<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1996
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ARTHUR J. GALLAGHER & CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6411 36-2151613
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NO.)
ORGANIZATION)
TWO PIERCE PLACE
ITASCA, ILLINOIS 60143-3141
(708) 773-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
----------------
CARL E. FASIG
COUNSEL AND SECRETARY
ARTHUR J. GALLAGHER & CO.
TWO PIERCE PLACE
ITASCA, ILLINOIS 60143-3141
(708) 285-3449
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES OF ALL COMMUNICATIONS AND NOTICES TO:
JOHN S. CHAPMAN, ESQ.
LORD, BISSELL & BROOK
115 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value.... 500,000 shares $39.125 $19,562,500 $6,746.00
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) In addition to the 500,000 shares being registered hereby, the prospectus
contained herein also relates to shares previously registered on the
Registrant's Registration Statements Nos. 33-60660, 33-76778 and 33-58101.
(2) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee, on the basis of the last price quoted for
the Registrant's Common Stock, as reported on the consolidated transaction
reporting system for securities listed on the New York Stock Exchange on
February 29, 1996.
As permitted by Rule 429, the prospectus in this Registration Statement
constitutes Post-Effective Amendment No. 3 to Registration Statement No. 33-
60660 which became effective May 27, 1993, Post-Effective Amendment No. 2 to
Registration Statement No. 33-76778 which became effective March 30, 1994, and
Post-Effective Amendment No. 1 to Registration Statement No. 33-58101 which
became effective April 24, 1995.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ARTHUR J. GALLAGHER & CO.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K, showing the location in the
Prospectus of the answers to the items in Part I of Form S-1.
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION LOCATION IN PROSPECTUS
-------------------- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus....... Cover Page; Facing Page
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover; Available Information
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............... Prospectus Summary; The Company
4. Use of Proceeds................ Cover Page; Securities Covered by this
Prospectus
5. Determination of Offering Cover Page; Securities Covered by this
Price.......................... Prospectus
6. Dilution....................... *
7. Selling Security Holders....... *
8. Plan of Distribution........... Cover Page; Securities Covered by this
Prospectus
9 Description of Securities to be
Registered...................... Description of Capital Stock
10. Interest of Named Experts and
Counsel........................ Legal Opinion
11. Information with Respect to the Cover Page; The Company; Price Range of
Registrant..................... Common Stock and Dividends; Selected Con-
solidated Financial Data; Selected Quar-
terly Financial Data (Unaudited); Manage-
ment's Discussion and Analysis of Financial
Condition and Results of Operations; Busi-
ness of the Company; Management; Certain
Transactions; Security Ownership of Certain
Beneficial Owners and Management; Financial
Statements
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... *
</TABLE>
- --------
*Not applicable or answer thereto is negative.
<PAGE>
PROSPECTUS
ARTHUR J. GALLAGHER & CO.
2,483,847 SHARES
COMMON STOCK, $1.00 PAR VALUE
----------------
All of the 2,483,847 shares of common stock, par value $1.00 ("Common
Stock"), of Arthur J. Gallagher & Co. (the "Company") offered hereby may be
offered and issued by the Company from time to time in connection with future
acquisitions of other businesses or properties. See "Securities Covered by this
Prospectus."
The last sales price of the Company's Common Stock on February 29, 1996 as
reported on the Consolidated Transaction Reporting System for securities listed
on the New York Stock Exchange was $39.125 per share.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS MARCH , 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy material and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy material
and other information concerning the Company can be inspected and copied at the
offices of the Commission at Room 1024, 450 5th Street, N.W., Washington, D.C.
20549; 500 W. Madison, Suite 1400, Chicago, Illinois 60606; and Seven World
Trade Center, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 5th Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company's reports, proxy
material and informational filings under the Exchange Act may also be inspected
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus is a part) and exhibits
thereto which the Company has filed with the Commission in Washington, D.C. For
further information, reference is made to the Registration Statement including
the exhibits filed or incorporated as a part of it.
----------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, BY ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH
AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............... 2
Prospectus Summary.................. 3
The Company......................... 4
Securities Covered by this
Prospectus......................... 4
Price Range of Common Stock and
Dividends.......................... 6
Selected Consolidated Financial
Data............................... 6
Selected Quarterly Financial Data
(Unaudited)........................ 7
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 8
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business of the Company............ 11
Management......................... 19
Compensation of Executive Officers
and Directors..................... 20
Summary Compensation Table......... 21
Principal Holders of Securities.... 25
Description of Capital Stock....... 26
Legal Opinion...................... 29
Experts............................ 29
Index to Financial Statements and
Supplementary Data................ F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
THE COMPANY
The Company is engaged in the insurance brokerage business and provides risk
management and other insurance-related services to its 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. The Company operates through approximately
140 offices throughout the United States and five abroad and believes that it
is the eighth largest insurance broker in the United States in terms of total
revenues. See "Business of the Company".
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered............... 2,483,847 shares which may be offered and
issued from time to time in connection with
future acquisitions by the Company.
NYSE symbol........................ AJG
Common Stock Outstanding on
February 29, 1996................. 15,611,379 shares
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF EARNINGS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commissions and fees.............. $395,929 $357,972 $322,177 $295,690 $270,232
Investment income and other....... 16,069 9,692 16,541 13,732 11,149
-------- -------- -------- -------- --------
Total revenues.................... 411,998 367,664 338,718 309,422 281,381
Net earnings...................... 41,491 34,405 28,816 23,868 19,628
Net earnings per common and common
equivalent share................. 2.54 2.12 1.71 1.47 1.19
Dividends declared per common
share............................ 1.00 .88 .72 .64 .64
Book value per common share....... 7.66 6.36 7.43 6.08 5.74
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- --------
<S> <C> <C>
Total assets................................................. $495,794 $462,069
Total stockholders' equity................................... 118,142 96,245
</TABLE>
The financial information for all periods prior to December 31, 1995 has been
restated for all significant acquisitions accounted for using the pooling of
interests method.
3
<PAGE>
THE COMPANY
Arthur J. Gallagher & Co. (the "Company") is engaged through its subsidiaries
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 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 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 comprehensively structured risk management and brokerage services 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 services
operations of the Company. The Company's international operations include a
Lloyd's broker and affiliated companies in London and facilities in Bermuda,
U.K., Scotland and Singapore.
The Company was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. The executive offices of the Company are located at Two
Pierce Place, Itasca, Illinois 60143-3141, and its telephone number is (708)
773-3800. Unless the context requires otherwise, the "Company" refers to Arthur
J. Gallagher & Co. and its subsidiaries.
SECURITIES COVERED BY THIS PROSPECTUS
The shares of Common Stock of the Company covered by this Prospectus may be
offered and issued by the Company from time to time in connection with future
acquisitions of other businesses or properties.
The Company reasonably expects that it will offer and sell the shares covered
by this Prospectus in connection with future acquisitions within two years from
the initial effective dates of the Registration Statements of which this
Prospectus is a part. It is anticipated that acquisitions by the Company will
consist principally of additional insurance brokerage and related businesses.
The consideration for acquisitions may include cash (including installment
payments), shares of Common Stock, other securities including securities which
may be converted into Common Stock, guarantees, assumptions of liabilities or
any two or more of the foregoing, as determined from time to time by
negotiations between the Company and the owners or controlling persons of the
businesses or properties to be acquired. In addition, the Company may enter
into employment contracts and non-competition agreements with former owners and
key executive personnel of these acquired businesses. The Company at this time
is engaged in preliminary discussions with a number of candidates for possible
future acquisitions.
In general, the terms of an acquisition will be determined by negotiations
between the Company's representatives and the owners or controlling persons of
the businesses or properties to be acquired, and the factors taken into account
in acquisitions may include among others the established quality and reputation
of the business and its management, gross commission revenues, earning power,
cash flow, growth potential, location of the business and properties to be
acquired and geographical and service diversification resulting from the
acquisition. It is anticipated that shares of Common Stock issued in any
acquisition will be valued at a price reasonably related to the current market
value of the Common Stock of the Company as reported on the Consolidated
4
<PAGE>
Transaction Reporting System for securities listed on the New York Stock
Exchange, either at the time the terms of the acquisition are tentatively
agreed upon or at or about the time or times of delivery of the shares. The
Company does not expect to receive any cash proceeds (other than cash balances
of acquired companies) in connection with any such issuances.
It is not expected that underwriting discounts or commissions will be paid by
the Company except that finder's fees may be paid to persons from time to time
in connection with specific acquisitions. Any person receiving any such fees
may be deemed to be an underwriter within the meaning of the Securities Act of
1933 (the "1933 Act").
When a material acquisition or series of acquisitions constituting in the
aggregate a material acquisition occurs, the Company must file an amendment to
the Registration Statements of which this Prospectus forms a part discussing or
disclosing the acquisition or acquisitions and the effects on the Company. That
amendment must become effective under the 1933 Act before any further shares
may be sold hereunder.
5
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
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 period January 1, 1994
through December 31, 1995 and the dividends declared per share for such period.
The table reflects the range of high and low sales prices per share as reported
on the Consolidated Transaction Reporting System for securities listed on the
New York Stock Exchange.
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
HIGH LOW PER SHARE
---- ---- ---------
<S> <C> <C> <C>
1995 QUARTERLY PERIODS
First............................................... $36 $30 1/8 $.25
Second.............................................. 36 3/8 34 .25
Third............................................... 38 34 5/8 .25
Fourth.............................................. 38 32 1/2 .25
1994 QUARTERLY PERIODS
First............................................... $36 3/8 $28 1/4 $.22
Second.............................................. 33 3/8 28 1/8 .22
Third............................................... 33 7/8 29 .22
Fourth.............................................. 33 1/2 29 5/8 .22
</TABLE>
See the Cover Page of this Prospectus for a recent market price of the
Company's Common Stock.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five years
in the period ended December 31, 1995 have been derived from the consolidated
financial statements of the Company. Such data should be read in conjunction
with the Company's audited consolidated financial statements included elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS
DATA:
Commissions..................... $235,877 $216,471 $193,423 $184,028 $177,749
Fees............................ 160,052 141,501 128,754 111,662 92,483
Investment income and other..... 16,069 9,692 16,541 13,732 11,149
-------- -------- -------- -------- --------
Total revenues.................. 411,998 367,664 338,718 309,422 281,381
Total expenses.................. 349,133 314,651 291,155 272,669 253,368
-------- -------- -------- -------- --------
Earnings before income taxes.... 62,865 53,013 47,563 36,753 28,013
Net earnings.................... 41,491 34,405 28,816 23,868 19,628
Net earnings per common and
common equivalent share........ 2.54 2.12 1.71 1.47 1.19
Dividends declared per common
share.......................... 1.00 .88 .72 .64 .64
Weighted average number of
common and common equivalent
shares outstanding............. 16,315 16,250 16,840 16,287 16,550
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... 495,794 462,069 485,979 432,551 416,004
Long-term debt less current
portion........................ 2,260 3,390 28,166 23,888 24,432
Total stockholders' equity...... 118,142 96,245 119,096 94,289 90,750
</TABLE>
6
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the quarterly operating results for the years
ended December 31, 1995 and 1994 (in thousands, except per share amounts).
<TABLE>
<CAPTION>
1995
---------------------------------
1ST 2ND 3RD 4TH
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues............................... $95,605 $94,893 $110,641 $110,859
Earnings before income taxes................. 10,226 9,059 23,704 19,876
Net earnings................................. 6,636 5,875 15,432 13,548
Net earnings per common and common equivalent
share....................................... .41 .36 .94 .83
<CAPTION>
1994
---------------------------------
1ST 2ND 3RD 4TH
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues............................... $85,590 $83,689 $100,691 $ 97,694
Earnings before income taxes................. 8,416 6,790 20,296 17,511
Net earnings................................. 5,340 4,301 12,827 11,937
Net earnings per common and common equivalent
share....................................... .32 .26 .79 .75
</TABLE>
The financial information for all periods prior to December 31, 1995 has been
restated for all significant acquisitions accounted for using the pooling of
interests method.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Fluctuations in premiums charged by insurance companies have a material
effect on the insurance brokerage industry. Commission revenues are based on a
percentage of the premiums paid by the insured and generally follow premium
levels. Since the mid 1980s, lower premium rates and excess capacity have
prevailed among property and casualty insurance carriers resulting in heavy
competition for market share. This "soft market" (i.e. generally lower premium
rates) has generally resulted in flat to reduced renewal commissions during the
period.
Over the past three years, the United States and the world have experienced
catastrophes ranging from severe hurricanes to devastating earthquakes.
Extraordinarily high losses associated with these events appear to have had a
generally limited impact on the insurance industry. Turmoil continues at
Lloyd's of London raising doubt about its long term viability. In the past
year, there have been substantial mergers and a consolidation within the
insurance industry. Rates for workers compensation coverage have generally been
reduced. In recent years, low interest rates have reduced interest income
earned on invested funds. Throughout all of this, there has generally been
little change in property/casualty rates. Excess capacity remains and the
competitive environment continues. It is management's view that for the
foreseeable future, insurance pricing will not change significantly.
Growth of the alternative insurance market has continued, albeit more slowly
in recent years, notwithstanding the soft market conditions. The Company
believes this move from the traditional approach of purchasing insurance will
continue regardless of the property/casualty pricing environment and
anticipates that sales in the risk management, benefits and self-insurance
services areas will again be a major contributor to fee revenue growth in 1996.
