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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, 1994
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-9761
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ARTHUR J. GALLAGHER & CO.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Two Pierce Place 60143-3141
Itasca, Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (708) 773-3800
---------
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 March 13, 1995 was $461,385,000.
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of March 13, 1995 was 14,987,193.
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, 1995
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<PAGE>
PART I
ITEM 1. BUSINESS.
Arthur J. Gallagher & Co. (the "Registrant") and its subsidiaries (the
Registrant and its subsidiaries are collectively referred to as the "Company"
unless the context otherwise requires) are engaged in providing insurance
brokerage, risk management and related services to clients in the United States
and abroad. The Company's principal activity is the negotiation and placement
of insurance for its clients. The Company also specializes in furnishing risk
management services. Risk management involves assisting clients in analyzing
risks and determining whether proper protection is best obtained through the
purchase of insurance or through retention of all or a portion of those risks
and the adoption of corporate risk management policies and cost-effective loss
control and prevention programs. Risk management services also include claims
management, loss control consulting and property appraisals. The Company
believes that its ability to deliver a comprehensively structured risk
management and brokerage service is one of its major strengths.
The Company operates through a network of approximately 140 offices located
throughout the United States and five abroad. Some of these offices are fully
staffed with sales, marketing, claims and other service personnel; others
function as servicing offices for the brokerage and risk management service
operations of the Company. The Company's international operations include a
Lloyd's broker and affiliated companies in London and facilities in Bermuda,
Paris and Singapore.
The Company was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. The Company's executive offices are located at Two Pierce
Place, Itasca, Illinois 60143, and its telephone number is (708) 773-3800.
The Company has not presented industry segment information as its operations
are predominantly those of insurance brokerage and risk management and other
related insurance services.
BROKERAGE OPERATIONS
The Company places insurance for and services commercial, industrial,
institutional, governmental, religious and personal accounts throughout the
United States and abroad. The Company acts as an agent in soliciting,
negotiating and effecting contracts of insurance through insurance companies
world-wide, and also as a broker in procuring contracts of insurance on behalf
of insureds. Specific coverages include all forms of property and casualty,
marine, employee benefits, pension and life insurance products.
The Company places surplus lines coverages (coverages not available from
insurance companies licensed by the states in which the risks are located) for
various specialized risks. The Company also provides reinsurance services to
its clients.
RISK MANAGEMENT SERVICES
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. In 1962, the Company expanded
the services of its traditional insurance brokerage operations, which included
consulting with respect to risk analysis and coverage requirements, by forming
the predecessor of its wholly-owned subsidiary, Gallagher Bassett Services,
Inc., to provide expanded risk management services, including claims
management, risk control consulting services, information management and
property appraisals offered 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.
<PAGE>
The Company believes that its risk management services are an important
factor in securing new brokerage business and retaining brokerage clients. The
Company also markets these services directly to the client on an unbundled
basis independently of brokerage services in order to capitalize on the
interest in self-insurance created by market conditions. These services include
consulting on a wide range of risk management needs such as toxic waste
disposal, handling of dangerous cargo, workers' compensation, medical cost
containment, substance abuse, employment-related background investigations,
loss prevention, property appraisals, and liability reserve reviews. Such
efforts have contributed substantially to the growth in the Company's fee
revenues.
In connection with its risk management services, the Company provides self-
insurance programs for large institutions, risk sharing pools and associations,
and large commercial and industrial customers. Self-insurance, as administered
by the Company, is a program in which the client assumes a manageable portion
of its insurance risks, usually (although not always) placing the less
predictable and larger loss exposures with an excess carrier. The Company's
offices are staffed to provide services relating to claims, property
appraisals, loss control consulting and computerized record keeping in
administering the clients' programs.
The Company's Gallagher Benefit Services Division specializes in risk
management of human resources through fully insured and self-insured programs.
This division provides employee benefit services in connection with the design,
financing, implementation, administration and communication of compensation and
employee benefit programs (including pension and profit-sharing plans, group
life, health, accident and disability insurance programs and tax deferral
plans), and provides other professional services in connection therewith.
Services are supported by an on-line data processing system provided by an
outside vendor.
MARKETS AND MARKETING
A substantial portion of the commission and fee business of the Company is
derived from institutions, not-for-profit organizations, municipal and other
governmental entities and associations. In addition, the Company's clients
include large United States and multinational corporations engaged in a broad
range of commercial and industrial businesses. The Company also places
insurance for individuals. The Company services its clients through its network
of approximately 140 offices in the United States and five abroad. No material
part of the Company's business is dependent upon a single customer or on a few
customers, the loss of any one or more of which would have a materially adverse
effect on the Company. In 1994, the largest single customer represented
approximately 1% of total revenues.
The Company believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of reinsurance,
is one of its major strengths. The Company also believes that its risk
management business enhances and attracts other brokerage business due to the
nature and strength of business relationships which it forms with clients when
providing a variety of risk management services on an on-going basis.
The Company requires its employees serving in a sales or marketing capacity,
including certain executive officers of the Company, to enter into agreements
with the Company restricting disclosure of confidential information and
solicitation of clients and prospects of the Company upon their termination of
employment. The confidentiality and non-solicitation provisions of such
agreements terminate in the event of a hostile change in control of the
Company, as defined therein.
COMPETITION
The Company believes it is the eighth largest insurance broker in the United
States and in the top 11 worldwide in terms of total revenues. The insurance
brokerage and service business is highly competitive and there are many
insurance brokerage and service organizations as well as individuals throughout
the world who actively compete with the Company in every area of its business.
A number of competing firms are significantly larger and some have many times
the commission and/or fee revenues of the Company. There
2
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are firms in a particular region or locality which are as large or larger than
the particular local office of the Company. The Company believes that the
primary factors determining its competitive position with other organizations
in its industry are the overall cost and the quality of services rendered.
The Company is also in competition with certain insurance companies which
write insurance directly for their customers. Government benefits relating to
health, disability, and retirement are also alternatives to private insurance
and hence indirectly compete with the business of the Company. To date, such
direct writing and government benefits have had, in the opinion of the Company,
relatively little effect on its business and operations, but the Company can
make no prediction as to their effect in the future.
REGULATION
In every state and foreign jurisdiction in which the Company does business,
the Company or an employee is required to be licensed or receive regulatory
approval in order for the Company to conduct business. In addition to licensing
requirements applicable to the Company, most jurisdictions require that
individuals who engage in brokerage and certain insurance service activities be
personally licensed.
The Company's operations depend on its continued good standing under the
licenses and approvals pursuant to which it operates. Licensing laws and
regulations vary from jurisdiction to jurisdiction. In all jurisdictions the
applicable licensing laws and regulations are subject to amendment or
interpretation by regulatory authorities, and generally such authorities are
vested with relatively broad and general discretion as to the granting,
renewing and revoking of licenses and approvals.
INTERNATIONAL OPERATIONS
Arthur J. Gallagher (UK) Limited, formerly known as Gallagher Plumer Limited,
is a wholly-owned Lloyd's brokerage subsidiary of the Company. This subsidiary
is a London based insurance broker which provides brokerage services to
clientele primarily located outside of the United Kingdom ("U.K."). The
principal activity of Arthur J. Gallagher (UK) Limited is to negotiate and
place insurance and reinsurance with Lloyd's underwriters and insurance
companies worldwide. Its brokerage services encompass four major categories:
aviation, direct marine hull and cargo, reinsurance (marine and non-marine) and
overseas property and casualty (predominantly North America).
Although Arthur J. Gallagher (UK) Limited is located in London, the thrust of
its business development has been with non-U.K. brokers, agents and insurers
rather than domestic U.K. retail business. This subsidiary presently services
clients in approximately 40 countries, with approximately 57% of its brokerage
income originating in the United States. Its clients are primarily insurance
and reinsurance companies, underwriters at Lloyd's, the Company and its non-
U.K. subsidiaries, other independent agents and brokers, and major business
corporations requiring direct insurance and reinsurance placement.
Risk Management Partners LTD ("RMP") is a company that is 50% owned by a
subsidiary of Arthur J. Gallagher & Co. and 50% owned by a subsidiary of
American Re Corporation, one of the world's largest and most prominent
reinsurance companies. RMP was created in early 1995 to market insurance
products and risk management services to public entities in the U.K. where
market conditions for the governmental sector are very similar to the
conditions that existed in the United States during the early to middle 1980s.
In this market, only a small number of carriers are offering coverage and there
is little discussion of alternative approaches. RMP sees a strong demand for
alternatives in this marketplace and is poised to fill that need with products
and services delivered by professionals with years of experience in public
entity business.
Arthur J. Gallagher & Co. (Bermuda) Limited provides clients with direct
access to the risk-taking capacity of Bermuda-based insurers for both direct
and reinsurance placements. It also acts as a wholesaler to the Company's
marketing efforts by accessing foreign insurance and reinsurance companies in
the placing of U.S. and foreign risks. In addition, it provides services
relating to the formation and management of offshore captive insurance
companies.
3
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A Company subsidiary, Arthur J. Gallagher International, Inc., located in
Rhode Island, provides brokerage services to and arranges overseas risk
management and loss control services for multinational organizations.
Gallagher Bassett International LTD. ("GBI"), a subsidiary of Gallagher
Bassett Services, Inc., provides risk management services for foreign
operations, as well as U.S. operations that are foreign-controlled.
Headquartered in London, GBI works with insurance companies, reinsurance
companies, overseas brokers, and risk managers of overseas organizations.
Services are offered on an unbundled basis wherever applicable and include
consulting, claims management, information management, loss control, and
property valuations. GBI's service network includes over 120 associate offices
throughout the world. The combination of Gallagher Bassett offices and
affiliated locations provides one of the most comprehensive worldwide service
networks available.
Additional information relating to the Company's foreign operations is
contained in Note 14 of Notes to Consolidated Financial Statements.
