Back to GetFilings.com
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-9761
---------
ARTHUR J. GALLAGHER & CO.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Two Pierce Place 60143-3141
Itasca, Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (630) 773-3800
---------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, par value ON WHICH REGISTERED
$1.00 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
---------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported price at which the
stock was sold on February 28, 1997 was $469,762,000.
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of February 28, 1997 was 16,653,426.
PORTIONS OF DOCUMENTS INCORPORATED BY PART OF FORM 10-K INTO WHICH DOCUMENT
REFERENCE INTO THIS REPORT IS INCORPORATED
ARTHUR J. GALLAGHER & CO. PART III
Proxy Statement dated March 28, 1997
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS.
Arthur J. Gallagher & Co. (the "Registrant") and its subsidiaries (the
Registrant and its subsidiaries are collectively referred to as the "Company"
unless the context otherwise requires) are engaged in providing insurance
brokerage, risk management and employee benefit services and other related
services to clients in the United States and abroad. The Company's principal
activity is the negotiation and placement of insurance for its clients. The
Company also specializes in furnishing risk management services. Risk
management involves assisting clients in analyzing risks and determining
whether proper protection is best obtained through the purchase of insurance
or through retention of all or a portion of those risks and the adoption of
corporate risk management policies and cost-effective loss control and
prevention programs. Risk management services also include claims management,
loss control consulting and property appraisals. The Company believes that its
ability to deliver a comprehensively structured risk management and brokerage
service is one of its major strengths.
The Company operates through a network of approximately 150 offices located
throughout the United States and six countries abroad. Some of these offices
are fully staffed with sales, marketing, claims and other service personnel;
others function as servicing offices for the brokerage and risk management
service operations of the Company. The Company's international operations
include a Lloyd's broker and affiliated companies in London and facilities in
Argentina, Australia, Bermuda, Canada, United Kingdom ("U.K.") and Scotland.
The Company was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. The Company's executive offices are located at Two Pierce
Place, Itasca, Illinois 60143-3141, and its telephone number is (630) 773-
3800.
The Company has not presented industry segment information as its operations
are predominantly those of insurance brokerage and risk management, employee
benefits and other related insurance services.
BROKERAGE OPERATIONS
The Company places insurance for and services commercial, industrial,
institutional, governmental, religious and personal accounts throughout the
United States and abroad. The Company acts as an agent in soliciting,
negotiating and effecting contracts of insurance through insurance companies
world-wide, and also as a broker in procuring contracts of insurance on behalf
of insureds. Specific coverages include all forms of property and casualty,
marine, employee benefits, pension and life insurance products.
The Company places surplus lines coverages (coverages not available from
insurance companies licensed by the states in which the risks are located) for
various specialized risks. The Company also provides reinsurance services to
its clients.
RISK MANAGEMENT SERVICES
Through its wholly-owned subsidiary, Gallagher Bassett Services, Inc., the
Company provides a variety of professional consulting services to assist
clients in analyzing risks and in determining whether proper protection is
best obtained through the purchase of insurance or through retention of all or
a portion of those risks and the adoption of risk management policies and
cost-effective loss control and prevention programs. A full range of risk
management services is offered including claims management, risk control
consulting services, information management and property appraisals on a
totally integrated or select, stand-alone basis. Gallagher Bassett Services,
Inc. provides these services for the Company's clients through a network of
over 100 offices throughout the United States.
The Company believes that its risk management services are an important
factor in securing new brokerage business and retaining brokerage clients. The
Company also markets these services directly to the client on an unbundled
basis independently of brokerage services in order to capitalize on the
interest in self-insurance created by market conditions. These services include
consulting on a wide range of risk management needs such as toxic waste
disposal, handling of dangerous cargo, workers' compensation, medical cost
containment, substance abuse, employment-related background investigations,
loss prevention, property appraisals, and liability reserve reviews.
In connection with its risk management services, the Company provides self-
insurance programs for large institutions, risk sharing pools and associations,
and large commercial and industrial customers. Self-insurance, as administered
by the Company, is a program in which the client assumes a manageable portion
of its insurance risks, usually (although not always) placing the less
predictable and larger loss exposures with an excess carrier. The Company's
offices are staffed to provide services relating to claims, property
appraisals, loss control consulting and computerized record keeping in
administering the clients' programs.
The Company's Gallagher Benefit Services Division specializes in risk
management of human resources through fully insured and self-insured programs.
This division provides employee benefit services in connection with the design,
financing, implementation, administration and communication of compensation and
employee benefit programs (including pension and profit-sharing plans, group
life, health, accident and disability insurance programs and tax deferral
plans), and provides other professional services in connection therewith.
Services are supported by an on-line data processing system provided by an
outside vendor.
MARKETS AND MARKETING
A substantial portion of the commission and fee business of the Company is
derived from institutions, not-for-profit organizations, municipal and other
governmental entities and associations. In addition, the Company's clients
include large United States and multinational corporations engaged in a broad
range of commercial and industrial businesses. The Company also places
insurance for individuals. The Company services its clients through its network
of approximately 150 offices in the United States and six countries abroad. No
material part of the Company's business is dependent upon a single customer or
on a few customers, the loss of any one or more of which would have a
materially adverse effect on the Company. In 1996, the largest single customer
represented approximately 1% of total revenues.
The Company believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of reinsurance,
is one of its major strengths. The Company also believes that its risk
management business enhances and attracts other brokerage business due to the
nature and strength of business relationships which it forms with clients when
providing a variety of risk management services on an on-going basis.
The Company requires its employees serving in a sales or marketing capacity,
including certain executive officers of the Company, to enter into agreements
with the Company restricting disclosure of confidential information and
solicitation of clients and prospects of the Company upon their termination of
employment. The confidentiality and non-solicitation provisions of such
agreements terminate in the event of a hostile change in control of the
Company, as defined therein.
COMPETITION
The Company believes it is the seventh largest insurance broker in the United
States and in the top eight worldwide in terms of total revenues. The insurance
brokerage and service business is highly competitive and there are many
insurance brokerage and service organizations as well as individuals throughout
the world who actively compete with the Company in every area of its business.
A number of competing firms are significantly larger and some have many times
the commission and/or fee revenues of the Company. There are firms in a
particular region or locality which are as large or larger than the particular
local office of the Company. The Company believes that the primary factors
determining its competitive position with other organizations in its industry
are the overall cost and the quality of services rendered.
2
The Company is also in competition with certain insurance companies which
write insurance directly for their customers. Government benefits relating to
health, disability, and retirement are also alternatives to private insurance
and hence indirectly compete with the business of the Company. To date, such
direct writing and government benefits have had, in the opinion of the
Company, relatively little effect on its business and operations, but the
Company can make no prediction as to their effect in the future.
REGULATION
In every state and foreign jurisdiction in which the Company does business,
the Company or an employee is required to be licensed or receive regulatory
approval in order for the Company to conduct business. In addition to
licensing requirements applicable to the Company, most jurisdictions require
that individuals who engage in brokerage and certain insurance service
activities be personally licensed.
The Company's operations depend on its continued good standing under the
licenses and approvals pursuant to which it operates. Licensing laws and
regulations vary from jurisdiction to jurisdiction. In all jurisdictions the
applicable licensing laws and regulations are subject to amendment or
interpretation by regulatory authorities, and generally such authorities are
vested with relatively broad and general discretion as to the granting,
renewing and revoking of licenses and approvals.
INTERNATIONAL OPERATIONS
Arthur J. Gallagher (UK) Limited, is a wholly-owned Lloyd's brokerage
subsidiary of the Company. This subsidiary is a London based insurance broker
which provides brokerage services to clientele primarily located outside of
the U.K. The principal activity of Arthur J. Gallagher (UK) Limited is to
negotiate and place insurance and reinsurance with Lloyd's underwriters and
insurance companies worldwide. Its brokerage services encompass four major
categories: aviation, direct marine hull and cargo, reinsurance (marine and
non-marine) and overseas property and casualty (predominantly North America).
Although Arthur J. Gallagher (UK) Limited is located in London, the thrust
of its business development has been with non-U.K. brokers, agents and
insurers rather than domestic U.K. retail business. Its clients are primarily
insurance and reinsurance companies, underwriters at Lloyd's, the Company and
its non-U.K. subsidiaries, other independent agents and brokers, and major
business corporations requiring direct insurance and reinsurance placement.
Arthur J. Gallagher & Co. (Bermuda) Limited provides clients with direct
access to the risk-taking capacity of Bermuda-based insurers for both direct
and reinsurance placements. It also acts as a wholesaler to the Company's
marketing efforts by accessing foreign insurance and reinsurance companies in
the placing of U.S. and foreign risks. In addition, it provides services
relating to the formation and management of offshore captive insurance
companies.
A Company subsidiary, Arthur J. Gallagher International, Inc., located in
Rhode Island, provides brokerage services to and arranges overseas risk
management and loss control services for multinational organizations.
Gallagher Bassett International LTD. ("GBI"), a subsidiary of Gallagher
Bassett Services, Inc., provides risk management services for foreign
operations, as well as U.S. operations that are foreign-controlled.
Headquartered in London, GBI works with insurance companies, reinsurance
companies, overseas brokers, and risk managers of overseas organizations.
Services are offered on an unbundled basis wherever applicable and include
consulting, claims management, information management, loss control, and
property valuations. GBI's service network includes over 120 associate offices
throughout the world. The combination of Gallagher Bassett offices and
affiliated locations provides one of the most comprehensive worldwide service
networks available.
Additional information relating to the Company's foreign operations is
contained in Note 12 of Notes to Consolidated Financial Statements.
3
COMMISSIONS AND FEES
The two major sources of operating revenues are commissions from brokerage
and risk management operations and service fees from risk management
operations. Information with respect to these two major sources as well as
investment income and other revenue for each of the three years in the period
ended December 31, 1996 are set forth below:
1996 1995* 1994*
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
Commissions........................ $261,471 57% $255,914 58% $237,163 60%
Fees............................... 171,515 38 161,868 37 143,238 36
Investment income and other........ 23,693 5 21,748 5 13,571 4
-------- --- -------- --- -------- ---
$456,679 100% $439,530 100% $393,972 100%
======== === ======== === ======== ===
- - --------
*Restated for poolings of interests
The primary source of the Company's compensation for its brokerage services
is commissions paid by insurance companies which are usually based upon a
percentage of the premium paid by the insured. Commission rates are dependent
on a number of factors including the type of insurance, the particular
insurance company and the capacity in which the Company acts. In some cases the
Company is compensated for brokerage or advisory services directly by a fee
from a client, particularly when insurers do not pay commissions. The Company
may also receive contingent commissions which are based on the profit the
insurance company makes on the overall volume of business placed by the Company
in a given period of time. Occasionally, the Company shares commissions with
other brokers who have participated with the Company in placing insurance or
servicing insureds.
