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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-9761
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ARTHUR J. GALLAGHER & CO.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
(State or other jurisdiction of (I.R.S. Employer Identification
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 (708) 773-3800
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, par value ON WHICH REGISTERED
$1.00 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported price at which the
stock was sold on February 29, 1996 was $543,616,000.
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of February 29, 1996 was 15,611,379.
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 29, 1996
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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 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 140 offices located
throughout the United States and five 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 Bermuda,
U.K., Scotland and Singapore.
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, and its telephone number is (708) 773-3800.
The Company has not presented industry segment information as its operations
are predominantly those of insurance brokerage and risk management 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. Such
efforts have contributed substantially to the growth in the Company's fee
revenues.
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 140 offices in the United States and five 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 1995, 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 eighth largest insurance broker in the United
States and in the top nine 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
2
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.
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
United Kingdom ("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. This subsidiary presently services
clients in approximately 40 countries, with approximately 58% of its brokerage
income originating in the United States. 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.
Risk Management Partners LTD ("RMP") is a company that is 50% owned by a
subsidiary of Arthur J. Gallagher & Co. and 50% owned by a subsidiary of
American Re Corporation, one of the world's largest and most prominent
reinsurance companies. RMP was created in early 1995 to market insurance
products and risk management services to public entities in the U.K. where
market conditions for the governmental sector are very similar to the
conditions that existed in the United States during the early to middle 1980s.
In this market, only a small number of carriers are offering coverage and there
is little discussion of alternative approaches. RMP sees a strong demand for
alternatives in this marketplace and is poised to fill that need with products
and services delivered by professionals with years of experience in public
entity business.
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.
3
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 14 of Notes to Consolidated Financial Statements.
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, 1995 are set forth below:
1995 1994 1993
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
Commissions........................ $235,877 57% $216,471 59% $193,423 57%
Fees............................... 160,052 39 141,501 38 128,754 38
Investment income and other........ 16,069 4 9,692 3 16,541 5
-------- --- -------- --- -------- ---
$411,998 100% $367,664 100% $338,718 100%
======== === ======== === ======== ===
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
production, whereas expenses are fairly uniform throughout the year. See Note
15 of Notes to Consolidated Financial Statements for unaudited quarterly
operating results for 1995 and 1994.
4
ACQUISITIONS
Since January 1, 1991 through December 31, 1995, the Company has acquired
twenty-five 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 1995 and 1994.
On February 29, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Levitt/Kristan Company, a California
corporation engaged in the insurance brokerage business, in exchange for
112,100 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. Two principals entered into two year employment
agreements with the Company.
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, 1995, the Company and its subsidiaries employed
approximately 3,700 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 12
of Notes to Consolidated Financial Statements for information with respect to
the Company's lease commitments at December 31, 1995.
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, 1995.
5
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..... 73 Chief Executive Officer 1963-1994, Chairman since 1990
John P. Gallagher....... 68 Executive Vice President since 1963, Vice Chairman since 1990,
deceased February 23, 1996
J. Patrick Gallagher, 44 President since 1990, Chief Executive Officer since 1995
Jr.....................
John G. Campbell........ 58 Vice President since 1978
Michael J. Cloherty..... 48 Vice President--Finance since 1981
Peter J. Durkalski...... 45 Vice President since 1990
James W. Durkin, Jr..... 46 Vice President since 1985
Walter F. McClure....... 62 Senior Vice President since 1993
John D. Stancik......... 52 Vice President since 1986
Gary Van der Voort...... 50 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.
6
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,
1994 through December 31, 1995 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
------- ------- ---------
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
1994 Quarterly Periods
First............................................... $36 3/8 $28 1/4 $.22
Second.............................................. $33 3/8 $28 1/8 $.22
Third............................................... $33 7/8 $ 29 $.22
Fourth.............................................. $33 1/2 $29 5/8 $.22
As of February 1, 1996, there were approximately 600 holders of record of the
Company's common stock.
7
ITEM 6. SELECTED FINANCIAL DATA.
ARTHUR J. GALLAGHER & CO.