COMMISSIONS AND FEES
The two major sources of operating revenues are commissions from brokerage
and risk management operations and service fees from risk management
operations. Information with respect to these two major sources as well as
investment income and other revenue for each of the three years in the period
ended December 31, 1994 are set forth below:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions........................ $206,820 58% $185,016 56% $176,382 59%
Fees............................... 140,063 39 127,822 39 111,087 37
Investment income and other........ 9,494 3 16,425 5 12,216 4
-------- --- -------- --- -------- ---
$356,377 100% $329,263 100% $299,685 100%
======== === ======== === ======== ===
</TABLE>
The primary source of the Company's compensation for its brokerage services
is commissions paid by insurance companies which are usually based upon a
percentage of the premium paid by the insured. Commission rates are dependent
on a number of factors including the type of insurance, the particular
insurance company and the capacity in which the Company acts. In some cases the
Company is compensated for brokerage or advisory services directly by a fee
from a client, particularly when insurers do not pay commissions. The Company
may also receive contingent commissions which are based on the profit the
insurance company makes on the overall volume of business placed by the Company
in a given period of time. Occasionally, the Company shares commissions with
other brokers who have participated with the Company in placing insurance or
servicing insureds.
The Company's compensation for risk management services is in the form of
fees and commissions. The Company typically negotiates fees in advance with its
risk management clients on an annual basis based upon the estimated value of
the services to be performed. In some cases the Company receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.
The Company's revenues vary significantly from quarter to quarter as a result
of the timing of policy renewals and the net effect of new and lost business
production, whereas expenses are fairly uniform throughout the year. See Note
15 of Notes to Consolidated Financial Statements for unaudited quarterly
operating results for 1994 and 1993.
4
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ACQUISITIONS--PAST
Since January 1, 1990 through December 31, 1994, the Company has acquired
eighteen insurance brokerage services businesses and one loss control services
business and disposed of one reinsurance subsidiary. See Note 2 of Notes to
Consolidated Financial Statements for further information concerning
acquisitions in 1993 and 1994.
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.
ACQUISITIONS--CURRENT
On January 1, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of RMI Insurance Services, Inc., in Granada
Hills, California, a California corporation engaged in the insurance brokerage
business in exchange for 48,765 shares of the Company's Common Stock. The
acquisition was accounted for as a pooling of interests. The principal and one
key employee entered into two year employment agreements with the Company.
On February 28, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Walter Bryce Insurance Agency, Inc., an
Oklahoma corporation engaged in the insurance brokerage business, in exchange
for 90,795 shares of the Company's Common Stock. The acquisition was accounted
for as a pooling of interests. Two principals entered into two year employment
agreements with the Company.
ACQUISITIONS--FUTURE
The Company is considering and intends to consider from time to time
acquisitions and divestitures on terms it deems advantageous. The Company at
this time has an agreement in principle to make one acquisition, which
acquisition (if consummated) will not be material in relation to the Company.
The Company has also 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, 1994, the Company and its subsidiaries employed
approximately 3,300 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. Except for one office building
which the Company owns, the Company operates all of its branch and service
offices in leased premises. Certain of these leases for office space have
options permitting renewals for additional periods. In addition to minimum
fixed rentals, a number of leases contain escalation clauses related to
increases in the cost of living in future years. See Note 12 of Notes to
Consolidated Financial Statements for information with respect to the Company's
lease commitments at December 31, 1994.
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.
5
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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, 1994.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND YEAR FIRST ELECTED
---- --- -------------------------------
<S> <C> <C>
Robert E. Gallagher..... 72 Chief Executive Officer 1963-1994, Chairman since 1990
John P. Gallagher....... 67 Executive Vice President since 1963, Vice Chairman since 1990
J. Patrick Gallagher, 43 President since 1990, Chief Executive Officer since 1995
Jr.....................
John G. Campbell........ 57 Vice President since 1978
Michael J. Cloherty..... 47 Vice President--Finance since 1981
Peter J. Durkalski...... 44 Vice President since 1990
James W. Durkin, Jr..... 45 Vice President since 1985
Walter F. McClure....... 61 Senior Vice President since 1993
John D. Stancik......... 51 Vice President since 1986
Gary Van der Voort...... 49 Vice President since 1986
</TABLE>
Each such person has been principally employed by the Company in management
capacities for more than the past five years. All executive officers are
elected annually and serve at the pleasure of the Board of Directors.
6
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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,
1993 through December 31, 1994 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.
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
HIGH LOW PER SHARE
------- ------- ---------
<S> <C> <C> <C>
1994 Quarterly Periods
First............................................... $36 3/8 $28 1/4 $.22
Second.............................................. $33 3/8 $28 1/8 $.22
Third............................................... $33 7/8 $ 29 $.22
Fourth.............................................. $33 1/2 $29 5/8 $.22
1993 Quarterly Periods
First............................................... $35 5/8 $25 1/2 $.18
Second.............................................. $37 3/8 $ 31 $.18
Third............................................... $ 33 $29 1/2 $.18
Fourth.............................................. $37 1/8 $31 5/8 $.18
</TABLE>
As of February 1, 1995, there were approximately 600 holders of record of the
Company's common stock.
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ITEM 6. SELECTED FINANCIAL DATA.
ARTHUR J. GALLAGHER & CO.
GROWTH RECORD: 1985-1994
<TABLE>
<CAPTION>
AVERAGE
ANNUAL -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND GROWTH 1994 1993 1992
EMPLOYEE DATA) ------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenue Data
Commissions........................... $ 206,820 $185,016 $176,382
Fees.................................. 140,063 127,822 111,087
Investment income and other........... 9,494 16,425 12,216
--------- -------- --------
Total revenues...................... $ 356,377 $329,263 $299,685
Dollar growth......................... $ 27,114 $ 29,578 $ 25,879
Percent growth........................ 13% 8% 10% 9%
--- --------- -------- --------
Pretax Earnings Data
Pretax earnings....................... $ 53,238 $ 48,447 $ 36,837
Dollar growth......................... $ 4,791 $ 11,610 $ 9,025
Percent growth........................ 17% 10% 32% 32%
Pretax earnings as a percentage of
revenues............................. 15% 15% 12%
--- --------- -------- --------
Earnings Data
Net earnings.......................... $ 34,540 $ 29,446 $ 23,923
Dollar growth......................... $ 5,094 $ 5,523 $ 4,407
Percent growth........................ 16% 17% 23% 23%
Net earnings as a percentage of
revenues............................. 10% 9% 8%
--- --------- -------- --------
Earnings Per Share Data
Shares outstanding at year end........ 14,784 15,689 15,164
Earnings per share(b)................. $ 2.17 $ 1.79 $ 1.50
Percent growth of earnings per share.. 15% 21% 19% 25%
--- --------- -------- --------
Employee Data
Number at year end.................... 3,308 3,169 2,942
Number growth......................... 139 227 175
Percent growth........................ 6% 4% 8% 6%
Revenue per employee(c)............... $ 108 $ 104 $ 102
Earnings per employee(c).............. $ 10 $ 9 $ 8
--- --------- -------- --------
Common Stock Dividend Data
Dividends declared per share(d)....... $ .88 $ .72 $ .64
Total dividends declared.............. $ 13,209 $ 10,808 $ 8,767
Percent of earnings................... 38% 37% 37%
--- --------- -------- --------
Balance Sheet Data
Total assets.......................... $ 451,110 $477,873 $425,109
Long-term debt less current portion... $ 3,390 $ 28,166 $ 23,888
Total stockholders' equity............ $ 96,731 $119,438 $ 93,969
--- --------- -------- --------
Return On Beginning Stockholders'
Equity................................. 29% 31% 27%
</TABLE>
NOTES:
(a) The financial information for all periods prior to 1994 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
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- - ----------------------------------------------------------------------
1991 1990 1989 1988 1987 1986 1985
- - -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$170,805 $166,400 $153,168 $139,260 $127,719 $113,862 $ 90,900
92,019 79,218 65,264 57,025 51,799 41,894 34,372
10,982 16,468 16,995 15,704 13,541 12,689 10,481
- - -------- -------- -------- -------- -------- -------- --------
$273,806 $262,086 $235,427 $211,989 $193,059 $168,445 $135,753
$ 11,720 $ 26,659 $ 23,438 $ 18,930 $ 24,614 $ 32,692 $ 26,785
4% 11% 11% 10% 15% 24% 25%
- - -------- -------- -------- -------- -------- -------- --------
$ 27,812 $ 31,166 $ 30,617 $ 27,620 $ 30,966 $ 29,703 $ 21,569
$ (3,354) $ 549 $ 2,997 $ (3,346) $ 1,263 $ 8,134 $ 8,655
(11)% 2% 11% (11)% 4% 38% 67%
10% 12% 13% 13% 16% 18% 16%
- - -------- -------- -------- -------- -------- -------- --------
$ 19,516 $ 21,584 $ 20,747 $ 19,995 $ 20,033 $ 19,026 $ 14,358
$ (2,068) $ 837 $ 752 $ (38) $ 1,007 $ 4,668 $ 5,138
(10)% 4% 4% 0% 5% 33% 56%
7% 8% 9% 9% 10% 11% 11%
- - -------- -------- -------- -------- -------- -------- --------
15,470 15,684 15,699 15,950 16,418 16,362 16,125
$ 1.20 $ 1.33 $ 1.27 $ 1.21 $ 1.20 $ 1.14 $ .87
(10)% 5% 5% 1% 5% 31% 47%
- - -------- -------- -------- -------- -------- -------- --------
2,767 2,656 2,542 2,404 2,328 2,130 1,905
111 114 138 76 198 225 146
4% 4% 6% 3% 9% 12% 8%
$ 99 $ 99 $ 93 $ 88 $ 83 $ 79 $ 71
$ 7 $ 8 $ 8 $ 8 $ 9 $ 9 $ 8
- - -------- -------- -------- -------- -------- -------- --------
$ .64 $ .60 $ .52 $ .48 $ .40 $ .20 $ .14
$ 8,439 $ 6,999 $ 5,905 $ 5,375 $ 4,296 $ 1,913 $ 1,193
43% 32% 28% 27% 21% 10% 8%
- - -------- -------- -------- -------- -------- -------- --------
$412,329 $402,599 $366,538 $348,847 $325,487 $290,817 $244,805
$ 24,432 $ 24,723 $ 24,775 $ 25,063 $ 20,073 $ 20,000 $ 20,000
$ 89,907 $ 89,191 80,853 $ 74,025 $ 70,963 $ 62,448 $ 44,916
- - -------- -------- -------- -------- -------- -------- --------
22% 27% 28% 28% 32% 42% 44%
</TABLE>
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Fluctuations in premiums charged by insurance companies materially affect the
insurance brokerage industry. Commission revenues are based on a percentage of
the premiums paid by the insured and generally follow premium levels. Beginning
in late 1986 and continuing through the present, price competition has
prevailed among property and casualty insurers. This "soft market" (i.e.
generally lower premium rates) has generally resulted in flat to reduced
renewal commissions during the period.