The Company's compensation for risk management services is in the form of
fees and commissions. The Company typically negotiates fees in advance with its
risk management clients on an annual basis based upon the estimated value of
the services to be performed. In some cases the Company receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.
The Company's revenues vary significantly from quarter to quarter as a result
of the timing of policy renewals and the net effect of new and lost business,
whereas expenses are fairly uniform throughout the year. See Note 13 of Notes
to Consolidated Financial Statements for unaudited quarterly operating results
for 1996 and 1995.
ACQUISITIONS
Since January 1, 1992 through December 31, 1996, the Company has acquired
twenty-eight insurance services businesses, and disposed of two insurance
services businesses. See Note 2 of Notes to Consolidated Financial Statements
for further information concerning acquisitions in 1996 and 1995.
The following acquisitions have occurred since December 31, 1996:
On January 1, 1997, a wholly owned subsidiary of the Company acquired
substantially all of the assets of Byerly & Company, Inc., a Colorado
corporation engaged in the employee benefits business, in exchange for 164,370
shares of the Company's Common Stock. The acquisition was accounted for as a
pooling of interests. Four principals entered into two year employment
agreements with the Company.
On January 2, 1997, a wholly owned subsidiary of the Company acquired
substantially all of the assets of Arnold & Company, Inc., a Michigan
corporation engaged in the retirement planning and actuarial services business,
in exchange for 41,080 shares of the Company's Common Stock. The acquisition
was accounted for as a pooling of interests. One principal entered into a two
year employment agreement with the Company.
4
The Company believes that the net effect of these acquisitions has been and
will be to expand significantly the volume of general services rendered by the
Company and the geographical markets in which the Company renders such
services and not to change substantially the nature of the services performed
by the Company.
The Company is considering and intends to consider from time to time
acquisitions and divestitures on terms it deems advantageous. The Company has
had preliminary discussions with a number of other candidates for possible
future acquisitions. No assurances can be given that any additional
acquisitions or divestitures will be consummated, or, if consummated, will be
advantageous to the Company.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries employed
approximately 3,900 employees, none of whom is represented by a labor union.
The Company continuously reviews benefits and other matters of interest to its
employees. The Company considers its relations with its employees to be
satisfactory.
ITEM 2. PROPERTIES.
The Company's executive offices and certain subsidiary and branch facilities
are located at Two Pierce Place, Itasca, Illinois where the Company leases
approximately 200,000 square feet of space. The lease commitment on the above
mentioned property expires February 28, 2006. The Company operates all of its
branch and service offices in leased premises. Certain of these leases for
office space have options permitting renewals for additional periods. In
addition to minimum fixed rentals, a number of leases contain escalation
clauses related to increases in the cost of living in future years. See Note
10 of Notes to Consolidated Financial Statements for information with respect
to the Company's lease commitments at December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in litigation on a number of
matters and are subject to certain other claims arising in the normal course
of business, none of which, individually or in the aggregate, in the opinion
of management, is expected to have a material adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the Company's
fourth fiscal quarter ended December 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
NAME AGE POSITION AND YEAR FIRST ELECTED
---- --- -------------------------------
Robert E. Gallagher..... 74 Chief Executive Officer 1963-1994, Chairman since 1990
J. Patrick Gallagher, 45 President since 1990, Chief Executive Officer since 1995
Jr.....................
John G. Campbell........ 59 Vice President since 1978
Michael J. Cloherty..... 49 Vice President--Finance 1981-1995, Executive Vice President since 1996
Peter J. Durkalski...... 46 Vice President since 1990
James W. Durkin, Jr..... 47 Vice President since 1985
Walter F. McClure....... 63 Senior Vice President since 1993
John D. Stancik......... 53 Vice President since 1986
Gary Van der Voort...... 51 Vice President since 1986
Each such person has been principally employed by the Company in management
capacities for more than the past five years. All executive officers are
elected annually and serve at the pleasure of the Board of Directors.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is listed on the New York Stock Exchange, trading
under the symbol "AJG". The following table sets forth information as to the
price range of the Company's common stock for the two-year period January 1,
1995 through December 31, 1996 and the dividends declared per share for such
period. The table reflects the range of high and low sales prices per share as
reported on the Consolidated Transaction Reporting System for securities listed
on the New York Stock Exchange.
DIVIDENDS
DECLARED
HIGH LOW PER SHARE
------- ------- ---------
1996 Quarterly Periods
First............................................... $39 1/2 $35 7/8 $.29
Second.............................................. 36 3/8 30 .29
Third............................................... 35 31 1/2 .29
Fourth.............................................. 34 1/2 29 1/8 .29
1995 Quarterly Periods
First............................................... $ 36 $30 1/8 $.25
Second.............................................. 36 3/8 34 .25
Third............................................... 38 34 5/8 .25
Fourth.............................................. 38 32 1/2 .25
As of February 1, 1997, there were approximately 700 holders of record of the
Company's common stock.
6
THIS PAGE INTENTIONALLY LEFT BLANK
7
ITEM 6. SELECTED FINANCIAL DATA.
ARTHUR J. GALLAGHER & CO.
GROWTH RECORD: 1987-1996
AVERAGE YEARS ENDED DECEMBER 31,
ANNUAL -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND GROWTH 1996 1995 1994
EMPLOYEE DATA) ------- -------- --------- --------
Revenue Data
Commissions........................... $261,471 $ 255,914 $237,163
Fees.................................. 171,515 161,868 143,238
Investment income and other........... 23,693 21,748 13,571
-------- --------- --------
Total revenues...................... $456,679 $ 439,530 $393,972
Dollar growth......................... $ 17,149 $ 45,558 $ 30,613
Percent growth........................ 10% 4% 12% 8%
--- -------- --------- --------
Pretax Earnings Data
Pretax earnings....................... $ 69,399 $ 68,382 $ 58,852
Dollar growth......................... $ 1,017 $ 9,530 $ 5,885
Percent growth........................ 9% 1% 16% 11%
Pretax earnings as a percentage of
revenues............................. 15% 16% 15%
--- -------- --------- --------
Net Earnings Data
Net earnings.......................... $ 45,803 $ 42,545 $ 37,166
Dollar growth......................... $ 3,258 $ 5,379 $ 5,980
Percent growth........................ 9% 8% 14% 19%
Net earnings as a percentage of
revenues............................. 10% 10% 9%
--- -------- --------- --------
Net Earnings Per Share Data
Shares outstanding at year end........ 16,293 16,365 16,071
Earnings per share(b)................. $ 2.63 $ 2.47 $ 2.16
Percent growth of earnings per share.. 9% 6% 14% 23%
--- -------- --------- --------
Employee Data
Number at year end.................... 3,939 3,926 3,595
Number growth......................... 13 331 161
Percent growth........................ 6% 0% 9% 5%
Revenue per employee(c)............... $ 116 $ 112 $ 110
Net earnings per employee(c).......... $ 12 $ 11 $ 10
--- -------- --------- --------
Common Stock Dividend Data
Dividends declared per share(d)....... $ 1.16 $ 1.00 $ .88
Total dividends declared.............. $ 18,399 $ 15,270 $ 13,209
Percent of net earnings............... 40% 36% 36%
--- -------- --------- --------
Balance Sheet Data
Total assets.......................... $590,424 $ 565,831 $514,823
Long-term debt less current portion... $ 1,130 $ 2,260 $ 3,390
Total stockholders' equity............ $134,530 $ 125,509 $104,249
--- -------- --------- --------
Return On Beginning Stockholders'
Equity................................. 36% 41% 29%
NOTES:
(a) The financial information for all periods prior to 1996 has been restated
for acquisitions accounted for using the pooling of interests method.
(b) Based on the weighted average number of common and common equivalent
shares, if any, outstanding during the year.
(c) Based on the number of employees at year end.
(d) Based on the total dividends on a share of common stock outstanding during
the entire year.
8
YEARS ENDED DECEMBER 31,
- - -----------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
- - -------- -------- -------- -------- -------- -------- --------
$212,005 $197,481 $189,978 $183,413 $166,676 $153,640 $140,258
130,806 113,757 94,472 79,783 66,102 57,963 52,708
20,548 16,587 14,152 19,922 19,698 17,407 14,970
- - -------- -------- -------- -------- -------- -------- --------
$363,359 $327,825 $298,602 $283,118 $252,476 $229,010 $207,936
$ 35,534 $ 29,223 $ 15,484 $ 30,642 $ 23,466 $ 21,074 $ 23,758
11% 10% 5% 12% 10% 10% 13%
- - -------- -------- -------- -------- -------- -------- --------
$ 52,967 $ 40,111 $ 32,712 $ 35,792 $ 36,023 $ 29,213 $ 33,348
$ 12,856 $ 7,399 $ (3,080) $ (231) $ 6,810 $ (4,135) $ 965
32% 23% (9)% (1)% 23% (12)% 3%
15% 12% 11% 13% 14% 13% 16%
- - -------- -------- -------- -------- -------- -------- --------
$ 31,186 $ 25,029 $ 22,280 $ 24,156 $ 24,173 $ 21,092 $ 21,822
$ 6,157 $ 2,749 $ (1,876) $ (17) $ 3,081 $ (730) $ 840
25% 12% (8)% 0% 15% (3)% 4%
9% 8% 7% 9% 10% 9% 10%
- - -------- -------- -------- -------- -------- -------- --------
16,976 16,451 16,757 16,971 16,986 17,237 17,705
$ 1.75 $ 1.45 $ 1.27 $ 1.38 $ 1.37 $ 1.18 $ 1.21
21% 14% (8)% (1)% 16% (2)% 4%
- - -------- -------- -------- -------- -------- -------- --------
3,434 3,183 2,986 2,860 2,722 2,585 2,490
251 197 126 138 137 95 201
8% 7% 4% 5% 5% 4% 9%
$ 106 $ 103 $ 100 $ 99 $ 93 $ 89 $ 84
$ 9 $ 8 $ 7 $ 8 $ 9 $ 8 $ 9
- - -------- -------- -------- -------- -------- -------- --------
$ .72 $ .64 $ .64 $ .60 $ .52 $ .48 $ .40
$ 10,808 $ 8,767 $ 8,439 $ 6,999 $ 5,905 $ 5,375 $ 4,296
35% 35% 38% 29% 24% 25% 20%
- - -------- -------- -------- -------- -------- -------- --------
$541,399 $488,979 $470,054 $462,533 $419,293 $400,733 $378,692
$ 28,166 $ 23,888 $ 24,432 $ 24,723 $ 24,775 $ 25,063 $ 20,073
$126,011 $ 99,539 $ 95,001 $ 94,363 $ 87,463 $ 77,820 $ 74,952
- - -------- -------- -------- -------- -------- -------- --------
31% 26% 24% 28% 31% 28% 33%
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Fluctuations in premiums charged by insurance companies have a material
effect on the insurance brokerage industry. Commission revenues are based on a
percentage of the premiums paid by the insured and generally follow premium
levels. Lower premium rates and excess capacity prevail among property and
casualty insurance carriers resulting in heavy competition for market share.