GROWTH RECORD: 1986-1995
AVERAGE
ANNUAL -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND GROWTH 1995 1994 1993
EMPLOYEE DATA) ------- --------- -------- --------
Revenue Data
Commissions........................... $ 235,877 $216,471 $193,423
Fees.................................. 160,052 141,501 128,754
Investment income and other........... 16,069 9,692 16,541
--------- -------- --------
Total revenues...................... $ 411,998 $367,664 $338,718
Dollar growth......................... $ 44,334 $ 28,946 $ 29,296
Percent growth........................ 11% 12% 9% 9%
--- --------- -------- --------
Pretax Earnings Data
Pretax earnings....................... $ 62,865 $ 53,013 $ 47,563
Dollar growth......................... $ 9,852 $ 5,450 $ 10,810
Percent growth........................ 12% 19% 11% 29%
Pretax earnings as a percentage of
revenues............................. 15% 14% 14%
--- --------- -------- --------
Earnings Data
Net earnings.......................... $ 41,491 $ 34,405 $ 28,816
Dollar growth......................... $ 7,086 $ 5,589 $ 4,948
Percent growth........................ 12% 21% 19% 21%
Net earnings as a percentage of
revenues............................. 10% 9% 9%
--- --------- -------- --------
Earnings Per Share Data
Shares outstanding at year end........ 15,426 15,132 16,037
Earnings per share(b)................. $ 2.54 $ 2.12 $ 1.71
Percent growth of earnings per share.. 12% 20% 24% 16%
--- --------- -------- --------
Employee Data
Number at year end.................... 3,739 3,415 3,271
Number growth......................... 324 144 240
Percent growth........................ 7% 9% 4% 8%
Revenue per employee(c)............... $ 110 $ 108 $ 104
Net earnings per employee(c).......... $ 11 $ 10 $ 9
--- --------- -------- --------
Common Stock Dividend Data
Dividends declared per share(d)....... $ 1.00 $ .88 $ .72
Total dividends declared.............. $ 15,270 $ 13,209 $ 10,808
Percent of earnings................... 37% 38% 38%
--- --------- -------- --------
Balance Sheet Data
Total assets.......................... $ 495,794 $462,069 $485,979
Long-term debt less current portion... $ 2,260 $ 3,390 $ 28,166
Total stockholders' equity............ $ 118,142 $ 96,245 $119,096
--- --------- -------- --------
Return On Beginning Stockholders'
Equity................................. 43% 29% 31%
NOTES:
(a) The financial information for all periods prior to 1995 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,
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1992 1991 1990 1989 1988 1987 1986
- -------- -------- -------- -------- -------- -------- --------
$184,028 $177,749 $172,640 $156,850 $143,697 $131,361 $119,201
111,662 92,483 79,671 65,990 57,963 52,708 42,193
13,732 11,149 16,557 17,105 15,786 13,593 12,790
- -------- -------- -------- -------- -------- -------- --------
$309,422 $281,381 $268,868 $239,945 $217,446 $197,662 $174,184
$ 28,041 $ 12,513 $ 28,923 $ 22,499 $ 19,784 $ 23,478 $ 33,648
10% 5% 12% 10% 10% 13% 24%
- -------- -------- -------- -------- -------- -------- --------
$ 36,753 $ 28,013 $ 31,245 $ 30,753 $ 27,617 $ 31,067 $ 30,139
$ 8,740 $ (3,232) $ 492 $ 3,136 $ (3,450) $ 928 $ 8,335
31% (10)% 2% 11% (11)% 3% 38%
12% 10% 12% 13% 13% 16% 17%
- -------- -------- -------- -------- -------- -------- --------
$ 23,868 $ 19,628 $ 21,631 $ 20,829 $ 19,993 $ 20,094 $ 19,288
$ 4,240 $ (2,003) $ 802 $ 836 $ (101) $ 806 $ 4,789
22% (9)% 4% 4% (1)% 4% 33%
8% 7% 8% 9% 9% 10% 11%
- -------- -------- -------- -------- -------- -------- --------
15,512 15,818 16,032 16,047 16,298 16,766 16,710
$ 1.47 $ 1.19 $ 1.30 $ 1.25 $ 1.18 $ 1.18 $ 1.13
24% (8)% 4% 6% 0% 4% 31%
- -------- -------- -------- -------- -------- -------- --------
3,031 2,849 2,732 2,618 2,475 2,391 2,193
182 117 114 143 84 198 231
6% 4% 4% 6% 4% 9% 12%
$ 102 $ 99 $ 98 $ 92 $ 88 $ 83 $ 79
$ 8 $ 7 $ 8 $ 8 $ 8 $ 8 $ 9
- -------- -------- -------- -------- -------- -------- --------
$ .64 $ .64 $ .60 $ .52 $ .48 $ .40 $ .20
$ 8,767 $ 8,439 $ 6,999 $ 5,905 $ 5,375 $ 4,296 $ 1,913
37% 43% 32% 28% 27% 21% 10%
- -------- -------- -------- -------- -------- -------- --------
$432,551 $416,004 $406,391 $369,939 $353,217 $331,050 $295,343
$ 23,888 $ 24,432 $ 24,723 $ 24,775 $ 25,063 $ 20,073 $ 20,000
$ 94,289 $ 90,750 $ 89,674 $ 81,473 $ 74,518 $ 71,556 $ 63,174
- -------- -------- -------- -------- -------- -------- --------
26% 22% 27% 28% 28% 32% 42%
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. Since the mid 1980s, lower premium rates and excess capacity have
prevailed among property and casualty insurance carriers resulting in heavy
competition for market share. This "soft market" (i.e. generally lower premium
rates) has generally resulted in flat to reduced renewal commissions during the
period.
Over the past three years, the United States and the world have experienced
catastrophes ranging from severe hurricanes to devastating earthquakes.
Extraordinarily high losses associated with these events appear to have had a
generally limited impact on the insurance industry. Turmoil continues at
Lloyd's of London raising doubt about its long-term viability. In the past
year, there have been substantial mergers and a consolidation within the
insurance industry. Rates for workers compensation coverage have generally been
reduced. In recent years, low interest rates have reduced interest income
earned on invested funds. Throughout all of this, there has generally been
little change in property/casualty rates. Excess capacity remains and the
competitive environment continues. It is management's view that for the
foreseeable future, insurance pricing will not change significantly.
Growth of the alternative insurance market has continued, albeit more slowly
in recent years, notwithstanding the soft market conditions. The Company
believes this move from the traditional approach of purchasing insurance will
continue regardless of the property/casualty pricing environment and
anticipates that sales in the risk management, benefits and self-insurance
services areas will again be a major contributor to fee revenue growth in 1996.
