 9,530 $ 5,885 Percent growth........................ 9% 1% 16% 11% Pretax earnings as a percentage of revenues............................. 15% 16% 15% --- -------- --------- -------- Net Earnings Data Net earnings.......................... $ 45,803 $ 42,545 $ 37,166 Dollar growth......................... $ 3,258 $ 5,379 $ 5,980 Percent growth........................ 9% 8% 14% 19% Net earnings as a percentage of revenues............................. 10% 10% 9% --- -------- --------- -------- Net Earnings Per Share Data Shares outstanding at year end........ 16,293 16,365 16,071 Earnings per share(b)................. $ 2.63 $ 2.47 $ 2.16 Percent growth of earnings per share.. 9% 6% 14% 23% --- -------- --------- -------- Employee Data Number at year end.................... 3,939 3,926 3,595 Number growth......................... 13 331 161 Percent growth........................ 6% 0% 9% 5% Revenue per employee(c)............... $ 116 $ 112 $ 110 Net earnings per employee(c).......... $ 12 $ 11 $ 10 --- -------- --------- -------- Common Stock Dividend Data Dividends declared per share(d)....... $ 1.16 $ 1.00 $ .88 Total dividends declared.............. $ 18,399 $ 15,270 $ 13,209 Percent of net earnings............... 40% 36% 36% --- -------- --------- -------- Balance Sheet Data Total assets.......................... $590,424 $ 565,831 $514,823 Long-term debt less current portion... $ 1,130 $ 2,260 $ 3,390 Total stockholders' equity............ $134,530 $ 125,509 $104,249 --- -------- --------- -------- Return On Beginning Stockholders' Equity................................. 36% 41% 29%
NOTES: (a) The financial information for all periods prior to 1996 has been restated for acquisitions accounted for using the pooling of interests method. (b) Based on the weighted average number of common and common equivalent shares, if any, outstanding during the year. (c) Based on the number of employees at year end. (d) Based on the total dividends on a share of common stock outstanding during the entire year. 8
YEARS ENDED DECEMBER 31, - - ----------------------------------------------------------------------- 1993 1992 1991 1990 1989 1988 1987 - - -------- -------- -------- -------- -------- -------- -------- $212,005 $197,481 $189,978 $183,413 $166,676 $153,640 $140,258 130,806 113,757 94,472 79,783 66,102 57,963 52,708 20,548 16,587 14,152 19,922 19,698 17,407 14,970 - - -------- -------- -------- -------- -------- -------- -------- $363,359 $327,825 $298,602 $283,118 $252,476 $229,010 $207,936 $ 35,534 $ 29,223 $ 15,484 $ 30,642 $ 23,466 $ 21,074 $ 23,758 11% 10% 5% 12% 10% 10% 13% - - -------- -------- -------- -------- -------- -------- -------- $ 52,967 $ 40,111 $ 32,712 $ 35,792 $ 36,023 $ 29,213 $ 33,348 $ 12,856 $ 7,399 $ (3,080) $ (231) $ 6,810 $ (4,135) $ 965 32% 23% (9)% (1)% 23% (12)% 3% 15% 12% 11% 13% 14% 13% 16% - - -------- -------- -------- -------- -------- -------- -------- $ 31,186 $ 25,029 $ 22,280 $ 24,156 $ 24,173 $ 21,092 $ 21,822 $ 6,157 $ 2,749 $ (1,876) $ (17) $ 3,081 $ (730) $ 840 25% 12% (8)% 0% 15% (3)% 4% 9% 8% 7% 9% 10% 9% 10% - - -------- -------- -------- -------- -------- -------- -------- 16,976 16,451 16,757 16,971 16,986 17,237 17,705 $ 1.75 $ 1.45 $ 1.27 $ 1.38 $ 1.37 $ 1.18 $ 1.21 21% 14% (8)% (1)% 16% (2)% 4% - - -------- -------- -------- -------- -------- -------- -------- 3,434 3,183 2,986 2,860 2,722 2,585 2,490 251 197 126 138 137 95 201 8% 7% 4% 5% 5% 4% 9% $ 106 $ 103 $ 100 $ 99 $ 93 $ 89 $ 84 $ 9 $ 8 $ 7 $ 8 $ 9 $ 8 $ 9 - - -------- -------- -------- -------- -------- -------- -------- $ .72 $ .64 $ .64 $ .60 $ .52 $ .48 $ .40 $ 10,808 $ 8,767 $ 8,439 $ 6,999 $ 5,905 $ 5,375 $ 4,296 35% 35% 38% 29% 24% 25% 20% - - -------- -------- -------- -------- -------- -------- -------- $541,399 $488,979 $470,054 $462,533 $419,293 $400,733 $378,692 $ 28,166 $ 23,888 $ 24,432 $ 24,723 $ 24,775 $ 25,063 $ 20,073 $126,011 $ 99,539 $ 95,001 $ 94,363 $ 87,463 $ 77,820 $ 74,952 - - -------- -------- -------- -------- -------- -------- -------- 31% 26% 24% 28% 31% 28% 33%
9 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 based on a percentage of the premiums paid by the insured and generally follow premium levels. Lower premium rates and excess capacity prevail among property and 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 during the period. During the past three years, several catastrophes have caused billions of dollars of insured losses domestically and abroad. According to some estimates, 1996 will rank as the fifth most expensive year on record with over $7 billion in insured property losses. Consolidation in the form of substantial mergers, both in the United States and internationally, continues within the insurance industry resulting in fewer companies writing risks. Financial services reform is likely in the near future. Proposed federal legislation seeks to allow affiliations between banks and insurance entities. A recent report claims the property/casualty insurance industry began to materially weaken its core loss reserves in 1996 which reverses several years of favorable reserving trends. In spite of forces which would reduce competition and weaken profits, there is still little change in property/casualty rates. Sufficient capacity remains and the sharply competitive environment continues. Management believes insurance pricing will not change significantly in 1997. Along with the soft market conditions, the growth of the alternative insurance market has slowed during the past year. Although the property/casualty pricing environment has resulted in some buyers returning to first dollar coverage, the Company still believes a move from the traditional approach of purchasing insurance will continue. The Company anticipates new sales in the risk management, benefits and self-insurance services areas will again be a major factor in fee revenue growth in 1997. Historically, inflation has contributed to increased property replacement costs and higher litigation awards causing some clients to seek higher levels of insurance coverage. These factors have the effect of generating higher premiums to customers and higher commissions to the Company. More recently, the United States and other parts of the world have experienced low rates of inflation along with business downsizing, reduced sales and lower payrolls. These events have resulted in lower levels of exposures to insure. In general, premium rates have had a greater effect on the Company's revenues than inflation. Although the Company reported record net earnings in 1996, it is looking to the future and exploring not only the core businesses of brokering insurance and risk management services, but also expanding within the fields of insurance captives and financial and related investment services. These are areas which may hold opportunities for future profit growth. RESULTS OF OPERATIONS The Company's results of operations for all periods prior to December 31, 1996 have been restated to include the results of Morgan, Read & Coleman Ltd., Lamberson Koster & Company and The Levitt/Kristan Company on a combined basis as if they had operated as part of the Company. The Company continues to search for merger partners which complement existing business and provide entry into new market niches and new geographic areas. For the effect of such restatements in the aggregate on year-to-year comparisons, see Note 2 of the Notes to Consolidated Financial Statements. In January, 1997, the Company acquired two benefit consulting firms, Byerly & Company, Inc., and Arnold & Company, Inc. These acquisitions will be accounted for as poolings of interests and were neither singly nor in the aggregate material to the Company. Commission revenues increased by $5.6 million or 2% in 1996. This increase is the result of new business partially offset by lost business and modest renewal rate reductions. Commission revenues increased by $18.8 million or 8% in 1995. This increase is the result of new business production and, to a lesser extent, modest renewal rate increases partially offset by lost business. 10 Fee revenues increased by $9.6 million or 6% in 1996. This increase, generated primarily by Gallagher Bassett Services, Inc., resulted from new business production and modest increases in existing business partially offset by lost business. The rate of increase from 1995 to 1996 has been adversely affected by strong price competition in the insurance industry, causing some buyers to choose first dollar converge over self-funded plans. Fee revenues increased by $18.6 million or 13% in 1995. This increase, again generated primarily by Gallagher Bassett Services, Inc., resulted from strong new business production of $19.2 million and increases in existing business partially offset by lost business. Investment income and other increased by $1.9 million or 9% in 1996. This increase is due primarily to an increase in unrealized gains on investment strategies accounted for on a trading basis, which are invested with outside fund managers. Investment income and other increased by $8.2 million or 60% in 1995. This increase is due primarily to a combination of significantly higher returns on funds invested with outside fund managers and a gain of $2.0 million recorded on the sale of a subsidiary in the fourth quarter of 1995. This increase is partially offset by a gain of $656,000 realized in closing out interest 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. Salaries and employee benefits increased by $7.7 million or 3% in 1996 due principally to salary increases and the annualized effect of prior year hires along with a corresponding increase in employee benefit expenses. These increases were mitigated by a wage freeze for certain management employees. Salaries and employee benefits increased by $21.7 million or 10% in 1995 due principally to salary increases and the annualized