<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM_________________________ TO___________________________
Commission File Number 1-9761
ARTHUR J. GALLAGHER & CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO PIERCE PLACE, ITASCA, ILLINOIS 60143-3141
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(708) 773-3800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [_]
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of June 30, 1996 was 15,280,385.
<PAGE>
ARTHUR J. GALLAGHER & CO.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE NO.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statement of Earnings for the three-month and
six-month periods ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheet at June 30, 1996 and
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows for the six-month
periods ended June 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 7-8
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 9
Exhibit 3.1 - Restated Certificate of Incorporation
of the Company as Amended
Exhibit 3.5 - Amendment to the Rights Agreement
dated as of May 12, 1987
Exhibit 11.0 - Computation of Net Earnings Per
Common and Common Equivalent Share (Unaudited)
Exhibit 13.0 - Liquidity and Capital Resources (from "Item 7.
Management's Discussion and Analysis of Financial Condition
and Results of Operations" from Form 10-K for fiscal year ended
December 31, 1995)
Exhibit 27.0 - Financial Data Schedule
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
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<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-month period ended Six-month period ended
June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Commissions $ 56,490 $53,702 $114,677 $111,134
Fees 41,432 38,419 79,624 74,823
Investment income and other 4,661 3,472 8,999 6,326
-------- ------- -------- --------
Total revenues 102,583 95,593 203,300 192,283
Expenses:
Salaries and employee benefits 57,171 54,240 112,546 108,441
Other operating expenses 34,713 32,582 67,617 64,753
-------- ------- -------- --------
Total expenses 91,884 86,822 180,163 173,194
-------- -------- -------- --------
Earnings before income taxes 10,699 8,771 23,137 19,089
Provision for income taxes 3,638 3,184 7,867 6,774
-------- ------- -------- --------
Net earnings $ 7,061 $ 5,587 $ 15,270 $ 12,315
======== ======= ======== ========
Net earnings per common and common
equivalent share $ .43 $ .34 $ .92 $ .75
Dividends declared per common share $ .29 $ .25 $ .58 $ .50
Weighted average number of common and
common equivalent shares outstanding 16,921 16,420 17,057 16,324
</TABLE>
See accompanying notes.
-3-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- -------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,962 $ 53,764
Restricted cash 56,330 69,043
Premiums and fees receivable 205,855 194,330
Investment strategies - trading 52,127 46,123
Other 23,804 20,615
-------- --------
Total current assets 386,078 383,875
Marketable securities - available for sale 40,589 41,712
Other noncurrent assets 40,384 42,223
Fixed assets 70,960 67,569
Accumulated depreciation and amortization (47,282) (44,850)
-------- --------
Net fixed assets 23,678 22,719
Intangible assets - net 6,926 7,576
-------- --------
$497,655 $498,105
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $276,627 $265,181
Accrued salaries and bonuses 5,857 13,468
Accounts payable and other accrued liabilities 60,176 57,160
Unearned fees 13,880 12,746
Income taxes payable 8,509 10,409
Other 11,427 6,907
-------- --------
Total current liabilities 376,476 365,871
Deferred income taxes and other noncurrent accounts 10,562 13,801
Stockholders' equity:
Common stock - issued and outstanding 15,280
shares in 1996 and 15,538 shares in 1995 15,280 15,538
Retained earnings 95,563 102,861
Unrealized holding (loss) gain on available
for sale securities - net of income taxes (226) 34
-------- --------
Total stockholders' equity 110,617 118,433
-------- --------
$497,655 $498,105
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-month period ended
June 30,
1996 1995
------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 15,270 $ 12,315
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net gain on investments (2,054) (187)
Depreciation and amortization 4,766 4,755
Decrease (increase) in restricted cash 12,713 (5,646)
Increase in premiums receivable (7,653) (15,724)
Increase in premiums payable 11,446 30,077
Increase in trading investments - net (4,274) (2,648)
(Increase) decrease in other current
assets (3,189) 51
Decrease in accrued salaries
and bonuses (7,611) (4,726)
Increase in accounts payable and other
accrued liabilities 2,180 694
Decrease in income taxes payable (1,900) (5,722)
(Decrease increase in deferred taxes (896) 646
Other 2,081 9,702
-------- --------
Net cash provided by operating activities 20,879 23,587
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (14,009) (9,276)
Proceeds from the sale of marketable securities 13,999 7,680
Proceeds from maturities of marketable securities 1,024 1,127
Additions to fixed assets (5,075) (5,539)
Other 63 204
-------- --------
Net cash used by investing activities (3,998) (5,804)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,825 4,886
Tax benefit from issuance of common stock 1,364 1,193
Repurchase of common stock (19,887) (5,224)
Dividends paid (8,391) (7,005)
Retirement of long-term debt (630) (1,130)
Equity transactions of pooled companies
prior to dates of acquisition (964) 211
-------- --------
Net cash used by financing activities (22,683) (7,069)
-------- --------
Net (decrease) increase in cash and cash equivalents (5,802) 10,714
Cash and cash equivalents at beginning of period 53,764 44,306
-------- --------
Cash and cash equivalents at end of period $ 47,962 $ 55,020
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 217 $ 270
Income taxes paid $ 9,387 $ 10,746
</TABLE>
See accompanying notes.