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,
however, the United States has experienced low rates of inflation along with
business downsizing, reduced sales and lower payrolls. These events have
resulted in lower levels of exposure to insure. In general, premium rates have
had a greater effect on the Company's revenues than inflation.
RESULTS OF OPERATIONS
The Company's results of operations for all periods prior to December 31,
1995 have been restated to include the results of IMC Risk Management Group,
Inc. and W. Lawrence Pfeiffer & Associates, Inc. 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.
Commission revenues increased by $19.4 million or 9% in 1995. This increase
is the result of new business production of $30.4 million, partially offset by
lost business. Commission revenues increased by $23.0 million or 12% in 1994.
This increase is the result of new business production of $30.1 million, and to
a lesser extent, modest renewal rate increases partially offset by lost
business.
Fee revenues increased by $18.6 million or 13% in 1995. This increase,
generated primarily by Gallagher Bassett Services, Inc., resulted from strong
new business production of $26.3 million and increases in existing business
partially offset by lost business. Fee revenues increased by $12.7 million or
10% in 1994. This
10
increase, again generated primarily by Gallagher Bassett Services, Inc.,
resulted from strong new business production of $20.5 million and increases in
existing business partially offset by lost business.
Investment income and other increased by $6.4 million or 66% 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. Investment income
and other decreased by $6.8 million or 41% in 1994. This decrease is due
primarily to a combination of significantly lower returns on funds invested
with outside fund managers and lower levels of funds available for investment.
This decrease is partially offset by a gain of $656,000 realized in closing out
interest rate exchange agreements related to the retirement of the Company's
debt agreement in the fourth quarter of 1994 and by a gain of $800,000 from the
sale of two personal lines books of business also recorded in the fourth
quarter of 1994.
Salaries and employee benefits increased by $21.9 million or 11% in 1995 due
principally to a 9% increase in year-end employee head count and a
corresponding increase in employee benefit expenses, salary increases for
employees, and the annualized effect of prior year hires. Salaries and employee
benefits increased by $21.9 million or 13% in 1994 due principally to salary
increases, the annualized effect of prior year hires, a 4% increase in year-end
employee head count and a corresponding increase in employee benefit expenses
and changes in certain benefit plan actuarial assumptions. Also contributing to
this increase is a $4.6 million non-recurring gain from a restructuring and
settlement of a defined benefit plan at the Company's London subsidiary, Arthur
J. Gallagher (UK) Limited, recorded in 1993. See Note 10 of the Notes to
Consolidated Financial Statements. In 1995, 1994 and 1993, salaries and
employee benefits have represented 53%, 54% and 52%, respectively, as a
percentage of total revenues.
Other operating expenses increased by $12.6 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 office facilities and significantly
higher business insurance costs. Other operating expenses increased by $1.6
million or 1% in 1994. This increase was due primarily to additional office
facilities (rent and utilities, miscellaneous office and supply expenses)
resulting from leasing new office space and expanding and upgrading existing
facilities, and higher business insurance costs. Travel and entertainment costs
also increased in 1994 due to an increase in both the number of employees and
the Company's sales volume. This increase was partially offset by the non-
recurring write-off in 1993 of $2.0 million by a 1994 acquisition of certain
intangible assets and by a reduction in professional fees related to claims
processing, investment management and acquisition costs.
The Company's overall tax rate of 34% in 1995 is less than the statutory
federal rate. For 1995, 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 35% in 1994 approximates the statutory federal rate. For
1994, the net effects of state and foreign taxes were again substantially
offset by the tax benefits generated by certain investments. The Company's
overall tax rate of 39% in 1993 is greater than the statutory federal rate of
35%, due primarily to the net effects of state and foreign taxes which are
partially offset by the tax benefits generated by certain investments, and to
pre-acquisition income of pooled entities which was taxed to the previous
owners. See Note 13 of the Notes to Consolidated Financial Statements.
The Company's foreign operations recorded earnings before income taxes of
$2.6 million, $1.3 million, and $7.1 million in 1995, 1994, and 1993,
respectively. The 1995 increase is due primarily to stronger investment income.
The 1994 decrease is due primarily to the 1993 non-recurring foreign benefit
plan gain mentioned above and a reduction in investment income. See Notes 13
and 14 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 15 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 with a positive cash flow from operations and has
consequently been able to finance its operations and capital expenditures from
internally generated funds. 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. Loans under the
Credit Agreement are repayable no later than February, 1998, and bear floating
interest rates over the term of the loan. In February, 1993, a loan was funded
for $20 million. The Company simultaneously entered into interest rate exchange
agreements which fixed the rate of interest payable on the loan. The Company
retired the $20 million loan in the fourth quarter of 1994 and has fully
satisfied all obligations associated with the loan. The Company also recognized
a gain of $656,000 in closing out the interest rate exchange agreements. The
Credit Agreement remains in effect and as of December 31, 1995, there are no
borrowings currently existing under this agreement.
The Company also entered into two term loan agreements (the "Term Loan
Agreements") that have outstanding balances of $1.9 million and $1.5 million at
December 31, 1995. 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 also has line of credit facilities of $17.5 million and $10.0
million which expire on April 30, 1996 and February 28, 1997, respectively. No
borrowings currently exist under these facilities.
The Company paid $14.7 million in cash dividends on its common stock in 1995.
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 1995, the Company's
Board of Directors declared a dividend of $.25 per share which is $.03 or 14%
greater than each quarterly dividend in 1994. In January, 1996, the Company
announced a first quarter dividend of $.29 per share, a 16% increase over the
quarterly dividend in 1995.