Within the past three years, the United States has experienced the
devastation of hurricanes in the Southeast and Hawaii, suffered severe losses
from flooding in the Midwest, and in California, witnessed earthquakes and more
recently observed heavy damage from torrential rains, windstorms and flooding.
In January, 1995, Japan was struck by its worst earthquake in more than 70
years. Extraordinarily high losses associated with these catastrophes appear to
have had limited impact on the insurance industry, and the competitive
environment continues. There remains an overabundance of risk-taking capital,
interest rates have risen and a number of insurers are selling their product
below cost. Although some forecasts anticipate premium increases, the prospect
for overall rate increases in 1995 is unpredictable. The soft market appears to
be the arena in which insurance brokers will do business in the foreseeable
future.
Growth of the alternative insurance market has continued notwithstanding the
soft market conditions. The Company believes this move from the traditional
approach of purchasing insurance will continue regardless of the
property/casualty pricing environment and anticipates that sales in the risk
management, benefits and self-insurance services areas will again be a major
contributor to fee revenue growth in 1995.
Historically, inflation has contributed to increased property replacement
costs and higher litigation awards causing some clients to seek higher levels
of insurance coverage. These factors have the effect of generating higher
premiums to customers and higher commissions to the Company. More recently,
however, the United States has experienced low rates of inflation along with
business down-sizing, reduced sales and lower payrolls. These events have
resulted in lower levels of exposure to insure. In general, premium rates have
had a greater effect on the Company's revenues than inflation.
RESULTS OF OPERATIONS
The Company's results of operations for all periods prior to December 31,
1994 have been restated to include the results of Donald P. Pipino and
Associates, Inc. and The Steel Agency on a combined basis as if they had
operated as part of the Company. The Company continues to search for merger
partners which complement existing business and provide entry into new market
niches and new geographic areas. For the effect of such restatements in the
aggregate on year-to-year comparisons, see Note 2 of the Notes to Consolidated
Financial Statements.
Commission revenues increased by $21.8 million or 12% in 1994. This increase
is the result of new business production of approximately $30.1 million and, to
a lesser extent, modest renewal rate increases partially offset by lost
business. In 1993, commission revenues increased by $8.6 million or 5% over
1992. This increase is the result of new business production efforts partially
offset by lost business and, to a lesser extent, renewal rate decreases.
Fee revenues increased by $12.2 million or 10% in 1994. This increase,
generated primarily by Gallagher Bassett Services, Inc., resulted from strong
new business production of $20.5 million and increases in existing business
partially offset by lost business. Fee revenues increased by $16.7 million or
15% in 1993. This increase, again generated primarily by Gallagher Bassett
Services, Inc., resulted from strong new business production of $19.9 million
and increases in existing business partially offset by lost business.
Investment income and other decreased by $6.9 million or 42% in 1994. This
decrease is due primarily to a combination of significantly lower returns on
funds invested with outside fund managers and lower levels
10
<PAGE>
of funds available for investment. This decrease is partially offset by a gain
of $656,000 realized in closing out interest rate exchange agreements related
to the retirement of the Company's debt agreement in the fourth quarter of 1994
and by a gain of $800,000 from the sale of two personal lines books of business
also recorded in the fourth quarter of 1994. In 1993, investment income and
other increased $4.2 million, or 34% over 1992 due primarily to investment
gains recorded on limited partnership investment strategies and was partially
offset by lower interest rates and a $1.1 million gain from the sale of a
personal lines book of business recorded in the second quarter of 1992.
Salaries and employee benefits increased by $21.2 million or 13% in 1994 due
principally to salary increases, the annualized effect of prior year hires, a
4% increase in year-end employee head count and a corresponding increase in
employee benefit expenses and changes in certain benefit plan actuarial
assumptions. Also contributing to this increase is a $4.6 million non-recurring
gain from a restructuring and settlement of a defined benefit plan at the
Company's London subsidiary, Arthur J. Gallagher (UK) Limited, recorded in
1993. See Note 10 of the Notes to Consolidated Financial Statements. Salaries
and employee benefits increased by $9.7 million or 6% in 1993 due principally
to salary increases, the annualized effect of prior year hires, an 8% increase
in year-end employee head count and an increase of $1.1 million in
postretirement benefits resulting from the adoption of Statement of Financial
Accounting Standards No. 106. Prior to 1993, postretirement benefits had been
recorded on a pay-as-you-go basis. See Note 11 of the Notes to Consolidated
Financial Statements. This increase was partially offset by the $4.6 million
gain from the benefit plan restructuring mentioned above. Without the effect of
the benefit plan gain, the increase in salaries and employee benefits would
have been $14.3 million or 9%. In 1994, 1993 and 1992, salaries and employee
benefits have represented 53%, 51% and 53%, respectively, of total revenues.
Other operating expenses increased by $1.7 million or 2% in 1994. This
increase was due primarily to additional office facilities (rent and utilities,
miscellaneous office and supply expenses) resulting from leasing new office
space and expanding and upgrading existing facilities, and higher business
insurance costs. Travel and entertainment costs also increased due to an
increase in both the number of employees and the Company's sales volume. This
increase was partially offset by the non-recurring write-off in 1993 of $2.0
million by a 1994 acquisition of certain intangible assets and by a reduction
in professional fees related to claims processing, investment management and
acquisition costs. Other operating expenses increased by $8.9 million or 9% in
1993. This increase was due primarily to additional office facilities (rent and
utilities, miscellaneous office and supply expenses) resulting from leasing new
office space and expanding and upgrading existing facilities, the write-off of
intangibles mentioned above, and increased professional fees and business
insurance. Travel and entertainment costs also increased due to an increase in
both the number of employees and the Company's sales volume.
Interest expense of $1.7 million, $2.4 million and $3.0 million in 1994, 1993
and 1992, respectively, relates primarily to the Company's loan obligations
discussed in greater detail below.
The Company's overall tax rate of 35% in 1994 approximates the statutory
federal rate. For 1994, the net effect of state and foreign taxes were
substantially offset by the tax benefits generated by certain investments. The
Company's overall tax rates of 39% in 1993 and 35% in 1992 are greater than the
statutory federal rates of 35% and 34%, respectively, due primarily to the net
effect of state and foreign taxes which are substantially offset by the tax
benefits generated by certain investments. Additionally, the increase in the
1993 tax rate over 1992 is due partially to a federal tax rate increase
resulting from the Revenue Reconciliation Act of 1993 and the impact of the
restatement for a 1994 pooled acquisition. See Note 13 of the Notes to
Consolidated Financial Statements.
The Company's foreign operations recorded operating earnings before income
taxes of $1.3 million, $7.1 million, and $1.3 million in 1994, 1993, and 1992,
respectively. The 1994 decrease is due primarily to the 1993 non-recurring
foreign benefit plan gain mentioned above, and a reduction in investment
income. The 1993 increase was due primarily to the foreign benefit plan gain
mentioned above. See Notes 13 and 14 of the Notes to Consolidated Financial
Statements.
11
<PAGE>
The Company's total revenues vary from quarter to quarter as a result of the
timing of policy renewals and net new/lost business production, whereas
expenses are fairly uniform throughout the year. See Note 15 of the Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable with a positive cash flow from operations and has
consequently been able to finance its operations and capital expenditures from
internally generated funds. Funds restricted as to the Company's use (primarily
premiums held as fiduciary funds) have not been included in determining the
Company's liquidity.
In February, 1993, the Company entered into a $20 million unsecured revolving
credit agreement (the "Credit Agreement") with two banks. Loans under the
Credit Agreement are repayable no later than February, 1998, and bear floating
interest rates over the term of the loan. In February, 1993, a loan was funded
for $20 million. The Company simultaneously entered into interest rate exchange
agreements which fixed the rate of interest payable on the loan. The Company
retired the $20 million loan in the fourth quarter of 1994 and has fully
satisfied all obligations associated with the loan. The Company also recognized
a gain of $656,000 in closing out the interest rate exchange agreements. The
Credit Agreement remains in effect and as of December 31, 1994, there are no
borrowings currently existing under this agreement.
The Company also entered into two term loan agreements (the "Term Loan
Agreements") with a bank for $3.2 million and $2.5 million in 1993. 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 $17.5 million and $10.0 million
which expire on April 30, 1995 and February 28, 1996, respectively. No
borrowings currently exist under these facilities.
The Company paid $12.7 million in cash dividends on its common stock in 1994.
The Company's dividend policy is determined by the Board of Directors and
payments are fixed after considering the Company's available cash from earnings
and its known or anticipated cash needs. In each quarter of 1994, the Company's
Board of Directors declared a dividend of $.22 per share which is $.04 or 22%
greater than each quarterly dividend in 1993. In January, 1995, the Company
announced a first quarter dividend of $.25 per share, a 14% increase over the
quarterly dividend in 1994.
Net capital expenditures for fixed assets amounted to $7.4 million, $7.6
million and $6.2 million in 1994, 1993 and 1992, respectively. In 1995, the
Company intends to make additional capital improvements of approximately $7.5
million to upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
1995, to repurchase its common stock. Under the plan, the Company repurchased
1.4 million shares at a cost of $43.8 million, 225,000 shares at a cost of $7.0
million, and 610,000 shares at a cost of $15.9 million in 1994, 1993 and 1992,
respectively. The 1994 common stock repurchases, in part, caused the weighted
average shares outstanding to decrease by 590,000 shares from 1993 to 1994. The
repurchases were funded entirely by internally generated funds and are held for
reissuance in connection with exercises of options under its stock option
plans. Under the provisions of the plan, the Company is authorized to
repurchase approximately 340,000 additional shares through June 30, 1995. The
Company is under no commitment or obligation to repurchase any particular
amount of common stock and at its discretion may suspend the repurchase plan at
any time.