-5-
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been
omitted pursuant to such rules and regulations. The Company believes the
disclosures are adequate to make the information presented not misleading.
The unaudited consolidated financial statements included herein are, in the
opinion of management, prepared on a basis consistent with the audited
consolidated financial statements for the year ended December 31, 1995 and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information set forth.
The quarterly results of operations are not necessarily indicative of
results of operations for subsequent quarters or the full year.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's 1995 Annual Report to Stockholders.
2. ACQUISITIONS - POOLINGS OF INTERESTS
On February 29, 1996, the Company acquired substantially all of the net
assets of Levitt/Kristan Company in exchange for approximately 112,000
shares of its Common Stock. This acquisition was accounted for as a
pooling of interests. The consolidated financial statements for all
periods prior to the acquisition date have been restated to include the
operations of this company.
The following summarizes the restatement to reflect this acquisition (in
thousands):
<TABLE>
<CAPTION>
ATTRIBUTABLE
THREE-MONTH PERIOD ARTHUR J. TO POOLED
ENDED JUNE 30, 1995 GALLAGHER & CO. COMPANIES AS RESTATED
------------------- --------------- ------------ -----------
<S> <C> <C> <C>
Revenues $ 94,893 $ 700 $ 95,593
Net earnings (loss) $ 5,875 $ (288) $ 5,587
======== ====== ========
SIX-MONTH PERIOD
ENDED JUNE 30, 1995
-------------------
Revenues $190,498 $1,785 $192,283
Net earnings (loss) $ 12,511 $ (196) $ 12,315
======== ====== ========
</TABLE>
On May 31, 1996, the Company acquired substantially all of the net assets of
Alliance Insurance Group, Inc. in exchange for approximately 64,000 shares of
its Common Stock. This acquisition was accounted for as a pooling of interests
and was not material to the Company.
On July 1, 1996, the Company acquired substantially all of the net assets of
Lamberson Koster & Company in exchange for approximately 391,000 shares of its
Common Stock. This acquisition will be accounted for as a pooling of interests.
-6-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Reference is made to the Liquidity and Capital Resources section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's 1995 Form 10-K Annual Report for a description of the
Company's need for and ability to generate capital, which description is hereby
incorporated by reference. See Exhibit 13.0.
Since the Company filed its 1995 Form 10-K Annual Report, it extended its line
of credit facility of $17.5 million to April 30, 1997, and borrowed $10 million
against this facility.
RESULTS OF OPERATIONS
Extremely soft pricing in the insurance marketplace continues, and the Company
remains doubtful that price increases will change significantly in the remainder
of 1996.
Commission revenues increased by 5% to $56.5 million in the second quarter of
1996 and by 3% to $114.7 million in the first half of 1996 over the respective
periods in 1995. These increases are due principally to new business production
partially offset by lost business.
Fee revenues increased by 8% to $41.4 million in the second quarter of 1996 and
by 6% to $79.6 million in the first six months over the respective periods in
1995. These increases reflect new business production and to a lesser extent
renewal fee increases of self-insurance products generated primarily by
Gallagher Bassett Services, Inc. (a Company subsidiary), partially offset by
lost business.
Investment income and other increased 34% to $4.7 million in the second quarter
of 1996 and by 42% to $9.0 million in the first half of 1996 over the respective
periods in 1995. These increases were due primarily to significantly higher
returns on funds invested with outside fund managers.
Total expenses increased by 6% or $5.1 million in the second quarter of 1996
from the same period in 1995 and increased by 4% or $7.0 million in the first
half of 1996 over the same period in 1995.
Salaries and employee benefits increased by $2.9 million or 5% to $57.2 million
in the second quarter of 1996 and by $4.1 million or 4% to $112.5 million in the
first six months of 1996 over the respective periods in 1995. These increases
are due principally to increased employee head count combined with salary
increases and higher employee fringe benefit costs.
Other operating expenses increased by $2.1 million or 7% to $34.7 million in the
second quarter of 1996 and by 4% to $67.6 million in the first six months of
1996 over the respective periods in 1995. These increases are due primarily to
new and expanded offices and costs associated with more rentable space and
general office expenses and increased business insurance costs. Travel and
other direct employee expenses were up due to the growth in sales volume and
employee head count.
The effective income tax rate of 34% for the second quarter and first six months
of 1996 is less than the statutory federal rate of 35% and is less than the
Company's effective tax rate of 36% and 35% for the second quarter and first six
months of 1995, respectively. These differences are due primarily to the net
effect of state and foreign taxes which are substantially offset by the tax
benefits of certain investments.