Historically, inflation has contributed to increased property replacement
costs and higher litigation awards causing some clients to seek higher levels
of insurance coverage. These factors have the effect of generating higher
premiums to customers and higher commissions to the Company. More recently,
however, the United States has experienced low rates of inflation along with
business downsizing, reduced sales and lower payrolls. These events have
resulted in lower levels of exposure to insure. In general, premium rates have
had a greater effect on the Company's revenues than inflation.
RESULTS OF OPERATIONS
The Company's results of operations for all periods prior to December 31,
1995 have been restated to include the results of IMC Risk Management Group,
Inc. and W. Lawrence Pfeiffer & Associates, Inc. on a combined basis as if they
had operated as part of the Company. The Company continues to search for merger
partners which complement existing business and provide entry into new market
niches and new geographic areas. For the effect of such restatements in the
aggregate on year-to-year comparisons, see Note 2 of the Notes to Consolidated
Financial Statements.
Commission revenues increased by $19.4 million or 9% in 1995. This increase
is the result of new business production of $30.4 million, partially offset by
lost business. Commission revenues increased by $23.0 million or 12% in 1994.
This increase is the result of new business production of $30.1 million, and to
a lesser extent, modest renewal rate increases partially offset by lost
business.
Fee revenues increased by $18.6 million or 13% in 1995. This increase,
generated primarily by Gallagher Bassett Services, Inc., resulted from strong
new business production of $26.3 million and increases in existing business
partially offset by lost business. Fee revenues increased by $12.7
8
<PAGE>
million or 10% in 1994. This increase, again generated primarily by Gallagher
Bassett Services, Inc., resulted from strong new business production of $20.5
million and increases in existing business partially offset by lost business.
Investment income and other increased by $6.4 million or 66% in 1995. This
increase is due primarily to a combination of significantly higher returns on
funds invested with outside fund managers and a gain of $2.0 million recorded
on the sale of a subsidiary in the fourth quarter of 1995. Investment income
and other decreased by $6.8 million or 41% in 1994. This decrease is due
primarily to a combination of significantly lower returns on funds invested
with outside fund managers and lower levels of funds available for investment.
This decrease is partially offset by a gain of $656,000 realized in closing out
interest rate exchange agreements related to the retirement of the Company's
debt agreement in the fourth quarter of 1994 and by a gain of $800,000 from the
sale of two personal lines books of business also recorded in the fourth
quarter of 1994.
Salaries and employee benefits increased by $21.9 million or 11% in 1995 due
principally to a 9% increase in year-end employee head count and a
corresponding increase in employee benefit expenses, salary increases for
employees, and the annualized effect of prior year hires. Salaries and employee
benefits increased by $21.9 million or 13% in 1994 due principally to salary
increases, the annualized effect of prior year hires, a 4% increase in year-end
employee head count and a corresponding increase in employee benefit expenses
and changes in certain benefit plan actuarial assumptions. Also contributing to
this increase is a $4.6 million non-recurring gain from a restructuring and
settlement of a defined benefit plan at the Company's London subsidiary, Arthur
J. Gallagher (UK) Limited recorded in 1993. See Note 10 of the Notes to
Consolidated Financial Statements. In 1995, 1994 and 1993, salaries and
employee benefits have represented 53%, 54% and 52%, respectively, as a
percentage of total revenues.
Other operating expenses increased by $12.6 million or 11% in 1995. These
increases are due primarily to additional office facilities (rent and
utilities, miscellaneous office and supply expenses) resulting from leasing new
office space and expanding and upgrading existing office facilities and
significantly higher business insurance costs. Other operating expenses
increased by $1.6 million or 1% in 1994. This increase was due primarily to
additional office facilities (rent and utilities, miscellaneous office and
supply expenses) resulting from leasing new office space and expanding and
upgrading existing facilities, and higher business insurance costs. Travel and
entertainment costs also increased in 1994 due to an increase in both the
number of employees and the Company's sales volume. This increase was partially
offset by the non-recurring write-off in 1993 of $2.0 million by a 1994
acquisition of certain intangible assets and by a reduction in professional
fees related to claim processing, investment management and acquisition costs.
The Company's overall tax rate of 34% in 1995 is less than the statutory
federal rate. For 1995, the net effects of state and foreign taxes are
substantially offset by the tax benefits of certain investments. The Company's
overall tax rate of 35% in 1994 approximates the statutory federal rate. For
1994, the net effects of state and foreign taxes were again substantially
offset by the tax benefits generated by certain investments. The Company's
overall tax rate of 39% in 1993 is greater than the statutory federal rate of
35%, due primarily to the net effects of state and foreign taxes which are
partially offset by the tax benefits generated by certain investments and to
pre-acquisition income of pooled entities which was taxed to the previous
owners. See Note 13 of the Notes to Consolidated Financial Statements.
The Company's foreign operations recorded operating earnings before income
taxes of $2.6 million, $1.3 million, and $7.1 million in 1995, 1994, and 1993,
respectively. The 1995 increase is due primarily to stronger investment income.
The 1994 decrease is due primarily to the 1993 non-recurring foreign benefit
plan gain mentioned above and a reduction in investment income. See Notes 13
and 14 of the Notes to Consolidated Financial Statements.
9
<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, 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 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,
10
<PAGE>
the Company is authorized to repurchase approximately 360,000 additional shares
through June 30, 1996. The Company is under no commitment or obligation to
repurchase any particular amount of common stock and at its discretion may
suspend the repurchase plan at any time.
The Company believes that internally generated funds will continue to be
sufficient to meet the Company's foreseeable cash needs, including non-
operating cash disbursements such as anticipated dividends, capital
expenditures and repayment of borrowings under its loan agreements if the
Company so determines.
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.
BUSINESS OF THE COMPANY
The Company is engaged in the insurance brokerage business and provides risk
management and other insurance-related services to clients in the United States
and abroad. The Company has not presented industry segment information as its
operations are predominantly those of insurance brokerage and risk management
and other related insurance services.
BROKERAGE OPERATIONS
The Company places insurance for and services commercial, industrial,
institutional, governmental, religious and personal accounts throughout the
United States and abroad. The Company acts as an agent in soliciting,
negotiating and effecting contracts of insurance through insurance companies
world-wide, and also as a broker in procuring contracts of insurance on behalf
of insureds. Specific coverages include all forms of property and casualty,
marine, employee benefits, pension and life insurance products.
The Company places surplus lines coverages (coverages not available from
insurance companies licensed by the states in which the risks are located) for
various specialized risks. The Company also provides reinsurance services to
its clients.
RISK MANAGEMENT SERVICES
Through its wholly-owned subsidiary, Gallagher Bassett Services, Inc., the
Company provides a variety of professional consulting services to assist
clients in analyzing risks and in determining whether proper protection is best
obtained through the purchase of insurance or through retention of all or a
portion of those risks and the adoption of risk management policies and cost-
effective loss control and prevention programs. A full range of risk management
services is offered, including claims management, risk control consulting
services, information management and property appraisals on a totally
integrated or select, stand-alone basis. Gallagher Bassett Services, Inc.
provides these services for the Company's clients through a network of over 100
offices throughout the United States.
The Company believes that its risk management services are an important
factor in securing new brokerage business and retaining brokerage clients. The
Company also markets these services directly to the client on an unbundled
basis independently of brokerage services in order to capitalize
11
<PAGE>
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 a network
of approximately 140 offices in the United States and five abroad. No material
part of the Company's business is dependent upon a single customer or on a few
customers, the loss of any one or more of which would have a materially adverse
effect on the Company. In 1995, the largest single customer represented
approximately 1% of total revenues.
The Company believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of reinsurance,
is one of its major strengths. The Company also believes that its risk
management business enhances and attracts other brokerage business due to the
nature and strength of business relationships which it forms with clients when
providing a variety of risk management services on an ongoing basis.
The Company requires its employees serving in a sales or marketing capacity,
including certain executive officers of the Company, to enter into agreements
with the Company restricting disclosure of confidential information and
solicitation of clients and prospects of the Company upon their termination of
employment. The confidentiality and non-solicitation provisions of such
agreements terminate in the event of a hostile change in control of the
Company, as defined therein.
COMPETITION
The Company believes it is the eighth largest insurance broker in the United
States and in the top nine worldwide in terms of total revenues. The insurance
brokerage and service business is highly competitive and there are many
insurance brokerage and service organizations as well as individuals throughout
the world who actively compete with the Company in every area of its business.
A number of competing firms are significantly larger and some have many times
the commission and/or
12
<PAGE>
fee revenues of the Company. There are firms in a particular region or locality
which are as large or larger than the particular local office of the Company.
The Company believes that the primary factors determining its competitive
position with other organizations in its industry are the overall cost and the
quality of services rendered.
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 58% of its brokerage
income originating in the United States. Its clients are primarily insurance
and reinsurance companies, underwriters at Lloyd's, the Company and its non-
U.K. subsidiaries, other independent agents and brokers, and major business
corporations requiring direct insurance and reinsurance placement.
Risk Management Partners Ltd ("RMP") is a company that is 50% owned by a
subsidiary of Arthur J. Gallagher & Co. and 50% owned by a subsidiary of
American Re Corporation, one of the world's largest and most prominent
reinsurance companies. RMP was created in early 1995 to market insurance
products and risk management services to public entities in the U.K. where
market conditions for the governmental sector are very similar to the
conditions that existed in the United States during the early to middle 1980s.
In this market, only a small number of carriers are offering coverage and there
is little discussion of alternative approaches. RMP sees a strong demand for
alternatives in this marketplace and is poised to fill that need with products
and services delivered by professionals with years of experience in public
entity business.
13
<PAGE>
Arthur J. Gallagher & Co. (Bermuda) Limited provides clients with direct
access to the risk-taking capacity of Bermuda-based insurers for both direct
and reinsurance placements. It also acts as a wholesaler to the Company's
marketing efforts by accessing foreign insurance and reinsurance companies in
the placing of U.S. and foreign risks. In addition, it provides services
relating to the formation and management of offshore captive insurance
companies.
A Company subsidiary, Arthur J. Gallagher International, Inc., located in
Rhode Island, provides brokerage services to and arranges overseas risk
management and loss control services for multinational organizations.
Gallagher Bassett International Ltd. ("GBI"), a subsidiary of Gallagher
Bassett Services, Inc., provides risk management services for foreign
operations, as well as U.S. operations that are foreign-controlled.
Headquartered in London, GBI works with insurance companies, reinsurance
companies, overseas brokers, and risk managers of overseas organizations.
Services are offered on an unbundled basis wherever applicable and include
consulting, claims management, information management, loss control, and
property valuations. GBI's service network includes over 120 associate offices
throughout the world. The combination of Gallagher Bassett offices and
affiliated locations provides one of the most comprehensive worldwide service
networks available.
Additional information relating to the Company's foreign operations is
contained in Note 14 of Notes to Consolidated Financial Statements.
COMMISSIONS AND FEES
The two major sources of operating revenues are commissions from brokerage
and risk management operations and service fees from risk management
operations. Information with respect to these two major sources as well as
investment income and other revenue for each of the three years in the period
ended December 31, 1995 are set forth below:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions........................ $235,877 57% $216,471 59% $193,423 57%
Fees............................... 160,052 39 141,501 38 128,754 38
Investment income and other........ 16,069 4 9,692 3 16,541 5
-------- --- -------- --- -------- ---
$411,998 100% $367,664 100% $338,718 100%
======== === ======== === ======== ===
</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.
14
<PAGE>
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 the Notes to Consolidated Financial Statements for unaudited quarterly
operating results for 1995 and 1994.
ACQUISITIONS--PAST
From January 1, 1991 through December 31, 1995, the Company acquired twenty-
four insurance brokerage services businesses and one loss control services
business and disposed of one reinsurance subsidiary and one loss control
services business. See Note 2 of the Notes to Consolidated Financial Statements
for further information concerning acquisitions in 1994 and 1995.
On December 29, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Planning Corporation and Environmental
Claims Management Incorporated, Virginia corporations engaged in the insurance
brokerage and claim handling business, in exchange for 15,000 shares and 2,300
shares, respectively, of the Company's Common Stock. These acquisitions were
accounted for as poolings of interests. Three principals entered into two year
employment agreements with the Company.
On November 30, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Schadow Agency, Inc., a Minnesota
corporation engaged in the insurance brokerage business, in exchange for 61,800
shares of the Company's Common Stock. The acquisition was accounted for as a
pooling of interests. The principal entered into a two year employment
agreement with the Company.
On August 31, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Mintz & Josephson Insurance Agency and
Brokerage, Inc., a California corporation engaged in the insurance brokerage
business, in exchange for 92,100 shares of the Company's Common Stock. The
acquisition was accounted for as a pooling of interests. Two principals entered
into three year employment agreements with the Company.
On August 31, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of IMC Risk Management Group, Inc. and W.
Lawrence Pfeiffer & Associates, Inc., Missouri corporations engaged in the
insurance brokerage business, in exchange for 308,000 shares and 40,200 shares,
respectively, of the Company's Common Stock. These acquisitions were accounted
for as poolings of interests. Two principals entered into three year employment
agreements with the Company.
On May 31, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of BHK&R, Inc., a Minnesota corporation engaged
in the insurance brokerage and service business, in exchange for 63,850 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.