This "soft market" (i.e., lower premium rates) has generally resulted in flat
or reduced renewal commissions during the period.
During the past three years, several catastrophes have caused billions of
dollars of insured losses domestically and abroad. According to some estimates,
1996 will rank as the fifth most expensive year on record with over $7 billion
in insured property losses. Consolidation in the form of substantial mergers,
both in the United States and internationally, continues within the insurance
industry resulting in fewer companies writing risks. Financial services reform
is likely in the near future. Proposed federal legislation seeks to allow
affiliations between banks and insurance entities. A recent report claims the
property/casualty insurance industry began to materially weaken its core loss
reserves in 1996 which reverses several years of favorable reserving trends. In
spite of forces which would reduce competition and weaken profits, there is
still little change in property/casualty rates. Sufficient capacity remains and
the sharply competitive environment continues. Management believes insurance
pricing will not change significantly in 1997.
Along with the soft market conditions, the growth of the alternative
insurance market has slowed during the past year. Although the
property/casualty pricing environment has resulted in some buyers returning to
first dollar coverage, the Company still believes a move from the traditional
approach of purchasing insurance will continue. The Company anticipates new
sales in the risk management, benefits and self-insurance services areas will
again be a major factor in fee revenue growth in 1997.
Historically, inflation has contributed to increased property replacement
costs and higher litigation awards causing some clients to seek higher levels
of insurance coverage. These factors have the effect of generating higher
premiums to customers and higher commissions to the Company. More recently, the
United States and other parts of the world have experienced low rates of
inflation along with business downsizing, reduced sales and lower payrolls.
These events have resulted in lower levels of exposures to insure. In general,
premium rates have had a greater effect on the Company's revenues than
inflation.
Although the Company reported record net earnings in 1996, it is looking to
the future and exploring not only the core businesses of brokering insurance
and risk management services, but also expanding within the fields of insurance
captives and financial and related investment services. These are areas which
may hold opportunities for future profit growth.
RESULTS OF OPERATIONS
The Company's results of operations for all periods prior to December 31,
1996 have been restated to include the results of Morgan, Read & Coleman Ltd.,
Lamberson Koster & Company and The Levitt/Kristan Company on a combined basis
as if they had operated as part of the Company. The Company continues to search
for merger partners which complement existing business and provide entry into
new market niches and new geographic areas. For the effect of such restatements
in the aggregate on year-to-year comparisons, see Note 2 of the Notes to
Consolidated Financial Statements. In January, 1997, the Company acquired two
benefit consulting firms, Byerly & Company, Inc., and Arnold & Company, Inc.
These acquisitions will be accounted for as poolings of interests and were
neither singly nor in the aggregate material to the Company.
Commission revenues increased by $5.6 million or 2% in 1996. This increase is
the result of new business partially offset by lost business and modest renewal
rate reductions. Commission revenues increased by $18.8 million or 8% in 1995.
This increase is the result of new business production and, to a lesser extent,
modest renewal rate increases partially offset by lost business.
10
Fee revenues increased by $9.6 million or 6% in 1996. This increase,
generated primarily by Gallagher Bassett Services, Inc., resulted from new
business production and modest increases in existing business partially offset
by lost business. The rate of increase from 1995 to 1996 has been adversely
affected by strong price competition in the insurance industry, causing some
buyers to choose first dollar converge over self-funded plans. Fee revenues
increased by $18.6 million or 13% in 1995. This increase, again generated
primarily by Gallagher Bassett Services, Inc., resulted from strong new
business production of $19.2 million and increases in existing business
partially offset by lost business.
Investment income and other increased by $1.9 million or 9% in 1996. This
increase is due primarily to an increase in unrealized gains on investment
strategies accounted for on a trading basis, which are invested with outside
fund managers. Investment income and other increased by $8.2 million or 60% in
1995. This increase is due primarily to a combination of significantly higher
returns on funds invested with outside fund managers and a gain of $2.0 million
recorded on the sale of a subsidiary in the fourth quarter of 1995. This
increase is partially offset by a gain of $656,000 realized in closing out
interest exchange agreements related to the retirement of the Company's debt
agreement in the fourth quarter of 1994 and by a gain of $800,000 from the sale
of two personal lines books of business also recorded in the fourth quarter of
1994.
Salaries and employee benefits increased by $7.7 million or 3% in 1996 due
principally to salary increases and the annualized effect of prior year hires
along with a corresponding increase in employee benefit expenses. These
increases were mitigated by a wage freeze for certain management employees.
Salaries and employee benefits increased by $21.7 million or 10% in 1995 due
principally to salary increases and the annualized effect of prior year hires
along with a corresponding increase in employee benefit expenses and changes in
certain benefit plan actuarial assumptions. In 1996, 1995 and 1994, salaries
and employee benefits have represented 52%, 53% and 53%, respectively, as a
percentage of total revenues.
Other operating expenses increased by $8.4 million or 6% in 1996. This
increase is due primarily to an increase in professional fees related to the
outsourcing of certain distribution functions, increased performance fees for
funds invested with professional money fund managers, an increase in brokerage
expenses due to increased business with other brokers, additional rent and
utility expenses resulting from leasing new office space and expanding and
upgrading existing office facilities and increased bad debt write-offs. Other
operating expenses increased by $14.4 million or 11% in 1995. This increase is
due primarily to additional office facilities (rent and utilities,
miscellaneous office and supply expenses) resulting from leasing new office
space and expanding and upgrading existing facilities, and significantly higher
business insurance costs.
The Company's overall tax rate of 34% in 1996 is less than the statutory
federal rate. For 1996, the net effects of state and foreign taxes are
substantially offset by the tax benefits of certain investments. The Company's
overall tax rate of 38% in 1995 is greater than the statutory federal rate due
primarily to the net effects of state and foreign taxes which are partially
offset by the tax benefits generated by certain investments and by pre-
acquisition income of pooled entities which was taxed to the previous owners.
The Company's overall tax rate of 37% in 1994 is greater than the statutory
federal rate, due primarily to the net effects of state and foreign taxes which
are partially offset by the tax benefits generated by certain investments and
by pre-acquisition income of pooled entities which was taxed to the previous
owners. See Note 11 of the Notes to Consolidated Financial Statements.
The Company's foreign operations recorded operating earnings before income
taxes of $4.2 million, $3.4 million, and $2.2 million in 1996, 1995, and 1994,
respectively. The 1996 increase is due primarily to a decrease in compensation
related costs at the Company's London subsidiaries. The 1995 increase is due
primarily to stronger investment income. See Notes 11 and 12 of the Notes to
Consolidated Financial Statements.
The Company's total revenues vary from quarter to quarter as a result of the
timing of policy renewals and net new/lost business production, whereas
expenses are fairly uniform throughout the year. See Note 13 of the Notes to
Consolidated Financial Statements.
11
LIQUIDITY AND CAPITAL RESOURCES
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable and positive cash flow from operations and funds
available under various loan agreements have been sufficient to finance the
operations and capital expenditures of the Company. Cash generated from
operating activities was $33.6 million and $43.5 million for the years ended
December 31, 1996 and 1995, respectively. Funds restricted as to the Company's
use (primarily premiums held as fiduciary funds) have not been included in
determining the Company's liquidity.
In February, 1993, the Company entered into a $20 million unsecured revolving
credit agreement (the "Credit Agreement") with two banks. As provided for in an
amendment effective in October, 1996, the loan maturity date has been extended
and loans under the Credit Agreement are repayable no later than June 30, 2001,
and bear floating interest rates over the term of the loan. The Company
recognized a gain of $656,000 in closing out the interest rate exchange
agreements related to the repayment of a loan under the agreement in 1994. The
Credit Agreement remains in effect and as of December 31, 1996, there are no
borrowings currently existing under this agreement.
The Company also has two term loan agreements (the "Term Loan Agreements")
that have outstanding balances of $1.3 million and $1.0 million at December 31,
1996. Loans under the Term Loan Agreements are repayable in equal annual
installments no later than January 11, 1998, and June 15, 1998, respectively,
and bear interest rates over the terms of the loans of 6.64% and 6.30%,
respectively.
The Credit Agreement and Term Loan Agreements require the maintenance of
certain financial requirements. The Company is currently in compliance with
these requirements.
The Company has line of credit facilities of $27.5 million which expire on
April 30, 1997. As of December 31, 1996, $10.0 million in short-term borrowings
existed under these facilities. These borrowings were used to finance expanded
investment activity. No borrowings existed at December 31, 1995.
The Company paid $17.5 million in cash dividends on its common stock in 1996.
The Company's dividend policy is determined by the Board of Directors and
payments are fixed after considering the Company's available cash from earnings
and its known or anticipated cash needs. In each quarter of 1996, the Company's
Board of Directors declared a dividend of $ .29 per share which is $.04 or 16%
greater than each quarterly dividend in 1995. In January, 1997, the Company
announced a first quarter dividend of $.31 per share, a 7% increase over the
quarterly dividend in 1996.