The Company believes that internally generated funds will continue to be
sufficient to meet the Company's foreseeable cash needs, including non-
operating cash disbursements such as anticipated
12
<PAGE>
dividends, capital expenditures and repayment of borrowings under its loan
agreements 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. Prior to 1994, the Company did not
provide for U. S. income taxes on the undistributed earnings of certain foreign
subsidiaries ($19.2 million) which are considered permanently invested outside
the United States. See Note 13 of the Notes to Consolidated Financial
Statements. Although not available for domestic needs, the undistributed
earnings generated by the foreign subsidiaries referred to above may be used to
finance foreign operations and acquisitions.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Consolidated Financial Statements:
Consolidated Statement of Earnings..................................... 15
Consolidated Balance Sheet............................................. 16
Consolidated Statement of Cash Flows................................... 17
Consolidated Statement of Stockholders' Equity......................... 18
Notes to Consolidated Financial Statements.................... 19 through 30
Management's Report...................................................... 31
Report of Independent Auditors........................................... 32
</TABLE>
14
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
OPERATING RESULTS
Revenues:
Commissions....................................... $206,820 $185,016 $176,382
Fees.............................................. 140,063 127,822 111,087
Investment income and other....................... 9,494 16,425 12,216
-------- -------- --------
Total revenues.................................. 356,377 329,263 299,685
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 188,920 167,701 158,006
Other operating expenses.......................... 112,491 110,762 101,867
Interest expense.................................. 1,728 2,353 2,975
-------- -------- --------
Total expenses.................................. 303,139 280,816 262,848
-------- -------- --------
Earnings before income taxes........................ 53,238 48,447 36,837
Provision for income taxes.......................... 18,698 19,001 12,914
-------- -------- --------
Net earnings.................................... $ 34,540 $ 29,446 $ 23,923
======== ======== ========
Net earnings per common and common equivalent share. $ 2.17 $ 1.79 $ 1.50
Dividends declared per common share................. $ .88 $ .72 $ .64
Weighted average number of common and common
equivalent shares outstanding...................... 15,902 16,492 15,939
</TABLE>
See accompanying notes.
15
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 39,689 $ 43,525
Restricted cash.......................................... 69,135 82,888
Premiums and fees receivable............................. 179,823 159,083
Investment strategies--trading........................... 42,637 74,198
Other.................................................... 19,788 19,921
-------- --------
Total current assets................................... 351,072 379,615
Marketable securities--available for sale.................. 37,836 45,292
Other noncurrent assets.................................... 34,294 25,941
Fixed assets............................................... 58,930 52,197
Accumulated depreciation and amortization.................. (38,918) (32,823)
-------- --------
Net fixed assets....................................... 20,012 19,374
Intangible assets--net..................................... 7,896 7,651
-------- --------
$451,110 $477,873
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Premiums payable to insurance companies.................. $251,508 $239,797
Accrued salaries and bonuses............................. 12,060 10,139
Accounts payable and other accrued liabilities........... 44,862 37,443
Unearned fees............................................ 13,859 11,130
Income taxes payable..................................... 11,590 8,780
Other.................................................... 7,847 11,006
-------- --------
Total current liabilities.............................. 341,726 318,295
Long-term debt............................................. 3,390 28,166
Deferred income taxes and other noncurrent accounts........ 9,263 11,974
Stockholders' equity:
Common stock--issued 14,784 shares in 1994 and 15,689
shares in 1993.......................................... 14,784 15,689
Capital in excess of par value........................... -- 8,110
Retained earnings........................................ 84,840 95,639
Unrealized holding loss on available for sale
securities--net of income taxes......................... (2,893) --
-------- --------
Total stockholders' equity............................. 96,731 119,438
-------- --------
$451,110 $477,873
======== ========
</TABLE>
See accompanying notes.
16
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 34,540 $ 29,446 $ 23,923
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net loss (gain) on investments............... 3,042 (5,121) (1,524)
Depreciation and amortization................ 7,357 9,243 7,620
Decrease (increase) in restricted cash....... 13,753 (13,908) 3,602
Increase in premiums receivable.............. (19,410) (6,924) (10,819)
Increase in premiums payable................. 11,711 14,090 6,570
Decrease in trading investments--net......... 26,811 -- --
Decrease in other current assets............. 2,074 6,339 725
Increase in accrued salaries and bonuses..... 1,921 2,250 1,324
Increase in accounts payable and other
accrued liabilities......................... 6,900 3,727 2,603
Increase (decrease) in income taxes payable.. 2,810 1,895 (206)
Decrease in deferred income taxes............ (5,053) (7,028) (3,269)
Other........................................ (8,644) (2,067) (2,279)
-------- -------- --------
Net cash provided by operating activities.. 77,812 31,942 28,270
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities............. (28,409) (51,755) (35,329)
Proceeds from the sale of marketable
securities.................................... 30,527 35,159 30,128
Proceeds from maturities of marketable
securities.................................... 2,224 9,332 3,915
Investment in leveraged leases................. -- 750 --
Purchase of investment strategies.............. -- (24,900) (88)
Increase in short-term securities--net......... -- -- (682)
Additions to fixed assets...................... (7,379) (7,645) (6,206)
Other.......................................... 316 176 --
-------- -------- --------
Net cash used by investing activities...... (2,721) (38,883) (8,262)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 3,141 9,722 4,447
Tax benefit from issuance of common stock...... 747 3,541 --
Repurchase of common stock..................... (43,843) (7,035) (15,856)
Dividends paid................................. (12,690) (10,336) (8,686)
Proceeds from issuance of long-term debt....... -- 25,650 --
Retirement of long-term debt................... (24,776) (20,242) (544)
Equity transactions of pooled companies prior
to dates of acquisition....................... (1,506) 427 (435)
-------- -------- --------
Net cash (used by) provided by financing
activities................................ (78,927) 1,727 (21,074)
-------- -------- --------
Net decrease in cash and cash equivalents........ (3,836) (5,214) (1,066)
Cash and cash equivalents at beginning of year... 43,525 48,739 49,805
-------- -------- --------
Cash and cash equivalents at end of year......... $ 39,689 $ 43,525 $ 48,739
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 1,873 $ 2,809 $ 2,832
Income taxes paid.............................. $ 19,902 $ 19,298 $ 16,040
</TABLE>
See accompanying notes.
17
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
CAPITAL GAIN (LOSS)
COMMON STOCK IN EXCESS ON AVAILABLE
--------------- OF RETAINED FOR SALE
SHARES AMOUNT PAR VALUE EARNINGS SECURITIES
------ ------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991
as previously reported...... 14,967 $14,967 $ 132 $ 74,073 $ --
Acquisition of pooled
companies................. 503 503 (132) 364 --
------ ------- -------- -------- -------
Balance at December 31, 1991
as restated................. 15,470 15,470 -- 74,437 --
Net earnings............... -- -- -- 23,923 --
Cash dividends declared on
common stock.............. -- -- -- (8,767) --
Common stock issued under
stock option plans........ 304 304 4,143 -- --
Common stock repurchases... (610) (610) (1,954) (12,542) --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- 9 (444) --
------ ------- -------- -------- -------
Balance at December 31, 1992. 15,164 15,164 2,198 76,607 --
Net earnings............... -- -- -- 29,446 --
Cash dividends declared on
common stock.............. -- -- -- (10,808) --
Common stock issued under
stock option plans........ 574 574 9,148 -- --
Tax benefit from issuance
of common stock........... -- -- 3,541 -- --
Common stock repurchases... (225) (225) (6,810) -- --
Common stock issued in two
pooling acquisitions...... 176 176 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- 33 394 --
------ ------- -------- -------- -------
Balance at December 31, 1993. 15,689 15,689 8,110 95,639 --
Net earnings............... -- -- -- 34,540 --
Cash dividends declared on
common stock.............. -- -- -- (13,209) --
Common stock issued under
stock option plans........ 171 171 2,970 -- --
Tax benefit from issuance
of common stock........... -- -- 747 -- --
Common stock repurchases... (1,392) (1,392) (11,827) (30,624) --
Common stock issued in
three pooling
acquisitions.............. 316 316 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- -- (1,506) --
Cumulative effect of
accounting change, net of
taxes of $970............. -- -- -- -- 1,456
Change in unrealized gain
(loss), net of taxes of
$2,899.................... -- -- -- -- (4,349)
------ ------- -------- -------- -------
Balance at December 31, 1994. 14,784 $14,784 $ -- $ 84,840 $(2,893)
====== ======= ======== ======== =======
</TABLE>
See accompanying notes.
18
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company operates in the insurance brokerage and risk management business
and offers various services that are related to that activity. The accompanying
consolidated financial statements include the accounts of the Company and all
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation. Certain reclassifications have been made to the prior year
balance sheet amounts 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 $846,000 and $876,000 at December 31, 1994 and 1993,
respectively.
Consolidated statement of cash flows
Short-term investments, consisting principally of commercial paper and
certificates of deposit which have a maturity of ninety days or less at date of
purchase, are considered cash equivalents.
Marketable securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 115, "Accounting for Certain Investments in Debt
and Equity Securities". The new standard requires that securities designated as
available for sale be carried at fair value, with unrealized gains and losses,
less related deferred income taxes, excluded from earnings and reported as a
separate component of stockholders' equity. In addition, securities designated
as trading are required to be carried at fair value, with unrealized gains and
losses included in the statement of earnings. Previously, the Company carried
these investments at either the lower of cost or fair value, or at amortized
cost. As of January 1, 1994, the Company adopted the provisions of the new
standard for investments held as of or acquired after that date. In accordance
with Statement 115, prior period financial statements have not been restated to
reflect the change in accounting principle. The cumulative effect as of January
1, 1994 of adopting Statement 115 increased the opening balance of
stockholders' equity by $1,456,000 (net of deferred income taxes of $970,000)
to reflect the net unrealized holding gains on securities classified as
available for sale previously carried at the lower of cost or fair value, or at
amortized cost. There was no cumulative effect on net earnings as a result of
the adoption of Statement 115 because the securities classified as trading were
carried as a current asset and had a fair value below cost at January 1, 1994.
Accordingly, such unrealized losses were recorded in prior period earnings.
Marketable securities are considered available for sale and consist primarily
of preferred and common stocks. Gains and losses are recognized in income when
realized using the specific identification method. The fair value for
marketable securities is based on quoted market prices.
Investment strategies are considered trading securities and consist primarily
of limited partnerships which invest in common stocks. Fair value is determined
by reference to the fair value of the underlying common stocks which is based
on quoted market prices.
19
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fixed assets
Fixed assets are carried at cost. Furniture and equipment with a cost of
$52,246,000 at December 31, 1994 ($45,903,000 at December 31, 1993) are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements with a cost of $6,684,000 at December 31,
1994 ($6,294,000 at December 31, 1993) 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 over forty years
using the straight-line method. Accumulated amortization at December 31, 1994
was $7,145,000 ($4,616,000 at December 31, 1993).