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.
On January 1, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of RMI Insurance Services, Inc., 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.
15
<PAGE>
On November 30, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Kaler, Carney, Liffler & Co., a
Massachusetts corporation engaged in the insurance brokerage business, in
exchange for 184,560 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. The principal entered into a two year
employment agreement with the Company.
On August 31, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of James S. Pipino Insurance Agency, Inc., an
Ohio corporation engaged in the insurance brokerage business, in exchange for
31,400 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. Two principals and one key employee entered into two
year employment agreements with the Company.
On April 29, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Turtleoak Corporation, a South Carolina
corporation engaged in the insurance brokerage business, in exchange for
100,000 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. Three principals and two key employees entered into
three year employment agreements with the Company.
On February 28, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Steel Agency, a New Jersey corporation
engaged in the insurance brokerage business, in exchange for 258,015 shares of
the Company's Common Stock. The acquisition was accounted for as a pooling of
interests. Four principals entered into two year employment agreements with the
Company.
On February 28, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Donald P. Pipino and Associates, Inc., in
Youngstown, Ohio, an Ohio corporation engaged in the insurance brokerage
business, in exchange for 245,000 shares of the Company's Common Stock. The
acquisition was accounted for as a pooling of interests. Three principals
entered into three year employment agreements with the Company.
On August 31, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Welling Associates, Inc., a New York
corporation engaged in the retirement and pension consulting business, in
exchange for 113,000 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. The principal entered into a two year
employment agreement with the Company.
On August 31, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Stark, Johnson & Stinson, Inc., a
Massachusetts corporation engaged in the insurance brokerage business, in
exchange for 63,000 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. Three principals entered into three
year employment agreements with the Company.
On May 28, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of L. C. Thoelecke, Inc., an Illinois
corporation engaged in the insurance brokerage business, in exchange for
181,000 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. The principal entered into a two year employment
agreement with the Company.
On May 28, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Woodsmall Companies, Inc., a Missouri
corporation engaged in the insurance brokerage and employee benefits services
business, in exchange for 350,000 shares of the Company's Common Stock. The
acquisition was accounted for as a pooling of interests. Six principals entered
into two year employment agreements with the Company.
16
<PAGE>
On November 30, 1992, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The ABOW Companies, Inc., a Michigan
corporation engaged in the employee benefits services business, in exchange for
362,500 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. Eight principals entered into two year employment
agreements with the Company.
On August 31, 1992, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of American Security Services Corp., a Delaware
corporation engaged in the security and risk management consulting business, in
exchange for 125,000 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. The principal entered into a two year
employment agreement with the Company.
On August 31, 1992, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Pacific Insurance Agency, a California
corporation engaged in the insurance brokerage and services business, in
exchange for 328,545 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.
On August 30, 1991, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Henley & Associates Insurance Agency, Inc.,
a Texas corporation engaged in the insurance brokerage and services business,
in exchange for 530,865 shares of the Company's Common Stock. The acquisition
was accounted for as a pooling of interests. Two principals entered into three
year employment agreements with the Company.
On May 31, 1991, a wholly-owned subsidiary of the Company acquired the
partnership interest in Leonard Newman Agency, L.P., a New York limited
partnership engaged in the insurance brokerage and services business, in
exchange for 800,000 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. The principal entered into a three
year employment agreement with a subsidiary of the Company. In addition, eight
key employees entered into employment agreements with a subsidiary of the
Company for various terms up to three years.
On May 31, 1991, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Broussard, Bush & Hurst, Inc., a Louisiana
corporation, and two affiliates, all engaged in the insurance brokerage and
services business, in exchange for 417,000 shares of the Company's Common
Stock. The acquisition was accounted for as a pooling of interests. Three
principals entered into three year employment agreements with the Company.
On May 31, 1991, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Camden Insurance Agency, Inc., a California
corporation engaged in the insurance brokerage and services business, in
exchange for 199,000 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 three year employment agreements with the Company.
As indicated in the foregoing, the Company attempts to retain the services of
certain of the principals and key personnel connected with the acquired
businesses in acquisitions. In all such cases, such individuals and such
businesses were unaffiliated with the Company at the time of the respective
acquisitions.
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.
17
<PAGE>
ACQUISITIONS--CURRENT
On February 29, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Levitt/Kristan Company, a California
corporation engaged in the insurance brokerage business, in exchange for
112,100 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. Two principals entered into two year employment
agreements with the Company.
ACQUISITIONS--FUTURE
The Company is considering and intends to consider from time to time
acquisitions and divestitures on terms it deems advantageous. The Company has
had preliminary discussions with a number of other candidates for possible
future acquisitions. No assurances can be given that any additional
acquisitions or divestitures will be consummated, or if consummated, will be
advantageous to the Company.
EMPLOYEES
As of December 31, 1995, the Company and its subsidiaries employed
approximately 3,700 employees, none of whom is represented by a labor union.
The Company continuously reviews benefits and other matters of interest to its
employees. The Company considers its relations with its employees to be
satisfactory.
PROPERTIES
The Company's executive offices and certain subsidiary and branch facilities
are located at Two Pierce Place, Itasca, Illinois where the Company leases
approximately 200,000 square feet of space. The lease commitment on the above
mentioned property expires February 28, 2006. The Company operates all of its
branch and service offices in leased premises. Certain of these leases for
office space have options permitting renewals for additional periods. In
addition to minimum fixed rentals, a number of leases contain escalation
clauses related to increases in the cost of living in future years. See Note 12
of the Notes to Consolidated Financial Statements for information with respect
to the Company's lease commitments at December 31, 1995.
STOCK REPURCHASES
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. Since the beginning of 1996, the Company has repurchased
53,000 shares at a cost of approximately $2.0 million. 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
307,000 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.
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.
18
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
TERM
POSITION AND YEAR AS DIRECTOR
NAME AGE FIRST ELECTED EXPIRES
---- --- ----------------- -----------
<S> <C> <C> <C>
Robert E. Gallagher(1).. 73 Director since 1950, Chief Executive 1998
Officer 1963-1994, Chairman since 1990
John P. Gallagher(1).... 68 Director since 1950, Executive Vice 1998
President since 1963, Vice Chairman
since 1990, deceased February 23, 1996
J. Patrick Gallagher, 44 Director since 1986, President since 1997
Jr.(1)................. 1990, Chief Executive Officer since
1995
T. Kimball Brooker...... 56 Director since 1994 1997
John G. Campbell........ 58 Director since 1981, Vice President 1998
since 1978
Michael J. Cloherty..... 48 Director since 1982, Vice President- 1996
Finance since 1981
Peter J. Durkalski...... 45 Vice President since 1990 --
James W. Durkin, Jr..... 46 Vice President since 1985 --
Jack M. Greenberg....... 53 Director since 1985 1996
Philip A. Marineau...... 49 Director since 1991 1996
Walter F. McClure....... 62 Director since 1981, Senior Vice 1998
President since 1993
John D. Stancik......... 52 Vice President since 1986 --
Gary M. Van der Voort... 50 Vice President since 1986 --
James R. Wimmer......... 67 Director since 1985 1997
</TABLE>
19
<PAGE>
- --------
(1) Robert E. Gallagher and John P. Gallagher are brothers. John P. Gallagher
is the father of J. Patrick Gallagher, Jr.
Each person has been principally employed by the Company in management
capacities for more than the past five years except the following:
T. Kimball Brooker has served as President of Barbara Oil Company since 1989,
and has been a Director of Barbara Oil Company since 1967. He was associated
with Morgan Stanley, Inc., from 1968 to 1988, and was Managing Director and
head of its Chicago office from 1978 to 1988. Morgan Stanley, Inc. was the
managing underwriter for the Company's public offering of Common Stock on June
20, 1984, and has provided other services to the Company. Mr. Brooker also
serves as a director of several civic institutions and corporations, including
Zenith Electronics Corp. and Boulevard Bancorp, Inc. He is a past Governor of
the Chicago Stock Exchange and was Vice Chairman from 1986 to 1988.
Jack M. Greenberg is a Director of and has served as the Chief Financial
Officer of McDonald's Corporation, a food services and restaurant company,
since 1982. He was appointed to the post of Vice Chairman of McDonald's
Corporation in 1992. From 1974 to 1982, Mr. Greenberg was a partner of Ernst &
Young LLP, independent auditors. Mr. Greenberg also serves as a director of
Harcourt General, Inc.
Philip A. Marineau was President and Chief Operating Officer of the Quaker
Oats Company until 1995. He joined the Quaker Oats Company in 1972 and became a
Director of that company in 1990.
James R. Wimmer was a partner of the law firm of Lord, Bissell & Brook from
1959 until he retired in February, 1992 and is presently of counsel to that law
firm. Lord, Bissell & Brook has provided legal services to the Company for over
twenty years. Mr. Wimmer also served as General Counsel of Commonwealth
Industries Corporation from 1991 through 1993.
Directors are divided into three classes and are elected for staggered three
year terms. All executive officers are elected annually and serve at the
pleasure of the Board of Directors.
Except as described above, there are no other family relationships between
any executive officer or director of the Company, and any director, executive
officer or person nominated or chosen by the Company to become a director or
executive officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors maintains a Compensation Committee. Members of the
Compensation Committee are J. Patrick Gallagher, Jr. (Chairman), T. Kimball
Brooker, Robert E. Gallagher, Jack M. Greenberg, Philip A. Marineau and James
R. Wimmer. J. Patrick Gallagher, Jr. and Robert E. Gallagher are executive
officers of the Company. Both officers abstain from discussing and voting on
matters concerning their respective compensation. James R. Wimmer, a director
of the Company, is of counsel to Lord, Bissell & Brook, the Company's outside
counsel.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information concerning compensation paid or set
aside by the Company and its subsidiaries on an accrual basis to or for the
benefit of the Chief Executive Officer and each of the other four most highly
compensated executive officers of the Company in each of the Company's last
three fiscal years.
20
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
-------------- ------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#) ($)(1)
- --------------------------- ---- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert E. Gallagher.............. 1995 275,000 30,000 -- --
Chairman 1994 265,000 30,000 -- --
1993 240,000 25,000 -- 1,250
John P. Gallagher................ 1995 272,500 30,000 -- 1,500
Vice Chairman 1994 262,000 30,000 -- 1,500
1993 237,000 25,000 -- 2,249
J. Patrick Gallagher, Jr. ....... 1995 356,000 76,000 10,000 1,500
President and Chief Executive
Officer 1994 341,250 73,750 15,000 1,500
1993 325,000 40,500 35,000 2,249
Michael J. Cloherty.............. 1995 325,000 85,000 10,000 1,500
Vice President-Finance 1994 300,000 67,000 15,000 1,500
1993 280,000 68,000 30,000 2,249
Gary M. Van der Voort............ 1995 305,760 59,100 10,000 1,500
Vice President 1994 294,000 57,000 15,000 1,500
1993 280,000 39,400 30,000 2,249
</TABLE>
- --------
(1) Indicates amounts contributed by the Company under the 401(k) feature of
the Company's Savings and Thrift Plan.
DIRECTORS' COMPENSATION
Directors who are officers of the Company receive compensation in their
capacities as such officers and receive no additional compensation for serving
as directors.
Non-employee directors, currently Messrs. Brooker, Greenberg, Marineau and
Wimmer, are eligible to receive compensation consisting of nonqualified stock
options. In addition, non-employee directors receive an annual retainer of
$20,000 per year, or in lieu of the cash retainer, an option to purchase shares
of the Company's Common Stock below market value, plus fees of $500 for
attendance at each Board meeting or committee meeting on a date other than a
Board meeting date. Non-employee directors are reimbursed for travel and
accommodation expenses incurred in attending Board or committee meetings. Non-
employee directors are not eligible for participation in any other compensation
plans of the Company.
In 1989, the Company's stockholders approved the adoption of the Company's
1989 Non-Employee Directors' Stock Option Plan (the "1989 Plan"), which was
subsequently amended in 1990, 1993 and 1994. The 1989 Plan currently provides
that non-employee directors are eligible to be granted nonqualified options to
purchase a maximum of 106,000 shares of the Company's Common Stock. The Plan
encompasses options granted to non-employee directors at the discretion of the
Option Committee of the Company's Board of Directors ("Discretionary Options")
and options granted to non-employee directors pursuant to an election made by a
non-employee director to receive options in lieu of his annual retainer
("Retainer Options"). Shares issued upon exercise of options granted under the
1989 Plan may be repurchased shares held by the Company or as authorized but
previously unissued shares.
Under the 1989 Plan, a Discretionary Option shall be exercisable at such rate
and price fixed by the Option Committee. Discretionary Options terminate if not
exercised by the date set forth in the 1989 Plan or by such date established by
the Option Committee at the time it makes the grant.
21
<PAGE>
Pursuant to the terms of the 1989 Plan, Messrs. Greenberg, Marineau and
Wimmer have filed one time irrevocable elections to receive their annual
retainers in the form of an option to purchase the Company's Common Stock. Each
year on or before two weeks preceding the Company's Annual Meeting of
Stockholders, the Option Committee shall determine the number of shares of
Common Stock with respect to which a non-employee director may be granted a
Retainer Option. The non-employee director's option exercise price per share
shall be equal to the Fair Market Value of the Common Stock subject to the
Retainer Option less the Annual Retainer, divided by the number of shares
subject to the Retainer Option. The option exercise price per share shall be
not less than the par value of the Common Stock. "Fair Market Value" is defined
as the closing price of the Company's Common Stock as reported on the New York
Stock Exchange Consolidated Transaction Reporting System for the day on which
the option is granted.