Net capital expenditures for fixed assets amounted to $10.1 million, $10.3
million and $7.5 million in 1996, 1995 and 1994, respectively. In 1997, the
Company intends to make additional capital improvements of approximately $11.0
million to upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
1997, to repurchase its common stock. Under the plan, the Company repurchased
645,000 shares at a cost of $21.3 million, 437,000 shares at a cost of $15.1
million and 1.4 million shares at a cost of $43.8 million in 1996, 1995 and
1994, respectively. The repurchases were funded entirely by internally
generated funds and are held for reissuance in connection with exercises of
options under its stock option plans. Under the provisions of the plan, the
Company is authorized to repurchase approximately 290,000 additional shares
through June 30, 1997. The Company is under no commitment or obligation to
repurchase any particular amount of common stock and at its discretion may
suspend the repurchase plan at any time.
The Company believes that internally generated funds will continue to be
sufficient to meet the Company's foreseeable cash needs, including non-
operating cash disbursements such as anticipated dividends, capital
expenditures and repayment of borrowings if the Company so determines.
Due to changes in the United States federal income tax laws effective in
1994, the Company began providing for U.S. income taxes on the undistributed
earnings of its foreign subsidiaries. The Company has not provided for U.S.
income taxes on these undistributed earnings accumulated prior to 1994 ($19.2
million), which are considered permanently invested outside the United States.
See Note 11 of the Notes to Consolidated Financial Statements. Although not
available for domestic needs, the undistributed earnings generated by certain
foreign subsidiaries referred to above may be used to finance foreign
operations and acquisitions.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGES
-----
Consolidated Financial Statements:
Consolidated Statement of Earnings................................... 13
Consolidated Balance Sheet........................................... 14
Consolidated Statement of Cash Flows................................. 15
Consolidated Statement of Stockholders' Equity....................... 16
Notes to Consolidated Financial Statements.................... 17 through 27
Management's Report..................................................... 28
Report of Independent Auditors.......................................... 29
13
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
OPERATING RESULTS
Revenues:
Commissions....................................... $261,471 $255,914 $237,163
Fees.............................................. 171,515 161,868 143,238
Investment income and other....................... 23,693 21,748 13,571
-------- -------- --------
Total revenues.................................. 456,679 439,530 393,972
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 239,455 231,716 210,061
Other operating expenses.......................... 147,825 139,432 125,059
-------- -------- --------
Total expenses.................................. 387,280 371,148 335,120
-------- -------- --------
Earnings before income taxes....................... 69,399 68,382 58,852
Provision for income taxes......................... 23,596 25,837 21,686
-------- -------- --------
Net earnings.................................... $ 45,803 $ 42,545 $ 37,166
======== ======== ========
Net earnings per common and common equivalent
share............................................. $ 2.63 $ 2.47 $ 2.16
Dividends declared per common share................ $ 1.16 $ 1.00 $ .88
Weighted average number of common and common
equivalent shares outstanding..................... 17,775 17,254 17,189
See accompanying notes.
14
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
ASSETS
------
Current assets:
Cash and cash equivalents................................... $ 56,990 $ 58,849
Restricted cash............................................. 87,224 95,388
Premiums and fees receivable................................ 237,640 226,675
Investment strategies--trading.............................. 53,409 46,123
Other....................................................... 28,677 22,448
-------- --------
Total current assets.................................... 463,940 449,483
Marketable securities--available for sale...................... 36,881 41,712
Deferred income taxes and other noncurrent assets.............. 52,509 42,360
Fixed assets................................................... 79,285 72,352
Accumulated depreciation and amortization...................... (53,284) (47,657)
-------- --------
Net fixed assets........................................ 26,001 24,695
Intangible assets--net......................................... 11,093 7,581
-------- --------
$590,424 $565,831
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Premiums payable to insurance companies..................... $323,867 $321,060
Accrued salaries and bonuses................................ 14,922 13,648
Accounts payable and other accrued liabilities.............. 68,170 60,174
Unearned fees............................................... 13,043 13,586
Income taxes payable........................................ 4,954 10,619
Other....................................................... 19,786 7,225
-------- --------
Total current liabilities............................... 444,742 426,312
Other noncurrent liabilities................................... 11,152 14,010
Stockholders' equity:
Common stock--issued and outstanding 16,293 shares in 1996
and
16,365 shares in 1995...................................... 16,293 16,365
Capital in excess of par value.............................. 2,140 --
Retained earnings........................................... 115,208 109,110
Unrealized gain on available for sale securities--net of
income taxes............................................... 889 34
-------- --------
Total stockholders' equity.............................. 134,530 125,509
-------- --------
$590,424 $565,831
======== ========
See accompanying notes.
15
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings................................. $ 45,803 $ 42,545 $ 37,166
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net (gain) loss on investments........... (3,928) (282) 3,042
Depreciation and amortization............ 9,774 10,172 7,890
Decrease (increase) in restricted cash... 8,164 (5,335) 16,229
Increase in premiums receivable.......... (6,829) (22,203) (19,011)
Increase in premiums payable............. 2,807 23,902 9,643
(Increase) decrease in trading
investments--net........................ (4,128) (2,353) 26,811
(Increase) decrease in other current
assets.................................. (6,484) (1,731) 3,123
Increase in accrued salaries and bonuses. 1,274 1,278 2,148
Increase in accounts payable and other
accrued liabilities..................... 7,127 9,612 7,776
(Decrease) increase in income taxes
payable................................. (5,665) (1,381) 1,866
Decrease in deferred income taxes........ (2,660) (1,317) (5,102)
Other.................................... (11,650) (9,389) (7,918)
-------- -------- --------
Net cash provided by operating
activities.......................... 33,605 43,518 83,663
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities........... (23,679) (21,918) (28,409)
Proceeds from sales of marketable securities. 28,747 20,078 30,527
Proceeds from maturities of marketable
securities.................................. 1,958 2,213 2,224
Additions to fixed assets.................... (10,055) (10,299) (7,537)
Other........................................ (4,362) 375 316
-------- -------- --------
Net cash used by investing
activities.......................... (7,391) (9,551) (2,879)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 7,966 7,044 3,141
Tax benefit from issuance of common stock...... 1,955 1,837 747
Repurchases of common stock.................... (21,290) (15,068) (43,843)
Dividends paid................................. (17,530) (14,666) (12,690)
Retirement of long-term debt................... (1,130) (1,130) (24,776)
Borrowings on line of credit facilities........ 10,000 -- --
Equity transactions of pooled companies prior
to dates of acquisition....................... (8,044) (3,172) (3,145)
-------- -------- --------
Net cash used by financing activities...... (28,073) (25,155) (80,566)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (1,859) 8,812 218
Cash and cash equivalents at beginning of year... 58,849 50,037 49,819
-------- -------- --------
Cash and cash equivalents at end of year......... $56,990 $ 58,849 $ 50,037
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 626 $ 478 $ 1,895
Income taxes paid.............................. $ 25,674 $ 22,027 $ 20,315
See accompanying notes.
16
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED
CAPITAL GAIN (LOSS)
COMMON STOCK IN EXCESS ON AVAILABLE
--------------- OF RETAINED FOR SALE
SHARES AMOUNT PAR VALUE EARNINGS SECURITIES
------ ------- --------- -------- ------------
(IN THOUSANDS)
Balance at December 31, 1993
as previously reported..... 16,037 $16,037 $ 8,110 $ 94,949 $ --
Acquisition of pooled
companies................. 939 939 -- 5,976 --
------ ------- ------- -------- ------
Balance at December 31, 1993
as restated................ 16,976 16,976 8,110 100,925 --
Net earnings............. -- -- -- 37,166 --
Cash dividends declared
on common stock......... -- -- -- (13,209) --
Common stock issued under
stock option plans...... 171 171 2,970 -- --
Tax benefit from issuance
of common stock......... -- -- 747 -- --
Common stock repurchases. (1,392) (1,392) (11,827) (30,624) --
Common stock issued in
three pooling
acquisitions............ 316 316 -- -- --
Equity transactions of
pooled companies prior
to dates of acquisition. -- -- -- (3,145) --
Cumulative effect of
accounting change, net
of taxes of $970........ -- -- -- -- 1,456
Change in unrealized gain
(loss), net of taxes of
$2,899.................. -- -- -- -- (4,391)
------ ------- ------- -------- ------
Balance at December 31,
1994....................... 16,071 16,071 -- 91,113 (2,935)
Net earnings............. -- -- -- 42,545 --
Cash dividends declared
on common stock......... -- -- -- (15,270) --
Common stock issued under
stock option plans...... 356 356 6,688 -- --
Tax benefit from issuance
of common stock......... -- -- 1,837 -- --
Common stock repurchases. (437) (437) (8,525) (6,106) --
Common stock issued in
seven pooling
acquisitions............ 375 375 -- -- --
Equity transactions of
pooled companies prior
to dates of acquisition. -- -- -- (3,172) --
Change in unrealized gain
(loss), net of taxes of
$1,951.................. -- -- -- -- 2,969
------ ------- ------- -------- ------
Balance at December 31,
1995....................... 16,365 16,365 -- 109,110 34
Net earnings............. -- -- -- 45,803 --
Cash dividends declared
on common stock......... -- -- -- (18,399) --
Common stock issued under
stock option plans...... 398 398 7,568 -- --
Tax benefit from issuance
of common stock......... -- -- 1,955 -- --
Common stock repurchases. (645) (645) (7,383) (13,262) --
Common stock issued in
three pooling
acquisitions............ 175 175 -- -- --
Equity transactions of
pooled companies prior
to dates of acquisition. -- -- -- (8,044) --
Change in unrealized gain
(loss), net of taxes of
$571.................... -- -- -- -- 855
------ ------- ------- -------- ------
Balance at December 31,
1996....................... 16,293 $16,293 $ 2,140 $115,208 $ 889
====== ======= ======= ======== ======
See accompanying notes.
17
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Arthur J. Gallagher & Co. (the Company) provides insurance broker and risk
management services to a wide variety of commercial, industrial, institutional
and governmental organizations. Commission revenue is principally generated
through the negotiation and placement of insurance for its clients. Fee revenue
is generated by providing other risk management services including claims
management, information management, risk control services and appraisals in
either the property/casualty market or human resource, employee benefit market.