2. ACQUISITIONS
Poolings of Interests
In 1994, the Company acquired substantially all the net assets of five
insurance brokerage firms in exchange for 819,000 shares of its common stock.
In 1993, the Company acquired substantially all the net assets of four
insurance brokerage firms in exchange for 707,000 shares of its common stock.
These acquisitions were accounted for as poolings of interests and, except for
three of the 1994 acquisitions and two of the 1993 acquisitions whose results
were not significant, the financial statements for all periods prior to the
acquisition dates have been restated to include the operations of these
companies.
The following summarizes the restatement to reflect the 1994 acquisitions:
<TABLE>
<CAPTION>
ATTRIBUTABLE TO
ARTHUR J. GALLAGHER POOLED COMPANIES AS RESTATED
------------------- ---------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1993
Revenues..................... $317,663 $11,600 $329,263
Net earnings................. 32,271 (2,825) 29,446
======== ======= ========
1992
Revenues..................... $288,918 $10,767 $299,685
Net earnings................. 23,836 87 23,923
======== ======= ========
</TABLE>
3. PREMIUM TRUST FUNDS
Premiums collected from insureds but not yet remitted to insurance carriers
are restricted as to use by laws in certain states and foreign jurisdictions in
which the Company's subsidiaries operate. Additionally, the Company's United
Kingdom subsidiaries are required by Lloyd's of London to meet certain
liquidity requirements.
20
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. MARKETABLE SECURITIES
The following is a summary of available for sale marketable securities:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------------
COST OR GROSS GROSS FAIR VALUE AND
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES CARRYING VALUE
-------------- ---------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Preferred stocks........ $25,841 $ 179 $2,326 $23,694
Fixed maturities........ 7,371 108 905 6,574
Common stocks........... 9,446 230 2,108 7,568
------- ------ ------ -------
$42,658 $ 517 $5,339 $37,836
======= ====== ====== =======
<CAPTION>
DECEMBER 31, 1993
----------------------------------------------------------------
COST OR
AMORTIZED COST
AND GROSS GROSS
CARRYING VALUE UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
-------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Preferred stocks........ $29,975 $2,818 $ 343 $32,450
Fixed maturities........ 8,097 497 444 8,150
Common stocks........... 7,220 771 912 7,079
------- ------ ------ -------
$45,292 $4,086 $1,699 $47,679
======= ====== ====== =======
</TABLE>
The gross realized gains on sales of marketable securities totaled
$2,004,000, $1,719,000 and $1,475,000 for the years ended December 31, 1994,
1993, and 1992, respectively. The gross realized losses totaled $312,000,
$929,000, and $340,000 for the years ended December 31, 1994, 1993, and 1992,
respectively.
Substantially all fixed maturity securities mature in 1998 or later. Actual
maturities may differ from contractual maturities because the issuers of the
securities may have the right to call or prepay obligations.
The net unrealized gains (losses) on investment strategies included in income
amounted to $83,000 in 1994, $1,908,000 in 1993, and ($1,573,000) in 1992.
5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1994, securities sold under agreements to repurchase the
identical securities are collateralized by government backed small business
administration loans and government securities with a carrying value of
$19,152,000 and a fair value of $19,098,000. The securities collateralizing the
agreements were held by two primary dealers.
21
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1993
------ -------
(IN THOUSANDS)
<S> <C> <C>
6.64% unsecured term note, payable in annual installments of
$630, commencing in 1994....................................... $2,520 $ 3,150
6.30% unsecured term note, payable in annual installments of
$500, commencing in 1994....................................... 2,000 2,500
Variable-rate unsecured revolving credit agreement (LIBOR plus
.625%)......................................................... -- 20,000
10% secured notes to former shareholders of an acquired
brokerage firm................................................. -- 4,067
------ -------
4,520 29,717
Less current portion............................................ 1,130 1,551
------ -------
$3,390 $28,166
====== =======
</TABLE>
In November, 1994, the Company retired its variable-rate unsecured revolving
credit agreement that was due in 1998. In connection with the retirement, the
Company also recognized a gain of $656,000 on the settlement of interest rate
exchange agreements that had been entered into in 1993 to fix the rate of
interest payable on the revolving credit agreement. The credit agreement
remains in effect and, as of December 31, 1994, there were no borrowings
outstanding under this agreement.
Terms of the loan agreements include various covenants which require the
Company to maintain specified levels of tangible net worth and restrict the
amount of payments on certain expenditures.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS)
<S> <C>
1995.................................................... $1,130
1996.................................................... 1,130
1997.................................................... 1,130
1998.................................................... 1,130
------
$4,520
======
</TABLE>
The Company has line of credit facilities of $17,500,000 which expires on
April 30, 1995 and $10,000,000 which expires on February 28, 1996. No
borrowings existed under these facilities at December 31, 1994.
7. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN
Capital Stock
The table below summarizes certain information about the Company's capital
stock at December 31, 1994:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED AND
CLASS PAR VALUE SHARES OUTSTANDING SHARES
- - ----- --------- ---------- ------------------
<S> <C> <C> <C>
Preferred stock......................... No par 1,000,000 --
Common stock............................ $ 1.00 50,000,000 14,784,000
</TABLE>
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
22
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock at the rate of one Right for each common share held. Under certain
conditions, each Right may be exercised to purchase one share of common stock
at an exercise price of $100. The Rights become exercisable and transferable
apart from the common stock after a public announcement that a person or group
has acquired 20% or more of the common stock or after commencement or public
announcement of a tender offer for 30% or more of the common stock. If the
Company is acquired in a merger or business combination, each Right may be
exercised to purchase the common stock of the surviving company having a market
value of twice the exercise price of each Right. The Rights, which expire May
12, 1997, may be redeemed by the Company at 5 cents per Right at any time prior
to the public announcement of the acquisition of 20% of the common stock. At
December 31, 1994, 25,000,000 shares of common stock were reserved for
potential exercise of the Rights.
8. STOCK OPTION PLANS
The Company has two sets of incentive and nonqualified stock option plans for
officers and key employees of the Company and its subsidiaries adopted in 1983
and 1988, respectively. Options granted under the 1983 plans become exercisable
at the rate of 10% per year beginning the calendar year after the date of grant
and expire ten years from the date of grant, or earlier in the event of death
or termination of the employee. The terms of options under the 1988 plans are
determined by the Company's Option Committee on the date of grant. Incentive
stock options are granted at the fair market value of the underlying shares at
the date of grant. The excess of fair market value at the date of grant over
the option price for the nonqualified stock options is considered compensation
and is charged against earnings ratably over the vesting period. No options may
be granted under any plan ten years after its inception.
In 1989, the Company adopted a non-employee director's stock option plan
which currently authorizes 106,000 shares for grant, with Discretionary Options
granted at the direction of the Option Committee and Retainer Options granted
in lieu of their annual retainer. Discretionary Options shall be exercisable at
such rates as shall be determined by the Committee on the date of grant.
Retainer Options shall be cumulatively exercisable at the rate of 25% of the
total Retainer Option at the end of each full fiscal quarter succeeding the
date of grant.
During 1986, the Company adopted an incentive stock option plan for its
officers and key employees resident in the United Kingdom. The United Kingdom
Plan is essentially the same plan as the Company's 1983 U.S. incentive plan,
with certain modifications to comply with United Kingdom law and to provide
potentially favorable tax treatment for grantees resident in the United
Kingdom.
Transactions related to all stock options are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1993 1992
-------------------- -------------------- --------------------
SHARES SHARES SHARES
UNDER OPTION UNDER OPTION UNDER OPTION
OPTION PRICE OPTION PRICE OPTION PRICE
------ ------------ ------ ------------ ------ ------------
(IN THOUSANDS, EXCEPT OPTION PRICE DATA)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance....... 3,997 $ 4.97-33.75 3,769 $ 4.97-27.63 3,470 $ 4.97-25.63
Granted................. 870 10.00-33.00 898 14.13-33.75 686 9.25-27.63
Exercised............... (171) 4.97-33.75 (574) 4.97-27.63 (304) 4.97-22.38
Canceled................ (82) 16.25-33.75 (96) 16.25-33.75 (83) 16.25-26.25
----- ------------ ----- ------------ ----- ------------
Ending balance.......... 4,614 $ 7.13-33.75 3,997 $ 4.97-33.75 3,769 $ 4.97-27.63
===== ============ ===== ============ ===== ============
Exercisable at end of
year................... 1,283 934 998
===== ===== =====
</TABLE>
Options with respect to 1,780,000 shares were available for grant at December
31, 1994.
23
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SAVINGS & THRIFT PLAN
The Company has a contributory savings & thrift plan covering the majority of
its employees. Company contributions are at the discretion of the Company's
Board of Directors and may not exceed the maximum amount deductible for federal
income tax purposes. The Company contributed $879,000, $773,000 and $640,000 in
1994, 1993 and 1992, respectively.
10. PENSION PLANS
The Company has a noncontributory defined benefit pension plan which covers
substantially all domestic employees who have attained a specified age and one
year of employment. Benefits under the plan are based on years of service and
salary history. The Company's contributions to the plan satisfy the minimum
funding requirements of ERISA. Plan assets consist primarily of common stocks
and bonds invested under the terms of a group annuity contract managed by a
life insurance company.
The Company accounts for the defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers'
Accounting for Pensions". The difference between the present value of the
projected benefit obligation at the date of adoption of SFAS 87 and the fair
value of plan assets at that date is being amortized on a straight-line basis
over the average remaining service period of employees expected to receive
benefits.
