<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
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
(630) 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
(630) 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
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- -------------------------------------------------------------------------------
<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>
1,200,000
Common Stock, $1.00 par value.... shares $32.875 $39,450,000 $11,954.55
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) In addition to the 1,200,000 shares being registered hereby, the
prospectus contained herein also relates to shares previously registered
on the Registrant's Registration Statements Nos. 33-76778, 33-58101 and
333-1435.
(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 March 14, 1997.
As permitted by Rule 429, the prospectus in this Registration Statement
constitutes Post-Effective Amendment No. 3 to Registration Statement No. 33-
76778 which became effective March 30, 1994, Post-Effective Amendment No. 2 to
Registration Statement No. 33-58101 which became effective April 24, 1995 and
Post-Effective Amendment No. 1 to Registration Statement No. 333-1435 which
became effective March 27, 1996.
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.
2,475,484 SHARES
COMMON STOCK, $1.00 PAR VALUE
----------------
All of the 2,475,484 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 March 14, 1997 as
reported on the Consolidated Transaction Reporting System for securities
listed on the New York Stock Exchange was $32.875 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 , 1997.
<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. In addition,
electronically filed documents including reports, proxy material and other
information covering the Company can be obtained from the Commission's web
site at http://www.sec.gov. 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
Business of the Company............ 11
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.......................... 19
Compensation of Executive Officers
and Directors...................... 21
Summary Compensation Table.......... 21
Principal Holders of Securities..... 25
Description of Capital Stock........ 26
Legal Opinion....................... 29
Experts............................. 29
Safe Harbor Statement............... 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
150 offices throughout the United States and six countries abroad and believes
that it is the seventh 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............... 2,475,484 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 March
14, 1997.......................... 16,425,641 shares
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF EARNINGS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commissions and fees.............. $432,986 $417,782 $380,401 $342,811 $311,238
Investment income and other....... 23,693 21,748 13,571 20,548 16,587
-------- -------- -------- -------- --------
Total revenues.................... 456,679 439,530 393,972 363,359 327,825
Net earnings...................... 45,803 42,545 37,166 31,186 25,029
Net earnings per common and common
equivalent share................. 2.63 2.47 2.16 1.75 1.45
Dividends declared per common
share............................ 1.16 1.00 .88 .72 .64
Book value per common share....... 8.26 7.67 6.49 7.42 6.05
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Total assets................................................. $590,424 $565,831
Total stockholders' equity................................... 134,530 125,509
</TABLE>
The financial information for all periods prior to December 31, 1996 has been
restated for all significant acquisitions accounted for using the pooling of
interests method.
3
<PAGE>
THE COMPANY
Arthur J. Gallagher & Co. and its subsidiaries (collectively referred to as
the "Company" unless the context otherwise requires) are engaged in providing
insurance brokerage, risk management, employee benefit services and other
related services to clients in the United States and abroad. The Company's
principal activity is the negotiation and placement of insurance for its
clients. The Company also specializes in furnishing risk management services.
Risk management involves assisting clients in analyzing risks and 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 150 offices located
throughout the United States and six countries abroad. Some of these offices
are fully staffed with sales, marketing, claims, and other service personnel;
others function as servicing offices for the brokerage and risk management
services operations of the Company. The Company's international operations
include a Lloyd's broker and affiliated companies in London and facilities in
Argentina, Australia, Bermuda, Canada, United Kingdom ("U.K.") and Scotland.
The Company was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. The executive offices of the Company are located at Two
Pierce Place, Itasca, Illinois 60143-3141, and its telephone number is (630)
773-3800.
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 Transaction Reporting System
4
<PAGE>
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, 1995
through December 31, 1996 and the dividends declared per share for such
period. The table reflects the range of high and low sales prices per share as
reported on the Consolidated Transaction Reporting System for securities
listed on the New York Stock Exchange.
<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
HIGH LOW PER SHARE
------- ------- ---------
<S> <C> <C> <C>
1996 QUARTERLY PERIODS
First............................................... $39 1/2 $35 7/8 $.29
Second.............................................. 36 3/8 30 .29
Third............................................... 35 31 1/2 .29
Fourth.............................................. 34 1/2 29 1/8 .29
1995 QUARTERLY PERIODS
First............................................... $36 $30 1/8 $.25
Second.............................................. 36 3/8 34 .25
Third............................................... 38 34 5/8 .25
Fourth.............................................. 38 32 1/2 .25
</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, 1996 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,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS
DATA:
Commissions..................... $261,471 $255,914 $237,163 $212,005 $197,481
Fees............................ 171,515 161,868 143,238 130,806 113,757
Investment income and other..... 23,693 21,748 13,571 20,548 16,587
-------- -------- -------- -------- --------
Total revenues.................. 456,679 439,530 393,972 363,359 327,825
Total expenses.................. 387,280 371,148 335,120 310,392 287,714
-------- -------- -------- -------- --------
Earnings before income taxes.... 69,399 68,382 58,852 52,967 40,111
Net earnings.................... 45,803 42,545 37,166 31,186 25,029
Net earnings per common and
common equivalent share........ $ 2.63 $ 2.47 $ 2.16 $ 1.75 $ 1.45
Dividends declared per common
share.......................... $ 1.16 $ 1.00 $ .88 $ .72 $ .64
Weighted average number of
common and common equivalent
shares outstanding............. 17,775 17,254 17,189 17,779 17,226
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... $590,424 $565,831 $514,823 $541,399 $488,979
Long-term debt less current
portion........................ 1,130 2,260 3,390 28,166 23,888
Total stockholders' equity...... 134,530 125,509 104,249 126,011 99,539
</TABLE>
6
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the quarterly operating results for the years
ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
1996 DATA)
<S> <C> <C> <C> <C>
Total revenues............................. $106,821 $108,618 $121,696 $119,544
Earnings before income taxes............... 14,579 12,307 25,520 16,993
Net earnings............................... 8,944 7,533 18,057 11,269
Net earnings per common and common
equivalent share.......................... .51 .44 1.03 .65
<CAPTION>
1995
<S> <C> <C> <C> <C>
Total revenues............................. $103,216 $100,883 $118,362 $117,069
Earnings before income taxes............... 12,603 9,784 26,179 19,816
Net earnings............................... 7,633 5,786 16,372 12,754
Net earnings per common and common
equivalent share.......................... .45 .34 .94 .74
</TABLE>
The financial information for all periods prior to December 31, 1996 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. Lower premium rates and excess capacity prevail among property and
casualty insurance carriers resulting in heavy competition for market share.
This "soft market" (i.e., lower premium rates) has generally resulted in flat
or reduced renewal commissions during the period.
During the past three years, several catastrophes have caused billions of
dollars of insured losses domestically and abroad. According to some
estimates, 1996 will rank as the fifth most expensive year on record with over
$7 billion in insured property losses. Consolidation in the form of
substantial mergers, both in the United States and internationally, continues
within the insurance industry resulting in fewer companies writing risks.
Financial services reform is likely in the near future. Proposed federal
legislation seeks to allow affiliations between banks and insurance entities.
A recent report claims the property/casualty insurance industry began to
materially weaken its core loss reserves in 1996 which reverses several years
of favorable reserving trends. In spite of forces which would reduce
competition and weaken profits, there is still little change in
property/casualty rates. Sufficient capacity remains and the sharply
competitive environment continues. Management believes insurance pricing will
not change significantly in 1997.
Along with the soft market conditions, the growth of the alternative
insurance market has slowed during the past year. Although the
property/casualty pricing environment has resulted in some buyers returning to
first dollar coverage, the Company still believes a move from the traditional
approach of purchasing insurance will continue. The Company anticipates new
sales in the risk management, benefits and self-insurance services areas will
again be a major factor in fee revenue growth in 1997.
Historically, inflation has contributed to increased property replacement
costs and higher litigation awards causing some clients to seek higher levels
of insurance coverage. These factors have the effect of generating higher
premiums to customers and higher commissions to the Company. More recently,
the United States and other parts of the world have experienced low rates of
inflation along with business downsizing, reduced sales and lower payrolls.
These events have resulted in lower levels of exposures to insure. In general,
premium rates have had a greater effect on the Company's revenues than
inflation.
Although the Company reported record net earnings in 1996, it is looking to
the future and exploring not only the core businesses of brokering insurance
and risk management services, but also expanding within the fields of
insurance captives and financial and related investment services. These are
areas which may hold opportunities for future profit growth.
RESULTS OF OPERATIONS
The Company's results of operations for all periods prior to December 31,
1996 have been restated to include the results of Morgan, Read & Coleman Ltd.,
Lamberson Koster & Company and The Levitt/Kristan Company on a combined basis
as if they had operated as part of the Company. The Company continues to
search for merger partners which complement existing business and provide
entry into new market niches and new geographic areas. For the effect of such
restatements in the aggregate on year-to-year comparisons, see Note 2 of the
Notes to Consolidated Financial Statements. In January, 1997, the Company
acquired two benefit consulting firms, Byerly & Company, Inc., and Arnold &
Company, Inc. These acquisitions will be accounted for as poolings of
interests and were neither singly nor in the aggregate material to the
Company.
8
<PAGE>
Commission revenues increased by $5.6 million or 2% in 1996. This increase
is the result of new business partially offset by lost business and modest
renewal rate reductions. Commission revenues increased by $18.8 million or 8%
in 1995. This increase is the result of new business production and, to a
lesser extent, modest renewal rate increases partially offset by lost
business.