The Company operates through approximately 150 offices throughout the United
States and six countries abroad.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and all subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have been made
to the prior years' financial statements in order to conform to the current
year presentation.
Revenue recognition
Commission income is generally recognized as of the effective date of
insurance policies except for commissions on installment premiums which are
recognized periodically as billed. Contingent commissions are recognized when
received. Fee income is recognized ratably as services are rendered. The income
effects of subsequent premium and fee adjustments are recorded when the
adjustments become known. Premiums and fees receivable are net of allowance for
doubtful accounts of $889,000 and $729,000 at December 31, 1996 and 1995,
respectively.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Such estimates and assumptions could change in the
future as more information becomes known which could impact the amounts
reported and disclosed herein.
Consolidated statement of cash flows
Short-term investments, consisting principally of commercial paper and
certificates of deposit which have a maturity of ninety days or less at date of
purchase, are considered cash equivalents.
Premium trust funds
Premiums collected from insureds but not yet remitted to insurance carriers
are restricted as to use by laws in certain states and foreign jurisdictions in
which the Company's subsidiaries operate. Additionally, the Company's United
Kingdom subsidiaries are required by Lloyd's of London to meet certain
liquidity requirements.
Marketable securities
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." The standard requires that
securities designated as available for sale be carried at fair value, with
unrealized gains and losses, less
18
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
related deferred income taxes, excluded from earnings and reported as a
separate component of stockholders' equity. In addition, securities designated
as trading are required to be carried at fair value, with unrealized gains and
losses included in the statement of earnings. Previously, the Company carried
these investments at either the lower of cost or fair value, or at amortized
cost. As of January 1, 1994, the Company adopted the provisions of the standard
for investments held as of or acquired after that date. In accordance with SFAS
115, prior period financial statements have not been restated to reflect the
change in accounting principle. The cumulative effect as of January 1, 1994 of
adopting SFAS 115 increased the opening balance of stockholders' equity by
$1,456,000 (net of deferred income taxes of $970,000) to reflect the net
unrealized holding gains on securities classified as available for sale
previously carried at the lower of cost or fair value, or at amortized cost.
There was no cumulative effect on net earnings as a result of the adoption of
SFAS 115 because the securities classified as trading were carried as a current
asset and had a fair value below cost at January 1, 1994. Accordingly, such
unrealized losses were recorded in prior period earnings.
Marketable securities are considered available for sale and consist primarily
of preferred and common stocks. Gains and losses are recognized in income when
realized using the specific identification method. The fair value for
marketable securities is based on quoted market prices.
Investment strategies are considered trading securities and consist primarily
of limited partnerships which invest in common stocks. Fair value is determined
by reference to the fair value of the underlying common stocks which is based
on quoted market prices.
Fixed assets
Fixed assets are carried at cost. Furniture and equipment with a cost of
$71,108,000 at December 31, 1996 ($64,414,000 at December 31, 1995) are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements with a cost of $8,177,000 at December 31,
1996 ($7,938,000 at December 31, 1995) are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
lease terms.
Intangible assets
Intangible assets consist primarily of the excess of cost over the value of
net tangible assets of acquired businesses and are amortized principally over
forty years using the straight-line method. Accumulated amortization at
December 31, 1996 was $6,316,000 ($7,234,000 at December 31, 1995).
Earnings per share
Earnings per share are computed based on the weighted average number of
common and common equivalent shares outstanding during the respective period.
Common equivalent shares include incremental shares from dilutive stock options
since the date of grant using the treasury stock method. There is no material
difference between primary and fully diluted per share amounts.
Stock based compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
options granted to employees.
19
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
Poolings of interests
In 1996, the Company acquired substantially all the net assets of five
insurance brokerage firms and one investigative services company in exchange
for 1,115,000 shares of its common stock. In 1995, the Company acquired
substantially all the net assets of nine insurance brokerage firms in exchange
for 723,000 shares of its common stock. These acquisitions were accounted for
as poolings of interests and, except for three of the 1996 acquisitions and
seven of the 1995 acquisitions whose results were not significant, the
financial statements for all periods prior to the acquisition dates have been
restated to include the operations of these companies.
The following summarizes the restatement to reflect the 1996 acquisitions:
ATTRIBUTABLE TO
ARTHUR J. GALLAGHER POOLED COMPANIES AS RESTATED
------------------- ---------------- -----------
(IN THOUSANDS)
1995
- - ----
Revenues....................... $416,006 $23,524 $439,530
Net earnings................... 41,491 1,054 42,545
======== ======= ========
1994
- - ----
Revenues....................... $370,339 $23,633 $393,972
Net earnings................... 34,405 2,761 37,166
======== ======= ========
In 1996, the Company also acquired a majority equity interest in a risk
management company, which was accounted for as a purchase.
3. MARKETABLE SECURITIES
The following is a summary of available for sale marketable securities:
COST OR GROSS GROSS FAIR
DECEMBER 31, 1996 AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
- - ----------------- -------------- ---------------- ----------------- -------
(IN THOUSANDS)
Preferred stocks..... $23,446 $1,126 $ 434 $24,138
Fixed maturities..... 4,962 116 234 4,844
Common stocks........ 6,991 1,542 634 7,899
------- ------ ------ -------
$35,399 $2,784 $1,302 $36,881
======= ====== ====== =======
DECEMBER 31, 1995
- - -----------------
Preferred stocks..... $25,111 $ 996 $ 447 $25,660
Fixed maturities..... 5,695 119 479 5,335
Common stocks........ 10,850 884 1,017 10,717
------- ------ ------ -------
$41,656 $1,999 $1,943 $41,712
======= ====== ====== =======
The gross realized gains on sales of marketable securities totaled
$1,652,000, $1,079,000 and $2,004,000 for the years ended December 31, 1996,
1995, and 1994, respectively. The gross realized losses totaled $881,000,
$1,918,000 and $312,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Substantially all fixed maturity securities mature in 2000 or later. Actual
maturities may differ from contractual maturities because the issuers of the
securities may have the right to call or prepay obligations.
The net unrealized gains (losses) on investment strategies included in income
amounted to $3,928,000 in 1996, ($171,000) in 1995, and $83,000 in 1994.
20
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1996, securities sold under agreements to repurchase the
identical securities are collateralized by government backed small business
administration loans and government securities with a carrying value of
$23,034,000 and a fair value of $23,262,000. The securities collateralizing the
agreements were held by two primary dealers. At December 31, 1995, these
securities had a carrying value of $20,071,000 and a fair value of $20,253,000.
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------
1996 1995
------ ------
(IN
THOUSANDS)
6.64% unsecured term note, payable in annual installments of
$630............................................................ $1,260 $1,890
6.30% unsecured term note, payable in annual installments of
$500............................................................ 1,000 1,500
------ ------
2,260 3,390
Less current portion............................................. 1,130 1,130
------ ------
$1,130 $2,260
====== ======
Terms of the loan agreements include various covenants which require the
Company to maintain specified levels of tangible net worth and restrict the
amount of payments on certain expenditures.
Maturities of long-term debt total $1,130,000 for 1997 and $1,130,000 for
1998.
In 1994, the Company retired its $20 million variable-rate (based on LIBOR
plus .4%) unsecured revolving credit agreement that was due in 1998. In
connection with the retirement, the Company also recognized a gain of $656,000
on the settlement of interest rate exchange agreements that had been entered
into in 1993 to fix the rate of interest payable on the revolving credit
agreement. The credit agreement remains in effect and expires on June 30, 2001.
As of December 31, 1996, there were no borrowings outstanding under this
agreement.
The Company also has line of credit facilities of $27,500,000 which expire on
April 30, 1997. Short-term borrowings under these facilities totaled
$10,000,000 at December 31, 1996. No borrowings existed under these facilities
at December 31, 1995. The weighted average interest rate on short-term
borrowings during 1996 was 6.875%.
6. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN
Capital Stock
The table below summarizes certain information about the Company's capital
stock at December 31:
1996 1995
--------------------- -----------------
AUTHORIZED PAR AUTHORIZED
CLASS PAR VALUE SHARES VALUE SHARES
- - ----- --------- ----------- ------ ----------
Preferred stock........................ No par 1,000,000 No par 1,000,000
Common stock........................... $ 1.00 100,000,000 $ 1.00 50,000,000
Stockholders' Rights Plan
Non-voting Rights, authorized by the Board of Directors on March 10, 1987 and
approved by stockholders on May 12, 1987, were distributed May 12, 1987 as a
dividend to holders of the Company's common stock at the rate of one Right for
each common share held. Under certain conditions, each Right may be exercised
to
21
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purchase one share of common stock at an exercise price of $100. The Rights
become exercisable and transferable apart from the common stock after a public
announcement that a person or group has acquired 20% or more of the common
stock or after commencement or public announcement of a tender offer for 30% or
more of the common stock. If the Company is acquired in a merger or business
combination, each Right may be exercised to purchase the common stock of the
surviving company having a market value of twice the exercise price of each
Right. The Rights Plan was amended in 1996 to extend the expiration of the
Rights to May 12, 2007. The Rights may be redeemed by the Company at 5 cents
per Right at any time prior to the public announcement of the acquisition of
20% of the common stock. At December 31, 1996, 25,000,000 shares of common
stock were reserved for potential exercise of the Rights.
7. STOCK OPTION PLANS
The Company has incentive and nonqualified stock option plans for officers
and key employees of the Company and its subsidiaries. The options are granted
at the fair market value of the underlying shares at the date of grant. Options
granted under the nonqualified plan become exercisable at the rate of 10% per
year beginning the calendar year after the date of grant or earlier in the
event of death, disability or retirement. Options expire ten years from the
date of grant, or earlier in the event of termination of the employee. No
options may be granted under the plan ten years after its inception.
In addition, the Company has a non-employee director's stock option plan
which currently authorizes 200,000 shares for grant, with Discretionary Options
granted at the direction of the Option Committee and Retainer Options granted
in lieu of their annual retainer. Discretionary Options shall be exercisable at
such rates as shall be determined by the Committee on the date of grant.