-7-
<PAGE>
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Earnings per share for the second quarter of 1996 were $.43 compared to $.34 in
1995, a 26% increase. First half earnings per share increased 23% from $.75 in
1995 to $.92 in 1996. These earnings per share increases reflect the growth in
revenues and a smaller growth in expenses noted above.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This quarterly report contains forward looking statements. Forward looking
statements made by or on behalf of the Company are subject to risks and
uncertainties, including but not limited to the following: the Company's
commission revenues are highly dependent on premiums charged by insurers, which
are subject to fluctuation; the property and casualty insurance industry
continues to experience a prolonged soft market despite high losses; continued
low interest rates will reduce income earned on invested funds; the insurance
brokerage and service businesses are extremely competitive with a number of
competitors being substantially larger than the Company; the alternative
insurance market continues to grow; the Company's revenues vary significantly
from quarter to quarter as a result of the timing of policy renewals and the net
effect of new and lost business production; the general level of economic
activity can have a substantial impact on the Company's renewal business. The
Company's ability to grow has been enhanced through acquisitions, which may or
may not be available on acceptable terms in the future, and which, if
consummated, may or may not be advantageous to the Company. Accordingly, actual
results may differ materially from those set forth in the forward looking
statements. Attention is also directed to other risk factors set forth in
documents filed by the Company with the Securities and Exchange Commission.
-8-
<PAGE>
ARTHUR J. GALLAGHER & CO.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of Stockholders of Arthur J. Gallagher & Co. held on
May 21, 1996, 14,052,568 shares of the Company's Common Stock, or 90.5% of
the total Common Stock outstanding on the record date for such meeting,
were represented.
Among other things, the stockholders of the Company approved an amendment
to the Company's 1988 Nonqualified Stock Option Plan increasing the number
of shares of Common Stock from 5,500,000 to 6,175,000. Of the shares voted
with respect to this proposal, 8,544,184 were voted in favor, 5,155,059
were voted against and 353,325 abstained.
The stockholders of the Company approved an amendment to the Company's 1989
Non-Employee Directors' Stock Option Plan increasing the number of shares
of Common Stock from 106,000 to 200,000. Of the shares voted with respect
to this proposal, 9,231,678 were voted in favor, 4,466,725 were voted
against and 354,165 abstained.
The stockholders of the Company approved an amendment to the Company's
Restated Certificate of Incorporation increasing the authorized Common
Stock from 50,000,000 to 100,000,000 shares. Of the shares voted with
respect to this proposal, 12,899,891 were voted in favor, 1,108,197 were
voted against and 44,480 abstained.
ITEM 5. OTHER INFORMATION
On July 18, 1996, the Board of Directors of the Company authorized an
amendment to the Rights Agreement between the Company and Harris Trust and
Savings Bank extending the Agreement until May 12, 2007. The Agreement
would have terminated in accordance with its original terms on May 12,
1997. Exhibit 3.5
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 3.1 - Restated Certificate of Incorporation of the Company as
Amended.
Exhibit 3.5 - Amendment to the Rights Agreement dated as of May 12,
1987.
Exhibit 11.0 - Computation of Net Earnings Per Common and Common
Equivalent Share (Unaudited).
Exhibit 13.0 - Liquidity and Capital Resources (from "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" from Form 10-K for fiscal year ended December
31, 1995).
Exhibit 27.0 - Financial Data Schedule (Unaudited).
b. Reports on Form 8-K. No Reports on Form 8-K were filed during the
three-month period ended June 30, 1996.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ARTHUR J. GALLAGHER & CO.
Date: July 29, 1996
/s/Michael J. Cloherty
----------------------------------------
Michael J. Cloherty
Executive Vice President - Finance
Chief Financial Officer
/s/David B. Hoch
---------------------------------------
David B. Hoch
Controller
Chief Accounting Officer
-10-
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
ARTHUR J. GALLAGHER & CO.
(FORMERLY AJG CO.)
Arthur J. Gallagher & Co. hereby certifies, by its officers, that this Restated
Certificate of Incorporation has been duly adopted by the board of directors of
Arthur J. Gallagher & Co. without a vote of stockholders, in accordance with the
provisions of Section 245 of the General Corporation Law of the State of
Delaware. The corporation further certifies that this Restated Certificate of
Incorporation only restates and integrates and does not further amend the
provisions of the corporation's certificate of incorporation as heretofore
amended or supplemented and there is no discrepancy between those provisions and
the provisions of this restated certificate.
FIRST. The name of the corporation is Arthur J. Gallagher & Co.
SECOND. The address of the corporation's registered office in the State of
Delaware is 229 South State in the City of Dover, 19901, and County of Kent.