Net capital expenditures for fixed assets amounted to $9.4 million, $7.5
million and $7.8 million in 1995, 1994 and 1993, respectively. In 1996, the
Company intends to make additional capital improvements of approximately $10.5
million to upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
1996, to repurchase its common stock. Under the plan, the Company repurchased
437,000 shares at a cost of $15.1 million, 1.4 million shares at a cost of
$43.8 million and 225,000 shares at a cost of $7.0 million in 1995, 1994 and
1993, respectively. The 1994 common stock repurchases, in part, caused the
weighted average shares outstanding to decrease by 590,000 shares from 1993 to
1994. The repurchases were funded entirely by internally generated funds and
are held for reissuance in connection with exercises of options under its stock
option plans. Under the provisions of the plan, the Company is authorized to
repurchase approximately 360,000 additional shares through June 30, 1996. 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 under its loan agreements if the
Company so determines.
12
Due to changes in the United States federal income tax laws, effective in
1994, the Company began providing for U. S. income taxes on the undistributed
earnings of its foreign subsidiaries. Prior to 1994, the Company did not
provide for U. S. income taxes on the undistributed earnings of certain foreign
subsidiaries ($19.2 million) which are considered permanently invested outside
the United States. See Note 13 of the Notes to Consolidated Financial
Statements. Although not available for domestic needs, the undistributed
earnings generated by certain foreign subsidiaries referred to above may be
used to finance foreign operations and acquisitions.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGES
-----
Consolidated Financial Statements:
Consolidated Statement of Earnings..................................... 15
Consolidated Balance Sheet............................................. 16
Consolidated Statement of Cash Flows................................... 17
Consolidated Statement of Stockholders' Equity......................... 18
Notes to Consolidated Financial Statements.................... 19 through 29
Management's Report...................................................... 30
Report of Independent Auditors........................................... 31
14
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
OPERATING RESULTS
Revenues:
Commissions....................................... $235,877 $216,471 $193,423
Fees.............................................. 160,052 141,501 128,754
Investment income and other....................... 16,069 9,692 16,541
-------- -------- --------
Total revenues.................................. 411,998 367,664 338,718
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 218,740 196,816 174,928
Other operating expenses.......................... 130,393 117,835 116,227
-------- -------- --------
Total expenses.................................. 349,133 314,651 291,155
-------- -------- --------
Earnings before income taxes........................ 62,865 53,013 47,563
Provision for income taxes.......................... 21,374 18,608 18,747
-------- -------- --------
Net earnings.................................... $ 41,491 $ 34,405 $ 28,816
======== ======== ========
Net earnings per common and common equivalent share. $ 2.54 $ 2.12 $ 1.71
Dividends declared per common share................. $ 1.00 $ .88 $ .72
Weighted average number of common and common
equivalent shares outstanding...................... 16,315 16,250 16,840
See accompanying notes.
15
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
------------------
1995 1994
-------- --------
(IN THOUSANDS)
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 53,545 $ 44,240
Restricted cash.......................................... 67,719 70,154
Premiums and fees receivable............................. 193,733 183,207
Investment strategies--trading........................... 46,123 42,637
Other.................................................... 20,534 20,617
-------- --------
Total current assets................................... 381,654 360,855
Marketable securities--available for sale.................. 41,712 37,929
Other noncurrent assets.................................... 42,219 34,515
Fixed assets............................................... 66,958 60,776
Accumulated depreciation and amortization.................. (44,325) (40,155)
-------- --------
Net fixed assets....................................... 22,633 20,621
Intangible assets--net..................................... 7,576 8,149
-------- --------
$495,794 $462,069
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Premiums payable to insurance companies.................. $263,378 $257,108
Accrued salaries and bonuses............................. 13,405 12,060
Accounts payable and other accrued liabilities........... 57,006 47,168
Unearned fees............................................ 12,746 13,859
Income taxes payable..................................... 10,409 11,590
Other.................................................... 6,907 10,923
-------- --------
Total current liabilities.............................. 363,851 352,708
Deferred income taxes and other noncurrent accounts........ 13,801 13,116
Stockholders' equity:
Common stock--issued and outstanding 15,426 shares in
1995 and 15,132 shares in 1994.......................... 15,426 15,132
Retained earnings........................................ 102,682 84,048
Unrealized holding gain (loss) on available for sale
securities--net of income taxes......................... 34 (2,935)
-------- --------
Total stockholders' equity............................. 118,142 96,245
-------- --------
$495,794 $462,069
======== ========
See accompanying notes.