Retainer Options shall be cumulatively exercisable at the rate of 25% of the
total Retainer Option at the end of each full fiscal quarter succeeding the
date of grant. The excess of fair market value at the date of grant over the
option price for these nonqualified stock options is considered compensation
and is charged against earnings ratably over the vesting period.
The Company also has an incentive stock option plan for its officers and key
employees resident in the United Kingdom. The United Kingdom plan is
essentially the same as the Company's domestic employee stock option plans,
with certain modifications to comply with United Kingdom law and to provide
potentially favorable tax treatment for grantees resident in the United
Kingdom.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for stock options granted
to employees. Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," requires disclosure of pro forma
information regarding net earnings and earnings per share, using pricing models
to estimate the fair value of stock option grants. Had compensation expense for
the Company's stock option plans been determined based on the estimated fair
value at the date of grant consistent with the methodology prescribed under
SFAS 123, approximate net earnings and earnings per share would have been as
follows:
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Pro forma net earnings.............................. $ 45,159 $ 42,292
Pro forma net earnings per common and common equiva-
lent share......................................... $ 2.59 $ 2.45
22
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of the pro forma disclosures, the estimated fair values of the
option grants are amortized to expense over the options' expected lives. The
fair value of options at the date of grant was estimated using the Black-
Scholes option pricing model with the following weighted-average assumptions:
1996 1995
---- ----
Dividend yield..................................................... 2.9% 2.9%
Risk-free interest rate............................................ 6.3% 6.2%
Volatility......................................................... 24.1% 24.5%
Expected life (years).............................................. 8.0 8.0
Transactions related to all stock options are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT EXERCISE PRICE DATA)
Beginning balance............... 4,770 $25.87 4,614 $24.29 3,997 $22.90
Granted......................... 714 32.05 626 34.49 870 29.36
Exercised....................... (398) 20.02 (356) 19.80 (171) 18.22
Canceled........................ (176) 28.44 (114) 27.97 (82) 23.15
----- ------ ----- ------ ----- ------
Ending balance.................. 4,910 $27.18 4,770 $25.87 4,614 $24.29
===== ====== ===== ====== ===== ======
Exercisable at end of year...... 1,728 1,513 1,283
===== ===== =====
Options with respect to 1,500,000 shares were available for grant at December
31, 1996.
Information regarding options outstanding and exercisable at December 31,
1996 is summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
NUMBER LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------- ----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT EXERCISE PRICE DATA)
$ 7.13 - $21.25........ 1,541 3.4 $19.01 848 $18.47
22.00 - 30.13.......... 1,240 6.0 26.14 487 24.91
30.25 - 33.75.......... 1,566 7.8 32.69 332 33.16
34.25 - 39.13.......... 563 8.5 34.50 61 34.44
----- --- ------ ----- ------
$ 7.13 - $39.13........ 4,910 6.0 $27.18 1,728 $23.67
===== === ====== ===== ======
8. RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan which covers
substantially all domestic employees who have attained a specified age and one
year of employment. Benefits under the plan are based on years of service and
salary history. The Company's contributions to the plan satisfy the minimum
funding requirements of ERISA. Plan assets consist primarily of common stocks
and bonds invested under the terms of a group annuity contract managed by a
life insurance company.
23
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for the defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers'
Accounting for Pensions." The difference beteween the present value of the
projected benefit obligation at the date of adoption of SFAS 87 and the fair
value of plan assets at that date is being amortized on a straight-line basis
over the average remaining service period of employees expected to receive
benefits.
The following table sets forth the plan's estimated funded status and amounts
recognized in the Company's consolidated financial statements:
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
Actuarial present value of accumulated benefit obligation:
Vested...................................................... $30,115 $24,775
Nonvested................................................... 6,039 6,027
------- -------
$36,154 $30,802
======= =======
Projected benefit obligation................................ $52,931 $45,143
Assets at fair value........................................ 39,045 31,900
------- -------
Projected benefit obligation in excess of plan assets....... 13,886 13,243
------- -------
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions.......... (287) (1,473)
Unamortized portion of net obligation at January 1.......... (555) (611)
------- -------
Unfunded accrued pension cost............................... $13,044 $11,159
======= =======
Pension expense for the plan consists of the following:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Service cost--benefits earned during the year..... $ 5,790 $ 5,027 $ 5,400
Interest cost on projected benefit obligation..... 3,322 2,775 2,467
Actual return on plan assets...................... (3,561) (5,283) (158)
Net amortization and deferral..................... 722 3,194 (1,366)
-------- -------- --------
Net pension expense............................... $ 6,273 $ 5,713 $ 6,343
======== ======== ========
The following assumptions were used in determining the actuarial present
value of the plan's projected benefit obligation:
DECEMBER 31,
--------------
1996 1995 1994
---- ---- ----
Discount rate.................................................... 7.5% 7.5% 8.0%
Rate of increase in future compensation levels................... 6.5% 6.5% 7.0%
Expected long-term rate of return on assets...................... 9.0% 9.0% 9.0%
The Company has a contributory savings and thrift plan covering the majority
of its employees. Company contributions are at the discretion of the Company's
Board of Directors and may not exceed the maximum amount deductible for federal
income tax purposes. The Company contributed $2,396,000, $1,035,000, and
$879,000 in 1996, 1995 and 1994, respectively.
24
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also has a foreign defined contribution plan which provides for
basic contributions by the Company and voluntary contributions by employees
which are matched 100% by the Company, up to a maximum of 5% of salary, as
defined. Net expense for foreign retirement plans amounted to $1,383,000 in
1996, $1,703,000 in 1995 and $1,611,000 in 1994.
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In 1992, the Company amended its health benefits plan to eliminate retiree
coverage, except for current retirees and those employees who had already
attained a specified age and length of service. The retiree health plan is
contributory, with contributions adjusted annually, and is funded on a pay-as-
you-go basis.
The components of the net periodic postretirement benefit cost include the
following:
YEARS ENDED
DECEMBER 31,
--------------------
1996 1995 1994
------ ---- ------
(IN THOUSANDS)
Service cost............................................. $ -- $-- $ --
Interest cost............................................ 717 701 828
Amortization of transition obligation..................... 512 512 512
Amortization of gain...................................... (209) (379) --
------ ---- ------
$1,020 $834 $1,340
====== ==== ======
The following table sets forth the estimated funded status and amounts
recognized in the Company's consolidated financial statements:
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 5,276 $ 3,939
Active eligible employees................................... 4,836 5,968
------- -------
10,112 9,907
Unrecognized transition obligation............................ (8,188) (8,700)
Unrecognized gain............................................. 1,611 1,644
------- -------
Accrued postretirement benefit cost........................... $ 3,535 $ 2,851
======= =======
The assumed healthcare cost trend rate used for the next year is 8.5%,
scaling down to 4.5% after 12 years. A 1% increase in the assumed healthcare
cost trend rate would increase the accumulated postretirement benefit
obligation by $1,341,000 at December 31, 1996 and would increase the net
periodic postretirement benefit cost for 1996 by $93,000.
The discount rate used to measure the accumulated postretirement benefit
obligation was 7.5% at December 31, 1996 and 1995. The transition obligation is
being amortized over 20 years.
10. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that none of the litigation will have a
material effect on the Company's financial position or operating results.
25
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company generally operates in leased premises. Certain office space
leases have options permitting renewals for additional periods. In addition to
minimum fixed rentals, a number of leases contain escalation clauses related to
increases in the cost of living in future years.
Minimum aggregate rental commitments at December 31, 1996 under noncancelable
operating leases having an initial term of more than one year are as follows:
TOTAL
--------------
(IN THOUSANDS)
1997............................................................ $ 24,939
1998............................................................ 21,782
1999............................................................ 19,422
2000............................................................ 15,287
2001............................................................ 12,050
Subsequent years................................................ 70,275
--------
$163,755
========
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $28,236,000 in 1996,
$27,520,000 in 1995 and $26,112,000 in 1994.
11. INCOME TAXES
YEARS ENDED DECEMBER
31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Earnings before income taxes consist of:
Domestic........................................... $65,200 $64,981 $56,665
Foreign............................................ 4,199 3,401 2,187
------- ------- -------
$69,399 $68,382 $58,852
======= ======= =======
Provision for income taxes consists of:
Federal--
Current.......................................... $19,953 $22,355 $21,327
Deferred......................................... (2,911) (2,734) (4,639)
------- ------- -------
17,042 19,621 16,688
------- ------- -------
State and local--
Current.......................................... 5,335 5,295 5,023
Deferred......................................... (415) (384) (637)
------- ------- -------
4,920 4,911 4,386
------- ------- -------
Foreign--
Current.......................................... 729 1,524 (488)
Deferred......................................... 905 (219) 1,100
------- ------- -------
1,634 1,305 612
------- ------- -------
Total provision...................................... $23,596 $25,837 $21,686
======= ======= =======
26
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows:
1996 1995
------- -------
(IN THOUSANDS)
Deferred tax liabilities:
Leveraged leases.............................................. $ 1,324 $ 2,760
Unrealized investment gains................................... 592 22
Other......................................................... 4,555 4,385
------- -------
Deferred tax liabilities.................................... 6,471 7,167
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits....... 12,620 11,390
Accrued liabilities........................................... 11,132 9,495
Other......................................................... 1,040 970
------- -------
Total deferred tax assets................................... 24,792 21,855
Valuation allowance for deferred tax assets................. -- --
------- -------
Deferred tax assets......................................... 24,792 21,855
------- -------
Net deferred tax assets......................................... $18,321 $14,688
======= =======
A reconciliation of the provision for income taxes with the U.S. federal
income tax rate is as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
Federal statutory rate......... $24,290 35.0 $23,934 35.0 $20,598 35.0
State income taxes--net of
federal....................... 3,148 4.5 3,428 5.0 2,719 4.6
Pre-acquisition earnings of
pooled companies taxed to
previous owners............... (468) (0.7) (1,065) (1.6) (1,534) (2.6)
Foreign taxes.................. 208 0.3 215 0.3 433 0.7
General business credits....... (603) (0.8) (778) (1.1) (771) (1.3)
Other--net..................... (2,979) (4.3) 103 0.2 241 .4
------- ---- ------- ---- ------- ----
$23,596 34.0 $25,837 37.8 $21,686 36.8
======= ==== ======= ==== ======= ====
Due to changes in the U.S. federal income tax laws effective in 1994, the
Company began providing for U.S. income taxes on the undistributed earnings of
its foreign subsidiaries. Prior to 1994, the Company did not provide for U.S.
income taxes on the undistributed earnings ($19,200,000 at December 31, 1996)
of certain foreign subsidiaries which are considered permanently invested
outside of the U.S. The amount of unrecognized deferred tax liability on these
undistributed earnings is $5,000,000.
