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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-9761
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ARTHUR J. GALLAGHER & CO.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Two Pierce Place 60143-3141
Itasca, Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (630) 773-3800
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, par value ON WHICH REGISTERED
$1.00 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last reported price at which the
stock was sold on January 30, 1998 was $561,952,000.
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of January 30, 1998 was 16,609,073.
PORTIONS OF DOCUMENTS INCORPORATED BY PART OF FORM 10-K INTO WHICH DOCUMENT
REFERENCE INTO THIS REPORT IS INCORPORATED
ARTHUR J. GALLAGHER & CO. PART III
Proxy Statement dated March 27, 1998
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<PAGE>
PART I
ITEM 1. BUSINESS.
Arthur J. Gallagher & Co. (the "Registrant") and its subsidiaries (the
Registrant and its subsidiaries are collectively referred to as the "Company"
unless the context otherwise requires) are engaged in providing insurance
brokerage, risk management, employee benefit and other related services to
clients in the United States and abroad. The Company's principal activity is
the negotiation and placement of insurance for its clients. The Company also
specializes in furnishing risk management services. Risk management involves
assisting clients in analyzing risks and determining whether proper protection
is best obtained through the purchase of insurance or through retention of all
or a portion of those risks and the adoption of corporate risk management
policies and cost-effective loss control and prevention programs. Risk
management services also include claims management, loss control consulting
and property appraisals. The Company believes that its ability to deliver a
comprehensively structured risk management and brokerage service is one of its
major strengths.
The Company operates through a network of approximately 200 offices located
throughout the United States and six countries abroad. Some of these offices
are fully staffed with sales, marketing, claims and other service personnel;
others function as servicing offices for the brokerage and risk management
service operations of the Company. The Company's international operations
include a Lloyd's broker and affiliated companies in London, England and other
facilities in Australia, Bermuda, Canada, Scotland and Papua New Guinea.
The Company was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. The Company's executive offices are located at Two Pierce
Place, Itasca, Illinois 60143-3141, and its telephone number is (630) 773-
3800.
The Company has not presented industry segment information as its operations
are predominantly those of insurance brokerage, risk management, employee
benefit 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, which are 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.
("Gallagher Bassett"), 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, property
appraisals and insurance related investigative services on a totally
integrated or select, stand-alone basis. Gallagher Bassett provides these
services for the Company's clients through a network of over 100 offices
throughout the United States.
<PAGE>
The Company believes that its risk management services are an important
factor in securing new brokerage business and retaining brokerage clients. The
Company also markets these services directly to the client on an unbundled
basis independent of brokerage services in order to capitalize on the interest
in self-insurance created by market conditions. These services include
consulting on a wide range of risk management needs such as toxic waste
disposal, handling of dangerous cargo, workers' compensation, medical cost
containment, substance abuse, employment-related background investigations,
loss prevention, property appraisals and liability reserve reviews.
In connection with its risk management services, the Company provides self-
insurance programs for large institutions, risk sharing pools and
associations, and large commercial and industrial customers. Self-insurance,
as administered by the Company, is a program in which the client assumes a
manageable portion of its insurance risks, usually (although not always)
placing the less predictable and larger loss exposures with an excess carrier.
The Company's offices are staffed to provide services relating to claims,
property appraisals, loss control consulting and computerized record keeping
in administering the clients' programs.
The Company's Gallagher Benefit Services ("GBS") division specializes in
risk management of human resources through fully insured and self-insured
programs. GBS 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. The services provided by GBS are supported by an on-line
data processing system provided by an outside vendor.
MARKETS AND MARKETING
A substantial portion of the commission and fee business of the Company is
derived from institutions, not-for-profit organizations, municipal and other
governmental entities and associations. In addition, the Company's clients
include large United States and multinational corporations engaged in a broad
range of commercial and industrial businesses. The Company also places
insurance for individuals. The Company services its clients through its
network of approximately 200 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 1997, 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 fifth largest insurance broker worldwide in
terms of total revenues. The insurance brokerage and service business is
highly competitive and there are many insurance brokerage and service
organizations as well as individuals throughout the world who actively compete
with the Company in every area of its business. A number of competing firms
are significantly larger and some have many times the commission and/or fee
revenues of the Company. There are firms in a particular region or locality
which are as large or larger than the particular local office of the Company.