The following table sets forth the plan's estimated funded status and amounts
recognized in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested.................................................... $19,561 $ 20,143
Nonvested................................................. 3,758 4,682
------- --------
$23,319 $ 24,825
======= ========
Projected benefit obligation................................ $34,825 $ 39,357
Assets at fair value........................................ 23,119 19,729
------- --------
Projected benefit obligation in excess of plan assets....... 11,706 19,628
------- --------
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions......... (1,526) (11,892)
Unamortized portion of net obligation at January 1.......... (666) (722)
------- --------
Unfunded accrued pension cost............................... $ 9,514 $ 7,014
======= ========
</TABLE>
Pension expense for the plan consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1994 1993 1992
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year......... $ 5,400 $ 4,178 $2,983
Interest cost on projected benefit obligation......... 2,467 2,198 1,620
Actual return on plan assets.......................... (158) (2,285) (226)
Net amortization and deferral......................... (1,366) 1,304 (536)
------- ------- ------
Net pension expense................................... $ 6,343 $ 5,395 $3,841
======= ======= ======
</TABLE>
24
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following assumptions were used in determining the actuarial present
value of the plan's projected benefit obligation:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Discount rate................................................. 8.00% 7.00% 7.50%
Rate of increase in future compensation levels................ 7.00% 5.75% 5.75%
Expected long-term rate of return on assets................... 9.00% 9.00% 9.00%
</TABLE>
In 1993, the Company converted its foreign defined benefit plan to a defined
contribution plan. The defined contribution plan provides for basic
contributions by the Company and voluntary contributions by employees which are
matched 100% by the Company, up to a maximum of 5% of salary, as defined.
At the time of the foreign plan conversion, there was a surplus of plan
assets in excess of benefit obligations. Previously vested benefits of the plan
participants were settled by the purchase of annuity policies with a life
insurance company. As a result of the defined benefit plan settlement, the
Company recognized a $4,572,000 gain in 1993, which was recorded as an offset
to salaries and employee benefits expense.
Net pension expense for both domestic and foreign plans amounted to
$6,343,000 in 1994, $1,444,000 in 1993 and $4,521,000 in 1992.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In 1992, the Company amended its health benefits plan to eliminate retiree
coverage, except for current retirees and those employees who had already
attained a specified age and length of service. The retiree health plan is
contributory, with contributions adjusted annually, and is funded on a pay-as-
you-go basis.
The components of the net periodic postretirement benefit cost include the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1994 1993
------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.................................................. $ -- $ --
Interest cost................................................. 828 762
Amortization of transition obligation......................... 512 512
------ ------
$1,340 $1,274
====== ======
</TABLE>
The following table sets forth the estimated funded status and amounts
recognized in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 4,103 $ 3,350
Active eligible employees................................... 6,989 7,842
------- -------
11,092 11,192
Unrecognized transition obligation............................ (9,212) (9,724)
Unrecognized gain (loss)...................................... 372 (363)
------- -------
Accrued postretirement benefit cost........................... $ 2,252 $ 1,105
======= =======
</TABLE>
25
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assumed healthcare cost trend rate used for the next two years is 9.5%,
scaling down to 4.5% after 14 years. A 1% increase in the assumed healthcare
cost trend rate would increase the accumulated postretirement benefit
obligation by $1,599,000 at December 31, 1994 and would increase the net
periodic postretirement benefit cost for 1994 by $127,000.
The discount rate used to measure the accumulated postretirement benefit
obligation was 8.0% and 7.0% at December 31, 1994 and 1993, respectively. The
transition obligation is being amortized over 20 years. Prior to 1993,
postretirement benefits were recorded on a pay-as-you-go basis.
12. LEASES
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, 1994 under noncancelable
operating leases having an initial term of more than one year are as follows:
<TABLE>
<CAPTION>
TOTAL
--------------
(IN THOUSANDS)
<S> <C>
1995............................................................. $ 21,910
1996............................................................. 18,221
1997............................................................. 14,158
1998............................................................. 11,797
1999............................................................. 10,153
Subsequent years................................................. 54,782
--------
$131,021
========
</TABLE>
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $24,811,000 in 1994,
$24,122,000 in 1993 and $23,957,000 in 1992.
26
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Earnings before income taxes consist of:
Domestic........................................... $51,975 $41,305 $35,499
Foreign............................................ 1,263 7,142 1,338
------- ------- -------
$53,238 $48,447 $36,837
======= ======= =======
Provision for income taxes consists of:
Federal--
Current.......................................... $18,596 $17,428 $10,927
Deferred......................................... (4,475) (4,773) (2,245)
------- ------- -------
14,121 12,655 8,682
------- ------- -------
State and local--
Current.......................................... 4,972 4,667 3,693
Deferred......................................... (639) (682) (559)
------- ------- -------
4,333 3,985 3,134
------- ------- -------
Foreign--
Current.......................................... (856) 2,407 1,459
Deferred......................................... 1,100 (46) (361)
------- ------- -------
244 2,361 1,098
------- ------- -------
Total provision...................................... $18,698 $19,001 $12,914
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Leveraged leases.............................................. $ 2,972 $ 3,847
Other......................................................... 3,773 2,805
------- -------
Deferred tax liabilities.................................... 6,745 6,652
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits....... 9,776 6,620
Accrued liabilities........................................... 7,487 6,206
Unrealized investment losses.................................. 1,929 --
Other......................................................... 1,875 1,166
------- -------
Total deferred tax assets................................... 21,067 13,992
Valuation allowance for deferred tax assets................. -- --
------- -------
Deferred tax assets......................................... 21,067 13,992
------- -------
Net deferred tax assets......................................... $14,322 $ 7,340
======= =======
</TABLE>
27
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the provision for income taxes with the U.S. federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1994 1993 1992
--------------- --------------- ---------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate......... $18,640 35.0 $16,956 35.0 $12,525 34.0
State income taxes--net of
federal....................... 2,693 5.1 2,090 4.3 2,035 5.5
Dividend exclusion............. (993) (1.9) (699) (1.5) (888) (2.4)
Pre-acquisition earnings of
pooled companies taxed to
previous owners............... (750) (1.4) 1,158 2.4 (65) (0.1)
Foreign taxes.................. 388 .7 1,262 2.6 740 2.0
General business credits....... (2,510) (4.7) (1,655) (3.4) (1,074) (2.9)
Other--net..................... 1,230 2.3 (111) (0.2) (359) (1.0)
------- ---- ------- ---- ------- ----
$18,698 35.1 $19,001 39.2 $12,914 35.1
======= ==== ======= ==== ======= ====
</TABLE>
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, 1994)
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 $5,300,000.
28
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. FOREIGN OPERATIONS
Financial data by geographic area of operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Commissions and fees
United States................................ $ 332,795 $300,291 $274,603
Foreign, principally United Kingdom.......... 14,088 12,547 12,866
--------- -------- --------
346,883 312,838 287,469
Investment income.............................. 9,494 16,425 12,216
--------- -------- --------
$ 356,377 $329,263 $299,685
========= ======== ========
Earnings before taxes:
Operating profit (loss)
United States................................ $ 62,903 $ 48,772 $ 43,355
Foreign, principally United Kingdom.......... 106 (534) (1,560)
--------- -------- --------
63,009 48,238 41,795
General corporate expense, including interest
expense and investment income................. 9,771 (209) 4,958
--------- -------- --------
$ 53,238 $ 48,447 $ 36,837
========= ======== ========
Identifiable assets:
United States.................................. $ 227,845 $209,182 $199,895
Foreign, principally United Kingdom............ 78,641 80,090 73,097
--------- -------- --------
306,486 289,272 272,992
Corporate...................................... 144,624 188,601 152,117
--------- -------- --------
$ 451,110 $477,873 $425,109
========= ======== ========
</TABLE>
The consolidated financial statements include liabilities of $58,048,000 at
December 31, 1994 ($60,857,000 at December 31, 1993) after elimination of
intercompany balances applicable to foreign operations.
Exchange gains (losses) were approximately $106,000 in 1994, ($115,000) in
1993 and ($147,000) in 1992.
29
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
15. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994
-------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Total revenues................................. $82,949 $80,944 $97,653 $94,831
Earnings before income taxes................... 8,258 7,120 20,276 17,584
Net earnings................................... 5,234 4,517 12,806 11,983
Net earnings per common and common equivalent
share......................................... .32 .28 .81 .77
<CAPTION>
1993
-------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues................................. $74,751 $76,035 $91,590 $86,887
Earnings before income taxes................... 7,457 11,291 18,924 10,775
Net earnings................................... 4,695 7,044 12,041 5,666
Net earnings per common and common equivalent
share......................................... .29 .43 .73 .34
</TABLE>
30
<PAGE>
MANAGEMENT'S REPORT
The Management of Arthur J. Gallagher & Co. is responsible for the
preparation and integrity of the consolidated financial statements and the
related financial comments appearing in this annual report. The financial
statements were prepared in accordance with generally accepted accounting
principles and include certain amounts based on management's best estimates and
judgments. Other financial information presented in the annual report is
consistent with the financial statements.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed as authorized and are recorded and reported properly. This system
of controls is based upon written policies and procedures, appropriate
divisions of responsibility and authority, careful selection and training of
personnel and the utilization of an internal audit program and staff. Policies
and procedures prescribe that the Company and all employees are to maintain the
highest ethical standards and that business practices throughout the world are
to be conducted in a manner which is above reproach.
Ernst & Young LLP, independent auditors, has audited the Company's financial
statements and their report is presented herein.
The Board of Directors has an Audit Committee composed entirely of outside
Directors. Ernst & Young LLP has direct access to the Audit Committee and
periodically meets with the Committee to discuss accounting, auditing and
financial reporting matters.
Arthur J. Gallagher & Co.
Itasca, Illinois
January 18, 1995
/s/ J. Patrick Gallagher, Jr.
-------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
/s/ Michael J. Cloherty
-------------------------------------
Michael J. Cloherty
Chief Financial Officer
31
<PAGE>
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, 1994 and 1993, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1994. 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, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1994, the
Company changed its method of accounting for certain investments in debt and
equity securities.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
January 18, 1995
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
33
<PAGE>
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, 1995 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, 1995
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, 1995 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, 1994.
(b) Consolidated Balance Sheet as of December 31, 1994 and 1993.
(c) Consolidated Statement of Cash Flows for each of the three years
in the period ended December 31, 1994.
(d) Consolidated Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 1994.
(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:
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit Number 2(a) to Company's
Form 8-A Registration Statement filed October 22, 1987, File
No. 1-9761).
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
3.2 By-Laws of the Company (incorporated by reference to the same
exhibit number to Company's Form S-1 Registration Statement No.
33-10447).
3.3 Rights Agreement between the Company and Bank of America
Illinois (incorporated by reference to Exhibits 1 and 2 to
Company's Form 8-A Registration Statement filed May 12, 1987,
File No. 0-13480).
3.4 Assignment and Assumption Agreement of Rights Agreement by and
among Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago), Harris Trust and
Savings Bank and the Company (incorporated by reference to the
same exhibit number to Company's Form S-8 Registration
Statement No. 33-38031).