On May 9, 1995, the Company granted a Retainer Option for 1,000 shares of the
Company's Common Stock to each of Messrs. Greenberg, Marineau and Wimmer at an
exercise price of $15.00 per share. Such options are exercisable at the rate of
one-fourth of such grant each successive quarter commencing August 9, 1995. In
addition, on June 12, 1995, the Company granted a Discretionary Option for
3,000 shares of the Company's Common Stock to each of Messrs. Brooker,
Greenberg, Marineau and Wimmer at an exercise price of $34.375 per share, which
was the closing price for a share of Common Stock as reported on the
Consolidated Transaction Reporting System for securities listed on the New York
Stock Exchange on that date. Such options are exercisable at the rate of one-
third of such grant each successive June 12, commencing June 12, 1996.
The Company has an arrangement with two former directors of the Company, A.
James Gallagher, Jr. and Sterling L. Bassett, whereby each such former director
received consulting fees or retirement benefits at the rate of $50,000 per year
in 1995. This arrangement will continue in 1996.
SAVINGS AND THRIFT PLAN
The Company maintains a savings and thrift plan covering substantially all
U.S. employees which is qualified under the Internal Revenue Code. Employees
are covered by the plan on their date of hire and may generally contribute up
to 10% of total compensation on an after-tax basis to the plan. As of January
1, 1994, after-tax contributions are limited to employees with total
compensation of no more than $66,000. Employees who have attained age 21 and
completed a year of service may generally contribute up to the lesser of $8,200
in 1995 and 1996 or 8% of their gross earnings on a pre-tax basis under the
401(k) "salary reduction" feature of the plan. In 1995, the Company matched 25%
of any employee's pre-tax contributions up to a maximum 4% of such employee's
gross earnings, resulting in a possible maximum matched contribution from the
Company of 1% of such employee's gross earnings. As of January 1, 1996, the
Company will match 50% of any employee's pre-tax contributions up to a maximum
4% of such employee's gross earnings, resulting in a possible maximum matched
contribution from the Company of 2% of such employee's gross earnings.
PENSION PLAN
The Company also maintains a non-contributory defined benefit pension plan
covering substantially all domestic employees which is qualified under the
Internal Revenue Code. The plan provides an annual pension benefit on normal
retirement at age 65 which, when paid in the form of a single life annuity,
will equal 1% of final average earnings multiplied by the number of years of
credited service, not to exceed 25 years (without any deduction for social
security or other offset amounts). A person's earnings for purposes of the plan
include all compensation other than allowances such as moving expenses plus any
pre-tax contributions under the 401(k) feature of the savings and thrift plan.
Effective for plan years beginning after 1988, the maximum includible
compensation for a participant for any year may not exceed an overall salary
maximum as determined by the Internal Revenue Service ($150,000 in 1995). The
remuneration for executive
22
<PAGE>
officers shown under "Salary" and "Bonus" in the Summary Compensation Table
constitutes their earnings during 1995 for purposes of the plan without regard
to the Internal Revenue Service's limitations. "Final average earnings" are the
highest average earnings received in any five consecutive full calendar years
before retirement. Employee's pension rights are fully vested after the earlier
of (i) 5 years of service with the Company or (ii) the attainment of age 65.
The following table shows the estimated annual benefits (which are not
subject to deduction for social security or other offset amounts) payable on
retirement under the Company's defined benefit plan to persons in specific
remuneration and credited years of service classifications assuming (i) the
person elects the single life annuity basis providing monthly payments without
benefits to his survivors and (ii) the person continues in the employ of the
Company at his present rate of remuneration until age 65:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AERAGE REMUNERATIONV YEARS OF CREDITED
DURING HIGHEST SERVICE
FIVE -----------------------
CONSECUTIVE YEARS 25 OR
BEFORE RETIREMENT 15 20 MORE
- -------------------- ------- ------- -------
<S> <C> <C> <C>
$150,000............................................. $22,500 $30,000 $37,500
175,000............................................. 26,250 35,000 43,750
200,000............................................. 30,000 40,000 50,000
225,000............................................. 33,750 45,000 56,250
250,000............................................. 37,500 50,000 62,500
</TABLE>
For purposes of estimating potential pension benefits using the foregoing
table, the number of years of credited service as of December 31, 1995 for the
executive officers named in the Summary Compensation Table are as follows:
Robert E. Gallagher (25 years), John P. Gallagher (25 years), J. Patrick
Gallagher, Jr. (20 years), Michael J. Cloherty (13 years), and Gary M. Van der
Voort (25 years). Such pension benefits are in addition to the amounts payable
to such persons under the Company's savings and thrift plan on their retirement
and are subject to certain limitations as required under the Internal Revenue
Code.
STOCK OPTION PLANS
The Company maintains Stock Option Plans. The following table sets forth
certain information regarding options to purchase shares of Common Stock
granted to the executive officers of the Company named in the Summary
Compensation Table during the Company's 1995 fiscal year. Members of the Option
Committee (currently Robert E. Gallagher and John P. Gallagher) are not
eligible to participate in any of the Company's Stock Option Plans. The
exercise price of the options equals the closing price of a share of the
Company's Common Stock on the date of the option grant.
OPTION GRANTS IN THE LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------
% OF POTENTIAL
TOTAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL
SECURITIES GRANTED RATES OF STOCK PRICE
UNDERLYING TO APPRECIATION
OPTIONS EMPLOYEES FOR OPTION TERM(2)
GRANTED IN FISCAL EXERCISE EXPIRATION ---------------------
NAME (#) YEAR PRICE ($) DATE 5% ($) 10% ($)
---- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Gallagher..... -- -- -- -- -- --
John P. Gallagher....... -- -- -- -- -- --
J. Patrick Gallagher,
Jr..................... 10,000 1.60% 34.375 06/12/05 216,000 548,000
Michael J. Cloherty..... 10,000 1.60% 34.375 06/12/05 216,000 548,000
Gary M. Van der Voort... 10,000 1.60% 34.375 06/12/05 216,000 548,000
</TABLE>
23
<PAGE>
- --------
(1) Nonqualified options granted June 12, 1995, exercisable at the rate of 10%
of the total option for each calendar year after 1995.
(2) Based on actual option term and annual compounding.
The following table sets forth certain information regarding options to
purchase shares of Common Stock exercised during the Company's 1995 fiscal year
and the number and value of unexercised options to purchase shares of Common
Stock held at the end of the Company's 1995 fiscal year by the executive
officers of the Company named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SECURITIES SECURITIES VALUE OF VALUE OF
UNDERLYING UNDERLYING UNEXERCISED UNEXERCISED
NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY
SHARES VALUE OPTIONS AT OPTIONS AT OPTIONS AT OPTIONS AT
ACQUIRED ON REALIZED FY-END (#) FY-END (#) FY-END ($) FY-END ($)
NAME EXERCISE (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE(2)
---- ------------ -------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Gallagher..... -- -- -- -- -- --
John P. Gallagher....... -- -- -- -- -- --
J. Patrick Gallagher,
Jr..................... -- -- 22,000 87,000 256,000 828,000
Michael J. Cloherty..... -- -- 24,000 82,000 325,000 808,000
Gary M. Van der Voort... -- -- 55,000 85,000 930,000 864,000
</TABLE>
- --------
(1) Market value of underlying securities at exercise, minus the exercise
price.
(2) Market value of underlying securities at year end, minus the exercise
price.
SEVERANCE PAY PLAN
The Company has a plan for severance compensation to employees after a
hostile takeover. The plan defines a hostile takeover to include, among other
events, the following events, if not approved by two-thirds of the members of
the Board of Directors in office immediately prior to any such events: the
election of directors not nominated by the Board of Directors, a business
combination, such as a merger, not approved by the holders of 80% or more of
the Common Stock and the Board of Directors or not meeting various "fair price"
criteria, or the acquisition of 20% or more of the combined voting power of the
Company's stock by any person or entity. All full-time and part-time employees
who are regularly scheduled to work 20 or more hours per week and who have
completed at least two years of continuous employment with the Company are
participants in the plan. A severance benefit is payable under the plan if a
participant's employment with the Company terminates voluntarily or
involuntarily within two years after a hostile takeover for reasons such as
reduction in compensation, discontinuance of employee benefit plans without
replacement with substantially similar plans, change in duties or status,
certain changes in job location and involuntary termination of employment for
reasons other than just cause. For participants who have completed two but less
than five years of employment, the benefit is equal to the employee's annual
compensation during the year immediately preceding the termination of
employment. For employees who have completed five or more years of employment,
the benefit is equal to two and one-half times the employee's annual
compensation during the 12 months ending on the date of termination of
employment, but may not exceed 2.99 times average annual compensation during
the preceding five years. Annual compensation is defined for purposes of the
plan as the amount of the employee's wages, salary, bonuses and other incentive
compensation. Benefits are payable in a lump sum not less than 10 days after
termination of employment.
24
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following tabulation shows with respect to any person who is known to be
the beneficial owner as of December 31, 1995 of more than 5% of the Company's
Common Stock, par value $1.00 per share, which is its only class of issued and
outstanding capital stock, (i) the total number of shares of Common Stock
beneficially owned as of such date; and (ii) the percent of Common Stock so
owned as of the same date.
<TABLE>
<CAPTION>
AMOUNT & NATURE PERCENT OF
NAME AND ADDRESS OF OF BENEFICIAL COMMON
BENEFICIAL OWNER OWNERSHIP STOCK
------------------- --------------- ----------
<S> <C> <C>
Firstar Corporation.................................. 1,089,725(1) 7.0%
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
</TABLE>
The following tabulation shows with respect to each of the directors of the
Company, the executive officers named in the Summary Compensation Table, and
all directors and executive officers as a group, fourteen in number, (i) the
total number of shares of Common Stock beneficially owned as of February 29,
1996; and (ii) the percent of Common Stock so owned as of the same date.
<TABLE>
<CAPTION>
AMOUNT &
NATURE OF PERCENT OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP(2) STOCK
- ------------------------ ------------ ----------
<S> <C> <C>
Robert E. Gallagher................................... 764,685(3) 4.9%
John P. Gallagher..................................... 580,496(4) 3.7%
T. Kimball Brooker.................................... 11,020 *
John G. Campbell...................................... 29,685 *
Michael J. Cloherty................................... 107,402 *
J. Patrick Gallagher, Jr. ............................ 164,606(5) 1.1%
Jack M. Greenberg..................................... 19,780 *
Philip A. Marineau.................................... 9,780 *
Walter F. McClure..................................... 56,906 *
Gary M. Van der Voort................................. 121,326(6) *
James R. Wimmer....................................... 21,780(7) *
All directors and executive officers as a group (14
persons)............................................. 2,059,090 12.9%
</TABLE>
- --------
* Less than 1%
(1) Information obtained from a Schedule 13G dated February 9, 1996 filed with
the Securities and Exchange Commission by Firstar Corporation. The Company
has been informed by Firstar Corporation that Firstar Corporation, together
with certain of its subsidiaries, is considered the beneficial owner in the
aggregate of 1,089,725 shares, or 7.0% of shares outstanding, of the
Company's voting Common Stock.
(2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of
1934. Unless otherwise stated in these notes, each person has sole voting
and investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options exercisable within
sixty days are deemed outstanding for the purpose of computing the number
and percentage owned by such person, but are not deemed outstanding for the
purpose of computing the percentage owned by each other person listed.
Includes shares which the listed beneficial owner has a right to acquire
within sixty days as follows: John G. Campbell, 12,800 shares; Michael J.
Cloherty, 37,000 shares; J. Patrick Gallagher, Jr., 34,000 shares; Jack M.
Greenberg, 17,780 shares; Philip A. Marineau, 9,780 shares; Walter F.
McClure, 39,000 shares; Gary M. Van der Voort, 69,000 shares; James R.
Wimmer, 17,780 shares; all directors and executive officers as a group (14
persons), 342,060 shares.
25
<PAGE>
(3) Includes 75,000 shares held in trust for the benefit of Robert E.
Gallagher's grandchildren, 100,000 shares held by a limited partnership of
which Robert E. Gallagher and Isabel Gallagher, his wife, are the general
partners, 100,000 shares held in trust for the benefit of Isabel Gallagher,
and 69,012 shares held in the Lauren E. Gallagher Trust under which Robert
E. Gallagher is a trustee.
(4) Includes 26,925 shares held by his wife, Mary C. Gallagher, and 250,000
shares held by a limited partnership of which John P. Gallagher and Mary C.
Gallagher are the general partners.
(5) Includes 33,220 shares held in trust for the benefit of his minor children
by his wife, Anne M. Gallagher, and another as trustees and 23,820 shares
held by his wife.
(6) Includes 3,600 shares held as custodian for the benefit of his children
under the Uniform Gift to Minors Act.
(7) Includes 4,000 shares held by his wife, Gertrude A. Wimmer.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, $1.00
par value per share, and 1,000,000 shares of Preferred Stock without par value.
COMMON STOCK
As of February 29, 1996, there were 15,611,379 shares of Common Stock
outstanding held by approximately 600 stockholders of record.