The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD. The purpose of the corporation is to engage in any lawful act of
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. (A) The aggregate number of shares which the corporation is authorized
to issue is 51,000,000, of which 1,000,000 shares shall be Preferred Stock with
no par value per share and 50,000,000 shares shall be Common Stock with par
value of $1.00 per share.
(B) The designations, relative rights, voting rights, preferences and
privileges of each class of stock of the corporation, and the restrictions or
qualifications thereof shall be as follows:
1. PREFERRED STOCK
(a) The board of directors is expressly authorized at any time, and from
time to time, to issue shares of Preferred Stock in one or more series, and for
such consideration as the board may determine, with such voting powers, full or
limited but not to exceed one vote per share, or without voting powers, and with
such designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, as
shall be stated in the resolution or resolutions providing for the issue
thereof, and as are not stated in this Certificate of Incorporation, or any
amendment hereto. All shares of any one series shall be of equal rank and
identical in all respects.
(b) No dividend shall be paid or declared on any particular series of
Preferred Stock unless dividends shall be paid or declared pro rata on all
shares of Preferred Stock at the time outstanding of each other series which
ranks equally as to dividends with such particular series.
<PAGE>
(c) Unless and except to the extent otherwise required by law or provided
in the resolution or resolutions of the board of directors creating any series
of Preferred Stock pursuant to this section, the holders of the Preferred Stock
shall have no voting power with respect to any matter whatsoever. In no event
shall the Preferred Stock be entitled to more than one vote in respect of each
share of stock. Subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock, any amendment to this Certificate of
Incorporation which shall increase or decrease the authorized capital stock of
any class or classes may be adopted by the affirmative vote of the holders of a
majority of the outstanding shares of the voting stock of the corporation.
(d) Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the corporation, or which have been issued and
reacquired in any manner, shall, upon compliance with any applicable provisions
of The General Corporation Law of the State of Delaware, have the status of
authorized and unissued shares of Preferred Stock and may be reissued by the
board of directors as part of the series of which they were originally a part or
may be reclassified into and reissued as part of a new series or as a part of
any other series, all subject to the protective conditions or restrictions of
any outstanding series of Preferred Stock.
2. COMMON STOCK. The holders of the Common Stock shall be entitled to receive
such dividends as the board of directors may declare from time to time, provided
that any and all preferred dividends on the Preferred Stock for the then current
quarter have been theretofore set aside or paid, and all prior quarterly
dividends on the Preferred Stock have been paid in full. Upon the liquidation of
the corporation the holders of the Common Stock shall receive, share and share
alike, all of the net assets of the corporation remaining after the payment of
the liquidation preference payable with respect to the Preferred Stock. The
Common Stock shall not be subject to redemption or retirement. Each holder of
the Common Stock shall be entitled to one vote for each share of such stock
standing in his name on the books of the corporation. The holders of the Common
Stock shall not have cumulative voting rights in the election of directors.
3. NO PRE-EMPTIVE RIGHTS. No stockholder of the corporation shall, because of
his ownership of stock, have a pre-emptive or other right to purchase, subscribe
for, or take any part of any stock or any part of the notes, debentures, bonds,
or other securities convertible into or carrying options or warrants to purchase
stock of the corporation. Any part of the capital stock and any part of the
notes, debentures, bonds or other securities convertible into or carrying
options or warrants to purchase stock of the corporation authorized by this
Certificate of Incorporation or any amendment thereto, may at any time be
issued, optioned for sale, and sold or disposed of by the corporation pursuant
to resolutions of its board of directors to such persons and upon such terms as
may to such board seem proper without first offering such stock or securities or
any part thereof to existing stockholders.
FIFTH. The corporation is to have perpetual existence.
SIXTH. In furtherance and not in limitation of the powers conferred by statute,
the board of directors is expressly authorized:
To make, alter or repeal the by-laws of the corporation.
To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation.
<PAGE>
To set apart out of any of the funds of the corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
By resolution passed by a majority of the whole board, to designate
one or more committees, each committee to consist of one or more of the
directors of the corporation. The board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. The by-laws may
provide that in the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the board of directors to act at the meeting in
the place of any such absent or disqualified member. Any such committee, to
the extent provided in the resolution of the board of directors, or in the
by-laws of the corporation, shall have and may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation
to be affixed to all papers which may require it; but no such committee
shall have the power or authority in reference to amending the Certificate
of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the by-laws of the corporation; and, unless the
resolution or by-laws, expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance
of stock.
When and as authorized by the stockholders in accordance with statute,
to sell, lease or exchange all or substantially all of the property and
assets of the corporation including its goodwill, upon such terms and
conditions and for such consideration, which may consist in whole or in
part of money or property including shares of stock in, and/or other
securities of, any other corporation or corporations, as its board of
directors shall deem expedient and for the best interests of the
corporation.
SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stock-holders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
<PAGE>
EIGHTH. (a) Meetings of stockholders may be held within or without the State
of Delaware, as the by-laws may provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of directors or in the by-laws of the corporation.