4.1 Instruments defining the rights of security holders (relevant
portions contained in the Restated Certificate of Incorporation
and By-Laws of the Company and the Rights Agreement in Exhibits
3.1, 3.2, and 3.3, respectively, hereby incorporated by
reference).
4.4 Credit Agreement dated February 16, 1993 (incorporated by
reference to the same exhibit number to the Company's Form 10-K
Annual Report for 1992, File No.
1-9761).
**10.1 Arthur J. Gallagher & Co. Incentive Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form S-1
Registration Statement No. 2-89195).
**10.1.1 Amendment No. 1 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3 to Company's Form S-8 Registration
Statement No. 33-604).
**10.1.2 Amendment No. 2 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3.1 to Company's Form S-8 Registration
Statement No. 33-14625).
**10.2 Arthur J. Gallagher & Co. Nonqualified Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form S-1
Registration Statement No. 2-89195).
**10.2.1 Amendment No. 1 to Exhibit No. 10.2 (incorporated by reference
to Exhibit No. 10.4 to Company's Form S-8 Registration
Statement No. 33-604).
**10.2.2 Amendment No. 2 to Exhibit No. 10.2 (incorporated by reference
to Exhibit No. 10.4.1 to Company's Form S-8 Registration
Statement No. 33-14625).
**10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan and related form of stock option agreement (incorporated
by reference to the same exhibit number to Company's Form 10-K
Annual Report for 1986, File No. 0-13480).
**10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan
(incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 33-22029).
**10.26.1 Amendment No. 1 to Exhibit No. 10.26 (incorporated by reference
to Exhibit No. 10.3 to Company's Form S-8 Registration
Statement No. 33-24251).
**10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan
(incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 33-22029).
**10.27.1 Amendment No. 1 to Exhibit No. 10.27 (incorporated by reference
to Exhibit No. 10.4 to Company's Form S-8 Registration
Statement No. 33-30762).
**10.27.2 Amendment No. 2 to Exhibit No. 10.27 (incorporated by reference
to Exhibit No. 10.5 to Company's Form S-8 Registration
Statement No. 33-38031).
**10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
**10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock
Option Plan (incorporated by reference to Exhibit No. 10.1 to
Company's Form S-8 Registration Statement No. 33-30816).
**10.28.1 Amendment No. 1 to Exhibit 10.28 (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report
for 1990, File No. 1-9761).
**10.28.2 Amendment No. 3 to Exhibit No. 10.28 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and Itasca
Center III Limited Partnership, a Texas limited partnership,
dated July 26, 1989 (incorporated by reference to the same
exhibit number to Company's Form 10-K Annual Report for 1989,
File No. 1-9761).
10.7 Letter dated December 31, 1983 from Arthur J. Gallagher & Co.
to Bank of America Illinois regarding Common Stock Purchase
Financing Program including exhibits thereto and related
letters (incorporated by reference to the same exhibit number
to Company's Form S-1 Registration Statement No. 2-89195).
10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985
(incorporated by reference to the same exhibit number to
Company's Form 10-K Annual Report for 1985, File No. 0-13480).
**10.10 Board of Directors' Resolution from meeting on January 26, 1984
relating to consulting and retirement benefits for certain
directors (incorporated by reference to the same exhibit number
to Company's Form S-1 Registration Statement No. 2-89195).
**10.11 Form of Indemnity Agreement between the Company and each of its
directors and corporate officers (incorporated by reference to
Attachment A to the Company's Proxy Statement dated April 10,
1987 for its Annual Meeting of Stockholders, File No.
0-13480).
**10.13 Arthur J. Gallagher & Co. Stock Option Agreements dated May 10,
1988 between the Company and each of Robert H. B. Baldwin, Jack
M. Greenberg and James R. Wimmer (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report
for 1988, File No. 1-9761).
*11.0 Statement re: computation of earnings per common and common
equivalent share.
*21.0 Subsidiaries of the Company, including state or other
jurisdiction of incorporation or organization and the names
under which each does business.
*23.1 Consent of Ernst & Young LLP, as independent auditors.
*24.0 Powers of Attorney.
*27.0 Financial Data Schedule.
All other exhibits are omitted because they are inapplicable.
</TABLE>
- - --------
*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.
(b) Reports on Form 8-K
Not applicable
36
<PAGE>
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 14TH DAY OF
MARCH, 1995.
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 14TH DAY OF MARCH, 1995 BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
*Robert E. Gallagher Chairman and Director
_________________________________________
Robert E. Gallagher
*John P. Gallagher Executive Vice President, Director and Vice
_________________________________________ Chairman
John P. Gallagher
/s/ J. Patrick Gallagher, Jr. President and Director (Chief Executive
___________________________________________ Officer)
J. Patrick Gallagher, Jr.
/s/ Michael J. Cloherty Vice President--Finance and Director (Chief
___________________________________________ Financial Officer)
Michael J. Cloherty
/s/ David B. Hoch Controller (Chief Accounting Officer)
___________________________________________
David B. Hoch
*T. Kimball Brooker Director
_________________________________________
T. Kimball Brooker
*John G. Campbell Director
_________________________________________
John G. Campbell
*Jack M. Greenberg Director
___________________________________________
Jack M. Greenberg
*Philip A. Marineau Director
___________________________________________
Philip A. Marineau
*Walter F. McClure Director
___________________________________________
Walter F. McClure
*James R. Wimmer Director
___________________________________________
James R. Wimmer
</TABLE>
/s/ Carl E. Fasig
*By: ________________________________
Carl E. Fasig, Attorney-in-Fact
37
<PAGE>
SCHEDULE II
ARTHUR J. GALLAGHER & CO.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF YEAR EXPENSE ADJUSTMENTS YEAR
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful
accounts................... $ 875,815 $ 2,154 $ (31,543)(1) $ 846,426
Amortization of goodwill.... 2,797,673 334,514 134,131 (3) 3,266,318
Amortization of expiration
lists...................... 1,818,706 589,143 1,471,206 (3) 3,879,055
Year ended December 31, 1993
Allowance for doubtful
accounts................... $1,789,000 $1,390,251 $(2,303,436)(1) $ 875,815
Amortization of goodwill.... 2,507,894 289,779 2,797,673
Amortization of expiration
lists...................... 1,545,314 273,392 1,818,706
Year ended December 31, 1992
Allowance for doubtful
accounts................... $ 812,619 $ 925,727 $ 50,654 (1) $1,789,000
Amortization of goodwill.... 2,195,488 312,406 2,507,894
Amortization of expiration
lists...................... 1,381,609 208,359 (44,654)(2) 1,545,314
</TABLE>
- - --------
(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.
1
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit Number 2(a) to Company's Form 8-A
Registration Statement filed October 22, 1987, File No. 1-9761).
3.2 By-Laws of the Company (incorporated by reference to the same
exhibit number to Company's Form S-1 Registration Statement
No. 33-10447).
3.3 Rights Agreement between the Company and Bank of America Illinois
(incorporated by reference to Exhibits 1 and 2 to Company's Form 8-
A Registration Statement filed May 12, 1987, File No. 0-13480).
3.4 Assignment and Assumption Agreement of Rights Agreement by and
among Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago), Harris Trust and
Savings Bank and the Company (incorporated by reference to the same
exhibit number to Company's Form S-8 Registration Statement No. 33-
38031).
4.1 Instruments defining the rights of security holders (relevant
portions contained in the Restated Certificate of Incorporation and
By-Laws of the Company and the Rights Agreement in Exhibits 3.1,
3.2, and 3.3, respectively, hereby incorporated by reference).
4.4 Credit Agreement dated February 16, 1993 (incorporated by reference
to the same exhibit number to the Company's Form 10-K Annual Report
for 1992, File No. 1-9761).
**10.1 Arthur J. Gallagher & Co. Incentive Stock Option Plan and related
form of stock option agreement (incorporated by reference to the
same exhibit number to Company's Form S-1 Registration Statement
No. 2-89195).
**10.1.1 Amendment No. 1 to Exhibit No. 10.1 (incorporated by reference to
Exhibit No. 10.3 to Company's Form S-8 Registration Statement No.
33-604).
**10.1.2 Amendment No. 2 to Exhibit No. 10.1 (incorporated by reference to
Exhibit No. 10.3.1 to Company's Form S-8 Registration Statement No.
33-14625).
**10.2 Arthur J. Gallagher & Co. Nonqualified Stock Option Plan and
related form of stock option agreement (incorporated by reference
to the same exhibit number to Company's Form S-1 Registration
Statement No. 2-89195).
**10.2.1 Amendment No. 1 to Exhibit No. 10.2 (incorporated by reference to
Exhibit No. 10.4 to Company's Form S-8 Registration Statement No.
33-604).
**10.2.2 Amendment No. 2 to Exhibit No. 10.2 (incorporated by reference to
Exhibit No. 10.4.1 to Company's Form S-8 Registration Statement No.
33-14625).
**10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan and related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form 10-K Annual
Report for 1986, File No. 0-13480).
**10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan
(incorporated by reference to the same exhibit number to Company's
Form S-1 Registration Statement No. 33-22029).
**10.26.1 Amendment No. 1 to Exhibit No. 10.26 (incorporated by reference to
Exhibit No. 10.3 to Company's Form S-8 Registration Statement No.
33-24251).
**10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan
(incorporated by reference to the same exhibit number to Company's
Form S-1 Registration Statement No. 33-22029).
**10.27.1 Amendment No. 1 to Exhibit No. 10.27 (incorporated by reference to
Exhibit No. 10.4 to Company's Form S-8 Registration Statement No.
33-30762).
**10.27.2 Amendment No. 2 to Exhibit No. 10.27 (incorporated by reference to
Exhibit No. 10.5 to Company's Form S-8 Registration Statement No.
33-38031).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
**10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock Option
Plan (incorporated by reference to the Exhibit No. 10.1 to
Company's Form S-8 Registration Statement No. 33-30816).
**10.28.1 Amendment No. 1 to Exhibit No. 10.28 (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report for
1990, File No. 1-9761).
**10.28.2 Amendment No. 3 to Exhibit No. 10.28 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and Itasca Center
III Limited Partnership, a Texas limited partnership, dated July
26, 1989 (incorporated by reference to the same exhibit number to
Company's Form 10-K Annual Report for 1989, File No. 1-9761).