Holders of the outstanding Common Stock are entitled to one vote for each
share held of record on all matters presented to stockholders. The shares of
Common Stock have no cumulative voting rights in the election of directors, and
accordingly holders of a majority of the outstanding voting stock are entitled
to elect the entire Board. The holders of Common Stock have no conversion,
preemptive or subscription rights. Subject to the rights of holders of
Preferred Stock, upon liquidation of the Company, the net assets will be
distributed ratably among the holders of Common Stock. Subject to the prior
payment of all preferred dividends on shares of outstanding Preferred Stock,
the holders of Common Stock are entitled to receive ratably out of funds
legally available therefor dividends at such time and in such amounts as the
Board of Directors may from time to time determine. All shares of Common Stock
currently outstanding are, and when the shares of Common Stock offered by the
Company hereby are sold, such shares will be, fully paid and nonassessable.
PREFERRED STOCK
The Company also is authorized to issue 1,000,000 shares of Preferred Stock
without par value, issuable in series. The Board of Directors is authorized to
designate each series and the number of shares within the series and to
determine and fix the relative rights and preferences of the shares of each
series. No shares of Preferred Stock are currently issued or outstanding.
Preferred Stock, when and if issued, will be senior to Common Stock with
respect to dividend and liquidation rights. The relative rights and preferences
which may hereafter be fixed by resolution of the Board for any series of
Preferred Stock may provide that the shares of such series shall be senior to
the other series of Preferred Stock with respect to dividends, liquidation or
other rights and that such shares may be redeemable or may be convertible into
Common Stock or other securities.
COMMON SHARE PURCHASE RIGHTS
On March 10, 1987, the Board of Directors adopted a Common Share Purchase
Rights Plan (the "Plan"), which Plan was approved by the Company's stockholders
at their Annual Meeting on
26
<PAGE>
May 12, 1987. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and Harris Trust &
Savings Bank. The description of the Rights contained herein is qualified in
its entirety by reference to the form of Rights Agreement which has been
included as an exhibit to the Registration Statement of which this Prospectus
is a part.
Under the Plan, Common Share Purchase Rights (the "Rights") were distributed
as a dividend at the rate of one Right for each share of Common Stock held by
stockholders of record as of May 12, 1987 (the "Record Date"). The Company also
will issue one Right with respect to each share of Common Stock that becomes
outstanding after May 12, 1987, but prior to the earliest of the Distribution
Date (as hereinafter defined), the redemption of the Rights or the expiration
of the Rights. Each Right entitles the registered holder to purchase from the
Company one share of Common Stock at the price of $100 per share, subject to
certain adjustments (the "Purchase Price").
With respect to the shares of Common Stock outstanding as of May 12, 1987,
the Rights are evidenced by the Common Stock certificates. With respect to the
shares of Common Stock that become outstanding after May 12, 1987 but prior to
the earliest of the Distribution Date (as hereinafter defined), the redemption
of the Rights or the expiration of the Rights, the Rights will be evidenced by
Common Stock certificates that contain a legend incorporating the Rights
Agreement by reference.
The Rights will not be exercisable or transferable apart from the Common
Stock until the earlier to occur of (i) ten days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") acquired or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding Common Stock or (ii) ten days
following the commencement or announcement of an intention to make a tender
offer or exchange offer for 30% or more of the outstanding Common Stock (the
earlier of such dates being called the "Distribution Date"). Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates representing Common Stock
outstanding as of May 12, 1987 (or issued after May 12, 1987 but prior to the
earliest of the Distribution Date, the redemption of the Rights or the
expiration of the Rights) would also constitute the transfer of the Rights
associated with the Common Stock represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights (the "Right Certificates") would be mailed to holders of record of
the Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone would evidence the Rights.
The Rights would not be exercisable until the Distribution Date and would
expire on May 12, 1997 unless earlier redeemed by the Company as described
below. Until a Right is exercised, the holder thereof, as such, would have no
rights as a stockholder, including, without limitation, the right to vote or to
receive dividends. The Rights would be redeemable by the Company in whole, but
not in part, at a price of $0.05 per Right (the "Redemption Price") prior to
the public announcement that 20% or more of the Company's Common Stock had been
accumulated by a single acquirer or group.
In the event that the Company were acquired in a merger or other business
combination transaction or 50% or more of its assets or earning power were
sold, proper provision would be made so that each holder of a Right thereafter
would have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the exercise price of the Right. In the event that the
Company were the surviving corporation in a merger and its Common Stock was not
changed or exchanged, or in the event that an Acquiring Person engages in one
of a number of self-dealing transactions specified in the Rights Agreement,
such as certain sales of assets to the Company or obtaining certain financial
benefits from the Company, proper provision would be made so that each holder
of a Right, other than Rights that were beneficially owned by the Acquiring
Person on the Distribution Date (which would thereafter
27
<PAGE>
be void) would thereafter have the right to receive upon exercise that number
of shares of Common Stock having a market value of two times the exercise price
of the Right.
The Purchase Price payable and the number of shares of Common Stock or other
securities or property purchasable, upon exercise of the Rights would be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of the
Common Stock, (ii) upon the grant to holders of shares of the Common Stock of
certain rights or warrants to subscribe for shares of Common Stock or
convertible securities at less than the current market price of the Common
Stock, or (iii) upon the distribution to holders of shares of the Common Stock
of evidences of indebtedness or assets (excluding regular periodic cash
dividends out of earnings or retained earnings at a rate not in excess of 125%
of the rate of the last cash dividend theretofore paid or dividends payable in
shares of Common Stock) or of subscription rights or warrants (other than those
referred to above). With certain exceptions, no adjustment in the Purchase
Price would be required until cumulative adjustments required an adjustment of
at least 1% in such Purchase Price. No fractional shares would be issued and in
lieu thereof, an adjustment in cash would be made based on the market price of
the Common Stock on the last trading date prior to the date of exercise.
The Rights have certain anti-takeover effects. The Rights would cause
substantial dilution to a person who attempts to acquire the Company without
conditioning his offer on a substantial number of Rights being acquired. The
Rights would have no effect, however, on a person who is willing to acquire
control of the Company and wait until the Rights expire before acquiring 100%
ownership. Moreover, the Rights would not affect a transaction approved by the
Company prior to the public announcement that 20% or more of the Company's
Common Stock had been accumulated by a single acquirer or group, because the
Rights could be redeemed until that time.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Restated Certificate of Incorporation contains provisions which
could deter, delay or prevent a change in control of the Company which is
opposed by the Board of Directors. Such provisions include the following: (a) a
provision for classification of the Board of Directors into three classes and a
minimum of three and a maximum of fifteen directors at any time; (b) a
requirement that 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 the Company and of not less than
67% of the voting stock held by stockholders other than a "Related Person" as
defined below; (c) a requirement that any merger, purchase of assets or other
business combination ("Business Combination") between the Company and certain
owners of 20% or more of the outstanding voting stock of the Company ("Related
Person") in order to become effective must be approved by the affirmative vote
of not less than 80% of the shares of outstanding voting stock of the Company
and by 67% of the stock owned by stockholders other than the Related Person;
and (d) a requirement that the provisions summarized in (a), (b) and (c) may
only be repealed or amended by the affirmative vote of 80% of the outstanding
voting stock of the Company and the affirmative vote of 67% of the outstanding
voting stock owned by stockholders other than a Related Person. The 80% and 67%
approval requirements do not apply if (1) two-thirds of the directors who held
office immediately prior to the date the Related Person became a Related Person
approve the Business Combination or (2) the Business Combination is between the
Company and a subsidiary at least 50% owned by the Company and in which the
Related Person has no interest, or (3) any consideration to be paid to
stockholders of the Company as part of the Business Combination meets certain
fair price tests and stockholders of the Company have received a timely mailing
containing (A) the recommendation of outside directors and directors who held
office immediately prior to the Related Person's becoming such and (B) the
opinion of a reputable investment banking or financial services firm as to the
fairness of the Business Combination. The By-laws also provide that special
meetings
28
<PAGE>
of stockholders may be called by the President or by the Secretary at the
request in writing of the majority of the Board of Directors. On May 14, 1991
the stockholders approved a proposal to amend the Company's Restated
Certificate of Incorporation to require all stockholder action take place at a
meeting of the stockholders.
The foregoing provisions of the Restated Certificate of Incorporation and By-
laws could have the effect of perpetuating current management or preventing
approval by the holders of a majority of the Company's voting stock. In
addition, it would be possible for the Board of Directors to authorize issuance
of the Preferred Stock, without further approval by the stockholders, with
rights and preferences which could impede a takeover of the Company. The
foregoing summary is qualified in its entirety by reference to the provisions
of the Restated Certificate of Incorporation and By-laws, as amended, which
have been included as exhibits to the Registration Statement of which this
Prospectus is a part.
LEGAL OPINION
The legality of the shares of Common Stock offered hereby will be passed upon
for the Company by Carl E. Fasig, Counsel and Secretary for the Company. Mr.
Fasig holds options with respect to 2,300 shares that are exercisable within 60
days from the date of this Prospectus.
EXPERTS
The consolidated financial statements of the Company at December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Registration Statement 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.
29
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Consolidated Financial Statements:
Consolidated Statement of Earnings...................................... F-2
Consolidated Balance Sheet.............................................. F-3
Consolidated Statement of Cash Flows.................................... F-4
Consolidated Statement of Stockholders' Equity.......................... F-5
Notes to Consolidated Financial Statements.............................. F-6
Management's Report....................................................... F-18
Report of Independent Auditors............................................ F-19
</TABLE>
F-1
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
OPERATING RESULTS
Revenues:
Commissions....................................... $235,877 $216,471 $193,423
Fees.............................................. 160,052 141,501 128,754
Investment income and other....................... 16,069 9,692 16,541
-------- -------- --------
Total revenues.................................. 411,998 367,664 338,718
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 218,740 196,816 174,928
Other operating expenses.......................... 130,393 117,835 116,227
-------- -------- --------
Total expenses.................................. 349,133 314,651 291,155
-------- -------- --------
Earnings before income taxes........................ 62,865 53,013 47,563
Provision for income taxes.......................... 21,374 18,608 18,747
-------- -------- --------
Net earnings.................................... $ 41,491 $ 34,405 $ 28,816
======== ======== ========
Net earnings per common and common equivalent share. $ 2.54 $ 2.12 $ 1.71
Dividends declared per common share................. $ 1.00 $ .88 $ .72
Weighted average number of common and common
equivalent shares outstanding...................... 16,315 16,250 16,840
</TABLE>
See accompanying notes.
F-2
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 53,545 $ 44,240
Restricted cash.......................................... 67,719 70,154
Premiums and fees receivable............................. 193,733 183,207
Investment strategies--trading........................... 46,123 42,637
Other.................................................... 20,534 20,617
-------- --------
Total current assets................................... 381,654 360,855
Marketable securities--available for sale.................. 41,712 37,929
Other noncurrent assets.................................... 42,219 34,515
Fixed assets............................................... 66,958 60,776
Accumulated depreciation and amortization.................. (44,325) (40,155)
-------- --------
Net fixed assets....................................... 22,633 20,621
Intangible assets--net..................................... 7,576 8,149
-------- --------
$495,794 $462,069
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Premiums payable to insurance companies.................. $263,378 $257,108
Accrued salaries and bonuses............................. 13,405 12,060
Accounts payable and other accrued liabilities........... 57,006 47,168
Unearned fees............................................ 12,746 13,859
Income taxes payable..................................... 10,409 11,590
Other.................................................... 6,907 10,923
-------- --------
Total current liabilities.............................. 363,851 352,708
Deferred income taxes and other noncurrent accounts........ 13,801 13,116
Stockholders' equity:
Common stock--issued and outstanding 15,426 shares in
1995 and 15,132 shares in 1994.......................... 15,426 15,132
Retained earnings........................................ 102,682 84,048
Unrealized holding gain (loss) on available for sale
securities--net of income taxes......................... 34 (2,935)
-------- --------
Total stockholders' equity............................. 118,142 96,245
-------- --------
$495,794 $462,069
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings..................................... $ 41,491 $34,405 $28,816
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss (gain) on investments................. (282) 3,042 (5,121)
Depreciation and amortization.................. 7,994 7,528 9,370
Decrease (increase) in restricted cash......... 2,435 13,172 (13,955)
Increase in premiums receivable................ (11,493) (19,587) (6,424)
Increase in premiums payable................... 6,270 12,796 14,881
(Increase) decrease in trading investments--
net........................................... (2,353) 26,811 --
(Increase) decrease in other current assets.... (1,188) 2,694 6,000
Increase in accrued salaries and bonuses....... 1,345 1,921 2,250
Increase in accounts payable and other accrued
liabilities................................... 9,234 7,599 4,603
Increase (decrease) in income taxes payable.... (1,181) 2,810 1,895
Decrease in deferred income taxes.............. (1,317) (5,258) (7,290)
Other.......................................... (9,501) (7,657) (2,374)
-------- ------- -------
Net cash provided by operating activities.... 41,454 80,276 32,651
-------- ------- -------
Cash flows from investing activities:
Purchases of marketable securities............... (21,918) (28,409) (51,755)
Proceeds from the sale of marketable securities.. 20,078 30,527 35,159
Proceeds from maturities of marketable
securities...................................... 2,213 2,224 9,332
Investment in leveraged leases................... -- -- 750
Purchase of investment strategies................ -- -- (24,900)
Additions to fixed assets........................ (9,433) (7,496) (7,796)
Other............................................ 375 316 176
-------- ------- -------
Net cash used by investing activities........ (8,685) (2,838) (39,034)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 7,044 3,141 9,722
Tax benefit from issuance of common stock........ 1,837 747 3,541
Repurchase of common stock....................... (15,068) (43,843) (7,035)
Dividends paid................................... (14,666) (12,690) (10,336)
Proceeds from issuance of long-term debt......... -- -- 25,650
Retirement of long-term debt..................... (1,130) (24,776) (20,242)
Equity transactions of pooled companies prior to
dates of acquisition............................ (1,481) (1,473) 395
-------- ------- -------
Net cash (used) provided by financing
activities.................................. (23,464) (78,894) 1,695
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 9,305 (1,456) (4,688)
Cash and cash equivalents at beginning of year..... 44,240 45,696 50,384
-------- ------- -------
Cash and cash equivalents at end of year........... $ 53,545 $44,240 $45,696
======== ======= =======
Supplemental disclosures of cash flow information:
Interest paid.................................... $ 477 $ 1,874 $ 2,812
Income taxes paid................................ $ 21,571 $19,913 $19,321
</TABLE>
See accompanying notes.