The Company believes that the primary factors determining its competitive
position with other organizations in its industry are the overall cost and the
quality of services rendered.
2
<PAGE>
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
The Company's international operations are principally comprised of a
Lloyd's broker and a risk management services company in London, and an
insurance brokerage facility in Bermuda. 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 United Kingdom ("U.K."). The principal
activity of Arthur J. Gallagher (UK) Limited is to negotiate and place
insurance and reinsurance with Lloyd's underwriters and insurance companies
worldwide. Its brokerage services encompass four major categories: aviation,
direct marine hull and cargo, reinsurance (marine and non-marine) and overseas
property and casualty (risks predominantly located in 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. (UK) ("GBI"), a subsidiary of Gallagher
Bassett, provides risk management services for foreign operations, as well as
U.S. operations that are foreign-controlled. Headquartered in London, GBI
works with insurance companies, reinsurance companies, overseas brokers, and
risk managers of overseas organizations. Services are offered on an unbundled
basis wherever applicable and include consulting, claims management,
information management, loss control and property valuations. GBI's service
network includes associate offices located in more than 80 countries around
the world. The combination of Gallagher Bassett offices and affiliated
locations provides one of the most comprehensive worldwide service networks
available.
The Company also has facilities in Australia, Canada, Scotland and Papua New
Guinea that are not material to the Company's consolidated operations.
Additional information relating to the Company's foreign operations is
contained in Note 13 to the Consolidated Financial Statements.
3
<PAGE>
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, 1997 are set forth below:
<TABLE>
<CAPTION>
1997 1996* 1995*
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions........................ $273,801 56 $265,981 58 $261,569 59
Fees............................... 181,239 37 172,143 37 162,438 36
Investment income and other........ 32,988 7 23,898 5 21,816 5
-------- --- -------- --- -------- ---
$488,028 100 $462,022 100 $445,823 100
======== === ======== === ======== ===
</TABLE>
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*Restated for pooling of interests
The primary source of the Company's compensation for its brokerage services
is commissions paid by insurance companies which are usually based on 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 generally 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 on the estimated value of
the services to be performed. In some cases the Company receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.
The Company's revenues vary significantly from quarter to quarter as a
result of the timing of policy renewals and the net effect of new and lost
business, whereas expenses are fairly uniform throughout the year. See Note 14
to the Consolidated Financial Statements for unaudited quarterly operating
results for 1997 and 1996.
ACQUISITIONS
From January 1, 1993 through December 31, 1997, the Company has acquired
twenty-seven insurance service businesses and disposed of seven insurance
service businesses. See Note 2 to the Consolidated Financial Statements for
further information concerning acquisitions in 1997 and 1996.
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 areas in which the Company renders such services
and not to change substantially the nature of the services performed by the
Company.
The Company is considering and intends to consider from time to time
acquisitions and divestitures on terms it deems advantageous. The Company has
had preliminary discussions with a number of candidates for possible future
acquisitions and has executed non-binding letters of intent with four
candidates. No assurances can be given that any additional acquisitions or
divestitures will be consummated or, if consummated, will be advantageous to
the Company.
4
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company and its subsidiaries employed
approximately 3,900 employees, none of whom is represented by a labor union.
The Company continuously reviews benefits and other matters of interest to its
employees. The Company considers its relations with its employees to be
satisfactory.
ITEM 2. PROPERTIES.
The Company's executive offices and certain subsidiary and branch facilities
are located at Two Pierce Place, Itasca, Illinois where the Company leases
approximately 200,000 square feet of space. The lease commitment on the above
mentioned property expires February 28, 2006. The Company operates all of its
branch and service offices in leased premises. Certain of these leases for
office space have options permitting renewals for additional periods. In
addition to minimum fixed rentals, a number of leases contain escalation
clauses related to increases in the cost of living in future years. See Note
11 to the Consolidated Financial Statements for information with respect to
the Company's lease commitments at December 31, 1997.