(b) Whenever the vote of stockholders at a meeting thereof is required
or permitted to be taken for or in connection with any corporate action, by
any provision of the General Corporation Law of the State of Delaware, the
meeting and vote of stockholders may be dispensed with if the holders of a
majority of the shares of stock which would have been entitled to be voted
upon the action if such meeting were held shall consent in writing to such
corporate action being taken; provided that in no case shall the written
consent be by the holders of stock having less than the minimum percentage
of the total vote required by statute for the proposed corporate action and
that prompt notice must be given to all stockholders of the taking of
corporate action without a meeting and by less than unanimous written
consent.
(c) Election of directors need not be by written ballot unless the
by-laws of the corporation shall so provide.
NINTH. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
TENTH. A. In addition to the vote of stockholders otherwise required by law
or by the terms of any other Article of this Certificate of Incorporation, the
affirmative vote of the holders of not less than 80% of the outstanding shares
of voting stock of this corporation and the affirmative vote of the holders of
not less than 67% of the outstanding shares of voting stock held by stockholders
other than a "Related Person" (as hereinafter defined) shall be required for the
approval or authorization of any "Business Combination" (as hereinafter
defined); provided, however, that the 80% and 67% voting requirements shall not
be applicable if:
(1) The "Continuing Directors" of this corporation (as hereinafter defined)
by a two-thirds vote (a) have expressly approved in advance the acquisition of
outstanding shares of voting stock of the corporation that caused the Related
Person to become a Related Person, or (b) have approved the Business Combination
prior to the Related Person involved in the Business Combination having become a
Related Person; or
(2) The Business Combination is solely between this corporation and another
corporation, 50% or more of the voting stock of which is owned by this
corporation and none of which is owned by the Related Person; provided that if
this corporation is not the surviving entity, each stockholder of this
corporation receives the same type of consideration in such transaction in
proportion to his stockholdings and the provisions of this Article TENTH of this
corporation's Certificate of Incorporation are continued in effect or adopted by
such surviving corporation as part of its articles of incorporation or
certificate of incorporation, as the case may be, without any change; or
(3) All of the following conditions are satisfied:
<PAGE>
(a) The cash or fair market value of the property, securities or other
consideration to be received per share by holders of common stock of this
corporation in the Business Combination is not less than the higher of:
(i) the highest per share price (including brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by the
the Related Person in acquiring any of its holdings of this
corporation's common stock, or
(ii) an amount that bears that same percentage relationship to
the market price of this corporation's common stock immediately prior
to the announcement of such Business Combination as the highest per
share price determined in (i) above bears to the market price of this
corporation's common stock immediately prior to the commencement of
the acquisition of this corporation's voting stock that caused such
Related Person to become a Related Person, or
(iii) an amount calculated by multiplying the earnings per
share of the corporation's common stock for the four fiscal quarters
immediately preceding the record date for determination of
stockholders entitled to vote on such Business Combination by the
price/earnings multiple of the Related Person as of the record date as
customarily computed and reported in the financial press.
Appropriate adjustments shall be made with respect to (i), (ii) and (iii)
above for recapitalizations and for stock splits, stock dividends, and like
distributions; and
(b) A timely mailing shall have been made to the stockholders of this
corporation containing in a prominent place (i) any recommendations as to
the advisability (or inadvisability) of the Business Combination that the
Continuing Directors or "Outside Directors" (as hereinafter defined) may
choose to state, if there are at the time any such directors, and (ii) the
opinion of a reputable nationally recognized investment banking or
financial services firm as to the fairness from the financial point of view
of the terms of the Business Combination to the stockholders of this
corporation other than the Related Person (such firm to be engaged solely
on behalf of such other stockholders, to be paid a reasonable fee for its
services by this corporation upon receipt of such opinion, to be a firm
that has not previously been significantly associated with the Related
Person and, if there are at the time any such directors, to be selected by
a majority of the Continuing Directors and Outside Directors).
B. For the purposes of this Article TENTH, the following definitions
shall apply:
(1) The term "Business Combination" shall mean (a) any merger or
consolidation of this corporation or a subsidiary of this corporation with or
into a Related Person, (b) any sale, lease, exchange, transfer or other
disposition, including without limitation a mortgage or any other security
device, of all or any "Substantial Part" (as hereinafter defined) of the assets
either of this corporation (including without limitation any voting securities
of a subsidiary) or of a subsidiary, to a Related Person, (c) any merger or
consolidation of a Related Person with or into this corporation or a subsidiary
of this corporation, (d) any sale, lease, exchange, transfer or other
disposition of all or any Substantial Part of the assets of a Related Person to
this corporation or a subsidiary of this corporation, (e) the issuance of any
securities of this corporation or a subsidiary of this corporation to a Related
Person, (f) the acquisition of this corporation or a subsidiary of this
corporation of any securities issued by a Related Person, (g)
<PAGE>
any reclassification of securities, recapitalization or other transaction
designed to decrease the number of holders of this corporation's voting
securities remaining, if there is a Related Person, and (h) any agreement,
contract or other arrangement providing for any of the transactions described in
this definition of Business Combination.