F-4
<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, 1992
as previously reported...... 15,164 $15,164 $ 2,198 $ 76,607 $ --
Acquisition of pooled
companies................. 348 348 -- (28) --
------ ------- -------- -------- -------
Balance at December 31, 1992
as restated................. 15,512 15,512 2,198 76,579 --
Net earnings............... -- -- -- 28,816 --
Cash dividends declared on
common stock.............. -- -- -- (10,808) --
Common stock issued under
stock option plans........ 574 574 9,148 -- --
Tax benefit from issuance
of common stock........... -- -- 3,541 -- --
Common stock repurchases... (225) (225) (6,810) -- --
Common stock issued in two
pooling acquisitions...... 176 176 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- 33 362 --
------ ------- -------- -------- -------
Balance at December 31, 1993. 16,037 16,037 8,110 94,949 --
Net earnings............... -- -- -- 34,405 --
Cash dividends declared on
common stock.............. -- -- -- (13,209) --
Common stock issued under
stock option plans........ 171 171 2,970 -- --
Tax benefit from issuance
of common stock........... -- -- 747 -- --
Common stock repurchases... (1,392) (1,392) (11,827) (30,624) --
Common stock issued in
three pooling
acquisitions.............. 316 316 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- -- (1,473) --
Cumulative effect of
accounting change, net of
taxes of $970............. -- -- -- -- 1,456
Change in unrealized gain
(loss), net of taxes of
$2,899.................... -- -- -- -- (4,391)
------ ------- -------- -------- -------
Balance at December 31, 1994. 15,132 15,132 -- 84,048 (2,935)
Net earnings............... -- -- -- 41,491 --
Cash dividends declared on
common stock.............. -- -- -- (15,270) --
Common stock issued under
stock option plans........ 356 356 6,688 -- --
Tax benefit from issuance
of common stock........... -- -- 1,837 -- --
Common stock repurchases... (437) (437) (8,525) (6,106) --
Common stock issued in
seven pooling
acquisitions.............. 375 375 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- -- (1,481) --
Change in unrealized gain
(loss), net of taxes of
$1,951.................... -- -- -- -- 2,969
------ ------- -------- -------- -------
Balance at December 31, 1995. 15,426 $15,426 $ -- $102,682 $ 34
====== ======= ======== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operation
Arthur J. Gallagher & Co. (the Company) provides insurance broker and risk
management services to a wide variety of commercial, industrial, institutional
and governmental organizations. Commission revenue is principally generated
through the negotiation and placement of insurance for its clients. Fee revenue
is generated by providing other risk management services including claims
management, information management, risk control services and appraisals in
either the property/casualty market or human resource, employee benefit market.
The Company operates through approximately 140 offices throughout the United
States and five offices abroad.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and all subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have been made
to the prior year financial statements in order to conform to the current year
presentation.
Revenue recognition
Commission income is generally recognized as of the effective date of
insurance policies except for commissions on installment premiums which are
recognized periodically as billed. Contingent commissions are recognized when
received. Fee income is recognized ratably as services are rendered. The income
effects of subsequent premium and fee adjustments are recorded when the
adjustments become known. Premiums and fees receivable are net of allowance for
doubtful accounts of $709,000 and $846,000 at December 31, 1995 and 1994,
respectively.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Consolidated statement of cash flows
Short-term investments, consisting principally of commercial paper and
certificates of deposit which have a maturity of ninety days or less at date of
purchase, are considered cash equivalents.
Marketable securities
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 115, "Accounting for Certain Investments in Debt
and Equity Securities". The new standard requires that securities designated as
available for sale be carried at fair value, with unrealized gains and losses,
less related deferred income taxes, excluded from earnings and reported as a
separate component of stockholders' equity. In addition, securities designated
as trading are required to be carried at fair value, with unrealized gains and
losses included in the statement of earnings. Previously, the Company carried
these investments at either the lower of cost or fair value, or at amortized
cost. As of January 1, 1994, the Company adopted the provisions of the new
standard for investments held as of or acquired after that date. In accordance
with Statement 115, prior period financial statements have not been restated to
reflect the change in accounting principle. The cumulative effect as of January
1, 1994 of adopting Statement 115 increased the opening balance of
F-6
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Fixed assets
Fixed assets are carried at cost. Furniture and equipment with a cost of
$59,130,000 at December 31, 1995 ($53,576,000 at December 31, 1994) are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements with a cost of $7,828,000 at December 31,
1995 ($7,200,000 at December 31, 1994) are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
lease terms.
Intangible assets
Intangible assets consist primarily of the excess of cost over the value of
net tangible assets of acquired businesses and are amortized principally over
forty years using the straight-line method. Accumulated amortization at
December 31, 1995 was $7,225,000 ($7,221,000 at December 31, 1994).
Earnings per share
Earnings per share are computed based on the weighted average number of
common and common equivalent shares outstanding during the respective period.
Common equivalent shares include incremental shares from dilutive stock options
since the date of grant using the treasury stock method. There is no material
difference between primary and fully diluted per share amounts.
Stock based compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
option grants.
2. ACQUISITIONS
Poolings of interests
In 1995, the Company acquired substantially all the net assets of nine
insurance brokerage firms in exchange for 723,000 shares of its common stock.
In 1994, the Company acquired substantially all the net assets of five
insurance brokerage firms in exchange for 819,000 shares of its common stock.
These acquisitions were accounted for as poolings of interests and, except for
seven of the 1995 acquisitions and three of the 1994 acquisitions whose results
were not significant, the financial statements for all periods prior to the
acquisition dates have been restated to include the operations of these
companies.
F-7
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarizes the restatement to reflect the 1995 acquisitions:
<TABLE>
<CAPTION>
ATTRIBUTABLE TO
ARTHUR J. GALLAGHER POOLED COMPANIES AS RESTATED
------------------- ---------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1994
Revenues..................... $356,377 $11,287 $367,664
Net earnings................. 34,540 (135) 34,405
======== ======= ========
1993
Revenues..................... $329,263 $ 9,455 $338,718
Net earnings................. 29,446 (630) 28,816
======== ======= ========
</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.
4. MARKETABLE SECURITIES
The following is a summary of available for sale marketable securities (in
thousands):
<TABLE>
<CAPTION>
COST OR GROSS GROSS FAIR
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
-------------- ---------------- ----------------- -------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Preferred stocks... $25,111 $ 996 $ 447 $25,660
Fixed maturities... 5,695 119 479 5,335
Common stocks...... 10,850 884 1,017 10,717
------- ------ ------ -------
$41,656 $1,999 $1,943 $41,712
======= ====== ====== =======
DECEMBER 31, 1994
Preferred stocks... $25,841 $ 179 $2,326 $23,694
Fixed maturities... 7,371 108 905 6,574
Common stocks...... 9,581 230 2,150 7,661
------- ------ ------ -------
$42,793 $ 517 $5,381 $37,929
======= ====== ====== =======
</TABLE>
The gross realized gains on sales of marketable securities totaled
$1,079,000, $2,004,000 and $1,719,000 for the years ended December 31, 1995,
1994, and 1993, respectively. The gross realized losses totaled $1,918,000,
$312,000 and $929,000 for the years ended December 31, 1995, 1994, and 1993,
respectively.
Substantially all fixed maturity securities mature in 1999 or later. Actual
maturities may differ from contractual maturities because the issuers of the
securities may have the right to call or prepay obligations.
The net unrealized (losses) gains on investment strategies included in income
amounted to ($171,000) in 1995, $83,000 in 1994 and $1,908,000 in 1993.
F-8
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1995, securities sold under agreements to repurchase the
identical securities are collateralized by government backed small business
administration loans and government securities with a carrying value of
$20,071,000 and a fair value of $20,253,000. The securities collateralizing the
agreements were held by two primary dealers. At December 31, 1994, these
securities had a carrying value of $19,152,000 and a fair value of $19,098,000.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
(IN
THOUSANDS)
<S> <C> <C>
6.64% unsecured term note, payable in annual installments of
$630............................................................ $1,890 $2,520
6.30% unsecured term note, payable in annual installments of
$500............................................................ 1,500 2,000
------ ------
3,390 4,520
Less current portion............................................. 1,130 1,130
------ ------
$2,260 $3,390
====== ======
</TABLE>
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>
1996.................................................... $1,130
1997.................................................... 1,130
1998.................................................... 1,130
------
$3,390
======
</TABLE>
In November, 1994, the Company retired its $20 million variable-rate (based
on LIBOR plus .625%) unsecured revolving credit agreement that was due in 1998.
In connection with the retirement, the Company also recognized a gain of
$656,000 on the settlement of interest rate exchange agreements that had been
entered into in 1993 to fix the rate of interest payable on the revolving
credit agreement. The credit agreement remains in effect and, as of December
31, 1995, there were no borrowings outstanding under this agreement.
The Company also has line of credit facilities of $17,500,000 which expires
on April 30, 1996 and $10,000,000 which expires on February 28, 1997. No
borrowings existed under these facilities at December 31, 1995.
F-9
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN
Capital Stock
The table below summarizes certain information about the Company's capital
stock at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
AUTHORIZED
CLASS PAR VALUE SHARES
- ----- --------- ----------
<S> <C> <C>
Preferred stock............................................ No par 1,000,000
Common stock............................................... $ 1.00 50,000,000
</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 common stock at the rate of one Right for
each common share held. Under certain conditions, each Right may be exercised
to purchase one share of common stock at an exercise price of $100. The Rights
become exercisable and transferable apart from the common stock after a public
announcement that a person or group has acquired 20% or more of the common
stock or after commencement or public announcement of a tender offer for 30% or
more of the common stock. If the Company is acquired in a merger or business
combination, each Right may be exercised to purchase the common stock of the
surviving company having a market value of twice the exercise price of each
Right. The Rights, which expire May 12, 1997, may be redeemed by the Company at
5 cents per Right at any time prior to the public announcement of the
acquisition of 20% of the common stock. At December 31, 1995, 25,000,000 shares
of common stock were reserved for potential exercise of the Rights.
F-10
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
--------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
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....... 4,614 $ 7.13-33.75 3,997 $ 4.97-33.75 3,769 $ 4.97-27.63
Granted................. 626 15.00-37.00 870 10.00-33.00 898 14.13-33.75
Exercised............... (355) 16.25-33.75 (171) 4.97-33.75 (574) 4.97-27.63
Canceled................ (115) 16.25-34.88 (82) 16.25-33.75 (96) 16.25-33.75
----- ------------ ----- ------------ ----- ------------
Ending balance.......... 4,770 $ 7.13-37.00 4,614 $ 7.13-33.75 3,997 $ 4.97-33.75
===== ============ ===== ============ ===== ============
Exercisable at end of
year................... 1,513 1,283 934
===== ===== =====
</TABLE>
Options with respect to 1,269,000 shares were available for grant at December
31, 1995.
9. SAVINGS & THRIFT PLAN
The Company has a contributory savings & thrift plan covering the majority of
its employees. Company contributions are at the discretion of the Company's
Board of Directors and may not exceed the maximum amount deductible for federal
income tax purposes. The Company contributed $1,035,000, $879,000, and $773,000
in 1995, 1994 and 1993, respectively.
F-11
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
----------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested..................................................... $24,775 $19,561
Nonvested.................................................. 6,027 3,758
------- -------
$30,802 $23,319
======= =======
Projected benefit obligation................................. $45,143 $34,825
Assets at fair value......................................... 31,900 23,119
------- -------
Projected benefit obligation in excess of plan assets........ 13,243 11,706
------- -------
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions.......... (1,473) (1,526)
Unamortized portion of net obligation at January 1........... (611) (666)
------- -------
Unfunded accrued pension cost................................ $11,159 $ 9,514
======= =======
</TABLE>
Pension expense for the plan consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1995 1994 1993
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year......... $5,027 $ 5,400 $ 4,178
Interest cost on projected benefit obligation......... 2,775 2,467 2,198
Actual return on plan assets.......................... (5,283) (158) (2,285)
Net amortization and deferral......................... 3,194 (1,366) 1,304
------ ------- -------
Net pension expense................................... $5,713 $ 6,343 $ 5,395
====== ======= =======
</TABLE>
The following assumptions were used in determining the actuarial present
value of the plan's projected benefit obligation:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Discount rate................................................. 7.50% 8.00% 7.00%
Rate of increase in future compensation levels................ 6.50% 7.00% 5.75%
Expected long-term rate of return on assets................... 9.00% 9.00% 9.00%
</TABLE>
F-12
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993, the Company converted its foreign defined benefit plan to a defined
contribution plan. The defined contribution plan provides for basic
contributions by the Company and voluntary contributions by employees which are
matched 100% by the Company, up to a maximum of 5% of salary, as defined.