effect of prior year hires along with a corresponding increase in employee benefit expenses and changes in certain benefit plan actuarial assumptions. In 1996, 1995 and 1994, salaries and employee benefits have represented 52%, 53% and 53%, respectively, as a percentage of total revenues. Other operating expenses increased by $8.4 million or 6% in 1996. This increase is due primarily to an increase in professional fees related to the outsourcing of certain distribution functions, increased performance fees for funds invested with professional money fund managers, an increase in brokerage expenses due to increased business with other brokers, additional rent and utility expenses resulting from leasing new office space and expanding and upgrading existing office facilities and increased bad debt write-offs. Other operating expenses increased by $14.4 million or 11% in 1995. This increase is 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 significantly higher business insurance costs. The Company's overall tax rate of 34% in 1996 is less than the statutory federal rate. For 1996, the net effects of state and foreign taxes are substantially offset by the tax benefits of certain investments. The Company's overall tax rate of 38% in 1995 is greater than the statutory federal rate due primarily to the net effects of state and foreign taxes which are partially offset by the tax benefits generated by certain investments and by pre- acquisition income of pooled entities which was taxed to the previous owners. The Company's overall tax rate of 37% in 1994 is greater than the statutory federal rate, due primarily to the net effects of state and foreign taxes which are partially offset by the tax benefits generated by certain investments and by pre-acquisition income of pooled entities which was taxed to the previous owners. See Note 11 of the Notes to Consolidated Financial Statements. The Company's foreign operations recorded operating earnings before income taxes of $4.2 million, $3.4 million, and $2.2 million in 1996, 1995, and 1994, respectively. The 1996 increase is due primarily to a decrease in compensation related costs at the Company's London subsidiaries. The 1995 increase is due primarily to stronger investment income. See Notes 11 and 12 of the Notes to Consolidated Financial Statements. The Company's total revenues vary from quarter to quarter as a result of the timing of policy renewals and net new/lost business production, whereas expenses are fairly uniform throughout the year. See Note 13 of the Notes to Consolidated Financial Statements. 11 LIQUIDITY AND CAPITAL RESOURCES The insurance brokerage industry is not capital intensive. The Company has historically been profitable and positive cash flow from operations and funds available under various loan agreements have been sufficient to finance the operations and capital expenditures of the Company. Cash generated from operating activities was $33.6 million and $43.5 million for the years ended December 31, 1996 and 1995, respectively. Funds restricted as to the Company's use (primarily premiums held as fiduciary funds) have not been included in determining the Company's liquidity. In February, 1993, the Company entered into a $20 million unsecured revolving credit agreement (the "Credit Agreement") with two banks. As provided for in an amendment effective in October, 1996, the loan maturity date has been extended and loans under the Credit Agreement are repayable no later than June 30, 2001, and bear floating interest rates over the term of the loan. The Company recognized a gain of $656,000 in closing out the interest rate exchange agreements related to the repayment of a loan under the agreement in 1994. The Credit Agreement remains in effect and as of December 31, 1996, there are no borrowings currently existing under this agreement. The Company also has two term loan agreements (the "Term Loan Agreements") that have outstanding balances of $1.3 million and $1.0 million at December 31, 1996. Loans under the Term Loan Agreements are repayable in equal annual installments no later than January 11, 1998, and June 15, 1998, respectively, and bear interest rates over the terms of the loans of 6.64% and 6.30%, respectively. The Credit Agreement and Term Loan Agreements require the maintenance of certain financial requirements. The Company is currently in compliance with these requirements. The Company has line of credit facilities of $27.5 million which expire on April 30, 1997. As of December 31, 1996, $10.0 million in short-term borrowings existed under these facilities. These borrowings were used to finance expanded investment activity. No borrowings existed at December 31, 1995. The Company paid $17.5 million in cash dividends on its common stock in 1996. 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 1996, the Company's Board of Directors declared a dividend of $ .29 per share which is $.04 or 16% greater than each quarterly dividend in 1995. In January, 1997, the Company announced a first quarter dividend of $.31 per share, a 7% increase over the quarterly dividend in 1996. Net capital expenditures for fixed assets amounted to $10.1 million, $10.3 million and $7.5 million in 1996, 1995 and 1994, respectively. In 1997, the Company intends to make additional capital improvements of approximately $11.0 million to upgrade and modernize existing space, furniture and equipment. In 1988, the Company adopted a plan, which has been extended through June 30, 1997, to repurchase its common stock. Under the plan, the Company repurchased 645,000 shares at a cost of $21.3 million, 437,000 shares at a cost of $15.1 million and 1.4 million shares at a cost of $43.8 million in 1996, 1995 and 1994, respectively. 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 290,000 additional shares through June 30, 1997. 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 dividends, capital expenditures and repayment of borrowings if the Company so determines. 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. The Company has not provided for U.S. income taxes on these undistributed earnings accumulated prior to 1994 ($19.2 million), which are considered permanently invested outside the United States. See Note 11 of the Notes to Consolidated Financial Statements. Although not available for domestic needs, the undistributed earnings generated by certain foreign subsidiaries referred to above may be used to finance foreign operations and acquisitions. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGES ----- Consolidated Financial Statements: Consolidated Statement of Earnings................................... 13 Consolidated Balance Sheet........................................... 14 Consolidated Statement of Cash Flows................................. 15 Consolidated Statement of Stockholders' Equity....................... 16 Notes to Consolidated Financial Statements.................... 17 through 27 Management's Report..................................................... 28 Report of Independent Auditors.......................................... 29
13 ARTHUR J. GALLAGHER & CO. CONSOLIDATED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING RESULTS Revenues: Commissions....................................... $261,471 $255,914 $237,163 Fees.............................................. 171,515 161,868 143,238 Investment income and other....................... 23,693 21,748 13,571 -------- -------- -------- Total revenues.................................. 456,679 439,530 393,972 -------- -------- -------- Expenses: Salaries and employee benefits.................... 239,455 231,716 210,061 Other operating expenses.......................... 147,825 139,432 125,059 -------- -------- -------- Total expenses.................................. 387,280 371,148 335,120 -------- -------- -------- Earnings before income taxes....................... 69,399 68,382 58,852 Provision for income taxes......................... 23,596 25,837 21,686 -------- -------- -------- Net earnings.................................... $ 45,803 $ 42,545 $ 37,166 ======== ======== ======== Net earnings per common and common equivalent share............................................. $ 2.63 $ 2.47 $ 2.16 Dividends declared per common share................ $ 1.16 $ 1.00 $ .88 Weighted average number of common and common equivalent shares outstanding..................... 17,775 17,254 17,189
See accompanying notes. 14 ARTHUR J. GALLAGHER & CO. CONSOLIDATED BALANCE SHEET
DECEMBER 31, ------------------ 1996 1995 -------- -------- (IN THOUSANDS) ASSETS ------ Current assets: Cash and cash equivalents................................... $ 56,990 $ 58,849 Restricted cash............................................. 87,224 95,388 Premiums and fees receivable................................ 237,640 226,675 Investment strategies--trading.............................. 53,409 46,123 Other....................................................... 28,677 22,448 -------- -------- Total current assets.................................... 463,940 449,483 Marketable securities--available for sale...................... 36,881 41,712 Deferred income taxes and other noncurrent assets.............. 52,509 42,360 Fixed assets................................................... 79,285 72,352 Accumulated depreciation and amortization...................... (53,284) (47,657) -------- -------- Net fixed assets........................................ 26,001 24,695 Intangible assets--net......................................... 11,093 7,581 -------- -------- $590,424 $565,831 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Premiums payable to insurance companies..................... $323,867 $321,060 Accrued salaries and bonuses................................ 14,922 13,648 Accounts payable and other accrued liabilities.............. 68,170 60,174 Unearned fees............................................... 13,043 13,586 Income taxes payable........................................ 4,954 10,619 Other....................................................... 19,786 7,225 -------- -------- Total current liabilities............................... 444,742 426,312 Other noncurrent liabilities................................... 11,152 14,010 Stockholders' equity: Common stock--issued and outstanding 16,293 shares in 1996 and 16,365 shares in 1995...................................... 16,293 16,365 Capital in excess of par value.............................. 2,140 -- Retained earnings........................................... 115,208 109,110 Unrealized gain on available for sale securities--net of income taxes............................................... 889 34 -------- -------- Total stockholders' equity.............................. 134,530 125,509 -------- -------- $590,424 $565,831 ======== ========