Fee revenues increased by $9.6 million or 6% in 1996. This increase,
generated primarily by Gallagher Bassett Services, Inc., resulted from new
business production and modest increases in existing business partially offset
by lost business. The rate of increase from 1995 to 1996 has been adversely
affected by strong price competition in the insurance industry, causing some
buyers to choose first dollar converge over self-funded plans. Fee revenues
increased by $18.6 million or 13% in 1995. This increase, again generated
primarily by Gallagher Bassett Services, Inc., resulted from strong new
business production of $19.2 million and increases in existing business
partially offset by lost business.
Investment income and other increased by $1.9 million or 9% in 1996. This
increase is due primarily to an increase in unrealized gains on investment
strategies accounted for on a trading basis, which are invested with outside
fund managers. Investment income and other increased by $8.2 million or 60% in
1995. This increase is due primarily to a combination of significantly higher
returns on funds invested with outside fund managers and a gain of $2.0
million recorded on the sale of a subsidiary in the fourth quarter of 1995.
This increase is partially offset by a gain of $656,000 realized in closing
out interest exchange agreements related to the retirement of the Company's
debt agreement in the fourth quarter of 1994 and by a gain of $800,000 from
the sale of two personal lines books of business also recorded in the fourth
quarter of 1994.
Salaries and employee benefits increased by $7.7 million or 3% in 1996 due
principally to salary increases and the annualized effect of prior year hires
along with a corresponding increase in employee benefit expenses. These
increases were mitigated by a wage freeze for certain management employees.
Salaries and employee benefits increased by $21.7 million or 10% in 1995 due
principally to salary increases and the annualized effect of prior year hires
along with a corresponding increase in employee benefit expenses and changes
in certain benefit plan actuarial assumptions. In 1996, 1995 and 1994,
salaries and employee benefits have represented 52%, 53% and 53%,
respectively, as a percentage of total revenues.
Other operating expenses increased by $8.4 million or 6% in 1996. This
increase is due primarily to an increase in professional fees related to the
outsourcing of certain distribution functions, increased performance fees for
funds invested with professional money fund managers, an increase in brokerage
expenses due to increased business with other brokers, additional rent and
utility expenses resulting from leasing new office space and expanding and
upgrading existing office facilities and increased bad debt write-offs. Other
operating expenses increased by $14.4 million or 11% in 1995. This increase is
due primarily to additional office facilities (rent and utilities,
miscellaneous office and supply expenses) resulting from leasing new office
space and expanding and upgrading existing facilities, and significantly
higher business insurance costs.
The Company's overall tax rate of 34% in 1996 is less than the statutory
federal rate. For 1996, the net effects of state and foreign taxes are
substantially offset by the tax benefits of certain investments. The Company's
overall tax rate of 38% in 1995 is greater than the statutory federal rate due
primarily to the net effects of state and foreign taxes which are partially
offset by the tax benefits generated by certain investments and by pre-
acquisition income of pooled entities which was taxed to the previous owners.
The Company's overall tax rate of 37% in 1994 is greater than the statutory
federal rate, due primarily to the net effects of state and foreign taxes
which are partially offset by the tax benefits generated by certain
investments and by pre-acquisition income of pooled entities which was taxed
to the previous owners. See Note 11 of the Notes to Consolidated Financial
Statements.
9
<PAGE>
The Company's foreign operations recorded operating earnings before income
taxes of $4.2 million, $3.4 million, and $2.2 million in 1996, 1995, and 1994,
respectively. The 1996 increase is due primarily to a decrease in compensation
related costs at the Company's London subsidiaries. The 1995 increase is due
primarily to stronger investment income. See Notes 11 and 12 of the Notes to
Consolidated Financial Statements.
The Company's total revenues vary from quarter to quarter as a result of the
timing of policy renewals and net new/lost business production, whereas
expenses are fairly uniform throughout the year. See Note 13 of the Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable and positive cash flow from operations and funds
available under various loan agreements have been sufficient to finance the
operations and capital expenditures of the Company. Cash generated from
operating activities was $33.6 million and $43.5 million for the years ended
December 31, 1996 and 1995, respectively. Funds restricted as to the Company's
use (primarily premiums held as fiduciary funds) have not been included in
determining the Company's liquidity.
In February, 1993, the Company entered into a $20 million unsecured
revolving credit agreement (the "Credit Agreement") with two banks. As
provided for in an amendment effective in October, 1996, the loan maturity
date has been extended and loans under the Credit Agreement are repayable no
later than June 30, 2001, and bear floating interest rates over the term of
the loan. The Company recognized a gain of $656,000 in closing out the
interest rate exchange agreements related to the repayment of a loan under the
agreement in 1994. The Credit Agreement remains in effect and as of December
31, 1996, there are no borrowings currently existing under this agreement.
The Company also has two term loan agreements (the "Term Loan Agreements")
that have outstanding balances of $1.3 million and $1.0 million at December
31, 1996. Loans under the Term Loan Agreements are repayable in equal annual
installments no later than January 11, 1998, and June 15, 1998, respectively,
and bear interest rates over the terms of the loans of 6.64% and 6.30%,
respectively.
The Credit Agreement and Term Loan Agreements require the maintenance of
certain financial requirements. The Company is currently in compliance with
these requirements.
The Company has line of credit facilities of $27.5 million which expire on
April 30, 1997. As of December 31, 1996, $10.0 million in short-term
borrowings existed under these facilities. These borrowings were used to
finance expanded investment activity. No borrowings existed at December 31,
1995.
The Company paid $17.5 million in cash dividends on its common stock in
1996. The Company's dividend policy is determined by the Board of Directors
and payments are fixed after considering the Company's available cash from
earnings and its known or anticipated cash needs. In each quarter of 1996, the
Company's Board of Directors declared a dividend of $.29 per share which is
$.04 or 16% greater than each quarterly dividend in 1995. In January, 1997,
the Company announced a first quarter dividend of $.31 per share, a 7%
increase over the quarterly dividend in 1996.
Net capital expenditures for fixed assets amounted to $10.1 million, $10.3
million and $7.5 million in 1996, 1995 and 1994, respectively. In 1997, the
Company intends to make additional capital improvements of approximately $11.0
million to upgrade and modernize existing space, furniture and equipment.
In 1988, the Company adopted a plan, which has been extended through June
30, 1997, to repurchase its common stock. Under the plan, the Company
repurchased 645,000 shares at a cost of
10
<PAGE>
$21.3 million, 437,000 shares at a cost of $15.1 million and 1.4 million
shares at a cost of $43.8 million in 1996, 1995 and 1994, respectively. The
repurchases were funded entirely by internally generated funds and are held
for reissuance in connection with exercises of options under its stock option
plans. Under the provisions of the plan, the Company is authorized to
repurchase approximately 290,000 additional shares through June 30, 1997. The
Company is under no commitment or obligation to repurchase any particular
amount of common stock and at its discretion may suspend the repurchase plan
at any time.
The Company believes that internally generated funds will continue to be
sufficient to meet the Company's foreseeable cash needs, including non-
operating cash disbursements such as anticipated dividends, capital
expenditures and repayment of borrowings if the Company so determines.
Due to changes in the United States federal income tax laws effective in
1994, the Company began providing for U.S. income taxes on the undistributed
earnings of its foreign subsidiaries. The Company has not provided for U.S.
income taxes on these undistributed earnings accumulated prior to 1994 ($19.2
million), which are considered permanently invested outside the United States.
See Note 11 of the Notes to Consolidated Financial Statements. Although not
available for domestic needs, the undistributed earnings generated by certain
foreign subsidiaries referred to above may be used to finance foreign
operations and acquisitions.
BUSINESS OF THE COMPANY
The Company is engaged in providing insurance brokerage, risk management,
employee benefits services and other 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, risk
management, employee benefits and other related insurance services.
BROKERAGE OPERATIONS
The Company places insurance for and services commercial, industrial,
institutional, governmental, religious and personal accounts throughout the
United States and abroad. The Company acts as an agent in soliciting,
negotiating and effecting contracts of insurance through insurance companies
world-wide, and also as a broker in procuring contracts of insurance on behalf
of insureds. Specific coverages include all forms of property and casualty,
marine, employee benefits, pension and life insurance products.
The Company places surplus lines coverages (coverages not available from
insurance companies licensed by the states in which the risks are located) for
various specialized risks. The Company also provides reinsurance services to
its clients.
RISK MANAGEMENT SERVICES
Through its wholly-owned subsidiary, Gallagher Bassett Services, Inc., the
Company provides a variety of professional consulting services to assist
clients in analyzing risks and in determining whether proper protection is
best obtained through the purchase of insurance or through retention of all or
a portion of those risks and the adoption of risk management policies and
cost-effective loss control and prevention programs. A full range of risk
management services is offered, including claims management, risk control
consulting services, information management and property appraisals on a
totally integrated or select, stand-alone basis. Gallagher Bassett Services,
Inc. provides these services for the Company's clients through a network of
over 100 offices throughout the United States.
The Company believes that its risk management services are an important
factor in securing new brokerage business and retaining brokerage clients. The
Company also markets these services directly to the client on an unbundled
basis independently of brokerage services in order to capitalize
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.
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 150 offices in the United States and six countries abroad. No
material part of the Company's business is dependent upon a single customer or
on a few customers, the loss of any one or more of which would have a
materially adverse effect on the Company. In 1996, the largest single customer
represented approximately 1% of total revenues.
The Company believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of
reinsurance, is one of its major strengths. The Company also believes that its
risk management business enhances and attracts other brokerage business due to
the nature and strength of business relationships which it forms with clients
when providing a variety of risk management services on an on-going basis.
The Company requires its employees serving in a sales or marketing capacity,
including certain executive officers of the Company, to enter into agreements
with the Company restricting disclosure of confidential information and
solicitation of clients and prospects of the Company upon their termination of
employment. The confidentiality and non-solicitation provisions of such
agreements terminate in the event of a hostile change in control of the
Company, as defined therein.