At the time of the foreign plan conversion, there was a surplus of plan
assets in excess of benefit obligations. Previously vested benefits of the plan
participants were settled by the purchase of annuity policies with a life
insurance company. As a result of the defined benefit plan settlement, the
Company recognized a $4,572,000 gain in 1993, which was recorded as an offset
to salaries and employee benefits expense.
Net expense for foreign retirement plans amounted to $999,000 in 1995,
$1,041,000 in 1994 and ($3,951,000) in 1993.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In 1992, the Company amended its health benefits plan to eliminate retiree
coverage, except for current retirees and those employees who had already
attained a specified age and length of service. The retiree health plan is
contributory, with contributions adjusted annually, and is funded on a pay-as-
you-go basis.
The components of the net periodic postretirement benefit cost include the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1994 1993
----- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................................. $ -- $ -- $ --
Interest cost............................................. 701 828 762
Amortization of gain...................................... (379) -- --
Amortization of transition obligation..................... 512 512 512
----- ------ ------
$ 834 $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,
----------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 3,939 $ 4,103
Active eligible employees................................... 5,968 6,989
------- -------
9,907 11,092
Unrecognized transition obligation............................ (8,700) (9,212)
Unrecognized gain............................................. 1,644 372
------- -------
Accrued postretirement benefit cost........................... $ 2,851 $ 2,252
======= =======
</TABLE>
The assumed healthcare cost trend rate used for the next two years is 9.5%,
scaling down to 4.5% after 13 years. A 1% increase in the assumed healthcare
cost trend rate would increase the accumulated postretirement benefit
obligation by $1,426,000 at December 31, 1995 and would increase the net
periodic postretirement benefit cost for 1995 by $97,000.
F-13
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The discount rate used to measure the accumulated postretirement benefit
obligation was 7.5% and 8.0% at December 31, 1995 and 1994, respectively. The
transition obligation is being amortized over 20 years. Prior to 1993,
postretirement benefits were recorded on a pay-as-you-go basis.
12. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal actions incident to the nature of its
business. Management is of the opinion that none of the litigation will have a
material effect on the Company's financial position.
The Company generally operates in leased premises. Certain office space
leases have options permitting renewals for additional periods. In addition to
minimum fixed rentals, a number of leases contain escalation clauses related to
increases in the cost of living in future years.
Minimum aggregate rental commitments at December 31, 1995 under noncancelable
operating leases having an initial term of more than one year are as follows:
<TABLE>
<CAPTION>
TOTAL
--------------
(IN THOUSANDS)
<S> <C>
1996............................................................. $ 24,804
1997............................................................. 20,487
1998............................................................. 17,869
1999............................................................. 15,281
2000............................................................. 12,048
Subsequent years................................................. 50,629
--------
$141,118
========
</TABLE>
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $26,510,000 in 1995,
$25,130,000 in 1994 and $24,450,000 in 1993.
F-14
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Earnings before income taxes consist of:
Domestic........................................... $60,220 $51,750 $40,421
Foreign............................................ 2,645 1,263 7,142
------- ------- -------
$62,865 $53,013 $47,563
======= ======= =======
Provision for income taxes consists of:
Federal--
Current.......................................... $18,347 $18,652 $17,433
Deferred......................................... (2,734) (4,639) (5,034)
------- ------- -------
15,613 14,013 12,399
------- ------- -------
State and local--
Current.......................................... 5,268 4,990 4,669
Deferred......................................... (391) (639) (682)
------- ------- -------
4,877 4,351 3,987
------- ------- -------
Foreign--
Current.......................................... 1,103 (856) 2,407
Deferred......................................... (219) 1,100 (46)
------- ------- -------
884 244 2,361
------- ------- -------
Total provision...................................... $21,374 $18,608 $18,747
======= ======= =======
</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>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Leveraged leases.............................................. $ 2,760 $ 2,972
Other......................................................... 4,407 3,773
------- -------
Deferred tax liabilities.................................... 7,167 6,745
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits....... 11,390 10,012
Accrued liabilities........................................... 9,495 8,090
Unrealized investment losses.................................. -- 1,929
Other......................................................... 970 1,964
------- -------
Total deferred tax assets................................... 21,855 21,995
Valuation allowance for deferred tax assets................. -- --
------- -------
Deferred tax assets......................................... 21,855 21,995
------- -------
Net deferred tax assets......................................... $14,688 $15,250
======= =======
</TABLE>
F-15
<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,
-----------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate......... $22,003 35.0 $18,555 35.0 $16,647 35.0
State income taxes--net of
federal....................... 3,394 5.4 2,684 5.1 2,064 4.3
Pre-acquisition earnings of
pooled companies taxed to
previous owners............... (802) (1.3) (750) (1.4) 1,158 2.4
Foreign taxes.................. 59 .1 388 .7 1,262 2.7
General business credits....... (3,383) (5.4) (2,510) (4.7) (1,655) (3.5)
Other--net..................... 103 .2 241 .4 (729) (1.5)
------- ---- ------- ---- ------- ----
$21,374 34.0 $18,608 35.1 $18,747 39.4
======= ==== ======= ==== ======= ====
</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, 1995)
of certain foreign subsidiaries which are considered permanently invested
outside of the U.S. The amount of unrecognized deferred tax liability on these
undistributed earnings is $5,000,000.
14. FOREIGN OPERATIONS
Financial data by geographic area of operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Commissions and fees
United States................................ $ 381,130 $343,884 $309,630
Foreign, principally United Kingdom.......... 14,799 14,088 12,547
--------- -------- --------
395,929 357,972 322,177
Investment income.............................. 16,069 9,692 16,541
--------- -------- --------
$ 411,998 $367,664 $338,718
========= ======== ========
Earnings before taxes:
Operating profit (loss)
United States................................ $ 69,550 $ 62,480 $ 47,772
Foreign, principally United Kingdom.......... (551) 106 (534)
--------- -------- --------
68,999 62,586 47,238
General corporate expense, including interest
expense and investment income................. 6,134 9,573 (325)
--------- -------- --------
$ 62,865 $ 53,013 $ 47,563
========= ======== ========
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
United States.................................. $ 253,292 $238,804 $217,288
Foreign, principally United Kingdom............ 83,951 78,641 80,090
--------- -------- --------
337,243 317,445 297,378
Corporate...................................... 158,551 144,624 188,601
--------- -------- --------
$ 495,794 $462,069 $485,979
========= ======== ========
</TABLE>
F-16
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The consolidated financial statements include liabilities of $62,349,000 at
December 31, 1995 ($58,048,000 at December 31, 1994) after elimination of
intercompany balances applicable to foreign operations.
Exchange gains (losses) were approximately $51,000 in 1995, $106,000 in 1994
and ($115,000) in 1993.
15. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995
---------------------------------
1ST 2ND 3RD 4TH
------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Total revenues............................... $95,605 $94,893 $110,641 $110,859
Earnings before income taxes................. 10,226 9,059 23,704 19,876
Net earnings................................. 6,636 5,875 15,432 13,548
Net earnings per common and common equivalent
share....................................... .41 .36 .94 .83
<CAPTION>
1994
---------------------------------
1ST 2ND 3RD 4TH
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues............................... $85,590 $83,689 $100,691 $ 97,694
Earnings before income taxes................. 8,416 6,790 20,296 17,511
Net earnings................................. 5,340 4,301 12,827 11,937
Net earnings per common and common equivalent
share....................................... .32 .26 .79 .75
</TABLE>
F-17
<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, 1996
/s/ J. Patrick Gallagher, Jr.
-------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
/s/ Michael J. Cloherty
-------------------------------------
Michael J. Cloherty
Chief Financial Officer
F-18
<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, 1995 and 1994, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Arthur J.
Gallagher & Co. at December 31, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1994, the
Company changed its method of accounting for certain investments in debt and
equity securities.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
January 18, 1996
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the securities
being registered, all of which will be paid by the Registrant, are estimated as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $ 6,746
Printing Expenses................................................ 15,000
Legal Fees and Expenses.......................................... 5,000
Accountant's Fees and Expenses................................... 5,000
Miscellaneous Costs.............................................. 5,000
-------
Total........................................................ $36,746
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Seventh of the Registrant's By-laws (filed as Exhibit 3.2) and
Article Thirteenth of the Company's Restated Certificate of Incorporation
(filed as Exhibit 3.1) provide in effect for the indemnification by the
Registrant of each director, officer, employee or agent of the Registrant to
the full extent permitted by the General Corporation Law of Delaware.
Article Seventh of the Registrant's By-laws provides that the Registrant
shall indemnify any person in connection with any action, suit, or proceeding
brought or threatened by reason of the fact that he is or was a director,
officer, employee or agent of the Registrant, or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
enterprise against all costs actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Similar indemnity is permitted to be provided to such persons in connection
with an action or suit by or in the right of the Registrant, and provided
further that such person shall not have been adjudged liable for negligence or
misconduct in the performance of his duty to the Registrant, unless, in view of
all the circumstances of the case, the court in which the action or suit was
brought determines that such person despite the adjudication of liability is
fairly and reasonably entitled to indemnity for such expenses.
Article Thirteenth of the Company's Restated Certificate of Incorporation
eliminates the liability of the Company's directors for monetary damages for
breach of fiduciary duty as a director except where a director breaches his
duty of loyalty to the Company and its stockholders, fails to act in good faith
or engages in intentional misconduct or a knowing violation of law, authorizes
the payment of a dividend or stock repurchase which is illegal under Section
174 of the Delaware General Corporation Laws or obtains an improper personal
benefit.
The Registrant also maintains and pays premiums on a directors' and officers'
liability insurance policy and entered into an Indemnity Agreement with each of
the directors and officers of the Company. The provisions of the Indemnity
Agreement alter or clarify the statutory indemnity in the following respect:
(1) indemnity will be explicitly provided for settlements in derivative
actions; (2) prompt payment of litigation expenses will be provided in advance
of indemnification; (3) prompt indemnification of advances of expenses will be
provided unless a determination is made that the director or officer has not
met the required standard; (4) the director or officer will be permitted to
petition a court to determine whether his actions meet the standards required;
and (5) partial indemnification will be permitted in the event that the
director or officer is not entitled to full indemnification. In addition, the
Indemnity Agreement specifically includes indemnification with
S-1
<PAGE>
respect to actions, suits or proceedings brought under and/or predicated upon
the Securities Act of 1993, as amended, and/or the Securities Exchange Act of
1934, as amended.
The preceding summary is qualified in its entirety by the Company's Restated
Certificate of Incorporation, By-laws and Indemnity Agreement which are filed
as exhibits to this Registration Statement and for further information,
reference is made thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has not sold securities which
were not registered under the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A list of exhibits and financial statement schedules included as part of this
Registration Statement is set forth in the list which immediately precedes such
exhibits and schedules and is hereby incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement,
including (but not limited to) any addition or deletion of a managing
underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to any provision of the
Registrant's By-laws, Directors' and Officers' Liability Insurance Policy,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
S-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ITASCA, AND STATE OF
ILLINOIS, ON THE 5TH DAY OF MARCH, 1996.
Arthur J. Gallagher & Co.
/s/ J. Patrick Gallagher, Jr.
By: _________________________________
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW ON MARCH 5, 1996 BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Robert E. Gallagher* Chairman and Director
___________________________________________
(Robert E. Gallagher)
/s/ J. Patrick Gallagher, Jr. President and Director (Chief Executive
___________________________________________ Officer)
(J. Patrick Gallagher, Jr.)
/s/ Michael J. Cloherty Vice President--Finance and Director (Chief
___________________________________________ Financial Officer)
(Michael J. Cloherty)
/s/ David B. Hoch Controller (Chief Accounting Officer)
___________________________________________
(David B. Hoch)
T. Kimball Brooker* Director
___________________________________________
(T. Kimball Brooker)
John G. Cambpell* 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
S-3
<PAGE>
LIST OF EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company (in-
corporated 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), Har-
ris 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 (rele-
vant portions contained in the Restated Certificate of In-
corporation 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 same exhibit number to Company's Form 10-K
Annual Report for 1992, File No. 1-9761).
5.0 Opinion of Carl E. Fasig, Counsel and Secretary to the
Company, including consent.
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 Number 10.1 (incorporated by
reference to Exhibit Number 10.3 to Company's Form S-8
Registration Statement No. 33-604).
10.1.2 Amendment No. 2 to Exhibit Number 10.1 (incorporated by
reference to Exhibit Number 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 Number 10.2 (incorporated by
reference to Exhibit Number 10.4 to Company's Form S-8
Registration Statement No. 33-604).