ITEM 3. LEGAL PROCEEDINGS.
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 consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the Company's
fourth fiscal quarter ended December 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND YEAR FIRST ELECTED
---- --- -------------------------------
<S> <C> <C>
Robert E. Gallagher..... 75 Chief Executive Officer 1963-1994, Chairman since 1990
J. Patrick Gallagher, 46 President since 1990, Chief Executive Officer since 1995
Jr.....................
John G. Campbell........ 60 Vice President since 1978
Michael J. Cloherty..... 50 Vice President--Finance 1981-1995, Executive Vice President since 1996
Peter J. Durkalski...... 47 Vice President since 1990
James W. Durkin, Jr..... 48 Vice President since 1985
Walter F. McClure....... 64 Senior Vice President since 1993
John D. Stancik......... 54 Vice President since 1986
Gary Van der Voort...... 52 Vice President since 1986
</TABLE>
Each such person has been principally employed by the Company in management
capacities for more than the past five years. All executive officers are
elected annually and serve at the pleasure of the Board of Directors.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is listed on the New York Stock Exchange, trading
under the symbol "AJG." The following table sets forth information as to the
price range of the Company's common stock for the two-year period January 1,
1996 through December 31, 1997 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
QUARTERLY PERIODS HIGH LOW PER SHARE
- ----------------- ------- ------- ---------
<S> <C> <C> <C>
1997
- ----
First............................................... $33 1/2 $29 3/4 $.31
Second.............................................. 37 3/4 30 3/8 .31
Third............................................... 37 5/8 34 1/4 .31
Fourth.............................................. 38 1/4 34 3/8 .31
1996
- ----
First............................................... $39 1/2 $35 7/8 $.29
Second.............................................. 36 3/8 30 .29
Third............................................... 35 31 1/2 .29
Fourth.............................................. 34 1/4 29 1/8 .29
</TABLE>
As of January 30, 1998, there were approximately 650 holders of record of
the Company's common stock.
6
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7
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ITEM 6. SELECTED FINANCIAL DATA.
ARTHUR J. GALLAGHER & CO.
GROWTH RECORD: 1988-1997(A)
<TABLE>
<CAPTION>
AVERAGE YEARS ENDED DECEMBER 31,
ANNUAL ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND GROWTH 1997 1996 1995
EMPLOYEE DATA) ------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue Data
Commissions............................. $273,801 $265,981 $261,569
Fees.................................... 181,239 172,143 162,438
Investment income and other............. 32,988 23,898 21,816
-------- -------- --------
Total revenues........................ $488,028 $462,022 $445,823
Dollar growth........................... $ 26,006 $ 16,199 $ 44,322
Percent growth.......................... 9% 6% 4% 11%
----- -------- -------- --------
Pretax Earnings Data
Pretax earnings......................... $ 80,782 $ 65,677 $ 68,223
Dollar growth........................... $ 15,105 $ (2,546) $ 9,395
Percent growth.......................... 10% 23% (4)% 16%
Pretax earnings as a percentage of
revenues............................... 17% 14% 15%
----- -------- -------- --------
Net Earnings Data
Net earnings............................ $ 53,316 $ 43,144 $ 42,391
Dollar growth........................... $ 10,172 $ 753 $ 5,262
Percent growth.......................... 10% 24% 2% 14%
Net earnings as a percentage of
revenues............................... 11% 9% 10%
----- -------- -------- --------
Net Earnings Per Share Data
Shares outstanding at year end.......... 16,591 16,457 16,529
Net earnings per share(b)............... $ 3.13 $ 2.52 $ 2.43
Percent growth.......................... 11% 24% 4% 14%
----- -------- -------- --------
Employee Data
Number at year end...................... 3,890 4,019 3,990
Number growth........................... (129) 29 332
Percent growth.......................... 5% (3)% 1% 9%
Total revenue per employee(c)........... $ 125 $ 115 $ 112
Net earnings per employee(c)............ $ 14 $ 11 $ 11
----- -------- -------- --------
Common Stock Dividend Data
Dividends declared per share(d)......... $ 1.24 $ 1.16 $ 1.00
Total dividends declared................ $ 20,408 $ 18,399 $ 15,270
Percent of net earnings................. 38% 43% 36%
----- -------- -------- --------
Balance Sheet Data
Total assets............................ $641,752 $592,288 $568,075
Long-term debt less current portion..... -- 1,130 2,260
Total stockholders' equity.............. $163,907 $133,901 $126,179
----- -------- -------- --------
Return On Beginning Stockholders' Equity.. 40% 34% 40%
</TABLE>
NOTES:
(a) The financial information for all periods prior to 1997 has been restated
for the acquisition accounted for using the pooling of interests method
and for the required adoption on December 31, 1997 of the new accounting
standard on earnings per share.