COMPETITION
The Company believes it is the seventh largest insurance broker in the
United States and in the top eight worldwide in terms of total revenues. The
insurance brokerage and service business is highly competitive and there are
many insurance brokerage and service organizations as well as individuals
throughout the world who actively compete with the Company in every area of
its business. A number of competing firms are significantly larger and some
have many times the commission and/or fee revenues of the Company. There are
firms in a particular region or locality which are as large or larger
12
<PAGE>
than the particular local office of the Company. The Company believes that the
primary factors determining its competitive position with other organizations
in its industry are the overall cost and the quality of services rendered.
The Company is also in competition with certain insurance companies which
write insurance directly for their customers. Government benefits relating to
health, disability, and retirement are also alternatives to private insurance
and hence indirectly compete with the business of the Company. To date, such
direct writing and government benefits have had, in the opinion of the
Company, relatively little effect on its business and operations, but the
Company can make no prediction as to their effect in the future.
REGULATION
In every state and foreign jurisdiction in which the Company does business,
the Company or an employee is required to be licensed or receive regulatory
approval in order for the Company to conduct business. In addition to
licensing requirements applicable to the Company, most jurisdictions require
that individuals who engage in brokerage and certain insurance service
activities be personally licensed.
The Company's operations depend on its continued good standing under the
licenses and approvals pursuant to which it operates. Licensing laws and
regulations vary from jurisdiction to jurisdiction. In all jurisdictions the
applicable licensing laws and regulations are subject to amendment or
interpretation by regulatory authorities, and generally such authorities are
vested with relatively broad and general discretion as to the granting,
renewing and revoking of licenses and approvals.
INTERNATIONAL OPERATIONS
Arthur J. Gallagher (UK) Limited, is a wholly-owned Lloyd's brokerage
subsidiary of the Company. This subsidiary is a London based insurance broker
which provides brokerage services to clientele primarily located outside of
the U.K. The principal activity of Arthur J. Gallagher (UK) Limited is to
negotiate and place insurance and reinsurance with Lloyd's underwriters and
insurance companies worldwide. Its brokerage services encompass four major
categories: aviation, direct marine hull and cargo, reinsurance (marine and
non-marine) and overseas property and casualty (predominantly North America).
Although Arthur J. Gallagher (UK) Limited is located in London, the thrust
of its business development has been with non-U.K. brokers, agents and
insurers rather than domestic U.K. retail business. Its clients are primarily
insurance and reinsurance companies, underwriters at Lloyd's, the Company and
its non-U.K. subsidiaries, other independent agents and brokers, and major
business corporations requiring direct insurance and reinsurance placement.
Arthur J. Gallagher & Co. (Bermuda) Limited provides clients with direct
access to the risk-taking capacity of Bermuda-based insurers for both direct
and reinsurance placements. It also acts as a wholesaler to the Company's
marketing efforts by accessing foreign insurance and reinsurance companies in
the placing of U.S. and foreign risks. In addition, it provides services
relating to the formation and management of offshore captive insurance
companies.
A Company subsidiary, Arthur J. Gallagher International, Inc., located in
Rhode Island, provides brokerage services to and arranges overseas risk
management and loss control services for multinational organizations.
Gallagher Bassett International Ltd. ("GBI"), a subsidiary of Gallagher
Bassett Services, Inc., provides risk management services for foreign
operations, as well as U.S. operations that are foreign-controlled.
Headquartered in London, GBI works with insurance companies, reinsurance
companies,
13
<PAGE>
overseas brokers, and risk managers of overseas organizations. Services are
offered on an unbundled basis wherever applicable and include consulting,
claims management, information management, loss control, and property
valuations. GBI's service network includes over 120 associate offices
throughout the world. The combination of Gallagher Bassett offices and
affiliated locations provides one of the most comprehensive worldwide service
networks available.
Additional information relating to the Company's foreign operations is
contained in Note 12 of Notes to Consolidated Financial Statements.
COMMISSIONS AND FEES
The two major sources of operating revenues are commissions from brokerage
and risk management operations and service fees from risk management
operations. Information with respect to these two major sources as well as
investment income and other revenue for each of the three years in the period
ended December 31, 1996 are set forth below:
<TABLE>
<CAPTION>
1996 1995* 1994*
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions........................ $261,471 57% $255,914 58% $237,163 60%
Fees............................... 171,515 38 161,868 37 143,238 36
Investment income and other........ 23,693 5 21,748 5 13,571 4
-------- --- -------- --- -------- ---
$456,679 100% $439,530 100% $393,972 100%
======== === ======== === ======== ===
</TABLE>
- --------
*Restated for poolings if interests
The primary source of the Company's compensation for its brokerage services
is commissions paid by insurance companies which are usually based upon a
percentage of the premium paid by the insured. Commission rates are dependent
on a number of factors including the type of insurance, the particular
insurance company and the capacity in which the Company acts. In some cases
the Company is compensated for brokerage or advisory services directly by a
fee from a client, particularly when insurers do not pay commissions. The
Company may also receive contingent commissions which are based on the profit
the insurance company makes on the overall volume of business placed by the
Company in a given period of time. Occasionally, the Company shares
commissions with other brokers who have participated with the Company in
placing insurance or servicing insureds.
The Company's compensation for risk management services is in the form of
fees and commissions. The Company typically negotiates fees in advance with
its risk management clients on an annual basis based upon the estimated value
of the services to be performed. In some cases, the Company receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.
The Company's revenues vary significantly from quarter to quarter as a
result of the timing of policy renewals and the net effect of new and lost
business production, whereas expenses are fairly uniform throughout the year.
See Note 13 of the Notes to Consolidated Financial Statements for unaudited
quarterly operating results for 1996 and 1995.
ACQUISITIONS--PAST
From January 1, 1992 through December 31, 1996, the Company acquired twenty-
eight insurance brokerage services businesses and disposed of two insurance
services businesses. See Note 2 of the Notes to Consolidated Financial
Statements for further information concerning acquisitions in 1996 and 1995.
14
<PAGE>
On November 29, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of R.W. Stephens & Company Inc., a California
corporation engaged in the pension consulting business in exchange for 33,600
shares of the Company's Common Stock. This acquisition was accounted for as a
pooling of interests. The principal entered into a three year employment
agreement with the Company and four key employees entered into two year
employment agreements with the Company.
On August 31, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the shares of Morgan, Read & Coleman (Holdings) Limited,
and Morgan Insurance Services Limited, U.K. companies engaged in the insurance
brokerage and administrative services businesses, respectively, in exchange
for 436,000 shares of the Company's Common Stock. These acquisitions were
accounted for as poolings of interests. Ten principals entered into two year
employment agreements with a subsidiary of the Company.
On August 30, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Beymer & Bond Investigations, Inc., a
Florida company engaged in the investigative services business, in exchange
for 78,510 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. Two principals entered into three
year employment agreements with the Company.
On August 12, 1996, a wholly-owned subsidiary of the Company acquired 75% of
the assets of National Risk Control Services Pty Ltd, a Victoria, Australia
Company engaged in the loss prevention services business, in exchange for
Australian $450,000. Two principals entered into two year employment
agreements with a subsidiary of the Company and one principal and four key
employees entered into one year employment agreements with this subsidiary.
On July 1, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Lamberson Koster & Company, a California
corporation engaged in the risk management and insurance brokerage business in
exchange for 391,163 shares of the Company's Common Stock. This acquisition
was accounted for as a pooling of interests. One principal entered into a two
year employment agreement with the Company and six principals and one key
employee entered into three year employment agreements with the Company.
On May 31, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of the Alliance Insurance Group, Inc., an
Arizona corporation engaged in the insurance brokerage business in exchange
for 63,640 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. The principal entered into a three
year employment agreement with the Company.
On February 29, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of the Levitt/Kristan Company, a California
corporation engaged in the insurance brokerage business in exchange for
112,100 shares of the Company's Common Stock. This acquisition was accounted
for as a pooling of interests. Two principals entered into two year employment
agreements with the Company.
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.
15
<PAGE>
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.
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.
16
<PAGE>
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.
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.
17
<PAGE>
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.
ACQUISITIONS--CURRENT
On January 2, 1997, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Arnold & Company, Inc., a Michigan
corporation engaged in retirement planning and actuarial services in exchange
for 41,080 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. The principal entered into a three
year employment agreement with the Company.
On January 1, 1997, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Byerly & Company, Inc., a Colorado
corporation engaged in the group benefits consulting business in exchange for
164,370 shares of the Company's Common Stock. This acquisition was accounted
for as a pooling of interests. Four 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, 1996, the Company and its subsidiaries employed
approximately 3,900 employees, none of whom is represented by a labor union.
The Company continuously reviews benefits and other matters of interest to its
employees. The Company considers its relations with its employees to be
satisfactory.
PROPERTIES
The Company's executive offices and certain subsidiary and branch facilities
are located at Two Pierce Place, Itasca, Illinois where the Company leases
approximately 200,000 square feet of space. The lease commitment on the above
mentioned property expires February 28, 2006. The Company operates all of its
branch and service offices in leased premises. Certain of these leases for
office space have options permitting renewals for additional periods. In
addition to minimum fixed rentals, a number of leases contain escalation
clauses related to increases in the cost of living in future years. See Note
10 of the Notes to Consolidated Financial Statements for information with
respect to the Company's lease commitments at December 31, 1996.