(2) The term "Related Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with their
"Affiliates" and "Associates" (as defined as of November 1, 1983, in Rule 12b-2
under the Securities Exchange Act of 1934), "Beneficially Owns" (as defined as
of November 1, 1983, in Rule 13d-3 under the Securities Exchange Act of 1934) in
the aggregate 20% or more of the outstanding shares of the voting stock of this
corporation, and any Affiliate or Associate of any such individual, corporation,
partnership or other person or entity; provided that "Related Person" shall not
include any person who beneficially owned 20% or more of the outstanding shares
of the voting stock of the corporation on November 1, 1983.
(3) The term "Substantial Part" shall mean more than 30% of the fair market
value of the total assets of the corporation in question, as of the end of its
most recent fiscal year ending prior to the time the determination is being
made.
(4) Without limitation, any shares of voting stock of this corporation that
any Related Person has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise, shall be
deemed beneficially owned by the Related Person.
(5) For the purposes of subparagraph A.(3)(a) of this Article TENTH, the
term "other consideration to be received" shall include, without limitation,
capital stock of this corporation retained by its existing public stockholders
in the event of a Business Combination in which this corporation is the
surviving corporation.
(6) The term "Continuing Director" shall mean a director who was a member
of the board of directors of this corporation immediately prior to the time that
the Related Person involved in a Business Combination became a Related Person,
and the term "Outside Director" shall mean a director who is not (a) an officer
or employee of this corporation or any relative of an officer or employee or (b)
a Related Person or an officer, director, employee, Associate or Affiliate of a
Related Person, or a relative of any of the foregoing.
C. The affirmative vote required by this Article TENTH is required
notwithstanding the fact that no vote may be required, or that some lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
ELEVENTH. A. The number of directors of the corporation shall be fixed from
time to time by, or in the manner provided in, its by-laws, but in no event
shall the number of directors of the corporation be less than three nor more
than fifteen. The directors shall be divided into three classes, designated
Class I, Class II, and Class III. Such classes shall be as nearly equal in
number as possible. At the 1984 annual meeting of the stockholders, directors
of Class I shall be elected for a term expiring at the first annual meeting of
the stockholders following their election, directors of Class II shall be
elected for a term expiring at the second annual meeting of the stockholders
following their election, and directors of Class III shall be elected for a term
expiring at the third annual meeting of the stockholders following their
election. At each annual meeting of stockholders of the corporation following
the 1984 annual meeting, successors to the directors of the class whose terms
then expire shall be elected to hold
<PAGE>
office for a full term expiring at the third succeeding annual meeting of
stockholders. All directors shall continue in office until their respective
successors are duly elected and qualified.
B. Vacancies on the board of directors resulting from the death,
resignation or removal of a director or directors, and newly created
directorships resulting from any increases in the authorized number of
directors, shall be filled by a majority of the directors then in office, though
less than a quorum, or by a sole remaining director, and any director so chosen
shall, in the case of a director elected to fill a vacancy, hold office until
the expiration of the term of the office of the director he replaces, and in the
case of a director elected to fill a newly created directorship, shall hold
office until the expiration of the term of the class of directors to which he
was elected. If there are no directors in office, then an election of directors
shall be held in the manner provided by statute. If, at the time of filling any
vacancy or any newly created directorship, the directors then in office shall
constitute less than a majority of the whole board (as constituted immediately
prior to any such increase), the Court of Chancery may, upon application of any
stockholder or stockholders holding at least twenty-five percent of the total
number of shares at the time outstanding having the right to vote for such
directors, summarily order an election to be held to fill any such vacancies or
newly created directorships, or to replace the directors chosen by the directors
then in office.
C. A director or the entire board of directors may only be removed, with
or without cause, by the affirmative vote of the holders of 80% of the
outstanding shares of voting stock of this corporation and the affirmative vote
of the holders of not less than 67% of the outstanding shares of voting stock
held by stockholders other than a "Related Person" (as defined in Article
TENTH). Any director may be removed with cause at any time by the affirmative
vote of the majority of directors in office.
TWELFTH. The provisions set forth in this ARTICLE TWELFTH and in ARTICLES TENTH
and ELEVENTH may not be amended or repealed in any respect, unless such action
is approved by the affirmative vote of the holders of 80% or more of the
outstanding shares of voting stock of the corporation and the affirmative vote
of the holders of not less than 67% of the outstanding shares of voting stock
held by stockholders other than a "Related Person" (as defined in Article
TENTH).