See accompanying notes. 15 ARTHUR J. GALLAGHER & CO. CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net earnings................................. $ 45,803 $ 42,545 $ 37,166 Adjustments to reconcile net earnings to net cash provided by operating activities: Net (gain) loss on investments........... (3,928) (282) 3,042 Depreciation and amortization............ 9,774 10,172 7,890 Decrease (increase) in restricted cash... 8,164 (5,335) 16,229 Increase in premiums receivable.......... (6,829) (22,203) (19,011) Increase in premiums payable............. 2,807 23,902 9,643 (Increase) decrease in trading investments--net........................ (4,128) (2,353) 26,811 (Increase) decrease in other current assets.................................. (6,484) (1,731) 3,123 Increase in accrued salaries and bonuses. 1,274 1,278 2,148 Increase in accounts payable and other accrued liabilities..................... 7,127 9,612 7,776 (Decrease) increase in income taxes payable................................. (5,665) (1,381) 1,866 Decrease in deferred income taxes........ (2,660) (1,317) (5,102) Other.................................... (11,650) (9,389) (7,918) -------- -------- -------- Net cash provided by operating activities.......................... 33,605 43,518 83,663 -------- -------- -------- Cash flows from investing activities: Purchases of marketable securities........... (23,679) (21,918) (28,409) Proceeds from sales of marketable securities. 28,747 20,078 30,527 Proceeds from maturities of marketable securities.................................. 1,958 2,213 2,224 Additions to fixed assets.................... (10,055) (10,299) (7,537) Other........................................ (4,362) 375 316 -------- -------- -------- Net cash used by investing activities.......................... (7,391) (9,551) (2,879) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock......... 7,966 7,044 3,141 Tax benefit from issuance of common stock...... 1,955 1,837 747 Repurchases of common stock.................... (21,290) (15,068) (43,843) Dividends paid................................. (17,530) (14,666) (12,690) Retirement of long-term debt................... (1,130) (1,130) (24,776) Borrowings on line of credit facilities........ 10,000 -- -- Equity transactions of pooled companies prior to dates of acquisition....................... (8,044) (3,172) (3,145) -------- -------- -------- Net cash used by financing activities...... (28,073) (25,155) (80,566) -------- -------- -------- Net (decrease) increase in cash and cash equivalents..................................... (1,859) 8,812 218 Cash and cash equivalents at beginning of year... 58,849 50,037 49,819 -------- -------- -------- Cash and cash equivalents at end of year......... $56,990 $ 58,849 $ 50,037 ======== ======== ======== Supplemental disclosures of cash flow information: Interest paid.................................. $ 626 $ 478 $ 1,895 Income taxes paid.............................. $ 25,674 $ 22,027 $ 20,315
See accompanying notes. 16 ARTHUR J. GALLAGHER & CO. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED CAPITAL GAIN (LOSS) COMMON STOCK IN EXCESS ON AVAILABLE --------------- OF RETAINED FOR SALE SHARES AMOUNT PAR VALUE EARNINGS SECURITIES ------ ------- --------- -------- ------------ (IN THOUSANDS) Balance at December 31, 1993 as previously reported..... 16,037 $16,037 $ 8,110 $ 94,949 $ -- Acquisition of pooled companies................. 939 939 -- 5,976 -- ------ ------- ------- -------- ------ Balance at December 31, 1993 as restated................ 16,976 16,976 8,110 100,925 -- Net earnings............. -- -- -- 37,166 -- Cash dividends declared on common stock......... -- -- -- (13,209) -- Common stock issued under stock option plans...... 171 171 2,970 -- -- Tax benefit from issuance of common stock......... -- -- 747 -- -- Common stock repurchases. (1,392) (1,392) (11,827) (30,624) -- Common stock issued in three pooling acquisitions............ 316 316 -- -- -- Equity transactions of pooled companies prior to dates of acquisition. -- -- -- (3,145) -- Cumulative effect of accounting change, net of taxes of $970........ -- -- -- -- 1,456 Change in unrealized gain (loss), net of taxes of $2,899.................. -- -- -- -- (4,391) ------ ------- ------- -------- ------ Balance at December 31, 1994....................... 16,071 16,071 -- 91,113 (2,935) Net earnings............. -- -- -- 42,545 -- Cash dividends declared on common stock......... -- -- -- (15,270) -- Common stock issued under stock option plans...... 356 356 6,688 -- -- Tax benefit from issuance of common stock......... -- -- 1,837 -- -- Common stock repurchases. (437) (437) (8,525) (6,106) -- Common stock issued in seven pooling acquisitions............ 375 375 -- -- -- Equity transactions of pooled companies prior to dates of acquisition. -- -- -- (3,172) -- Change in unrealized gain (loss), net of taxes of $1,951.................. -- -- -- -- 2,969 ------ ------- ------- -------- ------ Balance at December 31, 1995....................... 16,365 16,365 -- 109,110 34 Net earnings............. -- -- -- 45,803 -- Cash dividends declared on common stock......... -- -- -- (18,399) -- Common stock issued under stock option plans...... 398 398 7,568 -- -- Tax benefit from issuance of common stock......... -- -- 1,955 -- -- Common stock repurchases. (645) (645) (7,383) (13,262) -- Common stock issued in three pooling acquisitions............ 175 175 -- -- -- Equity transactions of pooled companies prior to dates of acquisition. -- -- -- (8,044) -- Change in unrealized gain (loss), net of taxes of $571.................... -- -- -- -- 855 ------ ------- ------- -------- ------ Balance at December 31, 1996....................... 16,293 $16,293 $ 2,140 $115,208 $ 889 ====== ======= ======= ======== ======
See accompanying notes. 17 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations Arthur J. Gallagher & Co. (the Company) provides insurance broker 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 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. The Company operates through approximately 150 offices throughout the United States and six countries abroad. Basis of presentation The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries. All 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. 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 recognized when received. Fee income is 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 $889,000 and $729,000 at December 31, 1996 and 1995, respectively. 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. 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. Premium trust funds 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 the Company's subsidiaries operate. Additionally, the Company's United Kingdom subsidiaries are required by Lloyd's of London to meet certain liquidity requirements. Marketable securities In 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." The standard requires that securities designated as available for sale be carried at fair value, with unrealized gains and losses, less 18 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) related deferred income taxes, excluded from earnings and reported as a separate component of stockholders' equity. In addition, securities designated as trading are required to be carried at fair value, with unrealized gains and losses included in the statement of earnings. Previously, the Company carried these investments at either the lower of cost or fair value, or at amortized cost. As of January 1, 1994, the Company adopted the provisions of the standard for investments held as of or acquired after that date. In accordance with SFAS 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of January 1, 1994 of adopting SFAS 115 increased the opening balance of stockholders' equity by $1,456,000 (net of deferred income taxes of $970,000) to reflect the net unrealized holding gains on securities classified as available for sale previously carried at the lower of cost or fair value, or at amortized cost. There was no cumulative effect on net earnings as a result of the adoption of SFAS 115 because the securities classified as trading were carried as a current asset and had a fair value below cost at January 1, 1994. Accordingly, such unrealized losses were recorded in prior period earnings. Marketable securities are considered available for sale and consist primarily of preferred and common stocks. Gains and losses are recognized in income when realized using the specific identification method. The fair value for marketable securities is based on quoted market prices. Investment strategies are considered trading securities and consist primarily of limited partnerships which invest in common stocks. Fair value is determined by reference to the fair value of the underlying common stocks which is based on quoted market prices. Fixed assets Fixed assets are carried at cost. Furniture and equipment with a cost of $71,108,000 at December 31, 1996 ($64,414,000 at December 31, 1995) are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements with a cost of $8,177,000 at December 31, 1996 ($7,938,000 at December 31, 1995) are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the lease terms. Intangible assets Intangible assets consist primarily of the excess of cost over the value of net tangible assets of acquired businesses and are amortized principally over forty years using the straight-line method. Accumulated amortization at December 31, 1996 was $6,316,000 ($7,234,000 at December 31, 1995). Earnings per share Earnings per share are 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 since the date of grant using the treasury stock method. There is no material difference between primary and fully diluted per share amounts. Stock based compensation The Company 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. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock options granted to employees. 19 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. ACQUISITIONS Poolings of interests In 1996, the Company acquired substantially all the net assets of five insurance brokerage firms and one investigative services company in exchange for 1,115,000 shares of its common stock. In 1995, the Company acquired substantially all the net assets of nine insurance brokerage firms in exchange for 723,000 shares of its common stock. These acquisitions were accounted for as poolings of interests and, except for three of the 1996 acquisitions and seven of the 1995 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. The following summarizes the restatement to reflect the 1996 acquisitions:
ATTRIBUTABLE TO ARTHUR J. GALLAGHER POOLED COMPANIES AS RESTATED ------------------- ---------------- ----------- (IN THOUSANDS) 1995 - - ---- Revenues....................... $416,006 $23,524 $439,530 Net earnings................... 41,491 1,054 42,545 ======== ======= ======== 1994 - - ---- Revenues....................... $370,339 $23,633 $393,972 Net earnings................... 34,405 2,761 37,166 ======== ======= ========
In 1996, the Company also acquired a majority equity interest in a risk management company, which was accounted for as a purchase. 3. MARKETABLE SECURITIES The following is a summary of available for sale marketable securities:
COST OR GROSS GROSS FAIR DECEMBER 31, 1996 AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES VALUE - - ----------------- -------------- ---------------- ----------------- ------- (IN THOUSANDS) Preferred stocks..... $23,446 $1,126 $ 434 $24,138 Fixed maturities..... 4,962 116 234 4,844 Common stocks........ 6,991 1,542 634 7,899 ------- ------ ------ ------- $35,399 $2,784 $1,302 $36,881 ======= ====== ====== ======= DECEMBER 31, 1995 - - ----------------- Preferred stocks..... $25,111 $ 996 $ 447 $25,660 Fixed maturities..... 5,695 119 479 5,335 Common stocks........ 10,850 884 1,017 10,717 ------- ------ ------ ------- $41,656 $1,999 $1,943 $41,712 ======= ====== ====== =======
The gross realized gains on sales of marketable securities totaled $1,652,000, $1,079,000 and $2,004,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The gross realized losses totaled $881,000, $1,918,000 and $312,000 for the years ended December 31, 1996, 1995, and 1994, respectively. Substantially all fixed maturity securities mature in 2000 or later. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations. The net unrealized gains (losses) on investment strategies included in income amounted to $3,928,000 in 1996, ($171,000) in 1995, and $83,000 in 1994. 20 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE At December 31, 1996, 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 $23,034,000 and a fair value of $23,262,000. The securities collateralizing the agreements were held by two primary dealers. At December 31, 1995, these securities had a carrying value of $20,071,000 and a fair value of $20,253,000. 5. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ------------- 1996 1995 ------ ------ (IN THOUSANDS) 6.64% unsecured term note, payable in annual installments of $630............................................................ $1,260 $1,890 6.30% unsecured term note, payable in annual installments of $500............................................................ 1,000 1,500 ------ ------ 2,260 3,390 Less current portion............................................. 1,130 1,130 ------ ------ $1,130 $2,260 ====== ======
Terms of the loan agreements include various covenants which require the Company to maintain specified levels of tangible net worth and restrict the amount of payments on certain expenditures. Maturities of long-term debt total $1,130,000 for 1997 and $1,130,000 for 1998. In 1994, the Company retired its $20 million variable-rate (based on LIBOR plus .4%) unsecured revolving credit agreement that was due in 1998. In connection with the retirement, the Company also recognized a gain of $656,000 on the settlement of interest rate exchange agreements that had been entered into in 1993 to fix the rate of interest payable on the revolving credit agreement. The credit agreement remains in effect and expires on June 30, 2001. As of December 31, 1996, there were no borrowings outstanding under this agreement. The Company also has line of credit facilities of $27,500,000 which expire on April 30, 1997. Short-term borrowings under these facilities totaled $10,000,000 at December 31, 1996. No borrowings existed under these facilities at December 31, 1995. The weighted average interest rate on short-term borrowings during 1996 was 6.875%. 6. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN Capital Stock The table below summarizes certain information about the Company's capital stock at December 31:
1996 1995 --------------------- ----------------- AUTHORIZED PAR AUTHORIZED CLASS PAR VALUE SHARES VALUE SHARES - - ----- --------- ----------- ------ ---------- Preferred stock........................ No par 1,000,000 No par 1,000,000 Common stock........................... $ 1.00 100,000,000 $ 1.00 50,000,000
Stockholders' Rights Plan Non-voting Rights, authorized by the Board of Directors on March 10, 1987 and approved by stockholders on May 12, 1987, were distributed May 12, 1987 as a dividend to holders of the Company's common stock at the rate of one Right for each common share held. Under certain conditions, each Right may be exercised to 21 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 Plan was amended in 1996 to extend the expiration of the Rights to May 12, 2007. The Rights 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, 1996, 25,000,000 shares of common stock were reserved for potential exercise of the Rights. 7. STOCK OPTION PLANS The Company has incentive and nonqualified stock option plans for officers and key employees of the Company and its subsidiaries. The options are granted at the fair market value of the underlying shares at the date of grant. Options granted under the nonqualified plan 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. No options may be granted under the plan ten years after its inception. In addition, the Company has a non-employee director's stock option plan which currently authorizes 200,000 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. The excess of fair market 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. The Company 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 the Company'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. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for stock options granted to employees. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," requires disclosure of pro forma information regarding net earnings and earnings per share, using pricing models to estimate the fair value of stock option grants. Had compensation expense for the Company'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 earnings per share would have been as follows:
YEARS ENDED DECEMBER 31, ------------------------- 1996 1995 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma net earnings.............................. $ 45,159 $ 42,292 Pro forma net earnings per common and common equiva- lent share......................................... $ 2.59 $ 2.45
22 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) For purposes of the pro forma disclosures, the estimated fair values of the option grants are amortized to expense over the options' expected lives. The fair value of options at the date of grant was estimated using the Black- Scholes option pricing model with the following weighted-average assumptions:
1996 1995 ---- ---- Dividend yield..................................................... 2.9% 2.9% Risk-free interest rate............................................ 6.3% 6.2% Volatility......................................................... 24.1% 24.5% Expected life (years).............................................. 8.0 8.0
Transactions related to all stock options are as follows:
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ---------------- WEIGHTED WEIGHTED WEIGHTED SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE OPTION PRICE OPTION PRICE OPTION PRICE ------ -------- ------ -------- ------ -------- (IN THOUSANDS, EXCEPT EXERCISE PRICE DATA) Beginning balance............... 4,770 $25.87 4,614 $24.29 3,997 $22.90 Granted......................... 714 32.05 626 34.49 870 29.36 Exercised....................... (398) 20.02 (356) 19.80 (171) 18.22 Canceled........................ (176) 28.44 (114) 27.97 (82) 23.15 ----- ------ ----- ------ ----- ------ Ending balance.................. 4,910 $27.18 4,770 $25.87 4,614 $24.29 ===== ====== ===== ====== ===== ====== Exercisable at end of year...... 1,728 1,513 1,283 ===== ===== =====