STOCK REPURCHASES
In 1988, the Company adopted a plan, which has been extended through June
30, 1997, to repurchase its Common Stock. Under the plan, the Company
repurchased 645,000 shares at a cost of $21.3 million, 437,000 shares at a
cost of $15.1 million, and 1.4 million shares at a cost of $43.8 million in
18
<PAGE>
1996, 1995 and 1994, respectively. The repurchases were funded entirely by
internally generated funds and are held for reissuance in connection with
exercises of options under its stock option plans. Under the provisions of the
plan, the Company is authorized to repurchase approximately 290,000 additional
shares through June 30, 1997. The Company is under no commitment or obligation
to repurchase any particular amount of Common Stock and at its discretion may
suspend the repurchase plan at any time.
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.
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).. 74 Director since 1950, Chief Executive 1998
Officer 1963-1994, Chairman since 1990
J. Patrick Gallagher, 45 Director since 1986, President since 1997
Jr.(1)................. 1990, Chief Executive Officer since
1995
T. Kimball Brooker...... 57 Director since 1994 1997
John G. Campbell........ 59 Director since 1981, Vice President 1998
since 1978
Michael J. Cloherty..... 49 Director since 1982, Executive Vice 1996
President since 1996, Vice President--
Finance 1981 to 1995
Peter J. Durkalski...... 46 Vice President since 1990 --
James W. Durkin, Jr..... 47 Vice President since 1985 --
Frank M. Heffernan, Jr.. 66 Vice President since 1987 1998
Jack M. Greenberg....... 54 Director since 1985 1996
Philip A. Marineau...... 50 Director since 1991 1996
Walter F. McClure....... 63 Director since 1981, Senior Vice 1998
President since 1993
John D. Stancik......... 53 Vice President since 1986 --
Gary M. Van der Voort... 51 Vice President since 1986 --
James R. Wimmer......... 68 Director since 1985 1997
</TABLE>
- --------
(1) Robert E. Gallagher is an uncle 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. He has been a Director of Barbara Oil Company since 1967 and also serves
as a Director of Zenith Electronics
19
<PAGE>
Corporation. Until 1988, he was managing Director of Morgan Stanley & Co.
Incorporated (investment bankers) which 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. He is a past Governor of and was Vice Chairman
of the Midwest Stock Exchange from 1986 to 1988.
Jack M. Greenberg is Chairman of McDonald's U.S.A. since October 1996 and
was Vice Chairman since 1992 and Chief Financial Officer from 1982 to 1996 of
McDonald's Corporation. He has been a Director of McDonald's since he joined
the company in 1982 and is also a Director of Harcourt General, Inc. and Stone
Container Corporation.
Philip A. Marineau has been President and Chief Operating Officer of Dean
Foods Co. since December 1996. He was President of the Quaker Oats Company
from 1993 to 1995 and Chief Operating Officer from 1992 to 1995. He has been a
Director of Dean Foods Co. since December 1996 and a director of Pete's
Brewing Company since July 1996.
James R. Wimmer is a lawyer and of counsel to Lord, Bissell & Brook since
retiring as Partner in 1992. He joined the firm in 1954 and was named a
Partner in 1959. Lord, Bissell & Brook has provided legal services to the
Company for over twenty years. From 1991 through 1993, he was Vice Chairman
and General Counsel to Commonwealth Industries Corporation.
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.
20
<PAGE>
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 six most highly
compensated executive officers of the Company in each of the Company's last
three fiscal years.
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............. 1996 275,000 -- -- --
Chairman 1995 275,000 30,000 -- --
1994 265,000 30,000 -- --
J. Patrick Gallagher, Jr. ...... 1996 356,000 25,000 10,000 3,000
President and Chief Executive
Officer 1995 356,000 76,000 10,000 1,500
1994 341,250 73,750 15,000 1,500
Michael J. Cloherty............. 1996 346,000 25,000 10,000 3,000
Executive Vice President and 1995 325,000 85,000 10,000 1,500
Chief Financial Officer
1994 300,000 67,000 15,000 1,500
Gary M. Van der Voort........... 1996 305,760 15,000 10,000 3,000
Vice President 1995 305,760 59,100 10,000 1,500
1994 294,000 57,000 15,000 1,500
Peter J. Durkalski.............. 1996 261,500 20,000 10,000 3,000
Vice President 1995 261,500 56,225 10,000 1,500
1994 241,500 54,500 15,000 1,500
James W. Durkin, Jr............. 1996 250,000 15,000 10,000 3,000
Vice President 1995 250,000 50,000 10,000 1,500
1994 233,000 38,300 15,000 1,500
Walter F. McClure............... 1996 260,000 15,000 7,500 3,000
Senior Vice President 1995 260,000 51,150 7,500 1,500
1994 241,000 49,500 10,000 1,500
</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-
21
<PAGE>
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, 1994 and 1996. The 1989 Plan currently
provides that non-employee directors are eligible to be granted nonqualified
options to purchase a maximum of 200,000 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.
Pursuant to the terms of the 1989 Plan, Messrs. Marineau and Wimmer have
elected 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 21, 1996, 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 $11.875 per share. Such options are exercisable at the
rate of one-fourth of such grant each successive quarter commencing August 21,
1996. In addition, on July 18, 1996, the Company granted a Discretionary
Option for 5,000 shares of the Company's Common Stock to each of Messrs.
Brooker, Greenberg, Marineau and Wimmer at an exercise price of $31.875 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 July 18, commencing July 18, 1997.
The Company approved a supplemental deferred compensation arrangement,
effective July 1, 1996, with Robert E. Gallagher, upon his retirement, and to
his surviving spouse, upon his death, and the surviving spouse of John P.
Gallagher, providing for a payment of $100,000 annually inclusive of any
Company pension plan payments to be paid until the death of each such
beneficiary.
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
22
<PAGE>
than $66,000 ($80,000 after January 1, 1997). Employees who have attained age
21 and completed a year of service may generally contribute up to the lesser
of $8,200 in 1996 and $9,500 in 1997 or 8% of their gross earnings on a pre-
tax basis under the 401(k) "salary reduction" feature of the plan up to a
maximum salary of $160,000. Effective for plan years beginning after 1994, the
maximum includible compensation for an employee for any year may not exceed an
overall salary maximum as determined by the Internal Revenue Service ($150,000
in 1996 and $160,000 in 1997). In 1996, the Company matched 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 1996 and $160,000 in 1997). The remuneration for executive officers shown
under "Salary" and "Bonus" in the Summary Compensation Table constitutes their
earnings during 1996 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 $37,500
175,000............................................. 26,250 35,000 43,750
200,000............................................. 30,000 40,000 50,000
225,000............................................. 33,750 45,000 56,250
250,000............................................. 37,500 50,000 62,500
</TABLE>
For purposes of estimating potential pension benefits using the foregoing
table, the number of years of credited service as of December 31, 1996 for the
executive officers named in the Summary Compensation Table are as follows:
Robert E. Gallagher (25 years), J. Patrick Gallagher, Jr. (21 years), Michael
J. Cloherty (14 years), Gary M. Van der Voort (25 years), Peter J. Durkalski
(21 years), James W. Durkin, Jr. (20 years), and Walter F. McClure (19 years).
Such pension benefits are in addition to the amounts payable to such persons
under the Company's savings and thrift plan on their retirement and are
subject to certain limitations as required under the Internal Revenue Code.
23
<PAGE>
STOCK OPTION PLANS
The Company maintains Stock Option Plans. The following table sets forth
certain information regarding options to purchase shares of Common Stock
granted to the executive officers of the Company named in the Summary
Compensation Table during the Company's 1996 fiscal year. The exercise price
of the options equals the closing price of a share of the Company's Common
Stock on the date of the option grant.
OPTION GRANTS IN THE LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------
% OF POTENTIAL
TOTAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL
SECURITIES GRANTED RATES OF STOCK PRICE
UNDERLYING TO APPRECIATION
OPTIONS EMPLOYEES FOR OPTION TERM(2)
GRANTED IN FISCAL EXERCISE EXPIRATION ---------------------
NAME (#) YEAR PRICE ($) DATE 5% ($) 10% ($)
---- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Gallagher..... -- -- -- -- -- --
J. Patrick Gallagher,
Jr..................... 10,000 1.40% 31.875 07/17/06 200,000 508,000
Michael J. Cloherty..... 10,000 1.40% 31.875 07/17/06 200,000 508,000
Gary M. Van der Voort... 10,000 1.40% 31.875 07/17/06 200,000 508,000
Peter J. Durkalski...... 10,000 1.40% 31.875 07/18/06 200,000 508,000
James W. Durkin, Jr..... 10,000 1.40% 31.875 07/18/06 200,000 508,000
Walter F. McClure....... 7,500 1.05% 31.875 07/17/06 150,000 381,000
</TABLE>
- --------
(1) Nonqualified options granted July 18, 1996, exercisable at the rate of 10%
of the total option for each calendar year after 1996.
(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 1996 fiscal
year and the number and value of unexercised options to purchase shares of
Common Stock held at the end of the Company's 1996 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..... -- -- -- -- -- --
J. Patrick Gallagher,
Jr..................... -- -- 34,000 85,000 212,000 321,000
Michael J. Cloherty..... 24,000 366,000 13,000 78,000 5,000 299,000
Gary M. Van der Voort... -- -- 69,000 81,000 706,000 329,000
Peter J. Durkalski...... 51,500 824,000 13,000 81,000 5,000 321,000
James W. Durkin, Jr..... 10,800 172,000 30,000 79,000 166,000 304,000
Walter F. McClure....... 4,500 95,000 39,000 49,000 389,000 189,000
</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.
24
<PAGE>
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.
PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 1996, there were no beneficial owners 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. 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 March 14, 1997; 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(1) STOCK
- ------------------------ ------------ ----------
<S> <C> <C>
Robert E. Gallagher................................... 757,338(2) 4.6%
T. Kimball Brooker.................................... 13,370 *
John G. Campbell...................................... 30,235 *
Michael J. Cloherty................................... 87,502 *
Peter J. Durkalski.................................... 48,385(3)
James W. Durkin, Jr................................... 53,950
J. Patrick Gallagher, Jr. ............................ 178,120(4) 1.1%
Jack M. Greenberg..................................... 24,120 *
Frank M. Heffernan, Jr. .............................. 281,500(5) 1.7%
Philip A. Marineau.................................... 14,120 *
Walter F. McClure..................................... 63,156(6) *
Gary M. Van der Voort................................. 132,326(7) *
James R. Wimmer....................................... 25,870(8) *
All directors and executive officers as a group (14
persons)............................................. 1,767,824 10.5%
</TABLE>
- --------
* Less than 1%
25
<PAGE>
(1) 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: T. Kimball Brooker, 3,370 shares; John G.
Campbell, 13,350 shares; Michael J. Cloherty, 27,500 shares; Peter J.
Durkalski, 23,500 shares; James W. Durkin, Jr. 43,143 shares; J. Patrick
Gallagher, Jr., 47,500 shares; Jack M. Greenberg, 22,120 shares; Frank M.
Heffernan, Jr., 17,500 shares; Philip A. Marineau, 14,120 shares; Walter
F. McClure, 48,250 shares; Gary M. Van der Voort, 84,000 shares; James R.
Wimmer, 21,870 shares; all directors and executive officers as a group (14
persons), 391,223 shares.
(2) 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.
(3) Includes 4,885 shares held in trust for the benefit of his minor children
by his wife, Delores Durkalski, and another as trustees.
(4) 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.
(5) Includes 264,000 shares held in trust by Frank M. Heffernan, Jr. and
Lenore B. Heffernan, his wife, as trustees.
(6) Includes 11,600 shares held in trust by Walter F. McClure and Alice M.
McClure, his wife, as trustees.
(7) Includes 3,600 shares held as custodian for the benefit of his children
under the Uniform Gift to Minors Act.
(8) Includes 4,000 shares held by his wife, Gertrude A. Wimmer.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 100,000,000 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 March 14, 1997, there were 16,425,641 shares of Common Stock
outstanding held by approximately 700 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.
26
<PAGE>
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 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, as
amended on July 18, 1996, would expire on May 12, 2007 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,
27
<PAGE>
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 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
28
<PAGE>
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 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 3,200 shares that are exercisable
within 60 days from the date of this Prospectus.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31,
1996, 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 THEPRIVATE 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
29
<PAGE>
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.
30
<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-17
Report of Independent Auditors............................................ F-18
</TABLE>
F-1
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
OPERATING RESULTS
Revenues:
Commissions....................................... $261,471 $255,914 $237,163
Fees.............................................. 171,515 161,868 143,238
Investment income and other....................... 23,693 21,748 13,571
-------- -------- --------
Total revenues.................................. 456,679 439,530 393,972
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 239,455 231,716 210,061
Other operating expenses.......................... 147,825 139,432 125,059
-------- -------- --------
Total expenses.................................. 387,280 371,148 335,120
-------- -------- --------
Earnings before income taxes........................ 69,399 68,382 58,852
Provision for income taxes.......................... 23,596 25,837 21,686
-------- -------- --------
Net earnings.................................... $ 45,803 $ 42,545 $ 37,166
======== ======== ========
Net earnings per common and common equivalent share. $ 2.63 $ 2.47 $ 2.16
Dividends declared per common share................. $ 1.16 $ 1.00 $ .88
Weighted average number of common and common
equivalent shares outstanding...................... 17,775 17,254 17,189
</TABLE>
See accompanying notes.
F-2
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 56,990 $ 58,849
Restricted cash.......................................... 87,224 95,388
Premiums and fees receivable............................. 237,640 226,675
Investment strategies--trading........................... 53,409 46,123
Other.................................................... 28,677 22,448
-------- --------
Total current assets................................... 463,940 449,483
Marketable securities--available for sale.................. 36,881 41,712
Deferred income taxes and other noncurrent assets.......... 52,509 42,360
Fixed assets............................................... 79,285 72,352
Accumulated depreciation and amortization.................. (53,284) (47,657)
-------- --------
Net fixed assets....................................... 26,001 24,695
Intangible assets--net..................................... 11,093 7,581
-------- --------
$590,424 $565,831
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Premiums payable to insurance companies.................. $323,867 $321,060
Accrued salaries and bonuses............................. 14,922 13,648
Accounts payable and other accrued liabilities........... 68,170 60,174
Unearned fees............................................ 13,043 13,586
Income taxes payable..................................... 4,954 10,619
Other.................................................... 19,786 7,225
-------- --------
Total current liabilities.............................. 444,742 426,312
Other noncurrent liabilities............................... 11,152 14,010
Stockholders' equity:
Common stock--issued and outstanding 16,293 shares in
1996 and
16,365 shares in 1995................................... 16,293 16,365
Capital in excess of par value........................... 2,140 --
Retained earnings........................................ 115,208 109,110
Unrealized gain on available for sale securities--net of
income taxes............................................ 889 34
-------- --------
Total stockholders' equity............................. 134,530 125,509
-------- --------
$590,424 $565,831
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 45,803 $ 42,545 $ 37,166
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net (gain) loss on investments............... (3,928) (282) 3,042
Depreciation and amortization................ 9,774 10,172 7,890
Decrease (increase) in restricted cash....... 8,164 (5,335) 16,229
Increase in premiums receivable.............. (6,829) (22,203) (19,011)
Increase in premiums payable................. 2,807 23,902 9,643
(Increase) decrease in trading investments--
net......................................... (4,128) (2,353) 26,811
(Increase) decrease in other current assets.. (6,484) (1,731) 3,123
Increase in accrued salaries and bonuses..... 1,274 1,278 2,148
Increase in accounts payable and other
accrued liabilities......................... 7,127 9,612 7,776
(Decrease) increase in income taxes payable.. (5,665) (1,381) 1,866
Decrease in deferred income taxes............ (2,660) (1,317) (5,102)
Other........................................ (11,650) (9,389) (7,918)
-------- -------- --------
Net cash provided by operating activities.. 33,605 43,518 83,663
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities............. (23,679) (21,918) (28,409)
Proceeds from sales of marketable securities... 28,747 20,078 30,527
Proceeds from maturities of marketable
securities.................................... 1,958 2,213 2,224
Additions to fixed assets...................... (10,055) (10,299) (7,537)
Other.......................................... (4,362) 375 316
-------- -------- --------
Net cash used by investing activities...... (7,391) (9,551) (2,879)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 7,966 7,044 3,141
Tax benefit from issuance of common stock...... 1,955 1,837 747
Repurchases of common stock.................... (21,290) (15,068) (43,843)
Dividends paid................................. (17,530) (14,666) (12,690)
Retirement of long-term debt................... (1,130) (1,130) (24,776)
Borrowings on line of credit facilities........ 10,000 -- --
Equity transactions of pooled companies prior
to dates of acquisition....................... (8,044) (3,172) (3,145)
-------- -------- --------
Net cash used by financing activities...... (28,073) (25,155) (80,566)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (1,859) 8,812 218
Cash and cash equivalents at beginning of year... 58,849 50,037 49,819
-------- -------- --------
Cash and cash equivalents at end of year......... $56,990 $ 58,849 $ 50,037
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 626 $ 478 $ 1,895
Income taxes paid.............................. $ 25,674 $ 22,027 $ 20,315
</TABLE>
See accompanying notes.
F-4
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
CAPITAL GAIN (LOSS)
COMMON STOCK IN EXCESS ON AVAILABLE
--------------- OF RETAINED FOR SALE
SHARES AMOUNT PAR VALUE EARNINGS SECURITIES
------ ------- --------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993
as previously reported...... 16,037 $16,037 $ 8,110 $ 94,949 $ --
Acquisition of pooled
companies................. 939 939 -- 5,976 --
------ ------- ------- -------- ------
Balance at December 31, 1993
as restated................. 16,976 16,976 8,110 100,925 --
Net earnings............... -- -- -- 37,166 --
Cash dividends declared on
common stock.............. -- -- -- (13,209) --
Common stock issued under
stock option plans........ 171 171 2,970 -- --
Tax benefit from issuance
of common stock........... -- -- 747 -- --
Common stock repurchases... (1,392) (1,392) (11,827) (30,624) --
Common stock issued in
three pooling
acquisitions.............. 316 316 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- -- (3,145) --
Cumulative effect of
accounting change, net of
taxes of $970............. -- -- -- -- 1,456
Change in unrealized gain
(loss), net of taxes of
$2,899.................... -- -- -- -- (4,391)
------ ------- ------- -------- ------
Balance at December 31, 1994. 16,071 16,071 -- 91,113 (2,935)
Net earnings............... -- -- -- 42,545 --
Cash dividends declared on
common stock.............. -- -- -- (15,270) --
Common stock issued under
stock option plans........ 356 356 6,688 -- --
Tax benefit from issuance
of common stock........... -- -- 1,837 -- --
Common stock repurchases... (437) (437) (8,525) (6,106) --
Common stock issued in
seven pooling
acquisitions.............. 375 375 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- -- (3,172) --
Change in unrealized gain
(loss), net of taxes of
$1,951.................... -- -- -- -- 2,969
------ ------- ------- -------- ------
Balance at December 31, 1995. 16,365 16,365 -- 109,110 34
Net earnings............... -- -- -- 45,803 --
Cash dividends declared on
common stock.............. -- -- -- (18,399) --
Common stock issued under
stock option plans........ 398 398 7,568 -- --
Tax benefit from issuance
of common stock........... -- -- 1,955 -- --
Common stock repurchases... (645) (645) (7,383) (13,262) --
Common stock issued in
three pooling
acquisitions.............. 175 175 -- -- --
Equity transactions of
pooled companies prior to
dates of acquisition...... -- -- -- (8,044) --
Change in unrealized gain
(loss), net of taxes of
$571...................... -- -- -- -- 855
------ ------- ------- -------- ------
Balance at December 31, 1996. 16,293 $16,293 $ 2,140 $115,208 $ 889
====== ======= ======= ======== ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Arthur J. Gallagher & Co. (the Company) provides insurance broker and risk
management services to a wide variety of commercial, industrial, institutional
and governmental organizations. Commission revenue is principally generated
through the negotiation and placement of insurance for its clients. Fee
revenue is generated by providing other risk management services including
claims management, information management, risk control services and
appraisals in either the property/casualty market or human resource, employee
benefit market. The Company operates through approximately 150 offices
throughout the United States and six countries abroad.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and all subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. Certain reclassifications have been
made to the prior years' financial statements in order to conform to the
current year presentation.