THIRTEENTH. No director shall be personally liable to the corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director shall be liable under
Section 174 of Title 8 of the Delaware Code (relating to the Delaware General
Corporation Law) or any amendment thereto or successor provision thereto or
shall be liable by reason that, in addition to any and all other requirements
for such liability, such director (i) shall have breached the duty of loyalty to
the corporation or its stockholders, (ii) shall not have acted in good faith, or
in failing to act, shall not have acted in good faith, (iii) shall have acted in
a manner involving intentional misconduct or a knowing violation of law or, in
failing to act, shall have acted in a manner involving intentional misconduct or
a knowing violation of law, or (iv) shall have derived an improper personal
benefit. Neither the amendment nor repeal of this Article THIRTEENTH, nor the
adoption of
any provision of the Certificate of Incorporation inconsistent with this Article
THIRTEENTH, shall eliminate or reduce the effect of this Article THIRTEENTH in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Article THIRTEENTH would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
<PAGE>
IN WITNESS WHEREOF, Arthur J. Gallagher & Co. has caused this certificate
to be signed by its President and attested to by its Secretary this 12th day of
May, 1987.
ARTHUR J. GALLAGHER & CO.
By:/s/ Robert E. Gallagher
-----------------------------------
Robert E. Gallagher, President
ATTEST:
By:/s/ Dean H. Goossen
--------------------------------
Dean H. Goossen, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
OF
ARTHUR J. GALLAGHER & CO.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is:
Arthur J. Gallagher & Co.
2. The Restated Certificate of Incorporation of the Corporation is hereby
amended by striking out Article Eighth (b) thereof and by substituting in lieu
of said Article the following new Article:
"(b) Any action required or permitted to be taken by the stockholders of
the corporation must be taken at a duly called annual or special meeting of
the stockholders of the corporation and the power of stockholders to
consent in writing, without a meeting, to the taking of any action is
specifically denied."
3. The amendment of the Restated Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Signed and attested to on September 30, 1991.
/s/ Michael J. Cloherty
-------------------------------
Michael J. Cloherty
Vice President
Attest:
/s/ Carl E. Fasig
- --------------------------------
Carl E. Fasig
Assistant Secretary
<PAGE>
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
OF ARTHUR J. GALLAGHER & CO.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is:
Arthur J. Gallagher & Co.
2. The Restated Certificate of Incorporation of the Corporation is hereby
amended by striking out Article Fourth (A) thereof and by substituting in lieu
of said Article the following new Article:
"(A) The aggregate number of shares which the corporation is authorized to
issue is 101,000,000, of which 1,000,000 shares shall be Preferred Stock
with no par value per share and 100,000,000 shares shall be Common Stock
with par value of $1.00 per share."
3. The amendment of the Restated Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
Signed and attested to on May 30, 1996.
/s/ Michael J. Cloherty
-------------------------------
Michael J. Cloherty
Executive Vice President
Attest:
/s/ Carl E. Fasig
- -------------------------------
Carl E. Fasig
Secretary
<PAGE>
Exhibit 3.5
AMENDMENT TO THE RIGHTS AGREEMENT
DATED AS OF MAY 12, 1987
THIS AMENDMENT NO. ONE to the Rights Agreement is made by Arthur J.
Gallagher & Co., a Delaware corporation (the "Company") and Harris Trust &
Savings Bank (the "Rights Agent"). In exchange for good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree to amend Section 7(a) and Exhibit A by replacing the words
"May 12, 1997" with the words "May 12, 2007" where they appear.
All other terms and conditions of the Rights Agreement shall remain in full
force and effect consistent with their terms.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
19th day of July, 1996.
ARTHUR J. GALLAGHER & CO.
By: /s/ Michael J. Cloherty
------------------------
Michael J. Cloherty
Executive Vice President
HARRIS TRUST & SAVINGS BANK
By: /s/ Julie Power
------------------------
Julie Power
Trust Officer
<PAGE>
Exhibit 11.0
ARTHUR J. GALLAGHER & CO.
COMPUTATION OF NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net earnings $ 7,061 $ 5,587 $15,270 $12,315
Adjustments to net earnings for computation 223 - 429 -
------- ------- ------- -------
Net earnings applicable to computation $ 7,284 $ 5,587 $15,699 $12,315
======= ======= ======= =======
Average common shares outstanding 15,493 15,500 15,539 15,432
Dilutive effect of stock options 1,428 920 1,518 892
------- ------- ------- -------
Weighted average number of common and
common equivalent shares outstanding 16,921 16,420 17,057 16,324
======= ======= ======= =======
Net earnings per common and common
equivalent share $.43 $.34 $.92 $.75
</TABLE>
<PAGE>
Exhibit 13.0
LIQUIDITY AND CAPITAL RESOURCES
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable with a positive cash flow from operations and has
consequently been able to finance its operations and capital expenditures from
internally generated funds. Funds restricted as to the Company's use (primarily
premiums held as fiduciary funds) have not been included in determining the
Company's liquidity.