Options with respect to 1,500,000 shares were available for grant at December 31, 1996. Information regarding options outstanding and exercisable at December 31, 1996 is summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------- -------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE NUMBER LIFE EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE ----------- ----------- -------- ----------- -------- (IN THOUSANDS, EXCEPT EXERCISE PRICE DATA) $ 7.13 - $21.25........ 1,541 3.4 $19.01 848 $18.47 22.00 - 30.13.......... 1,240 6.0 26.14 487 24.91 30.25 - 33.75.......... 1,566 7.8 32.69 332 33.16 34.25 - 39.13.......... 563 8.5 34.50 61 34.44 ----- --- ------ ----- ------ $ 7.13 - $39.13........ 4,910 6.0 $27.18 1,728 $23.67 ===== === ====== ===== ======
8. RETIREMENT PLANS The Company 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. The Company's contributions to the plan satisfy the minimum funding requirements of ERISA. Plan assets consist primarily of common stocks and bonds invested under the terms of a group annuity contract managed by a life insurance company. 23 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company 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 beteween the present value of the projected 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. The following table sets forth the plan's estimated funded status and amounts recognized in the Company's consolidated financial statements:
DECEMBER 31, ---------------- 1996 1995 ------- ------- (IN THOUSANDS) Actuarial present value of accumulated benefit obligation: Vested...................................................... $30,115 $24,775 Nonvested................................................... 6,039 6,027 ------- ------- $36,154 $30,802 ======= ======= Projected benefit obligation................................ $52,931 $45,143 Assets at fair value........................................ 39,045 31,900 ------- ------- Projected benefit obligation in excess of plan assets....... 13,886 13,243 ------- ------- Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions.......... (287) (1,473) Unamortized portion of net obligation at January 1.......... (555) (611) ------- ------- Unfunded accrued pension cost............................... $13,044 $11,159 ======= =======
Pension expense for the plan consists of the following:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Service cost--benefits earned during the year..... $ 5,790 $ 5,027 $ 5,400 Interest cost on projected benefit obligation..... 3,322 2,775 2,467 Actual return on plan assets...................... (3,561) (5,283) (158) Net amortization and deferral..................... 722 3,194 (1,366) -------- -------- -------- Net pension expense............................... $ 6,273 $ 5,713 $ 6,343 ======== ======== ========
The following assumptions were used in determining the actuarial present value of the plan's projected benefit obligation:
DECEMBER 31, -------------- 1996 1995 1994 ---- ---- ---- Discount rate.................................................... 7.5% 7.5% 8.0% Rate of increase in future compensation levels................... 6.5% 6.5% 7.0% Expected long-term rate of return on assets...................... 9.0% 9.0% 9.0%
The Company has a contributory savings and thrift plan covering the majority of its employees. Company contributions are at the discretion of the Company's Board of Directors and may not exceed the maximum amount deductible for federal income tax purposes. The Company contributed $2,396,000, $1,035,000, and $879,000 in 1996, 1995 and 1994, respectively. 24 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company also has a foreign defined contribution plan which provides for basic contributions by the Company and voluntary contributions by employees which are matched 100% by the Company, up to a maximum of 5% of salary, as defined. Net expense for foreign retirement plans amounted to $1,383,000 in 1996, $1,703,000 in 1995 and $1,611,000 in 1994. 9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In 1992, the Company amended its health benefits plan to eliminate retiree coverage, except for current retirees and those employees who had already attained a specified age and length of service. The retiree health plan is contributory, with contributions adjusted annually, and is funded on a pay-as- you-go basis. The components of the net periodic postretirement benefit cost include the following:
YEARS ENDED DECEMBER 31, -------------------- 1996 1995 1994 ------ ---- ------ (IN THOUSANDS) Service cost............................................. $ -- $-- $ -- Interest cost............................................ 717 701 828 Amortization of transition obligation..................... 512 512 512 Amortization of gain...................................... (209) (379) -- ------ ---- ------ $1,020 $834 $1,340 ====== ==== ======
The following table sets forth the estimated funded status and amounts recognized in the Company's consolidated financial statements:
DECEMBER 31, ---------------- 1996 1995 ------- ------- (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees.................................................... $ 5,276 $ 3,939 Active eligible employees................................... 4,836 5,968 ------- ------- 10,112 9,907 Unrecognized transition obligation............................ (8,188) (8,700) Unrecognized gain............................................. 1,611 1,644 ------- ------- Accrued postretirement benefit cost........................... $ 3,535 $ 2,851 ======= =======
The assumed healthcare cost trend rate used for the next year is 8.5%, scaling down to 4.5% after 12 years. A 1% increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefit obligation by $1,341,000 at December 31, 1996 and would increase the net periodic postretirement benefit cost for 1996 by $93,000. The discount rate used to measure the accumulated postretirement benefit obligation was 7.5% at December 31, 1996 and 1995. The transition obligation is being amortized over 20 years. 10. COMMITMENTS AND CONTINGENCIES The Company 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 the Company's financial position or operating results. 25 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company 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 escalation clauses related to increases in the cost of living in future years. Minimum aggregate rental commitments at December 31, 1996 under noncancelable operating leases having an initial term of more than one year are as follows:
TOTAL -------------- (IN THOUSANDS) 1997............................................................ $ 24,939 1998............................................................ 21,782 1999............................................................ 19,422 2000............................................................ 15,287 2001............................................................ 12,050 Subsequent years................................................ 70,275 -------- $163,755 ========
Total rent expense, including rent relating to cancelable leases and leases with initial terms of less than one year, amounted to $28,236,000 in 1996, $27,520,000 in 1995 and $26,112,000 in 1994. 11. INCOME TAXES
YEARS ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Earnings before income taxes consist of: Domestic........................................... $65,200 $64,981 $56,665 Foreign............................................ 4,199 3,401 2,187 ------- ------- ------- $69,399 $68,382 $58,852 ======= ======= ======= Provision for income taxes consists of: Federal-- Current.......................................... $19,953 $22,355 $21,327 Deferred......................................... (2,911) (2,734) (4,639) ------- ------- ------- 17,042 19,621 16,688 ------- ------- ------- State and local-- Current.......................................... 5,335 5,295 5,023 Deferred......................................... (415) (384) (637) ------- ------- ------- 4,920 4,911 4,386 ------- ------- ------- Foreign-- Current.......................................... 729 1,524 (488) Deferred......................................... 905 (219) 1,100 ------- ------- ------- 1,634 1,305 612 ------- ------- ------- Total provision...................................... $23,596 $25,837 $21,686 ======= ======= =======
26 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 the Company's deferred tax liabilities and assets as of December 31 are as follows:
1996 1995 ------- ------- (IN THOUSANDS) Deferred tax liabilities: Leveraged leases.............................................. $ 1,324 $ 2,760 Unrealized investment gains................................... 592 22 Other......................................................... 4,555 4,385 ------- ------- Deferred tax liabilities.................................... 6,471 7,167 ------- ------- Deferred tax assets: Accrued and unfunded compensation and employee benefits....... 12,620 11,390 Accrued liabilities........................................... 11,132 9,495 Other......................................................... 1,040 970 ------- ------- Total deferred tax assets................................... 24,792 21,855 Valuation allowance for deferred tax assets................. -- -- ------- ------- Deferred tax assets......................................... 24,792 21,855 ------- ------- Net deferred tax assets......................................... $18,321 $14,688 ======= =======