16
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- ------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings..................................... $ 41,491 $34,405 $28,816
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss (gain) on investments................. (282) 3,042 (5,121)
Depreciation and amortization.................. 7,994 7,528 9,370
Decrease (increase) in restricted cash......... 2,435 13,172 (13,955)
Increase in premiums receivable................ (11,493) (19,587) (6,424)
Increase in premiums payable................... 6,270 12,796 14,881
(Increase) decrease in trading investments--
net........................................... (2,353) 26,811 --
(Increase) decrease in other current assets.... (1,188) 2,694 6,000
Increase in accrued salaries and bonuses....... 1,345 1,921 2,250
Increase in accounts payable and other accrued
liabilities................................... 9,234 7,599 4,603
Increase (decrease) in income taxes payable.... (1,181) 2,810 1,895
Decrease in deferred income taxes.............. (1,317) (5,258) (7,290)
Other.......................................... (9,501) (7,657) (2,374)
-------- ------- -------
Net cash provided by operating activities.... 41,454 80,276 32,651
-------- ------- -------
Cash flows from investing activities:
Purchases of marketable securities............... (21,918) (28,409) (51,755)
Proceeds from the sale of marketable securities.. 20,078 30,527 35,159
Proceeds from maturities of marketable
securities...................................... 2,213 2,224 9,332
Investment in leveraged leases................... -- -- 750
Purchase of investment strategies................ -- -- (24,900)
Additions to fixed assets........................ (9,433) (7,496) (7,796)
Other............................................ 375 316 176
-------- ------- -------
Net cash used by investing activities........ (8,685) (2,838) (39,034)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 7,044 3,141 9,722
Tax benefit from issuance of common stock........ 1,837 747 3,541
Repurchase of common stock....................... (15,068) (43,843) (7,035)
Dividends paid................................... (14,666) (12,690) (10,336)
Proceeds from issuance of long-term debt......... -- -- 25,650
Retirement of long-term debt..................... (1,130) (24,776) (20,242)
Equity transactions of pooled companies prior to
dates of acquisition............................ (1,481) (1,473) 395
-------- ------- -------
Net cash (used) provided by financing
activities.................................. (23,464) (78,894) 1,695
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 9,305 (1,456) (4,688)
Cash and cash equivalents at beginning of year..... 44,240 45,696 50,384
-------- ------- -------
Cash and cash equivalents at end of year........... $ 53,545 $44,240 $45,696
======== ======= =======
Supplemental disclosures of cash flow information:
Interest paid.................................... $ 477 $ 1,874 $ 2,812
Income taxes paid................................ $ 21,571 $19,913 $19,321
See accompanying notes.
17
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
UNREALIZED
HOLDING
CAPITAL GAIN (LOSS)
COMMON STOCK IN EXCESS ON AVAILABLE
--------------- OF RETAINED FOR SALE
SHARES AMOUNT PAR VALUE EARNINGS SECURITIES
------ ------- --------- -------- ------------
Balance at December 31, 1992
as previously reported...... 15,164 $15,164 $ 2,198 $ 76,607 $ --
Acquisition of pooled
companies................. 348 348 -- (28) --
------ ------- -------- -------- -------
Balance at December 31, 1992
as restated................. 15,512 15,512 2,198 76,579 --
Net earnings............... -- -- -- 28,816 --
Cash dividends declared on
common stock.............. -- -- -- (10,808) --
Common stock issued under
stock option plans........ 574 574 9,148 -- --
Tax benefit from issuance
of common stock........... -- -- 3,541 -- --
Common stock repurchases... (225) (225) (6,810) -- --
Common stock issued in two
pooling acquisitions...... 176 176 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- 33 362 --
------ ------- -------- -------- -------
Balance at December 31, 1993. 16,037 16,037 8,110 94,949 --
Net earnings............... -- -- -- 34,405 --
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...... -- -- -- (1,473) --
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. 15,132 15,132 -- 84,048 (2,935)
Net earnings............... -- -- -- 41,491 --
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...... -- -- -- (1,481) --
Change in unrealized gain
(loss), net of taxes of
$1,951.................... -- -- -- -- 2,969
------ ------- -------- -------- -------
Balance at December 31, 1995. 15,426 $15,426 $ -- $102,682 $ 34
====== ======= ======== ======== =======
See accompanying notes.
18
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operation
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 140 offices throughout the United
States and five offices 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 year 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 $709,000 and $846,000 at December 31, 1995 and 1994,
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. Actual results could differ from those estimates.
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.
Marketable securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 115, "Accounting for Certain Investments in Debt
and Equity Securities". The new standard requires that securities designated as
available for sale be carried at fair value, with unrealized gains and losses,
less 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 new
standard for investments held as of or acquired after that date. In accordance
with Statement 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 Statement 115 increased the opening balance of
stockholders' equity by $1,456,000 (net of deferred income taxes of $970,000)
to reflect
19
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Statement 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
$59,130,000 at December 31, 1995 ($53,576,000 at December 31, 1994) are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements with a cost of $7,828,000 at December 31,
1995 ($7,200,000 at December 31, 1994) 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, 1995 was $7,225,000 ($7,221,000 at December 31, 1994).
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
option grants.
2. ACQUISITIONS
Poolings of interests
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.
In 1994, the Company acquired substantially all the net assets of five
insurance brokerage firms in exchange for 819,000 shares of its common stock.
These acquisitions were accounted for as poolings of interests and, except for
seven of the 1995 acquisitions and three of the 1994 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.
20
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes the restatement to reflect the 1995 acquisitions:
ATTRIBUTABLE TO
ARTHUR J. GALLAGHER POOLED COMPANIES AS RESTATED
------------------- ---------------- -----------
(IN THOUSANDS)
1994
Revenues..................... $356,377 $11,287 $367,664
Net earnings................. 34,540 (135) 34,405
======== ======= ========
1993
Revenues..................... $329,263 $ 9,455 $338,718
Net earnings................. 29,446 (630) 28,816
======== ======= ========
3. 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.