10.7 Letter dated December 31, 1983 from Arthur J. Gallagher & Co. to
Bank of America Illinois regarding Common Stock Purchase Financing
Program including exhibits thereto and related letters
(incorporated by reference to the same exhibit number to Company's
Form S-1 Registration Statement No. 2-89195).
**10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985
(incorporated by reference to the same exhibit number to Company's
Form 10-K Annual Report for 1985, File No. 0-13480).
**10.10 Board of Directors' Resolution from meeting on January 26, 1984
relating to consulting and retirement benefits for certain
directors (incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 2-89195).
**10.11 Form of Indemnity Agreement between the Company and each of its
directors and corporate officers (incorporated by reference to
Attachment A to the Company's Proxy Statement dated April 10, 1987
for its Annual Meeting of Stockholders, File No. 0-13480).
**10.13 Arthur J. Gallagher & Co. Stock Option Agreements dated May 10,
1988 between the Company and each of Robert H. B. Baldwin, Jack M.
Greenberg and James R. Wimmer (incorporated by reference to the
same exhibit number to Company's Form 10-K Annual Report for 1988,
File No. 1-9761).
*11.0 Statement re: computation of earnings per common and common
equivalent share.
*21.0 Subsidiaries of the Company, including state or other jurisdiction
of incorporation or organization and the names under which each
does business.
*23.1 Consent of Ernst & Young LLP, as independent auditors.
*24.0 Powers of Attorney.
*27.0 Financial Data Schedule.
All other exhibits are omitted because they are inapplicable.
</TABLE>
- - --------
*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.
<PAGE>
EXHIBIT 11.0
ARTHUR J. GALLAGHER & CO.
COMPUTATION OF EARNINGS PER COMMON
AND COMMON EQUIVALENT SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Net earnings applicable to computation $34,540 $29,446 $23,923
======= ======= =======
Average common shares outstanding 15,108 15,569 15,270
Dilutive effect of stock options using
the treasury stock method 794 923 669
------- ------- -------
Weighted average number of common and
common equivalent shares outstanding 15,902 16,492 15,939
======= ======= =======
Net earnings per common and common
equivalent share $ 2.17 $ 1.79 $ 1.50
</TABLE>
<PAGE>
EXHIBIT 21.0
SUBSIDIARIES OF THE COMPANY
In the following list of subsidiaries of the Company, those companies which
are indented represent subsidiaries of the corporation under which they are
indented. Except for directors' qualifying shares, 100% of the voting stock of
each of the subsidiaries listed below, other than AJG Capital, Inc., is owned of
record or beneficially by its indicated parent. /(1)/
<TABLE>
<CAPTION>
State or Other
Jurisdiction of
Name Incorporation
---- ---------------
<S> <C>
Arthur J. Gallagher & Co. (Registrant) Delaware
Arthur J. Gallagher & Co. (Illinois) Illinois
Great Lakes Agency Incorporated Illinois
Arthur J. Gallagher & Co. of Oklahoma, Inc. Oklahoma
Arthur J. Gallagher & Co. - Chicago Metro Illinois
Arthur J. Gallagher & Co. (St. Louis) Delaware
Holt Texas, Inc. Texas
Arthur J. Gallagher Inc. Texas
Gallagher Braniff, Inc. Texas
Arthur J. Gallagher & Co. (Florida) Florida
Arthur J. Gallagher & Co. of New York, Inc. New York
Arthur J. Gallagher & Co. Ohio Agency, Inc. Ohio
International Special Risk Services, Inc. Illinois
Arthur J. Gallagher & Co. - Greenville South Carolina
Arthur J. Gallagher & Co. of Massachusetts, Inc. Massachusetts
Gallagher Insurance Advisors, Inc. Massachusetts
Morrill & Everett, Inc. New Hampshire
K.C.L. of Vermont, Inc. Vermont
Arthur J. Gallagher & Co. of Rhode Island, Inc. Rhode Island
Arthur J. Gallagher International, Inc. Delaware
Arthur J. Gallagher & Co. (Bermuda) Limited Bermuda
Arthur J. Gallagher Intermediaries (Bermuda) Limited Bermuda
Arthur J. Gallagher Management (Bermuda) Limited Bermuda
Arthur J. Gallagher & Co. - Little Rock Arkansas
Arthur J. Gallagher & Co. of Georgia, Inc. Georgia
Gallagher Plumer Holdings Limited England
Arthur J. Gallagher Investments, Inc. Delaware
Arthur J. Gallagher (UK) Limited England
John Plumer & Company Limited England
John Plumer & Partners Limited England
John Plumer & Partners Marine Limited England
Gallagher Plumer North America Limited England
Gallagher Plumer Non-Marine Reinsurance Brokers Limited England
Gallagher Plumer Aviation Limited England
Gallagher Plumer Marine Reinsurance Brokers Limited England
Gallagher Plumer Non-Marine Limited England
Gallagher Plumer & Partners Limited England
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Arthur J. Gallagher Financial Services, Inc. Delaware
Gallagher Bassett Services, Inc. Delaware
Gallagher Bassett of New York, Inc. New York
Gallagher Bassett International Ltd. Delaware
Gallagher bassett International Ltd. (UK) England
Gallagher Bassett International S.A. France
Arthur J. Gallagher & Co. Insurance Brokers of
California, Inc. California
Charity First Insurance Services, Inc. California
Arthur J. Gallagher & Co. of Connecticut, Inc. Connecticut
Arthur J. Gallagher Intermediaries, Inc. New York
LHC of Illinois, Inc. Illinois
Arthur J. Gallagher & Co. of Michigan, Inc. Michigan
Arthur J. Gallagher & Co. - Denver Colorado
Arthur J. Gallagher & Co. of Washington, Inc. Washington
AJG Capital, Inc./2/ Illinois
Gallagher Louisiana, Inc. Louisiana
Arthur J. Gallagher of Louisiana, Inc. Louisiana
Broussard, Bush & Hurst of Mississippi, Inc. Mississippi
Broussard, Bush & Hurst of Texas, Inc. Texas
The ABOW Companies, Inc. Michigan
Arthur J. Gallagher & Co. of Wisconsin, Inc. Wisconsin
Gallagher Woodsmall, Inc. Missouri
Woodsmall Benefit Services, Inc. Delaware
Gallagher Benefit Services of New York, Inc. New York
Arthur J. Gallagher & Co. of New Jersey, Inc. New Jersey
Arthur J. Gallagher & Co. Ohio Life Agency, Inc. Ohio
Gallagher Pipino, Inc. Ohio
Gallagher Sullivan, Inc. South Carolina
Arthur J. Gallagher & Co. of Pennsylvania, Inc. Pennsylvania
Gallagher Benefit Services of Texas, Inc. Texas
</TABLE>
/1/The Company conducts some of its operations under the following names:
Gallagher Benefit Services, Gallagher Bassett Benefit Administrators, Gallagher
Bassett Information Services, Pacific Atlantic Administrators, The Boston
Insurance Center, Gallagher Heffernan, Gallagher Newman, Broussard, Bush &
Hurst, Henley, Williams & Associates, Steel Agency and Gallagher Emperion.
/2/10% of the Common Stock of AJG Capital, Inc. is owned by an unrelated
party.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
Our audits included the consolidated financial statement schedule of Arthur
J. Gallagher & Co. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the consolidated financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference in the Registration
Statements, Form S-8, No. 33-604 and Form S-8, No. 33-14625) pertaining to the
Arthur J. Gallagher & Co. Incentive, United Kingdom Incentive and Nonqualified
Stock Option Plans, in the Registration Statement (Form S-8, No. 33-30762)
pertaining to the Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan,
in the Registration Statements (Form S-8, No. 33-24251 and Form S-8, No. 33-
38031) pertaining to the Arthur J. Gallagher & Co. 1988 Incentive and 1988
Nonqualified Stock Option Plans, in the Registration Statement (Form S-8, No.
33-30816) pertaining to the Arthur J. Gallagher & Co. Non-Employee Directors'
Stock Option Plan, in the Registration Statements (Form S-8, No. 33-64614 and
Form S-8, No. 33-80648) pertaining to the Arthur J. Gallagher & Co. 1988
Incentive, 1988 Nonqualified, and Non-Employee Directors' Stock Option Plans,
and in the related Prospectuses, of our report dated January 18, 1995 with
respect to the consolidated financial statements included herein, and our
report, with respect to which the date is January 18, 1995, included in the
preceding paragraph with respect to the consolidated financial statement
schedule included in this Annual Report on Form 10-K of Arthur J. Gallagher &
Co.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Chicago, Illinois
March 14, 1995
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ T. KIMBALL BROOKER
----------------------------
T. KIMBALL BROOKER
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ JOHN G. CAMPBELL
----------------------------
JOHN G. CAMPBELL
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ JOHN P. GALLAGHER
----------------------------
JOHN P. GALLAGHER
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ JACK M. GREENBERG
----------------------------
JACK M. GREENBERG
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ PHILIP A. MARINEAU
----------------------------
PHILIP A. MARINEAU
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ WALTER F. MC CLURE
----------------------------
WALTER F. MC CLURE
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ JAMES R. WIMMER
----------------------------
JAMES R. WIMMER
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1994 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 1st day of March, 1995.
/s/ ROBERT E. GALLAGHER
----------------------------
ROBERT E. GALLAGHER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ARTHUR J. GALLAGHER & CO. CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED IN THE 1994 FORM 10-K ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 108,824
<SECURITIES> 42,637
<RECEIVABLES> 179,823
<ALLOWANCES> 846
<INVENTORY> 0
<CURRENT-ASSETS> 351,072
<PP&E> 58,930
<DEPRECIATION> (38,918)
<TOTAL-ASSETS> 451,110
<CURRENT-LIABILITIES> 341,726
<BONDS> 0
<COMMON> 14,784
0
0
<OTHER-SE> 81,947
<TOTAL-LIABILITY-AND-EQUITY> 451,150
<SALES> 346,883
<TOTAL-REVENUES> 356,377
<CGS> 188,920
<TOTAL-COSTS> 188,920
<OTHER-EXPENSES> 112,491
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,728
<INCOME-PRETAX> 53,238
<INCOME-TAX> 18,698
<INCOME-CONTINUING> 34,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,540
<EPS-PRIMARY> 2.17
<EPS-DILUTED> 2.17
</TABLE>