A reconciliation of the provision for income taxes with the U.S. federal income tax rate is as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- % OF % OF % OF PRETAX PRETAX PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME ------- ------ ------- ------ ------- ------ (IN THOUSANDS) Federal statutory rate......... $24,290 35.0 $23,934 35.0 $20,598 35.0 State income taxes--net of federal....................... 3,148 4.5 3,428 5.0 2,719 4.6 Pre-acquisition earnings of pooled companies taxed to previous owners............... (468) (0.7) (1,065) (1.6) (1,534) (2.6) Foreign taxes.................. 208 0.3 215 0.3 433 0.7 General business credits....... (603) (0.8) (778) (1.1) (771) (1.3) Other--net..................... (2,979) (4.3) 103 0.2 241 .4 ------- ---- ------- ---- ------- ---- $23,596 34.0 $25,837 37.8 $21,686 36.8 ======= ==== ======= ==== ======= ====
Due to changes in the U.S. 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 ($19,200,000 at December 31, 1996) of certain foreign subsidiaries which are considered permanently invested outside of the U.S. The amount of unrecognized deferred tax liability on these undistributed earnings is $5,000,000. 27 ARTHUR J. GALLAGHER & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) 12. FOREIGN OPERATIONS Financial data by geographic area of operations are as follows:
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 --------- -------- -------- (IN THOUSANDS) Revenues: Commissions and fees United States................................ $ 406,520 $390,547 $353,615 Foreign, principally United Kingdom.......... 26,466 27,235 26,786 --------- -------- -------- 432,986 417,782 380,401 Investment income.............................. 23,693 21,748 13,571 --------- -------- -------- $ 456,679 $439,530 $393,972 ========= ======== ======== Earnings before taxes: Operating profit (loss) United States................................ $ 72,062 $ 70,122 $ 64,577 Foreign, principally United Kingdom.......... 48 (1,285) (31) --------- -------- -------- 72,110 68,837 64,546 General corporate expense, including interest expense and investment income................. 2,711 455 5,694 --------- -------- -------- $ 69,399 $ 68,382 $ 58,852 ========= ======== ======== DECEMBER 31, ------------------ 1996 1995 -------- -------- Identifiable assets: United States............................................ $279,759 $264,506 Foreign, principally United Kingdom...................... 133,368 142,774 -------- -------- 413,127 407,280 Corporate................................................ 177,297 158,551 -------- -------- $590,424 $565,831 ======== ========
The consolidated financial statements include liabilities of $107,053,000 at December 31, 1996 ($116,866,000 at December 31, 1995) after elimination of intercompany balances applicable to foreign operations. Exchange gains (losses) were approximately $253,000 in 1996, $85,000 in 1995 and ($81,000) in 1994. 13. QUARTERLY OPERATING RESULTS (UNAUDITED) Quarterly operating results for 1996 and 1995 were as follows:
1ST 2ND 3RD 4TH -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE 1996 DATA) Total revenues............................ $106,821 $108,618 $121,696 $119,544 Earnings before income taxes.............. 14,579 12,307 25,520 16,993 Net earnings.............................. 8,944 7,533 18,057 11,269 Net earnings per common and common equivalent share......................... .51 .44 1.03 .65 1995 Total revenues............................ $103,216 $100,883 $118,362 $117,069 Earnings before income taxes.............. 12,603 9,784 26,179 19,816 Net earnings.............................. 7,633 5,786 16,372 12,754 Net earnings per common and common equivalent share......................... .45 .34 .94 .74
28 MANAGEMENT'S REPORT The Management of Arthur J. Gallagher & Co. is responsible for the preparation and integrity of the consolidated financial statements and the related financial comments appearing in this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgments. Other financial information presented in the annual report is consistent with the financial statements. 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. Ernst & Young LLP, independent auditors, has audited the Company's 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 21, 1997 /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 29 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. as of December 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arthur J. Gallagher & Co. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1994, the Company changed its method of accounting for certain investments in debt and equity securities. /s/ Ernst & Young LLP ------------------------------------- ERNST & YOUNG LLP Chicago, Illinois January 21, 1997 30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors and nominees for directors of the Company is included under the caption entitled "Election of Directors" in the Proxy Statement dated March 28, 1997 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information regarding executive compensation of the Company's directors and executive officers is included in the Proxy Statement dated March 28, 1997 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 the Company is included under the caption entitled "Principal Holders of Securities" in the Proxy Statement dated March 28, 1997 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, 1996. (b) Consolidated Balance Sheet as of December 31, 1996 and 1995. (c) Consolidated Statement of Cash Flows for each of the three years in the period ended December 31, 1996. (d) Consolidated Statement of Stockholders' Equity for each of the three years in the period ended December 31, 1996. (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 the Company (incorporated by reference to the same exhibit number to Company's Form 10-Q Quarterly Report for the quarterly period ended June 30, 1996, File No. 1-9761).
32 3.2 By-Laws of the Company (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 33-10447). 3.3 Rights Agreement between the Company and Bank of America Illinois (formerly Continental Illinois National Bank and Trust Company of Chicago) (incorporated by reference to Exhibits 1 and 2 to Company'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 the Company (incorporated by reference to the same exhibit number to Company'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 Company'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 the Company and the Rights Agreement in Exhibits 3.1, 3.2, and 3.3, respectively, hereby incorporated by reference). 4.4 Credit Agreement dated February 16, 1993 (incorporated by reference to the same exhibit number to the Company's Form 10-K Annual Report for 1992, File No. 1-9761). **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 Company'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 Company'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 Company's Form S-8 Registration Statement No. 33-14625). **10.2 Arthur J. Gallagher & Co. Nonqualified Stock Option Plan and related form of stock option agreement (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 2-89195). **10.2.1 Amendment No. 1 to Exhibit No. 10.2 (incorporated by reference to Exhibit No. 10.4 to Company's Form S-8 Registration Statement No. 33-604). **10.2.2 Amendment No. 2 to Exhibit No. 10.2 (incorporated by reference to Exhibit No. 10.4.1 to Company's Form S-8 Registration Statement No. 33-14625). **10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option Plan and related form of stock option agreement (incorporated by reference to the same exhibit number to Company's Form 10-K Annual Report for 1986, File No. 0-13480). **10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 33-22029). **10.26.1 Amendment No. 1 to Exhibit No. 10.26 (incorporated by reference to Exhibit No. 10.3 to Company's Form S-8 Registration Statement No. 33-24251). **10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-64614). **10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 33-22029). **10.27.1 Amendment No. 1 to Exhibit No. 10.27 (incorporated by reference to Exhibit No. 10.4 to Company's Form S-8 Registration Statement No. 33-30762). **10.27.2 Amendment No. 2 to Exhibit No. 10.27 (incorporated by reference to Exhibit No. 10.5 to Company's Form S-8 Registration Statement No. 33-38031). **10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-64614).
33 **10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-80648). **10.27.5 Amendment No. 6 to Exhibit 10.27 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 333-06359). **10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock Option Plan (incorporated by reference to Exhibit No. 10.1 to Company's Form S-8 Registration Statement No. 33-30816). **10.28.1 Amendment No. 1 to Exhibit 10.28 (incorporated by reference to the same exhibit number to Company's Form 10-K Annual Report for 1990, File No. 1-9761). **10.28.2 Amendment No. 3 to Exhibit No. 10.28 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-64614). **10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-80648). **10.28.4 Amendment No. 6 to Exhibit 10.28 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 333-06359). 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 Company's Form 10-K Annual Report for 1989, 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 Company's Form S-1 Registration Statement No. 2- 89195). 10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985 (incorporated by reference to the same exhibit number to Company'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 Company's Form S-1 Registration Statement No. 2-89195). **10.11 Form of Indemnity Agreement between the Company and each of its directors and corporate officers (incorporated by reference to Attachment A to the Company'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 the Company and each of Robert H. B. Baldwin, Jack M. Greenberg and James R. Wimmer (incorporated by reference to the same exhibit number to Company's Form 10-K Annual Report for 1988, File No. 1-9761). *11.0 Statement re: computation of earnings per common and common equivalent share. *21.0 Subsidiaries of the Company, 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 inapplicable.