27
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
12. FOREIGN OPERATIONS
Financial data by geographic area of operations are as follows:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
Revenues:
Commissions and fees
United States................................ $ 406,520 $390,547 $353,615
Foreign, principally United Kingdom.......... 26,466 27,235 26,786
--------- -------- --------
432,986 417,782 380,401
Investment income.............................. 23,693 21,748 13,571
--------- -------- --------
$ 456,679 $439,530 $393,972
========= ======== ========
Earnings before taxes:
Operating profit (loss)
United States................................ $ 72,062 $ 70,122 $ 64,577
Foreign, principally United Kingdom.......... 48 (1,285) (31)
--------- -------- --------
72,110 68,837 64,546
General corporate expense, including interest
expense and investment income................. 2,711 455 5,694
--------- -------- --------
$ 69,399 $ 68,382 $ 58,852
========= ======== ========
DECEMBER 31,
------------------
1996 1995
-------- --------
Identifiable assets:
United States............................................ $279,759 $264,506
Foreign, principally United Kingdom...................... 133,368 142,774
-------- --------
413,127 407,280
Corporate................................................ 177,297 158,551
-------- --------
$590,424 $565,831
======== ========
The consolidated financial statements include liabilities of $107,053,000 at
December 31, 1996 ($116,866,000 at December 31, 1995) after elimination of
intercompany balances applicable to foreign operations.
Exchange gains (losses) were approximately $253,000 in 1996, $85,000 in 1995
and ($81,000) in 1994.
13. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1996 and 1995 were as follows:
1ST 2ND 3RD 4TH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
1996 DATA)
Total revenues............................ $106,821 $108,618 $121,696 $119,544
Earnings before income taxes.............. 14,579 12,307 25,520 16,993
Net earnings.............................. 8,944 7,533 18,057 11,269
Net earnings per common and common
equivalent share......................... .51 .44 1.03 .65
1995
Total revenues............................ $103,216 $100,883 $118,362 $117,069
Earnings before income taxes.............. 12,603 9,784 26,179 19,816
Net earnings.............................. 7,633 5,786 16,372 12,754
Net earnings per common and common
equivalent share......................... .45 .34 .94 .74
28
MANAGEMENT'S REPORT
The Management of Arthur J. Gallagher & Co. is responsible for the
preparation and integrity of the consolidated financial statements and the
related financial comments appearing in this annual report. The financial
statements were prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's best estimates and
judgments. Other financial information presented in the annual report is
consistent with the financial statements.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed as authorized and are recorded and reported properly. This system
of controls is based upon written policies and procedures, appropriate
divisions of responsibility and authority, careful selection and training of
personnel and the utilization of an internal audit program and staff. Policies
and procedures prescribe that the Company and all employees are to maintain the
highest ethical standards and that business practices throughout the world are
to be conducted in a manner which is above reproach.
Ernst & Young LLP, independent auditors, has audited the Company's financial
statements and their report is presented herein.
The Board of Directors has an Audit Committee composed entirely of outside
Directors. Ernst & Young LLP has direct access to the Audit Committee and
periodically meets with the Committee to discuss accounting, auditing and
financial reporting matters.
Arthur J. Gallagher & Co.
Itasca, Illinois
January 21, 1997
/s/ J. Patrick Gallagher, Jr.
-------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
/s/ Michael J. Cloherty
-------------------------------------
Michael J. Cloherty
Executive Vice President and
Chief Financial Officer
29
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Arthur J. Gallagher & Co.
We have audited the accompanying consolidated balance sheet of Arthur J.
Gallagher & Co. as of December 31, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arthur J.
Gallagher & Co. at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1994, the
Company changed its method of accounting for certain investments in debt and
equity securities.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
January 21, 1997
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and nominees for directors of the Company is
included under the caption entitled "Election of Directors" in the Proxy
Statement dated March 28, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of the Company's directors and
executive officers is included in the Proxy Statement dated March 28, 1997
under the caption entitled "Compensation of Executive Officers and Directors,"
and is incorporated herein by reference; provided, however, the report of the
Compensation Committee on executive compensation and the stock performance
graph shall not be deemed to be incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of the Company is included under the
caption entitled "Principal Holders of Securities" in the Proxy Statement
dated March 28, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements of Arthur J. Gallagher & Co.
consisting of:
(a) Consolidated Statement of Earnings for each of the three years
in the period ended December 31, 1996.
(b) Consolidated Balance Sheet as of December 31, 1996 and 1995.
(c) Consolidated Statement of Cash Flows for each of the three years
in the period ended December 31, 1996.
(d) Consolidated Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 1996.
(e) Notes to Consolidated Financial Statements.
(f) Report of Independent Auditors.
2. Consolidated Financial Statement Schedules consisting of:
(a) Schedule II--Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or the Notes thereto.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the same exhibit number to
Company's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 1996, File No. 1-9761).
32
3.2 By-Laws of the Company (incorporated by reference to the same
exhibit number to Company's Form S-1 Registration Statement No.
33-10447).
3.3 Rights Agreement between the Company and Bank of America
Illinois (formerly Continental Illinois National Bank and Trust
Company of Chicago) (incorporated by reference to Exhibits 1
and 2 to Company's Form 8-A Registration Statement filed May
12, 1987, File No. 0-13480).
3.4 Assignment and Assumption Agreement of Rights Agreement by and
among Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago), Harris Trust and
Savings Bank and the Company (incorporated by reference to the
same exhibit number to Company's Form S-8 Registration
Statement No. 33-38031).
3.5 Amendment No. 1 to Exhibit 3.3 (incorporated by reference to
the same exhibit number to Company's Form 10-Q Quarterly Report
for the quarterly period ended June 30, 1996, File No. 1-9761).
4.1 Instruments defining the rights of security holders (relevant
portions contained in the Restated Certificate of Incorporation
and By-Laws of the Company and the Rights Agreement in Exhibits
3.1, 3.2, and 3.3, respectively, hereby incorporated by
reference).
4.4 Credit Agreement dated February 16, 1993 (incorporated by
reference to the same exhibit number to the Company's Form 10-K
Annual Report for 1992, File No.
1-9761).
**10.1 Arthur J. Gallagher & Co. Incentive Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form S-1
Registration Statement No. 2-89195).
**10.1.1 Amendment No. 1 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3 to Company's Form S-8 Registration
Statement No. 33-604).
**10.1.2 Amendment No. 2 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3.1 to Company's Form S-8 Registration
Statement No. 33-14625).
**10.2 Arthur J. Gallagher & Co. Nonqualified Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form S-1
Registration Statement No. 2-89195).
**10.2.1 Amendment No. 1 to Exhibit No. 10.2 (incorporated by reference
to Exhibit No. 10.4 to Company's Form S-8 Registration
Statement No. 33-604).
**10.2.2 Amendment No. 2 to Exhibit No. 10.2 (incorporated by reference
to Exhibit No. 10.4.1 to Company's Form S-8 Registration
Statement No. 33-14625).
**10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan and related form of stock option agreement (incorporated
by reference to the same exhibit number to Company's Form 10-K
Annual Report for 1986, File No. 0-13480).
**10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan
(incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 33-22029).
**10.26.1 Amendment No. 1 to Exhibit No. 10.26 (incorporated by reference
to Exhibit No. 10.3 to Company's Form S-8 Registration
Statement No. 33-24251).
**10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan
(incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 33-22029).
**10.27.1 Amendment No. 1 to Exhibit No. 10.27 (incorporated by reference
to Exhibit No. 10.4 to Company's Form S-8 Registration
Statement No. 33-30762).
**10.27.2 Amendment No. 2 to Exhibit No. 10.27 (incorporated by reference
to Exhibit No. 10.5 to Company's Form S-8 Registration
Statement No. 33-38031).
**10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
33
**10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.27.5 Amendment No. 6 to Exhibit 10.27 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 333-06359).
**10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock
Option Plan (incorporated by reference to Exhibit No. 10.1 to
Company's Form S-8 Registration Statement No. 33-30816).
**10.28.1 Amendment No. 1 to Exhibit 10.28 (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report
for 1990, File No. 1-9761).
**10.28.2 Amendment No. 3 to Exhibit No. 10.28 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.28.4 Amendment No. 6 to Exhibit 10.28 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 333-06359).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and Itasca
Center III Limited Partnership, a Texas limited partnership,
dated July 26, 1989 (incorporated by reference to the same
exhibit number to Company's Form 10-K Annual Report for 1989,
File No. 1-9761).
10.7 Letter dated December 31, 1983 from Arthur J. Gallagher & Co.
to Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago) regarding Common
Stock Purchase Financing Program including exhibits thereto and
related letters (incorporated by reference to the same exhibit
number to Company's Form S-1 Registration Statement No. 2-
89195).
10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985
(incorporated by reference to the same exhibit number to
Company's Form 10-K Annual Report for 1985, File No. 0-13480).
**10.10 Board of Directors' Resolution from meeting on January 26, 1984
relating to consulting and retirement benefits for certain
directors (incorporated by reference to the same exhibit number
to Company's Form S-1 Registration Statement No. 2-89195).
**10.11 Form of Indemnity Agreement between the Company and each of its
directors and corporate officers (incorporated by reference to
Attachment A to the Company's Proxy Statement dated April 10,
1987 for its Annual Meeting of Stockholders, File No.
0-13480).
**10.13 Arthur J. Gallagher & Co. Stock Option Agreements dated May 10,
1988 between the Company and each of Robert H. B. Baldwin, Jack
M. Greenberg and James R. Wimmer (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report
for 1988, File No. 1-9761).
*11.0 Statement re: computation of earnings per common and common
equivalent share.
*21.0 Subsidiaries of the Company, including state or other
jurisdiction of incorporation or organization and the names
under which each does business.