Revenue recognition
Commission income is generally recognized as of the effective date of
insurance policies except for commissions on installment premiums which are
recognized periodically as billed. Contingent commissions are recognized when
received. Fee income is recognized ratably as services are rendered. The
income effects of subsequent premium and fee adjustments are recorded when the
adjustments become known. Premiums and fees receivable are net of allowance
for doubtful accounts of $889,000 and $729,000 at December 31, 1996 and 1995,
respectively.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Such estimates and assumptions could change in the
future as more information becomes known which could impact the amounts
reported and disclosed herein.
Consolidated statement of cash flows
Short-term investments, consisting principally of commercial paper and
certificates of deposit which have a maturity of ninety days or less at date
of purchase, are considered cash equivalents.
Premium trust funds
Premiums collected from insureds but not yet remitted to insurance carriers
are restricted as to use by laws in certain states and foreign jurisdictions
in which the Company's subsidiaries operate. Additionally, the Company's
United Kingdom subsidiaries are required by Lloyd's of London to meet certain
liquidity requirements.
Marketable securities
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." The standard requires that
securities designated as available for sale be carried at fair value, with
F-6
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 standard for investments held as of or acquired
after that date. In accordance with SFAS 115, prior period financial
statements have not been restated to reflect the change in accounting
principle. The cumulative effect as of January 1, 1994 of adopting SFAS 115
increased the opening balance of stockholders' equity by $1,456,000 (net of
deferred income taxes of $970,000) to reflect the net unrealized holding gains
on securities classified as available for sale previously carried at the lower
of cost or fair value, or at amortized cost. There was no cumulative effect on
net earnings as a result of the adoption of SFAS 115 because the securities
classified as trading were carried as a current asset and had a fair value
below cost at January 1, 1994. Accordingly, such unrealized losses were
recorded in prior period earnings.
Marketable securities are considered available for sale and consist
primarily of preferred and common stocks. Gains and losses are recognized in
income when realized using the specific identification method. The fair value
for marketable securities is based on quoted market prices.
Investment strategies are considered trading securities and consist
primarily of limited partnerships which invest in common stocks. Fair value is
determined by reference to the fair value of the underlying common stocks
which is based on quoted market prices.
Fixed assets
Fixed assets are carried at cost. Furniture and equipment with a cost of
$71,108,000 at December 31, 1996 ($64,414,000 at December 31, 1995) are
depreciated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements with a cost of $8,177,000 at December 31,
1996 ($7,938,000 at December 31, 1995) are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
lease terms.
Intangible assets
Intangible assets consist primarily of the excess of cost over the value of
net tangible assets of acquired businesses and are amortized principally over
forty years using the straight-line method. Accumulated amortization at
December 31, 1996 was $6,316,000 ($7,234,000 at December 31, 1995).
Earnings per share
Earnings per share are computed based on the weighted average number of
common and common equivalent shares outstanding during the respective period.
Common equivalent shares include incremental shares from dilutive stock
options since the date of grant using the treasury stock method. There is no
material difference between primary and fully diluted per share amounts.
Stock based compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
options granted to employees.
F-7
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS
Poolings of interests
In 1996, the Company acquired substantially all the net assets of five
insurance brokerage firms and one investigative services company in exchange
for 1,115,000 shares of its common stock. In 1995, the Company acquired
substantially all the net assets of nine insurance brokerage firms in exchange
for 723,000 shares of its common stock. These acquisitions were accounted for
as poolings of interests and, except for three of the 1996 acquisitions and
seven of the 1995 acquisitions whose results were not significant, the
financial statements for all periods prior to the acquisition dates have been
restated to include the operations of these companies.
The following summarizes the restatement to reflect the 1996 acquisitions:
<TABLE>
<CAPTION>
ATTRIBUTABLE TO
ARTHUR J. GALLAGHER POOLED COMPANIES AS RESTATED
------------------- ---------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1995
- ----
Revenues....................... $416,006 $23,524 $439,530
Net earnings................... 41,491 1,054 42,545
======== ======= ========
1994
- ----
Revenues....................... $370,339 $23,633 $393,972
Net earnings................... 34,405 2,761 37,166
======== ======= ========
</TABLE>
In 1996, the Company also acquired a majority equity interest in a risk
management company, which was accounted for as a purchase.
3. MARKETABLE SECURITIES
The following is a summary of available for sale marketable securities:
<TABLE>
<CAPTION>
COST OR GROSS GROSS FAIR
DECEMBER 31, 1996 AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
- ----------------- -------------- ---------------- ----------------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Preferred stocks..... $23,446 $1,126 $ 434 $24,138
Fixed maturities..... 4,962 116 234 4,844
Common stocks........ 6,991 1,542 634 7,899
------- ------ ------ -------
$35,399 $2,784 $1,302 $36,881
======= ====== ====== =======
<CAPTION>
DECEMBER 31, 1995
- -----------------
<S> <C> <C> <C> <C>
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
======= ====== ====== =======
</TABLE>
The gross realized gains on sales of marketable securities totaled
$1,652,000, $1,079,000 and $2,004,000 for the years ended December 31, 1996,
1995, and 1994, respectively. The gross realized losses totaled $881,000,
$1,918,000 and $312,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Substantially all fixed maturity securities mature in 2000 or later. Actual
maturities may differ from contractual maturities because the issuers of the
securities may have the right to call or prepay obligations.
The net unrealized gains (losses) on investment strategies included in
income amounted to $3,928,000 in 1996, ($171,000) in 1995, and $83,000 in
1994.
F-8
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1996, securities sold under agreements to repurchase the
identical securities are collateralized by government backed small business
administration loans and government securities with a carrying value of
$23,034,000 and a fair value of $23,262,000. The securities collateralizing
the agreements were held by two primary dealers. At December 31, 1995, these
securities had a carrying value of $20,071,000 and a fair value of
$20,253,000.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
(IN
THOUSANDS)
<S> <C> <C>
6.64% unsecured term note, payable in annual installments of
$630............................................................ $1,260 $1,890
6.30% unsecured term note, payable in annual installments of
$500............................................................ 1,000 1,500
------ ------
2,260 3,390
Less current portion............................................. 1,130 1,130
------ ------
$1,130 $2,260
====== ======
</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 total $1,130,000 for 1997 and $1,130,000 for
1998.
In 1994, the Company retired its $20 million variable-rate (based on LIBOR
plus .4%) unsecured revolving credit agreement that was due in 1998. In
connection with the retirement, the Company also recognized a gain of $656,000
on the settlement of interest rate exchange agreements that had been entered
into in 1993 to fix the rate of interest payable on the revolving credit
agreement. The credit agreement remains in effect and expires on June 30,
2001. As of December 31, 1996, there were no borrowings outstanding under this
agreement.
The Company also has line of credit facilities of $27,500,000 which expire
on April 30, 1997. Short-term borrowings under these facilities totaled
$10,000,000 at December 31, 1996. No borrowings existed under these facilities
at December 31, 1995. The weighted average interest rate on short-term
borrowings during 1996 was 6.875%.
6. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN
Capital Stock
The table below summarizes certain information about the Company's capital
stock at December 31:
<TABLE>
<CAPTION>
1996 1995
--------------------- -----------------
AUTHORIZED PAR AUTHORIZED
CLASS PAR VALUE SHARES VALUE SHARES
- ----- --------- ----------- ------ ----------
<S> <C> <C> <C> <C>
Preferred stock......................... No par 1,000,000 No par 1,000,000
Common stock............................ $ 1.00 100,000,000 $ 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
F-9
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Plan was amended in 1996 to
extend the expiration of the Rights to May 12, 2007. The Rights may be
redeemed by the Company at 5 cents per Right at any time prior to the public
announcement of the acquisition of 20% of the common stock. At December 31,
1996, 25,000,000 shares of common stock were reserved for potential exercise
of the Rights.
7. STOCK OPTION PLANS
The Company has incentive and nonqualified stock option plans for officers
and key employees of the Company and its subsidiaries. The options are granted
at the fair market value of the underlying shares at the date of grant.
Options granted under the nonqualified plan become exercisable at the rate of
10% per year beginning the calendar year after the date of grant or earlier in
the event of death, disability or retirement. Options expire ten years from
the date of grant, or earlier in the event of termination of the employee. No
options may be granted under the plan ten years after its inception.