4. MARKETABLE SECURITIES
The following is a summary of available for sale marketable securities:
COST OR GROSS GROSS FAIR
DECEMBER 31, 1995 AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
- ----------------- -------------- ---------------- ----------------- -------
(IN THOUSANDS)
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
======= ====== ====== =======
DECEMBER 31, 1994
- -----------------
Preferred stocks..... $25,841 $ 179 $2,326 $23,694
Fixed maturities..... 7,371 108 905 6,574
Common stocks........ 9,581 230 2,150 7,661
------- ------ ------ -------
$42,793 $ 517 $5,381 $37,929
======= ====== ====== =======
The gross realized gains on sales of marketable securities totaled
$1,079,000, $2,004,000 and $1,719,000 for the years ended December 31, 1995,
1994, and 1993, respectively. The gross realized losses totaled $1,918,000,
$312,000 and $929,000 for the years ended December 31, 1995, 1994, and 1993,
respectively.
Substantially all fixed maturity securities mature in 1999 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 (losses) gains on investment strategies included in income
amounted to ($171,000) in 1995, $83,000 in 1994 and $1,908,000 in 1993.
5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1995, 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
$20,071,000 and a fair value of $20,253,000. The securities collateralizing the
agreements were held by two primary dealers. At December 31, 1994, these
securities had a carrying value of $19,152,000 and a fair value of $19,098,000.
21
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------
1995 1994
------ ------
(IN
THOUSANDS)
6.64% unsecured term note, payable in annual installments of
$630............................................................ $1,890 $2,520
6.30% unsecured term note, payable in annual installments of
$500............................................................ 1,500 2,000
------ ------
3,390 4,520
Less current portion............................................. 1,130 1,130
------ ------
$2,260 $3,390
====== ======
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 are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS)
1996.................................................... $1,130
1997.................................................... 1,130
1998.................................................... 1,130
------
$3,390
======
In November, 1994, the Company retired its $20 million variable-rate (based
on LIBOR plus .625%) 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, as of December
31, 1995, there were no borrowings outstanding under this agreement.
The Company also has line of credit facilities of $17,500,000 which expires
on April 30, 1996 and $10,000,000 which expires on February 28, 1997. No
borrowings existed under these facilities at December 31, 1995.
7. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN
Capital Stock
The table below summarizes certain information about the Company's capital
stock at December 31, 1995 and 1994:
AUTHORIZED
CLASS PAR VALUE SHARES
- ----- --------- ----------
Preferred stock............................................ No par 1,000,000
Common stock............................................... $ 1.00 50,000,000
22
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 purchase one share of common stock at an exercise price of $100. The Rights
become exercisable and transferable apart from the common stock after a public
announcement that a person or group has acquired 20% or more of the common
stock or after commencement or public announcement of a tender offer for 30% or
more of the common stock. If the Company is acquired in a merger or business
combination, each Right may be exercised to purchase the common stock of the
surviving company having a market value of twice the exercise price of each
Right. The Rights, which expire May 12, 1997, may be redeemed by the Company at
5 cents per Right at any time prior to the public announcement of the
acquisition of 20% of the common stock. At December 31, 1995, 25,000,000 shares
of common stock were reserved for potential exercise of the Rights.
8. STOCK OPTION PLANS
The Company has two sets of incentive and nonqualified stock option plans for
officers and key employees of the Company and its subsidiaries adopted in 1983
and 1988, respectively. Options granted under the 1983 plans become exercisable
at the rate of 10% per year beginning the calendar year after the date of grant
and expire ten years from the date of grant, or earlier in the event of death
or termination of the employee. The terms of options under the 1988 plans are
determined by the Company's Option Committee on the date of grant. Incentive
stock options are granted at the fair market value of the underlying shares at
the date of grant. The excess of fair market value at the date of grant over
the option price for the nonqualified stock options is considered compensation
and is charged against earnings ratably over the vesting period. No options may
be granted under any plan ten years after its inception.
In 1989, the Company adopted a non-employee director's stock option plan
which currently authorizes 106,000 shares for grant, with Discretionary Options
granted at the direction of the Option Committee and Retainer Options granted
in lieu of their annual retainer. Discretionary Options shall be exercisable at
such rates as shall be determined by the Committee on the date of grant.
Retainer Options shall be cumulatively exercisable at the rate of 25% of the
total Retainer Option at the end of each full fiscal quarter succeeding the
date of grant.
During 1986, the Company adopted an incentive stock option plan for its
officers and key employees resident in the United Kingdom. The United Kingdom
Plan is essentially the same plan as the Company's 1983 U.S. incentive plan,
with certain modifications to comply with United Kingdom law and to provide
potentially favorable tax treatment for grantees resident in the United
Kingdom.
Transactions related to all stock options are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
SHARES SHARES SHARES
UNDER OPTION UNDER OPTION UNDER OPTION
OPTION PRICE OPTION PRICE OPTION PRICE
------ ------------ ------ ------------ ------ ------------
(IN THOUSANDS, EXCEPT OPTION PRICE DATA)
Beginning balance....... 4,614 $ 7.13-33.75 3,997 $ 4.97-33.75 3,769 $ 4.97-27.63
Granted................. 626 15.00-37.00 870 10.00-33.00 898 14.13-33.75
Exercised............... (355) 16.25-33.75 (171) 4.97-33.75 (574) 4.97-27.63
Canceled................ (115) 16.25-34.88 (82) 16.25-33.75 (96) 16.25-33.75
----- ------------ ----- ------------ ----- ------------
Ending balance.......... 4,770 $ 7.13-37.00 4,614 $ 7.13-33.75 3,997 $ 4.97-33.75
===== ============ ===== ============ ===== ============
Exercisable at end of
year................... 1,513 1,283 934
===== ===== =====
23
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options with respect to 1,269,000 shares were available for grant at December
31, 1995.