*23.1 Consent of Ernst & Young LLP, as independent auditors.
*24.0 Powers of Attorney.
*27.0 Financial Data Schedule.
All other exhibits are omitted because they are inapplicable.
- - --------
*Filed as exhibits to this Form 10-K with the Securities and Exchange
Commission; only Exhibits 11.0, 21.0 and 23.1 are included in this book.
**Such exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to item 601 of
Regulation S-K.
34
(b) Reports on Form 8-K
Not applicable
(c) Safe harbor statement under the private securities litigation reform act
of 1995.
This annual report contains forward looking statements. Forward looking
statements made by or on behalf of the Company are subject to risks and
uncertainties, including but not limited to the following: the Company's
commission revenues are highly dependent on premiums charged by insurers,
which are subject to fluctuation; the property and casualty insurance
industry continues to experience a prolonged soft market despite high
losses; continued low interest rates will reduce income earned on invested
funds; the insurance brokerage and service businesses are extremely
competitive with a number of competitors being substantially larger than
the Company; the alternative insurance market continues to grow; the
Company's revenues vary significantly from quarter to quarter as a result
of the timing of policy renewals and the net effect of new and lost
business production; the general level of economic activity can have a
substantial impact on the Company's renewal business. The Company's ability
to grow has been enhanced through acquisitions, which may or may not be
available on acceptable terms in the future, and which, if consummated, may
or may not be advantageous to the Company. Accordingly, actual results may
differ materially from those set forth in the forward looking statements.
Attention is also directed to other risk factors set forth in documents
filed by the Company with the Securities and Exchange Commission.
35
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THE 21ST DAY OF
MARCH, 1997.
Arthur J. Gallagher & Co.
/s/ J. Patrick Gallagher, Jr.
By___________________________________
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON THE 21ST DAY OF MARCH, 1997 BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES INDICATED.
NAME TITLE
---- -----
*Robert E. Gallagher Chairman and Director
_________________________________________
Robert E. Gallagher
/s/ J. Patrick Gallagher, Jr. President and Director (Chief Executive
___________________________________________ Officer)
J. Patrick Gallagher, Jr.
/s/ Michael J. Cloherty Executive Vice President and Director
___________________________________________ (Chief Financial Officer)
Michael J. Cloherty
/s/ David B. Hoch Controller (Chief Accounting Officer)
___________________________________________
David B. Hoch
*T. Kimball Brooker Director
_________________________________________
T. Kimball Brooker
*John G. Campbell Director
_________________________________________
John G. Campbell
*Jack M. Greenberg Director
___________________________________________
Jack M. Greenberg
*Frank M. Heffernan, Jr. Director
___________________________________________
Frank M. Heffernan, Jr.
*Philip A. Marineau Director
___________________________________________
Philip A. Marineau
*Walter F. McClure Director
___________________________________________
Walter F. McClure
*James R. Wimmer Director
___________________________________________
James R. Wimmer
/s/ Carl E. Fasig
*By: ________________________________
Carl E. Fasig, Attorney-in-Fact
36
SCHEDULE II
ARTHUR J. GALLAGHER & CO.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE ADDITIONS
AT CHARGED BALANCE
BEGINNING TO AT END
OF YEAR EXPENSE ADJUSTMENTS OF YEAR
--------- --------- ----------- -------
Year ended December 31, 1996
Allowance for doubtful accounts..... $ 729 $1,291 $(1,131)(1) $ 889
Amortization of goodwill............ 3,581 312 (474)(4) 3,419
Amortization of expiration lists.... 3,653 649 (1,405)(2) 2,897
Year ended December 31, 1995
Allowance for doubtful accounts..... $ 846 $ 77 $ (194)(1) $ 729
Amortization of goodwill............ 3,266 315 3,581
Amortization of expiration lists.... 3,955 489 (791)(2) 3,653
Year ended December 31, 1994
Allowance for doubtful accounts..... $ 876 $ 2 $ (32)(1) $ 846
Amortization of goodwill............ 2,798 334 134 (3) 3,266
Amortization of expiration lists.... 1,819 589 1,547 (3) 3,955
- - --------
(1) Bad debt write-offs net of recoveries.
(2) Reversal of fully amortized expiration lists.
(3) 1994 acquisitions accounted for as poolings of interests whose results
were not significant and financial statements for all prior periods were
not restated.
(4)Reversal of full amortized goodwill.
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation of the Company (incorporated
by reference to the same exhibit number to Company's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1996, File
No. 1-9761).
3.2 By-Laws of the Company (incorporated by reference to the same
exhibit number to Company's Form S-1 Registration Statement
No. 33-10447).
3.3 Rights Agreement between the Company and Bank of America Illinois
(formerly Continental Illinois National Bank and Trust Company of
Chicago) (incorporated by reference to Exhibits 1 and 2 to
Company's Form 8-A Registration Statement filed May 12, 1987, File
No. 0-13480).
3.4 Assignment and Assumption Agreement of Rights Agreement by and
among Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago), Harris Trust and
Savings Bank and the Company (incorporated by reference to the same
exhibit number to Company's Form S-8 Registration Statement No. 33-
38031).
3.5 Amendment No. 1 to Exhibit 3.3 (incorporated by reference to the
same exhibit number to Company's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 1996, File No. 1-9761).
4.1 Instruments defining the rights of security holders (relevant
portions contained in the Restated Certificate of Incorporation and
By-Laws of the Company and the Rights Agreement in Exhibits 3.1,
3.2, and 3.3, respectively, hereby incorporated by reference).
4.4 Credit Agreement dated February 16, 1993 (incorporated by reference
to the same exhibit number to the Company's Form 10-K Annual Report
for 1992, File No. 1-9761).
**10.1 Arthur J. Gallagher & Co. Incentive Stock Option Plan and related
form of stock option agreement (incorporated by reference to the
same exhibit number to Company's Form S-1 Registration Statement
No. 2-89195).
**10.1.1 Amendment No. 1 to Exhibit No. 10.1 (incorporated by reference to
Exhibit No. 10.3 to Company's Form S-8 Registration Statement No.
33-604).
**10.1.2 Amendment No. 2 to Exhibit No. 10.1 (incorporated by reference to
Exhibit No. 10.3.1 to Company's Form S-8 Registration Statement No.
33-14625).
**10.2 Arthur J. Gallagher & Co. Nonqualified Stock Option Plan and
related form of stock option agreement (incorporated by reference
to the same exhibit number to Company's Form S-1 Registration
Statement No. 2-89195).
**10.2.1 Amendment No. 1 to Exhibit No. 10.2 (incorporated by reference to
Exhibit No. 10.4 to Company's Form S-8 Registration Statement No.
33-604).
**10.2.2 Amendment No. 2 to Exhibit No. 10.2 (incorporated by reference to
Exhibit No. 10.4.1 to Company's Form S-8 Registration Statement No.
33-14625).
**10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan and related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form 10-K Annual
Report for 1986, File No. 0-13480).
**10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan
(incorporated by reference to the same exhibit number to Company's
Form S-1 Registration Statement No. 33-22029).
**10.26.1 Amendment No. 1 to Exhibit No. 10.26 (incorporated by reference to
Exhibit No. 10.3 to Company's Form S-8 Registration Statement No.
33-24251).
**10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan
(incorporated by reference to the same exhibit number to Company's
Form S-1 Registration Statement No. 33-22029).
**10.27.1 Amendment No. 1 to Exhibit No. 10.27 (incorporated by reference to
Exhibit No. 10.4 to Company's Form S-8 Registration Statement No.
33-30762).
**10.27.2 Amendment No. 2 to Exhibit No. 10.27 (incorporated by reference to
Exhibit No. 10.5 to Company's Form S-8 Registration Statement No.
33-38031).
**10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.27.5 Amendment No. 6 to Exhibit 10.27 (incorporated by reference to the
same exhibit number to Company's Form S-8 Registration Statement
No. 333-06359).
**10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock Option
Plan (incorporated by reference to Exhibit No. 10.1 to Company's
Form S-8 Registration Statement No. 33-30816).
**10.28.1 Amendment No. 1 to Exhibit No. 10.28 (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report for
1990, File No. 1-9761).
**10.28.2 Amendment No. 3 to Exhibit No. 10.28 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.28.4 Amendment No. 6 to Exhibit 10.28 (incorporated by reference to the
same exhibit number to Company's Form S-8 Registration Statement
No. 333-06359).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and Itasca Center
III Limited Partnership, a Texas limited partnership, dated July
26, 1989 (incorporated by reference to the same exhibit number to
Company's Form 10-K Annual Report for 1989, File No. 1-9761).
10.7 Letter dated December 31, 1983 from Arthur J. Gallagher & Co. to
Bank of America Illinois (formerly Continental Illinois National
Bank and Trust Company of Chicago) regarding Common Stock Purchase
Financing Program including exhibits thereto and related letters
(incorporated by reference to the same exhibit number to Company's
Form S-1 Registration Statement No. 2-89195).
10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985
(incorporated by reference to the same exhibit number to Company's
Form 10-K Annual Report for 1985, File No. 0-13480).
**10.10 Board of Directors' Resolution from meeting on January 26, 1984
relating to consulting and retirement benefits for certain
directors (incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 2-89195).
**10.11 Form of Indemnity Agreement between the Company and each of its
directors and corporate officers (incorporated by reference to
Attachment A to the Company's Proxy Statement dated April 10, 1987
for its Annual Meeting of Stockholders, File No. 0-13480).
**10.13 Arthur J. Gallagher & Co. Stock Option Agreements dated May 10,
1988 between the Company and each of Robert H. B. Baldwin, Jack M.
Greenberg and James R. Wimmer (incorporated by reference to the
same exhibit number to Company's Form 10-K Annual Report for 1988,
File No. 1-9761).
*11.0 Statement re: computation of earnings per common and common
equivalent share.
*21.0 Subsidiaries of the Company, including state or other jurisdiction
of incorporation or organization and the names under which each
does business.
*23.1 Consent of Ernst & Young LLP, as independent auditors.
*24.0 Powers of Attorney.
*27.0 Financial Data Schedule.
All other exhibits are omitted because they are inapplicable.
- - --------
*Filed herewith.
**Such exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to item 601 of
Regulation S-K.