In addition, the Company has a non-employee director's stock option plan
which currently authorizes 200,000 shares for grant, with Discretionary
Options granted at the direction of the Option Committee and Retainer Options
granted in lieu of their annual retainer. Discretionary Options shall be
exercisable at such rates as shall be determined by the Committee on the date
of grant. Retainer Options shall be cumulatively exercisable at the rate of
25% of the total Retainer Option at the end of each full fiscal quarter
succeeding the date of grant. The excess of fair market value at the date of
grant over the option price for these nonqualified stock options is considered
compensation and is charged against earnings ratably over the vesting period.
The Company also has an incentive stock option plan for its officers and key
employees resident in the United Kingdom. The United Kingdom plan is
essentially the same as the Company's domestic employee stock option plans,
with certain modifications to comply with United Kingdom law and to provide
potentially favorable tax treatment for grantees resident in the United
Kingdom.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for stock options granted
to employees. Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," requires disclosure of pro forma
information regarding net earnings and earnings per share, using pricing
models to estimate the fair value of stock option grants. Had compensation
expense for the Company's stock option plans been determined based on the
estimated fair value at the date of grant consistent with the methodology
prescribed under SFAS 123, approximate net earnings and earnings per share
would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Pro forma net earnings............................... $ 45,159 $ 42,292
Pro forma net earnings per common and common equiva-
lent share.......................................... $ 2.59 $ 2.45
</TABLE>
F-10
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of the pro forma disclosures, the estimated fair values of the
option grants are amortized to expense over the options' expected lives. The
fair value of options at the date of grant was estimated using the Black-
Scholes option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Dividend yield...................................................... 2.9% 2.9%
Risk-free interest rate............................................. 6.3% 6.2%
Volatility.......................................................... 24.1% 24.5%
Expected life (years)............................................... 8.0 8.0
</TABLE>
Transactions related to all stock options are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT EXERCISE PRICE DATA)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance............... 4,770 $25.87 4,614 $24.29 3,997 $22.90
Granted......................... 714 32.05 626 34.49 870 29.36
Exercised....................... (398) 20.02 (356) 19.80 (171) 18.22
Canceled........................ (176) 28.44 (114) 27.97 (82) 23.15
----- ------ ----- ------ ----- ------
Ending balance.................. 4,910 $27.18 4,770 $25.87 4,614 $24.29
===== ====== ===== ====== ===== ======
Exercisable at end of year...... 1,728 1,513 1,283
===== ===== =====
</TABLE>
Options with respect to 1,500,000 shares were available for grant at
December 31, 1996.
Information regarding options outstanding and exercisable at December 31,
1996 is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE PRICES NUMBER LIFE EXERCISE NUMBER EXERCISE
- ------------------------ OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------- ----------- -------- ----------- --------
(IN THOUSANDS, EXCEPT EXERCISE PRICE DATA)
<S> <C> <C> <C> <C> <C>
$ 7.13 - $21.25........ 1,541 3.4 $19.01 848 $18.47
22.00 - 30.13.......... 1,240 6.0 26.14 487 24.91
30.25 - 33.75.......... 1,566 7.8 32.69 332 33.16
34.25 - 39.13.......... 563 8.5 34.50 61 34.44
----- --- ------ ----- ------
$ 7.13 - $39.13........ 4,910 6.0 $27.18 1,728 $23.67
===== === ====== ===== ======
</TABLE>
8. RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan which covers
substantially all domestic employees who have attained a specified age and one
year of employment. Benefits under the plan are based on years of service and
salary history. The Company's contributions to the plan satisfy the minimum
funding requirements of ERISA. Plan assets consist primarily of common stocks
and bonds invested under the terms of a group annuity contract managed by a
life insurance company.
F-11
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for the defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers'
Accounting for Pensions." The difference beteween the present value of the
projected benefit obligation at the date of adoption of SFAS 87 and the fair
value of plan assets at that date is being amortized on a straight-line basis
over the average remaining service period of employees expected to receive
benefits.
The following table sets forth the plan's estimated funded status and
amounts recognized in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested..................................................... $30,115 $24,775
Nonvested.................................................. 6,039 6,027
------- -------
$36,154 $30,802
======= =======
Projected benefit obligation................................ $52,931 $45,143
Assets at fair value........................................ 39,045 31,900
------- -------
Projected benefit obligation in excess of plan assets....... 13,886 13,243
------- -------
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions......... (287) (1,473)
Unamortized portion of net obligation at January 1.......... (555) (611)
------- -------
Unfunded accrued pension cost............................... $13,044 $11,159
======= =======
</TABLE>
Pension expense for the plan consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year........... $5,790 $5,027 $5,400
Interest cost on projected benefit obligation........... 3,322 2,775 2,467
Actual return on plan assets............................ (3,561) (5,283) (158)
Net amortization and deferral........................... 722 3,194 (1,366)
------ ------ ------
Net pension expense..................................... $6,273 $5,713 $6,343
====== ====== ======
</TABLE>
The following assumptions were used in determining the actuarial present
value of the plan's projected benefit obligation:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate.................................................... 7.5% 7.5% 8.0%
Rate of increase in future compensation levels................... 6.5% 6.5% 7.0%
Expected long-term rate of return on assets...................... 9.0% 9.0% 9.0%
</TABLE>
The Company has a contributory savings and thrift plan covering the majority
of its employees. Company contributions are at the discretion of the Company's
Board of Directors and may not exceed the maximum amount deductible for
federal income tax purposes. The Company contributed $2,396,000, $1,035,000,
and $879,000 in 1996, 1995 and 1994, respectively.
F-12
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also has a foreign defined contribution plan which provides for
basic contributions by the Company and voluntary contributions by employees
which are matched 100% by the Company, up to a maximum of 5% of salary, as
defined. Net expense for foreign retirement plans amounted to $1,383,000 in
1996, $1,703,000 in 1995 and $1,611,000 in 1994.
9. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In 1992, the Company amended its health benefits plan to eliminate retiree
coverage, except for current retirees and those employees who had already
attained a specified age and length of service. The retiree health plan is
contributory, with contributions adjusted annually, and is funded on a pay-as-
you-go basis.
The components of the net periodic postretirement benefit cost include the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1996 1995 1994
------ ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.............................................. $ -- $-- $ --
Interest cost............................................. 717 701 828
Amortization of transition obligation..................... 512 512 512
Amortization of gain...................................... (209) (379) --
------ ---- ------
$1,020 $834 $1,340
====== ==== ======
</TABLE>
The following table sets forth the estimated funded status and amounts
recognized in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 5,276 $ 3,939
Active eligible employees................................... 4,836 5,968
------- -------
10,112 9,907
Unrecognized transition obligation............................ (8,188) (8,700)
Unrecognized gain............................................. 1,611 1,644
------- -------
Accrued postretirement benefit cost........................... $ 3,535 $ 2,851
======= =======
</TABLE>
The assumed healthcare cost trend rate used for the next year is 8.5%,
scaling down to 4.5% after 12 years. A 1% increase in the assumed healthcare
cost trend rate would increase the accumulated postretirement benefit
obligation by $1,341,000 at December 31, 1996 and would increase the net
periodic postretirement benefit cost for 1996 by $93,000.
The discount rate used to measure the accumulated postretirement benefit
obligation was 7.5% at December 31, 1996 and 1995. The transition obligation
is being amortized over 20 years.
10. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal actions incident to the nature of
its business. Management is of the opinion that none of the litigation will
have a material effect on the Company's financial position or operating
results.
F-13
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company generally operates in leased premises. Certain office space
leases have options permitting renewals for additional periods. In addition to
minimum fixed rentals, a number of leases contain escalation clauses related
to increases in the cost of living in future years.
Minimum aggregate rental commitments at December 31, 1996 under
noncancelable operating leases having an initial term of more than one year
are as follows:
<TABLE>
<CAPTION>
TOTAL
--------------
(IN THOUSANDS)
<S> <C>
1997............................................................. $ 24,939
1998............................................................. 21,782
1999............................................................. 19,422
2000............................................................. 15,287
2001............................................................. 12,050
Subsequent years................................................. 70,275
--------
$163,755
========
</TABLE>
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $28,236,000 in 1996,
$27,520,000 in 1995 and $26,112,000 in 1994.
11. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Earnings before income taxes consist of:
Domestic........................................... $65,200 $64,981 $56,665
Foreign............................................ 4,199 3,401 2,187
------- ------- -------
$69,399 $68,382 $58,852
======= ======= =======
Provision for income taxes consists of:
Federal--
Current.......................................... $19,953 $22,355 $21,327
Deferred......................................... (2,911) (2,734) (4,639)
------- ------- -------
17,042 19,621 16,688
------- ------- -------
State and local--
Current.......................................... 5,335 5,295 5,023
Deferred......................................... (415) (384) (637)
------- ------- -------
4,920 4,911 4,386
------- ------- -------
Foreign--
Current.......................................... 729 1,524 (488)
Deferred......................................... 905 (219) 1,100
------- ------- -------
1,634 1,305 612
------- ------- -------
Total provision...................................... $23,596 $25,837 $21,686
======= ======= =======
</TABLE>
F-14
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Leveraged leases.............................................. $ 1,324 $ 2,760
Unrealized investment gains................................... 592 22
Other......................................................... 4,555 4,385
------- -------
Deferred tax liabilities.................................... 6,471 7,167
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits....... 12,620 11,390
Accrued liabilities........................................... 11,132 9,495
Other......................................................... 1,040 970
------- -------
Total deferred tax assets................................... 24,792 21,855
Valuation allowance for deferred tax assets................. -- --
------- -------
Deferred tax assets......................................... 24,792 21,855
------- -------
Net deferred tax assets......................................... $18,321 $14,688
======= =======
</TABLE>
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,
-----------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------ ------- ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate......... $24,290 35.0 $23,934 35.0 $20,598 35.0
State income taxes--net of
federal....................... 3,148 4.5 3,428 5.0 2,719 4.6
Pre-acquisition earnings of
pooled companies taxed to
previous owners............... (468) (0.7) (1,065) (1.6) (1,534) (2.6)
Foreign taxes.................. 208 0.3 215 0.3 433 0.7
General business credits....... (603) (0.8) (778) (1.1) (771) (1.3)
Other--net..................... (2,979) (4.3) 103 0.2 241 .4
------- ---- ------- ---- ------- ----
$23,596 34.0 $25,837 37.8 $21,686 36.8
======= ==== ======= ==== ======= ====
</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, 1996)
of certain foreign subsidiaries which are considered permanently invested
outside of the U.S. The amount of unrecognized deferred tax liability on these
undistributed earnings is $5,000,000.