- - -------- *Filed as exhibits to this Form 10-K with the Securities and Exchange Commission; only Exhibits 11.0, 21.0 and 23.1 are included in this book. **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. 34 (b) Reports on Form 8-K Not applicable (c) 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 the Company are subject to risks and uncertainties, including but not limited to the following: the Company's commission revenues are highly dependent on premiums charged by insurers, which are subject to fluctuation; the property and casualty insurance industry continues to experience a prolonged soft market despite high losses; continued low interest rates will reduce income earned on invested funds; the insurance brokerage and service businesses are extremely competitive with a number of competitors being substantially larger than the Company; the alternative insurance market continues to grow; the Company's revenues vary significantly from quarter to quarter as a result of the timing of policy renewals and the net effect of new and lost business production; the general level of economic activity can have a substantial impact on the Company's renewal business. The Company's ability to grow has been enhanced through acquisitions, which may or may not be available on acceptable terms in the future, and which, if consummated, may or may not be advantageous to the Company. Accordingly, actual results may differ materially from those set forth in the forward looking statements. Attention is also directed to other risk factors set forth in documents filed by the Company with the Securities and Exchange Commission. 35 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 21ST DAY OF MARCH, 1997. 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 21ST DAY OF MARCH, 1997 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/ David B. Hoch Controller (Chief Accounting Officer) ___________________________________________ David B. Hoch *T. Kimball Brooker Director _________________________________________ T. Kimball Brooker *John G. Campbell Director _________________________________________ John G. Campbell *Jack M. Greenberg Director ___________________________________________ Jack M. Greenberg *Frank M. Heffernan, Jr. Director ___________________________________________ Frank M. Heffernan, Jr. *Philip A. Marineau Director ___________________________________________ Philip A. Marineau *Walter F. McClure Director ___________________________________________ Walter F. McClure *James R. Wimmer Director ___________________________________________ James R. Wimmer
/s/ Carl E. Fasig *By: ________________________________ Carl E. Fasig, Attorney-in-Fact 36 SCHEDULE II ARTHUR J. GALLAGHER & CO. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE ADDITIONS AT CHARGED BALANCE BEGINNING TO AT END OF YEAR EXPENSE ADJUSTMENTS OF YEAR --------- --------- ----------- ------- Year ended December 31, 1996 Allowance for doubtful accounts..... $ 729 $1,291 $(1,131)(1) $ 889 Amortization of goodwill............ 3,581 312 (474)(4) 3,419 Amortization of expiration lists.... 3,653 649 (1,405)(2) 2,897 Year ended December 31, 1995 Allowance for doubtful accounts..... $ 846 $ 77 $ (194)(1) $ 729 Amortization of goodwill............ 3,266 315 3,581 Amortization of expiration lists.... 3,955 489 (791)(2) 3,653 Year ended December 31, 1994 Allowance for doubtful accounts..... $ 876 $ 2 $ (32)(1) $ 846 Amortization of goodwill............ 2,798 334 134 (3) 3,266 Amortization of expiration lists.... 1,819 589 1,547 (3) 3,955
- - -------- (1) Bad debt write-offs net of recoveries. (2) Reversal of fully amortized expiration lists. (3) 1994 acquisitions accounted for as poolings of interests whose results were not significant and financial statements for all prior periods were not restated. (4)Reversal of full amortized goodwill. EXHIBIT INDEX 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to the same exhibit number to Company's Form 10-Q Quarterly Report for the quarterly period ended June 30, 1996, File No. 1-9761). 3.2 By-Laws of the Company (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 33-10447). 3.3 Rights Agreement between the Company and Bank of America Illinois (formerly Continental Illinois National Bank and Trust Company of Chicago) (incorporated by reference to Exhibits 1 and 2 to Company'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 the Company (incorporated by reference to the same exhibit number to Company'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 Company'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 the Company and the Rights Agreement in Exhibits 3.1, 3.2, and 3.3, respectively, hereby incorporated by reference). 4.4 Credit Agreement dated February 16, 1993 (incorporated by reference to the same exhibit number to the Company's Form 10-K Annual Report for 1992, File No. 1-9761). **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 Company'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 Company'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 Company's Form S-8 Registration Statement No. 33-14625). **10.2 Arthur J. Gallagher & Co. Nonqualified Stock Option Plan and related form of stock option agreement (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 2-89195). **10.2.1 Amendment No. 1 to Exhibit No. 10.2 (incorporated by reference to Exhibit No. 10.4 to Company's Form S-8 Registration Statement No. 33-604). **10.2.2 Amendment No. 2 to Exhibit No. 10.2 (incorporated by reference to Exhibit No. 10.4.1 to Company's Form S-8 Registration Statement No. 33-14625). **10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option Plan and related form of stock option agreement (incorporated by reference to the same exhibit number to Company's Form 10-K Annual Report for 1986, File No. 0-13480). **10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 33-22029). **10.26.1 Amendment No. 1 to Exhibit No. 10.26 (incorporated by reference to Exhibit No. 10.3 to Company's Form S-8 Registration Statement No. 33-24251). **10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-64614). **10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan (incorporated by reference to the same exhibit number to Company's Form S-1 Registration Statement No. 33-22029). **10.27.1 Amendment No. 1 to Exhibit No. 10.27 (incorporated by reference to Exhibit No. 10.4 to Company's Form S-8 Registration Statement No. 33-30762). **10.27.2 Amendment No. 2 to Exhibit No. 10.27 (incorporated by reference to Exhibit No. 10.5 to Company's Form S-8 Registration Statement No. 33-38031).
**10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-64614). **10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-80648). **10.27.5 Amendment No. 6 to Exhibit 10.27 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 333-06359). **10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock Option Plan (incorporated by reference to Exhibit No. 10.1 to Company's Form S-8 Registration Statement No. 33-30816). **10.28.1 Amendment No. 1 to Exhibit No. 10.28 (incorporated by reference to the same exhibit number to Company's Form 10-K Annual Report for 1990, File No. 1-9761). **10.28.2 Amendment No. 3 to Exhibit No. 10.28 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-64614). **10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 33-80648). **10.28.4 Amendment No. 6 to Exhibit 10.28 (incorporated by reference to the same exhibit number to Company's Form S-8 Registration Statement No. 333-06359). 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 Company's Form 10-K Annual Report for 1989, 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 Company's Form S-1 Registration Statement No. 2-89195). 10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985 (incorporated by reference to the same exhibit number to Company'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 Company's Form S-1 Registration Statement No. 2-89195). **10.11 Form of Indemnity Agreement between the Company and each of its directors and corporate officers (incorporated by reference to Attachment A to the Company'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 the Company and each of Robert H. B. Baldwin, Jack M. Greenberg and James R. Wimmer (incorporated by reference to the same exhibit number to Company's Form 10-K Annual Report for 1988, File No. 1-9761). *11.0 Statement re: computation of earnings per common and common equivalent share. *21.0 Subsidiaries of the Company, 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 inapplicable.
- - -------- *Filed herewith. **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. EX-11 2 COMPUTATION OF EARNINGS EXHIBIT 11.0 ARTHUR J. GALLAGHER & CO. COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- Net earnings........................................ $ 45,803 $ 42,545 $ 37,166 Adjustment to net earnings for computation related to the 20% limitation on the buy back of common shares using the treasury stock method............. 944 -- -- -------- -------- -------- Net earnings applicable to computation.............. $ 46,747 $ 42,545 $ 37,166 ======== ======== ======== Average common shares outstanding................... 16,283 16,343 16,395 Dilutive effect of stock options using the treasury stock method....................................... 1,492 911 794 -------- -------- -------- Weighted average number of common and common equivalent shares outstanding...................... 17,775 17,254 17,189 ======== ======== ======== Net earnings per common and common equivalent share. $ 2.63 $ 2.47 $ 2.16
EX-21 3 SUBSIDIARIES EXHIBIT 21.0 SUBSIDIARIES OF THE COMPANY In the following list of subsidiaries of the Company, those companies which are indented represent subsidiaries of the corporation under which they are indented. Except for directors' qualifying shares, 100% of the voting stock of each of the subsidiaries listed below, other than AJG Capital, Inc. and Risk Management Partners Ltd., is owned of record or beneficially by its indicated parent.(1)