9. SAVINGS & THRIFT PLAN
The Company has a contributory savings & 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 $1,035,000, $879,000, and $773,000
in 1995, 1994 and 1993, respectively.
10. PENSION 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.
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 between 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,
----------------
1995 1994
------- -------
(IN THOUSANDS)
Actuarial present value of accumulated benefit obligation:
Vested..................................................... $24,775 $19,561
Nonvested.................................................. 6,027 3,758
------- -------
$30,802 $23,319
======= =======
Projected benefit obligation................................. $45,143 $34,825
Assets at fair value......................................... 31,900 23,119
------- -------
Projected benefit obligation in excess of plan assets........ 13,243 11,706
------- -------
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions.......... (1,473) (1,526)
Unamortized portion of net obligation at January 1........... (611) (666)
------- -------
Unfunded accrued pension cost................................ $11,159 $ 9,514
======= =======
Pension expense for the plan consists of the following:
YEARS ENDED DECEMBER
31,
------------------------
1995 1994 1993
------ ------- -------
(IN THOUSANDS)
Service cost--benefits earned during the year......... $5,027 $ 5,400 $ 4,178
Interest cost on projected benefit obligation......... 2,775 2,467 2,198
Actual return on plan assets.......................... (5,283) (158) (2,285)
Net amortization and deferral......................... 3,194 (1,366) 1,304
------ ------- -------
Net pension expense................................... $5,713 $ 6,343 $ 5,395
====== ======= =======
24
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following assumptions were used in determining the actuarial present
value of the plan's projected benefit obligation:
DECEMBER 31,
-----------------
1995 1994 1993
----- ----- -----
Discount rate................................................. 7.50% 8.00% 7.00%
Rate of increase in future compensation levels................ 6.50% 7.00% 5.75%
Expected long-term rate of return on assets................... 9.00% 9.00% 9.00%
In 1993, the Company converted its foreign defined benefit plan to a defined
contribution plan. The defined contribution plan 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.
At the time of the foreign plan conversion, there was a surplus of plan
assets in excess of benefit obligations. Previously vested benefits of the plan
participants were settled by the purchase of annuity policies with a life
insurance company. As a result of the defined benefit plan settlement, the
Company recognized a $4,572,000 gain in 1993, which was recorded as an offset
to salaries and employee benefits expense.
Net expense for foreign retirement plans amounted to $999,000 in 1995,
$1,041,000 in 1994 and ($3,951,000) in 1993.
11. 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,
--------------------
1995 1994 1993
----- ------ ------
(IN THOUSANDS)
Service cost.............................................. $ -- $ -- $ --
Interest cost............................................. 701 828 762
Amortization of gain...................................... (379) -- --
Amortization of transition obligation..................... 512 512 512
----- ------ ------
$ 834 $1,340 $1,274
===== ====== ======
The following table sets forth the estimated funded status and amounts
recognized in the Company's consolidated financial statements:
DECEMBER 31,
----------------
1995 1994
------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 3,939 $ 4,103
Active eligible employees................................... 5,968 6,989
------- -------
9,907 11,092
Unrecognized transition obligation............................ (8,700) (9,212)
Unrecognized gain............................................. 1,644 372
------- -------
Accrued postretirement benefit cost........................... $ 2,851 $ 2,252
======= =======
25
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assumed healthcare cost trend rate used for the next two years is 9.5%,
scaling down to 4.5% after 13 years. A 1% increase in the assumed healthcare
cost trend rate would increase the accumulated postretirement benefit
obligation by $1,426,000 at December 31, 1995 and would increase the net
periodic postretirement benefit cost for 1995 by $97,000.
The discount rate used to measure the accumulated postretirement benefit
obligation was 7.5% and 8.0% at December 31, 1995 and 1994, respectively. The
transition obligation is being amortized over 20 years. Prior to 1993,
postretirement benefits were recorded on a pay-as-you-go basis.
12. 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.
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, 1995 under noncancelable
operating leases having an initial term of more than one year are as follows:
TOTAL
--------------
(IN THOUSANDS)
1996............................................................. $ 24,804
1997............................................................. 20,487
1998............................................................. 17,869
1999............................................................. 15,281
2000............................................................. 12,048
Subsequent years................................................. 50,629
--------
$141,118
========
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $26,510,000 in 1995,
$25,130,000 in 1994 and $24,450,000 in 1993.