10.2.2 Amendment No. 2 to Exhibit Number 10.2 (incorporated by
reference to Exhibit Number 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).
</TABLE>
S-4
<PAGE>
<TABLE>
<C> <S> <C>
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 ref-
erence to Exhibit Number 10.3 to Company's Form S-8 Regis-
tration Statement No. 33-24251).
10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by ref-
erence to same exhibit number on Company's Form S-8 Regis-
tration 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 Number 10.27 (incorporated by
reference to Exhibit Number 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 ref-
erence to Exhibit No. 10.5 to Company's Form S-8 Registra-
tion Statement No. 33-38031).
10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by ref-
erence to same exhibit number on Company's Form S-8 Regis-
tration Statement No. 33-64614).
10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by ref-
erence 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
Number 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 ref-
erence 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 ref-
erence to same exhibit number on Company's Form S-8 Regis-
tration Statement No. 33-64614).
10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by ref-
erence 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 refer-
ence to the same exhibit number to Company's Form 10-K An-
nual 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 ex-
hibit number to Company's Form S-1 Registration Statement
No. 2-89195).
10.7.1 Amendment to Exhibit Number 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 State-
ment No.
2-89195).
</TABLE>
S-5
<PAGE>
<TABLE>
<C> <S> <C>
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 Stockhold-
ers, 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 (incorpo-
rated 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 com-
mon equivalent share (incorporated by reference to the
same exhibit number to Company's Form 10-K Annual Report
for 1995, File No. 1-9761).
21.0 Subsidiaries of the Company, including state or other ju-
risdiction of incorporation or organization and the names
under which each does business (incorporated by reference
to the same exhibit number to Company's Form 10-K Annual
Report for 1995, File No. 1-9761).
23.1 Consent of Ernst & Young LLP, as independent auditors.
23.2 Consent of Carl E. Fasig, Counsel and Secretary to the
Company, included in Exhibit 5.0.
24.0 Powers of Attorney.
27.0 Financial Data Schedule (incorporated by reference to the
same exhibit number to Company's Form 10-K Annual Report
for 1995, File No. 1-9761).
</TABLE>
All other exhibits are omitted because they are inapplicable.
(b) Financial Statement Schedules:
*Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or the
notes thereto.
- --------
*Incorporated by reference to the Company's Form 10-K Annual Report for 1995,
File No. 1-9761.
S-6
<PAGE>
March 5, 1996
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street N.W.
Washington, D.C. 20549
Re: Arthur J. Gallagher & Co.
Registration Statement on Form S-1
Gentlemen:
I am counsel for Arthur J. Gallagher & Co. (the "Company") in connection with
the above referenced Registration Statement on Form S-1 (the "Registration
Statement") relating to the registration for possible sale by the Company of
500,000 shares of the Company's common stock, par value $1.00 per share
("Common Stock"), in connection with future acquisitions (the Prospectus
included in the Registration Statement also relates to shares previously
registered on the Company's Registration Statement Nos. 33-60660, 33-76778 and
33-58101).
In this connection, I have examined the originals or copies identified to my
satisfaction of such documents, corporate and other records, certificates, and
other papers as I deemed necessary to examine for purposes of this opinion.
Based upon such examination, I am of the opinion that the shares of Common
Stock which may be sold by the Company, upon payment of the purchase price
therefor, will be duly and legally authorized and issued, fully paid and
nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to me under "Legal Opinion" in the
Prospectus included in this Registration Statement.
Very truly yours,
/s/ Carl E. Fasig
-------------------------------------
CARL E. FASIG
Counsel and Secretary
cdg
<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. and Risk
Management Partners Ltd., 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
Gallagher--Great Lakes, Inc. ............................... Illinois
Arthur J. Gallagher & Co. of Oklahoma, Inc.................. Oklahoma
Arthur J. Gallagher & Co.--Chicago Metro...................... Illinois
Arthur J. Gallagher & Co. (St. Louis)......................... Delaware
Holt Texas, Inc............................................... Texas
Arthur J. Gallagher Inc..................................... Texas
Gallagher Braniff, Inc........................................ Texas
Arthur J. Gallagher & Co. (Florida)........................... Florida
Arthur J. Gallagher & Co. of New York, Inc.................... New York
Arthur J. Gallagher & Co. Ohio Agency, Inc.................... Ohio
International Special Risk Services, Inc...................... Illinois
Arthur J. Gallagher & Co.--Greenville......................... South Carolina
Arthur J. Gallagher & Co. of Massachusetts, Inc............... Massachusetts
Gallagher Insurance Advisors, Inc........................... Massachusetts
Morrill & Everett, Inc...................................... New Hampshire
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 (UK) Limited.............................. England
John Plumer & Company Limited............................... England
John Plumer & Partners Limited.............................. England
John Plumer & Partners Marine Limited..................... England
AJG Twenty Three Limited.................................... England
AJG Twenty Two Limited...................................... England
Arthur J. Gallagher Aviation Limited........................ England
AJG Twenty Limited.......................................... England
AJG Twenty One Limited...................................... England
Arthur J. Gallagher & Partners (UK) Limited................. England
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
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
Gallagher ABOW, Inc.......................................... Michigan
Arthur J. Gallagher & Co. of Wisconsin, Inc.................. Wisconsin
Gallagher Woodsmall, Inc..................................... Missouri
Woodsmall Benefit Services, Inc............................ Delaware
Gallagher Benefit Services of New York, Inc.................. New York
Arthur J. Gallagher & Co. of New Jersey, Inc................. New Jersey
Arthur J. Gallagher & Co. Ohio Life Agency, Inc.............. Ohio
Gallagher Pipino, Inc........................................ Ohio
Arthur J. Gallagher & Co. of Pennsylvania, Inc............... Pennsylvania
Gallagher Benefit Services of Texas, Inc..................... Texas
Arthur J. Gallagher & Co. of Minnesota, Inc.................. Minnesota
Risk Management Partners Ltd.(3)............................. England
IMC Insurance Management Corporation......................... Missouri
IMC Services Corporation................................... Missouri
</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, Gallagher Steel
Agency, Gallagher Emperion, Bryce Insurance, BHK&R, Inc., CMC Claims
Management Corporation, The Planning Corporation and Environmental Claims
Management Incorporated.
(2) 10% of the Common Stock of AJG Capital, Inc. is owned by an unrelated
party.
(3) 50% of the Common Stock of Risk Management Partners Ltd. is owned by an
unrelated party.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 18, 1996 in the Registration Statement on
Form S-1 and related Prospectus of Arthur J. Gallagher & Co. and subsidiaries
for the registration of 500,000 shares of its Common Stock.
We also consent to the incorporation by reference therein of our report with
respect to the consolidated financial statement schedule of Arthur J. Gallagher
& Co. and subsidiaries for the years ended December 31, 1995, 1994, and 1993
included in the 1995 Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
-------------------------------------
Ernst & Young LLP
Chicago, Illinois
March 1, 1996
<PAGE>
POWER OF ATTORNEY
Whereas, Arthur J. Gallagher & Co., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 500,000
additional shares of Common Stock, $1.00 par value, of the Company in
connection with business combinations; and
Whereas, the Company may from time to time file with the Commission under the
provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
Now, Therefore, the undersigned hereby:
(1) designates, constitutes and appoints Carl E. Fasig, Counsel and
Secretary of the Company, his attorney, with full power to act for and on
behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the
Registration Statement and to any and all Appendices, Amendments and Post-
Effective Amendments to the Registration Statement which the Company may
hereafter file with the Commission under the provisions of the Act and the
rules and regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which
Carl E. Fasig may lawfully take or do, or cause to be taken or done, by
virtue of the powers granted to him hereunder.
In Witness Whereof, the undersigned has hereunto set his hand this 28th day
of February, 1996.
/s/ Robert E. Gallagher
-------------------------------------
Robert E. Gallagher
<PAGE>
POWER OF ATTORNEY
Whereas, Arthur J. Gallagher & Co., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 500,000
additional shares of Common Stock, $1.00 par value, of the Company in
connection with business combinations; and
Whereas, the Company may from time to time file with the Commission under the
provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
Now, Therefore, the undersigned hereby:
(1) designates, constitutes and appoints Carl E. Fasig, Counsel and
Secretary of the Company, his attorney, with full power to act for and on
behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the
Registration Statement and to any and all Appendices, Amendments and Post-
Effective Amendments to the Registration Statement which the Company may
hereafter file with the Commission under the provisions of the Act and the
rules and regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which
Carl E. Fasig may lawfully take or do, or cause to be taken or done, by
virtue of the powers granted to him hereunder.
In Witness Whereof, the undersigned has hereunto set his hand this 28th day
of February, 1996.
/s/ T. Kimball Brooker
-------------------------------------
T. Kimball Brooker
<PAGE>
POWER OF ATTORNEY
Whereas, Arthur J. Gallagher & Co., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 500,000
additional shares of Common Stock, $1.00 par value, of the Company in
connection with business combinations; and
Whereas, the Company may from time to time file with the Commission under the
provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
Now, Therefore, the undersigned hereby:
(1) designates, constitutes and appoints Carl E. Fasig, Counsel and
Secretary of the Company, his attorney, with full power to act for and on
behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the
Registration Statement and to any and all Appendices, Amendments and Post-
Effective Amendments to the Registration Statement which the Company may
hereafter file with the Commission under the provisions of the Act and the
rules and regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which
Carl E. Fasig may lawfully take or do, or cause to be taken or done, by
virtue of the powers granted to him hereunder.
In Witness Whereof, the undersigned has hereunto set his hand this 28th day
of February, 1996.
/s/ John G. Campbell
-------------------------------------
John G. Campbell
<PAGE>
POWER OF ATTORNEY
Whereas, Arthur J. Gallagher & Co., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 500,000
additional shares of Common Stock, $1.00 par value, of the Company in
connection with business combinations; and
Whereas, the Company may from time to time file with the Commission under the
provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
Now, Therefore, the undersigned hereby:
(1) designates, constitutes and appoints Carl E. Fasig, Counsel and
Secretary of the Company, his attorney, with full power to act for and on
behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the
Registration Statement and to any and all Appendices, Amendments and Post-
Effective Amendments to the Registration Statement which the Company may
hereafter file with the Commission under the provisions of the Act and the
rules and regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which
Carl E. Fasig may lawfully take or do, or cause to be taken or done, by
virtue of the powers granted to him hereunder.
In Witness Whereof, the undersigned has hereunto set his hand this 28th day
of February, 1996.
/s/ Jack M. Greenberg
-------------------------------------
Jack M. Greenberg
<PAGE>
POWER OF ATTORNEY
Whereas, Arthur J. Gallagher & Co., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 500,000
additional shares of Common Stock, $1.00 par value, of the Company in
connection with business combinations; and
Whereas, the Company may from time to time file with the Commission under the
provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
Now, Therefore, the undersigned hereby:
(1) designates, constitutes and appoints Carl E. Fasig, Counsel and
Secretary of the Company, his attorney, with full power to act for and on
behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the
Registration Statement and to any and all Appendices, Amendments and Post-
Effective Amendments to the Registration Statement which the Company may
hereafter file with the Commission under the provisions of the Act and the
rules and regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which
Carl E. Fasig may lawfully take or do, or cause to be taken or done, by
virtue of the powers granted to him hereunder.
In Witness Whereof, the undersigned has hereunto set his hand this 28th day
of February, 1996.
/s/ Philip A. Marineau
-------------------------------------
Philip A. Marineau
<PAGE>
POWER OF ATTORNEY
Whereas, Arthur J. Gallagher & Co., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 500,000
additional shares of Common Stock, $1.00 par value, of the Company in
connection with business combinations; and
Whereas, the Company may from time to time file with the Commission under the
provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
Now, Therefore, the undersigned hereby:
(1) designates, constitutes and appoints Carl E. Fasig, Counsel and
Secretary of the Company, his attorney, with full power to act for and on
behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the
Registration Statement and to any and all Appendices, Amendments and Post-
Effective Amendments to the Registration Statement which the Company may
hereafter file with the Commission under the provisions of the Act and the
rules and regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which
Carl E. Fasig may lawfully take or do, or cause to be taken or done, by
virtue of the powers granted to him hereunder.
In Witness Whereof, the undersigned has hereunto set his hand this 28th day
of February, 1996.
/s/ Walter F. McClure
-------------------------------------
Walter F. McClure
<PAGE>
POWER OF ATTORNEY
Whereas, Arthur J. Gallagher & Co., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 500,000
additional shares of Common Stock, $1.00 par value, of the Company in
connection with business combinations; and
Whereas, the Company may from time to time file with the Commission under the
provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
Now, Therefore, the undersigned hereby:
(1) designates, constitutes and appoints Carl E. Fasig, Counsel and
Secretary of the Company, his attorney, with full power to act for and on
behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the
Registration Statement and to any and all Appendices, Amendments and Post-
Effective Amendments to the Registration Statement which the Company may
hereafter file with the Commission under the provisions of the Act and the
rules and regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which
Carl E. Fasig may lawfully take or do, or cause to be taken or done, by
virtue of the powers granted to him hereunder.
In Witness Whereof, the undersigned has hereunto set his hand this 28th day
of February, 1996.
/s/ James R. Wimmer
-------------------------------------
James R. Wimmer