STATE OR OTHER JURISDICTION OF NAME INCORPORATION - - ---- --------------- Arthur J. Gallagher & Co. (Registrant).......................... Delaware Arthur J. Gallagher & Co. (Illinois).......................... Illinois Gallagher--Great Lakes, Inc. ............................... Illinois Arthur J. Gallagher & Co. of Oklahoma, Inc.................. Oklahoma Arthur J. Gallagher & Co.--Chicago Metro...................... Illinois Arthur J. Gallagher & Co. (St. Louis)......................... Delaware Holt Texas, Inc............................................... Texas Arthur J. Gallagher Inc..................................... Texas Gallagher Braniff, Inc........................................ Texas Arthur J. Gallagher & Co. (Florida)........................... Florida Arthur J. Gallagher & Co. of New York, Inc.................... New York Arthur J. Gallagher & Co. Ohio Agency, Inc.................... Ohio International Special Risk Services, Inc...................... Illinois Arthur J. Gallagher & Co.--Greenville......................... South Carolina Arthur J. Gallagher & Co. of Massachusetts, Inc............... Massachusetts Gallagher Insurance Advisors, Inc........................... Massachusetts Morrill & Everett, Inc...................................... New Hampshire Arthur J. Gallagher & Co. of Rhode Island, Inc................ Rhode Island Arthur J. Gallagher International, Inc........................ Delaware Arthur J. Gallagher & Co. (Bermuda) Limited................... Bermuda Arthur J. Gallagher Intermediaries (Bermuda) Limited........ Bermuda Arthur J. Gallagher Management (Bermuda) Limited............ Bermuda Gallagher Captive Services (Cayman) Limited................. Cayman Islands Scholastic Risk Services Limited............................ Bermuda Arthur J. Gallagher & Co.--Little Rock........................ Arkansas Arthur J. Gallagher & Co. of Georgia, Inc..................... Georgia Gallagher Plumer Holdings Limited............................. England Arthur J. Gallagher (UK) Limited.............................. England Risk Management Partners Ltd.(3)............................ England John Plumer & Company Limited............................... England John Plumer & Partners Limited.............................. England John Plumer & Partners Marine Limited..................... England AJG Twenty Three Limited.................................... England AJG Twenty Two Limited...................................... England Arthur J. Gallagher Aviation Limited........................ England AJG Twenty Limited.......................................... England AJG Twenty One Limited...................................... England Arthur J. Gallagher & Partners (UK) Limited................. England Morgan, Read & Coleman (Holdings) Limited................... England Gallagher, Read & Coleman Limited......................... England Morgan, Read & Coleman (Sweden) AB........................ Sweden Morgan Insurance Services Limited........................... England Gallagher Bassett Services, Inc............................... Delaware Gallagher Bassett of New York, Inc.......................... New York Gallagher Bassett International Ltd......................... Delaware
STATE OR OTHER JURISDICTION OF NAME INCORPORATION ---- --------------- Gallagher Bassett International Ltd. (UK).................. England Gallagher Bassett Adjusters Canada, Inc.(3)................ Canada Gallagher Bassett Argentina S.A.(4)........................ Argentina Gallagher Bassett Australia Pty Ltd(4)..................... Australia Gallagher Benefit Administrators, Inc...................... Illinois Gallagher Bassett International S.A.......................... France Arthur J. Gallagher & Co. Insurance Brokers of California, Inc......................................................... California Charity First Insurance Services, Inc...................... California Arthur J. Gallagher & Co. of Connecticut, Inc................ Connecticut Arthur J. Gallagher Intermediaries, Inc...................... New York LHC of Illinois, Inc......................................... Illinois Arthur J. Gallagher & Co. of Michigan, Inc................... Michigan Arthur J. Gallagher & Co.--Denver............................ Colorado Arthur J. Gallagher & Co. of Washington, Inc................. Washington Gallagher Louisiana, Inc..................................... Louisiana Arthur J. Gallagher of Louisiana, Inc...................... Louisiana Broussard, Bush & Hurst of Mississippi, Inc.................. Mississippi Broussard, Bush & Hurst of Texas, Inc........................ Texas Gallagher ABOW, Inc.......................................... Michigan Arthur J. Gallagher & Co. of Wisconsin, Inc.................. Wisconsin Gallagher Woodsmall, Inc..................................... Missouri Woodsmall Benefit Services, Inc............................ Delaware Gallagher Benefit Services of New York, Inc.................. New York Arthur J. Gallagher & Co. of New Jersey, Inc................. New Jersey Arthur J. Gallagher & Co. Ohio Life Agency, Inc.............. Ohio Gallagher Pipino, Inc........................................ Ohio Arthur J. Gallagher & Co. of Pennsylvania, Inc............... Pennsylvania Gallagher Benefit Services of Texas, Inc..................... Texas Arthur J. Gallagher & Co. of Minnesota, Inc.................. Minnesota IMC Insurance Management Corporation......................... Missouri IMC Services Corporation................................... Missouri Gallagher Alliance Insurance Services, Inc................... Arizona AJG Financial Services, Inc.................................. Delaware AJG Capital, Inc.(2)....................................... Illinois AJG Investments, Inc....................................... Delaware Gallagher Captive Services, Inc.............................. Delaware Gallagher Benefit Services of Colorado, Inc.................. Colorado Lamberson Koster & Company................................... California Arthur J. Gallagher & Co. of Tennessee, Inc.................. Tennessee
- - -------- (1) The Company conducts some of its operations under the following names: Gallagher Benefit Services, Gallagher Bassett Benefit Administrators, Gallagher Bassett Information Services, Pacific Atlantic Administrators, The Boston Insurance Center, Gallagher Heffernan, Gallagher Newman, Broussard, Bush & Hurst, Henley, Williams & Associates, Gallagher Steel Agency, Gallagher Emperion, Bryce Insurance, BHK&R, Inc., CMC Claims Management Corporation, The Planning Corporation and Environmental Claims Management Incorporated. (2) 10% of the Common Stock of AJG Capital, Inc. is owned by an unrelated party. (3) 50% of the Common Stock of the Company is owned by an unrelated party. (4) 25% of the Common Stock of the Company is owned by an unrelated party. EX-23.1 4 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS Our audits included the consolidated financial statement schedule of Arthur J. Gallagher & Co. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, with respect to which the date is January 21, 1997, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the incorporation by reference in the Registration Statements (Form S-8, No. 33-604 and Form S-8, No. 33-14625) pertaining to the Arthur J. Gallagher & Co. Incentive, United Kingdom Incentive and Nonqualified Stock Option Plans, in the Registration Statement (Form S-8, No. 33-30762) pertaining to the Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan, in the Registration Statements (Form S-8, No. 33-24251 and Form S-8, No. 33-38031) pertaining to the Arthur J. Gallagher & Co. 1988 Incentive and 1988 Nonqualified Stock Option Plans, in the Registration Statement (Form S-8, No. 33-30816) pertaining to the Arthur J. Gallagher & Co. Non-Employee Directors' Stock Option Plan, in the Registration Statements (Form S-8, No. 33-64614 and Form S-8, No. 33-80648) pertaining to the Arthur J. Gallagher & Co. 1988 Incentive, 1988 Nonqualified, and Non-Employee Directors' Stock Option Plans, in the Registration Statement (Form S-8, No. 333-06359) pertaining to the Arthur J. Gallagher & Co. 1988 Nonqualified and Non-Employee Directors' Stock Option Plans, and in the related Prospectuses, of our report dated January 21, 1997 with respect to the consolidated financial statements included herein, and our report included in the preceding paragraph with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) of Arthur J. Gallagher & Co. /s/ Ernst & Young LLP ------------------------------------- ERNST & YOUNG LLP Chicago, Illinois March 21, 1997 EX-24 5 POWERS OF ATTORNEY EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him, and in his name, place and stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co. Annual Report on Form 10-K for the fiscal year ending December 31, 1996 and any and all amendments thereto and (ii) to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of this 25th day of February, 1997. /s/ FRANK M. HEFFERNAN, JR. ---------------------------- FRANK M. HEFFERNAN, JR. EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him, and in his name, place and stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co. Annual Report on Form 10-K for the fiscal year ending December 31, 1996 and any and all amendments thereto and (ii) to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of this 25th day of February, 1997. /s/ JOHN G. CAMPBELL ---------------------------- JOHN G. CAMPBELL EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him, and in his name, place and stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co. Annual Report on Form 10-K for the fiscal year ending December 31, 1996 and any and all amendments thereto and (ii) to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of this 25th day of February, 1997. /s/ ROBERT E. GALLAGHER ---------------------------- ROBERT E. GALLAGHER EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him, and in his name, place and stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co. Annual Report on Form 10-K for the fiscal year ending December 31, 1996 and any and all amendments thereto and (ii) to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of this 25th day of February, 1997. /s/ JACK M. GREENBERG ---------------------------- JACK M. GREENBERG EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him, and in his name, place and stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co. Annual Report on Form 10-K for the fiscal year ending December 31, 1996 and any and all amendments thereto and (ii) to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of this 25th day of February, 1997. /s/ PHILIP A. MARINEAU ---------------------------- PHILIP A. MARINEAU EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him, and in his name, place and stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co. Annual Report on Form 10-K for the fiscal year ending December 31, 1996 and any and all amendments thereto and (ii) to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of this 25th day of February, 1997. /s/ WALTER F. MC CLURE ---------------------------- WALTER F. MC CLURE EXHIBIT 24.0 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him, and in his name, place and stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co. Annual Report on Form 10-K for the fiscal year ending December 31, 1996 and any and all amendments thereto and (ii) to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in such connection, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has duly executed this instrument as of this 25th day of February, 1997. /s/ JAMES R. WIMMER ---------------------------- JAMES R. WIMMER EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Arthur J. Gallagher & Co. Consolidated Financial Statements included in the Form 10-K Annual Report for the fiscal year ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1994 JAN-01-1996 JAN-01-1994 DEC-31-1996 DEC-31-1994 144,214 140,090 53,409 42,637 237,640 205,434 (889) (729) 0 0 463,940 410,149 79,285 65,440 (53,284) (43,252) 590,424 514,823 444,742 397,402 0 0 16,293 16,071 0 0 0 0 118,237 88,178 590,424 514,823 432,986 380,401 456,679 393,972 239,455 210,061 239,455 210,061 147,825 125,059 0 0 0 0 69,399 58,852 23,596 21,686 45,803 37,166 0 0 0 0 0 0 45,803 37,166 2.63 2.16 2.63 2.16
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