26
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
YEARS ENDED DECEMBER
31,
-------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Earnings before income taxes consist of:
Domestic........................................... $60,220 $51,750 $40,421
Foreign............................................ 2,645 1,263 7,142
------- ------- -------
$62,865 $53,013 $47,563
======= ======= =======
Provision for income taxes consists of:
Federal--
Current.......................................... $18,347 $18,652 $17,433
Deferred......................................... (2,734) (4,639) (5,034)
------- ------- -------
15,613 14,013 12,399
------- ------- -------
State and local--
Current.......................................... 5,268 4,990 4,669
Deferred......................................... (391) (639) (682)
------- ------- -------
4,877 4,351 3,987
------- ------- -------
Foreign--
Current.......................................... 1,103 (856) 2,407
Deferred......................................... (219) 1,100 (46)
------- ------- -------
884 244 2,361
------- ------- -------
Total provision...................................... $21,374 $18,608 $18,747
======= ======= =======
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:
1995 1994
------- -------
(IN THOUSANDS)
Deferred tax liabilities:
Leveraged leases.............................................. $ 2,760 $ 2,972
Other......................................................... 4,407 3,773
------- -------
Deferred tax liabilities.................................... 7,167 6,745
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits....... 11,390 10,012
Accrued liabilities........................................... 9,495 8,090
Unrealized investment losses.................................. -- 1,929
Other......................................................... 970 1,964
------- -------
Total deferred tax assets................................... 21,855 21,995
Valuation allowance for deferred tax assets................. -- --
------- -------
Deferred tax assets......................................... 21,855 21,995
------- -------
Net deferred tax assets......................................... $14,688 $15,250
======= =======
27
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the provision for income taxes with the U.S. federal
income tax rate is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
Federal statutory rate......... $22,003 35.0 $18,555 35.0 $16,647 35.0
State income taxes--net of
federal....................... 3,394 5.4 2,684 5.1 2,064 4.3
Pre-acquisition earnings of
pooled companies taxed to
previous owners............... (802) (1.3) (750) (1.4) 1,158 2.4
Foreign taxes.................. 59 .1 388 .7 1,262 2.7
General business credits....... (3,383) (5.4) (2,510) (4.7) (1,655) (3.5)
Other--net..................... 103 .2 241 .4 (729) (1.5)
------- ---- ------- ---- ------- ----
$21,374 34.0 $18,608 35.1 $18,747 39.4
======= ==== ======= ==== ======= ====
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, 1995)
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.
14. FOREIGN OPERATIONS
Financial data by geographic area of operations are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
--------- -------- --------
(IN THOUSANDS)
Revenues:
Commissions and fees
United States................................ $ 381,130 $343,884 $309,630
Foreign, principally United Kingdom.......... 14,799 14,088 12,547
--------- -------- --------
395,929 357,972 322,177
Investment income.............................. 16,069 9,692 16,541
--------- -------- --------
$ 411,998 $367,664 $338,718
========= ======== ========
Earnings before taxes:
Operating profit (loss)
United States................................ $ 69,550 $ 62,480 $ 47,772
Foreign, principally United Kingdom.......... (551) 106 (534)
--------- -------- --------
68,999 62,586 47,238
General corporate expense, including interest
expense and investment income................. 6,134 9,573 (325)
--------- -------- --------
$ 62,865 $ 53,013 $ 47,563
========= ======== ========
DECEMBER 31,
----------------------------
1995 1994 1993
--------- -------- --------
Identifiable assets:
United States.................................. $ 253,292 $238,804 $217,288
Foreign, principally United Kingdom............ 83,951 78,641 80,090
--------- -------- --------
337,243 317,445 297,378
Corporate...................................... 158,551 144,624 188,601
--------- -------- --------
$ 495,794 $462,069 $485,979
========= ======== ========
28
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The consolidated financial statements include liabilities of $62,349,000 at
December 31, 1995 ($58,048,000 at December 31, 1994) after elimination of
intercompany balances applicable to foreign operations.
Exchange gains (losses) were approximately $51,000 in 1995, $106,000 in 1994
and ($115,000) in 1993.
15. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1995 and 1994 were as follows:
1995
---------------------------------
1ST 2ND 3RD 4TH
------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Total revenues............................... $95,605 $94,893 $110,641 $110,859
Earnings before income taxes................. 10,226 9,059 23,704 19,876
Net earnings................................. 6,636 5,875 15,432 13,548
Net earnings per common and common equivalent
share....................................... .41 .36 .94 .83
1994
---------------------------------
1ST 2ND 3RD 4TH
------- ------- -------- --------
Total revenues............................... $85,590 $83,689 $100,691 $ 97,694
Earnings before income taxes................. 8,416 6,790 20,296 17,511
Net earnings................................. 5,340 4,301 12,827 11,937
Net earnings per common and common equivalent
share....................................... .32 .26 .79 .75
29
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 18, 1996
/s/ J. Patrick Gallagher, Jr.
-------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
/s/ Michael J. Cloherty
-------------------------------------
Michael J. Cloherty
Chief Financial Officer
30
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, 1995 and 1994, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, 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 18, 1996
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
32
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 29, 1996 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 29, 1996
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 29, 1996 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, 1995.
(b) Consolidated Balance Sheet as of December 31, 1995 and 1994.
(c) Consolidated Statement of Cash Flows for each of the three years
in the period ended December 31, 1995.
(d) Consolidated Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 1995.
(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 Exhibit Number 2(a) to Company's
Form 8-A Registration Statement filed October 22, 1987, File
No. 1-9761).
33
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 (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).
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).
34
**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).
**10.28 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).
10.5 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 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.
35
(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.
36
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 4TH DAY OF
MARCH, 1996.
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 4TH DAY OF MARCH, 1996 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 Vice President--Finance 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
*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
37
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, 1995
Allowance for doubtful accounts..... $ 846 $ 77 $ (214)(1) $ 709
Amortization of goodwill............ 3,266 306 3,572
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
Year ended December 31, 1993
Allowance for doubtful accounts..... $1,789 $1,390 $(2,303)(1) $ 876
Amortization of goodwill............ 2,508 290 2,798
Amortization of expiration lists.... 1,546 273 1,819
- --------
(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.
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit Number 2(a) to Company's Form 8-A
Registration Statement filed October 22, 1987, 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
(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).
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).
**10.28 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).
10.5 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 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.