F-15
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
12. FOREIGN OPERATIONS
Financial data by geographic area of operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Commissions and fees
United States................................ $ 406,520 $390,547 $353,615
Foreign, principally United Kingdom.......... 26,466 27,235 26,786
--------- -------- --------
432,986 417,782 380,401
Investment income.............................. 23,693 21,748 13,571
--------- -------- --------
$ 456,679 $439,530 $393,972
========= ======== ========
Earnings before taxes:
Operating profit (loss)
United States................................ $ 72,062 $ 70,122 $ 64,577
Foreign, principally United Kingdom.......... 48 (1,285) (31)
--------- -------- --------
72,110 68,837 64,546
General corporate expense, including interest
expense and investment income................. 2,711 455 5,694
--------- -------- --------
$ 69,399 $ 68,382 $ 58,852
========= ======== ========
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C> <C>
Identifiable assets:
United States............................................ $279,759 $264,506
Foreign, principally United Kingdom...................... 133,368 142,774
-------- --------
413,127 407,280
Corporate................................................ 177,297 158,551
-------- --------
$590,424 $565,831
======== ========
</TABLE>
The consolidated financial statements include liabilities of $107,053,000 at
December 31, 1996 ($116,866,000 at December 31, 1995) after elimination of
intercompany balances applicable to foreign operations.
Exchange gains (losses) were approximately $253,000 in 1996, $85,000 in 1995
and ($81,000) in 1994.
13. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
1996 DATA)
<S> <C> <C> <C> <C>
Total revenues............................. $106,821 $108,618 $121,696 $119,544
Earnings before income taxes............... 14,579 12,307 25,520 16,993
Net earnings............................... 8,944 7,533 18,057 11,269
Net earnings per common and common
equivalent share.......................... .51 .44 1.03 .65
<CAPTION>
1995
<S> <C> <C> <C> <C>
Total revenues............................. $103,216 $100,883 $118,362 $117,069
Earnings before income taxes............... 12,603 9,784 26,179 19,816
Net earnings............................... 7,633 5,786 16,372 12,754
Net earnings per common and common
equivalent share.......................... .45 .34 .94 .74
</TABLE>
F-16
<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 21, 1997
/s/ J. Patrick Gallagher, Jr.
-------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
/s/ Michael J. Cloherty
-------------------------------------
Michael J. Cloherty
Executive Vice President and
Chief Financial Officer
F-17
<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, 1996 and 1995, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arthur J.
Gallagher & Co. at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1994,
the Company changed its method of accounting for certain investments in debt
and equity securities.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
January 21, 1997
F-18
<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.............. $11,955
Printing Expenses................................................ 15,000
Legal Fees and Expenses.......................................... 5,000
Accountant's Fees and Expenses................................... 5,000
Miscellaneous Costs.............................................. 5,000
-------
Total........................................................ $41,955
=======
</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 24TH DAY OF MARCH, 1997.
Arthur J. Gallagher & Co.
/s/ J. Patrick Gallagher, Jr.
By: _________________________________
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON MARCH 24, 1997 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 Executive Vice President and Director
___________________________________________ (Chief Financial Officer)
(Michael J. Cloherty)
/s/ David B. Hoch Controller (Chief Accounting Officer)
___________________________________________
(David B. Hoch)
T. Kimball Brooker* Director
___________________________________________
(T. Kimball Brooker)
John G. Campbell* Director
___________________________________________
(John G. Campbell)
Jack M. Greenberg* Director
___________________________________________
(Jack M. Greenberg)
Frank M. Heffernan, Jr.* Director
___________________________________________
(Frank M. Heffernan, Jr.)
Philip A. Marineau* Director
___________________________________________
Philip A. Marineau
Walter F. McClure* Director
___________________________________________
(Walter F. McClure)
James R. Wimmer* Director
___________________________________________
(James R. Wimmer)
</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 the same exhibit number to
Company's Form 10-Q Quarterly Report for the quarterly pe-
riod ended June 30, 1996, File No. 1-9761).
3.2 By-Laws of the Company (incorporated by reference to the
same exhibit number to Company's Form S-1 Registration
Statement No. 33-10447).
3.3 Rights Agreement between the Company and Bank of America
Illinois (formerly Continental Illinois National Bank and
Trust Company of Chicago) (incorporated by reference to
Exhibits 1 and 2 to Company's Form 8-A Registration State-
ment 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).
3.5 Amendment No. 1 to Exhibit Number 3.3 (incorporated by
reference to the same exhibit number to Company's Form 10-
Q Quarterly Report for the quarterly period ended June 30,
1996, File No. 1-9761).
4.1 Instruments defining the rights of security holders (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).
10.27.5 Amendment No. 6 to Exhibit No. 10.27 (incorporated by ref-
erence to the same exhibit number to Company's Form S-8
Registration Statement No. 333-06359).
10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors'
Stock Option Plan (incorporated by reference to Exhibit
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).
10.28.4 Amendment No. 6 to Exhibit No. 10.28 (incorporated by ref-
erence to the same exhibit number to Company's Form S-8
Registration Statement No. 333-06359).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and
Itasca Center III Limited Partnership, a Texas limited
partnership, dated July 26, 1989 (incorporated by 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 (formerly Continental Il-
linois National Bank and Trust Company of Chicago) regard-
ing Common Stock Purchase Financing Program including ex-
hibits thereto and related letters (incorporated by refer-
ence to the same exhibit number to Company's Form S-1 Reg-
istration 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).
</TABLE>
S-5
<PAGE>
<TABLE>
<C> <S> <C>
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).
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 1996, 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.
*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 1996, 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.
- --------
*Filed herewith.
**Incorporated by reference to the Company's Form 10-K Annual Report for 1996,
File No. 1-9761.
S-6
<PAGE>
March 18, 1997
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 1,200,000 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. 33-76778,
33-58101 and 333-1435).
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
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
Gallagher Captive Services (Cayman) Limited................. Cayman Islands
Scholastic Risk Services 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
Risk Management Partners Ltd.(3)............................ 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
Morgan, Read & Coleman (Holdings) Limited................... England
Gallagher, Read & Coleman Limited......................... England
Morgan, Read & Coleman (Sweden) AB...................... Sweden
Morgan Insurance Services Limited........................... England
Gallagher Bassett Services, Inc............................... Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
Gallagher Bassett of New York, Inc......................... New York
Gallagher Bassett International Ltd........................ Delaware
Gallagher Bassett International Ltd. (UK).................. England
Gallagher Bassett Adjusters Canada, Inc.(3)................ Canada
Gallagher Bassett Argentina S.A.(4)........................ Argentina
Gallagher Bassett Australia Pty Ltd(4)..................... Australia
Gallagher Bassett Administrators, Inc. .................... Illinois
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
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
IMC Insurance Management Corporation......................... Missouri
IMC Services Corporation................................... Missouri
Gallagher Alliance Insurance Services, Inc. ................. Arizona
AJG Financial Services, Inc. ................................ Delaware
AJG Capital, Inc.(2)....................................... Illinois
AJG Investments, Inc. ..................................... Delaware
Gallagher Captive Services, Inc. ............................ Delaware
Gallagher Benefit Services of Colorado, Inc. ................ Colorado
Lamberson Koster & Company................................... California
Arthur J. Gallagher & Co. of Tennessee, Inc. ................ Tennessee
</TABLE>
- --------
(1) The Company conducts some of its operations under the following names:
Gallagher Benefit Services, Gallagher 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 the company is owned by an unrelated party.
(4) 25% of the Common Stock of the company 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 21, 1997 in the Registration Statement on
Form S-1 and related Prospectus of Arthur J. Gallagher & Co. and subsidiaries
for the registration of 1,200,000 shares of its Common Stock.
We also consent to the incorporation by reference therein of our report
dated January 21, 1997 with respect to the consolidated financial statement
schedule of Arthur J. Gallagher & Co. and subsidiaries for the years ended
December 31, 1996, 1995, and 1994 included in the Annual Report (Form 10-K)
for 1996 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
-------------------------------------
Ernst & Young LLP
Chicago, Illinois
March 21, 1997
<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 1,200,000
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 25th day
of February, 1997.
/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 1,200,000
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 25th day
of February, 1997.
/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 1,200,000
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 25th day
of February, 1997.
/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 1,200,000
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 25th day
of February, 1997.
/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 1,200,000
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 25th day
of February, 1997.
/s/ Frank M. Heffernan, Jr.
-------------------------------------
Frank M. Heffernan, Jr.
<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 1,200,000
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 25th day
of February, 1997.
/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 1,200,000
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 25th day
of February, 1997.
/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 1,200,000
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 25th day
of February, 1997.
/s/ James R. Wimmer
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James R. Wimmer