In February, 1993, the Company entered into a $20 million unsecured revolving
credit agreement (the "Credit Agreement") with two banks. Loans under the
Credit Agreement are repayable no later than February, 1998, and bear floating
interest rates over the term of the loan. In February, 1993, a loan was funded
for $20 million. The Company simultaneously entered into interest rate exchange
agreements which fixed the rate of interest payable on the loan. The Company
retired the $20 million loan in the fourth quarter of 1994 and has fully
satisfied all obligations associated with the loan. The Company also recognized
a gain of $656,000 in closing out the interest rate exchange agreements. The
Credit Agreement remains in effect and as of December 31, 1995, there are no
borrowings currently existing under this agreement.
The Company also entered into two term loan agreements (the "Term Loan
Agreements") that have outstanding balances of $1.9 million and $1.5 million at
December 31, 1995. Loans under the Term Loan Agreements are repayable in equal
annual installments no later than January 11, 1998, and June 15, 1998,
respectively, and bear interest rates over the terms of the loans of 6.64% and
6.30% respectively.
The Credit Agreement and Term Loan Agreements require the maintenance of certain
financial requirements. The Company is currently in compliance with these
requirements.
The Company also has line of credit facilities of $17.5 million and $10.0
million which expire on April 30, 1996 and February 28, 1997, respectively.
No borrowings currently exist under these facilities.
The Company paid $14.7 million in cash dividends on its common stock in 1995.
The Company's dividend policy is determined by the Board of Directors and
payments are fixed after considering the Company's available cash from earnings
and its known or anticipated cash needs. In each quarter of 1995, the Company's
Board of Directors declared a dividend of $.25 per share which is $.03 or 14%
greater than each quarterly dividend in 1994. In January, 1996, the Company
announced a first quarter dividend of $.29 per share, a 16% increase over the
quarterly dividend in 1995.
Net capital expenditures for fixed assets amounted to $9.4 million, $7.5 million
and $7.8 million in 1995, 1994 and 1993, respectively. In 1996, the Company
intends to make additional capital improvements of approximately $10.5 million
to upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June 30,
1996, to repurchase its common stock. Under the plan, the Company repurchased
437,000 shares at a cost of $15.1 million, 1.4 million shares at a cost of $43.8
million and 225,000 shares at a cost of $7.0 million in 1995, 1994 and 1993,
respectively. The 1994 common stock repurchases, in part, caused the weighted
average shares outstanding to decrease by 590,000 shares from 1993 to 1994. The
repurchases were funded entirely by internally generated funds and are held for
reissuance in connection with exercises of options under its stock option plans.
Under the provisions of the plan, the Company is authorized to repurchase
approximately 360,000 additional shares through June 30, 1996. The Company is
under no commitment or obligation to repurchase any particular amount of common
stock and at its discretion may suspend the repurchase plan at any time.
<PAGE>
The Company believes that internally generated funds will continue to be
sufficient to meet the Company's foreseeable cash needs, including non-operating
cash disbursements such as anticipated dividends, capital expenditures and
repayment of borrowings under its loan agreements if the Company so determines.
Due to changes in the United States federal income tax laws, effective in 1994,
the Company began providing for U.S. income taxes on the undistributed earnings
of its foreign subsidiaries. Prior to 1994, the Company did not provide for
U.S. income taxes on the undistributed earnings of certain foreign subsidiaries
($19.2 million) which are considered permanently invested outside the United
States. See Note 13 of the Notes to Consolidated Financial Statements.
Although not available for domestic needs, the undistributed earnings generated
by certain foreign subsidiaries referred to above may be used to finance foreign
operations and acquisitions.
<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 1996
SECOND QUARTER FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 104,292 132,118
<SECURITIES> 52,127 45,396
<RECEIVABLES> 205,855 197,480
<ALLOWANCES> (720) (777)
<INVENTORY> 0 0
<CURRENT-ASSETS> 386,078 386,835
<PP&E> 70,960 67,839
<DEPRECIATION> (47,282) (45,356)
<TOTAL-ASSETS> 497,655 500,800
<CURRENT-LIABILITIES> 376,476 382,843
<BONDS> 0 0
0 0
0 0
<COMMON> 15,280 15,543
<OTHER-SE> 95,337 89,773
<TOTAL-LIABILITY-AND-EQUITY> 497,655 500,800
<SALES> 194,301 185,957
<TOTAL-REVENUES> 203,300 192,283
<CGS> 112,546 108,441
<TOTAL-COSTS> 112,546 108,441
<OTHER-EXPENSES> 67,617 64,753
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 23,137 19,089
<INCOME-TAX> 7,867 6,774
<INCOME-CONTINUING> 15,270 12,315
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15,270 12,315
<EPS-PRIMARY> .92 .75
<EPS-DILUTED> .92 .75
</TABLE>