(b) Based on the weighted average number of common and common equivalent
shares outstanding during the year.
(c) Based on the number of employees at year end.
(d) Based on the total dividends on a share of common stock outstanding during
the entire year.
8
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1994 1993 1992 1991 1990 1989 1988
- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$243,891 $219,433 $203,368 $195,452 $189,047 $171,944 $157,940
143,978 131,513 114,512 95,273 80,213 66,491 58,346
13,632 20,601 16,634 14,206 19,994 19,764 17,508
- -------- -------- -------- -------- -------- -------- --------
$401,501 $371,547 $334,514 $304,931 $289,254 $258,199 $233,794
$ 29,954 $ 37,033 $ 29,583 $ 15,677 $ 31,055 $ 24,405 $ 22,000
8% 11% 10% 5% 12% 10% 10%
- -------- -------- -------- -------- -------- -------- --------
$ 58,828 $ 53,467 $ 40,208 $ 32,820 $ 35,810 $ 35,838 $ 29,296
$ 5,361 $ 13,259 $ 7,388 $ (2,990) $ (28) $ 6,542 $ (4,014)
10% 33% 23% (8)% -- % 22% (12)%
15% 14% 12% 11% 12% 14% 13%
- -------- -------- -------- -------- -------- -------- --------
$ 37,129 $ 31,489 $ 25,078 $ 22,322 $ 24,177 $ 23,970 $ 21,135
$ 5,640 $ 6,411 $ 2,756 $ (1,855) $ 207 $ 2,835 $ (647)
18% 26% 12% (8)% 1% 13% (3)%
9% 8% 7% 7% 8% 9% 9%
- -------- -------- -------- -------- -------- -------- --------
16,235 17,140 16,615 16,921 17,135 17,150 17,401
$ 2.14 $ 1.75 $ 1.44 $ 1.26 $ 1.37 $ 1.35 $ 1.17
22% 22% 14% (8)% 1% 15% (3)%
- -------- -------- -------- -------- -------- -------- --------
3,658 3,497 3,244 3,042 2,917 2,774 2,635
161 253 202 125 143 139 95
5% 8% 7% 4% 5% 5% 4%
$ 110 $ 106 $ 103 $ 100 $ 99 $ 93 $ 89
$ 10 $ 9 $ 8 $ 7 $ 8 $ 9 $ 8
- -------- -------- -------- -------- -------- -------- --------
$ .88 $ .72 $ .64 $ .64 $ .60 $ .52 $ .48
$ 13,209 $ 10,808 $ 8,767 $ 8,439 $ 6,999 $ 5,905 $ 5,375
36% 34% 35% 38% 29% 25% 25%
- -------- -------- -------- -------- -------- -------- --------
$517,556 $544,239 $491,585 $472,367 $464,842 $421,432 $402,347
3,390 28,166 23,888 24,432 24,723 24,775 25,063
$104,897 $126,672 $ 99,794 $ 95,116 $ 94,369 $ 87,155 $ 78,693
- -------- -------- -------- -------- -------- -------- --------
29% 32% 26% 24% 28% 30% 28%
</TABLE>
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Fluctuations in premiums charged by insurance companies have a material
effect on the insurance brokerage industry. Commission revenues are based on a
percentage of the premiums paid by insureds and generally follow premium
levels. Lower premium rates currently prevail among property/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.
Although 1997 may prove to have the lowest insured property loss experience
in a decade, the years 1996 and 1995 were marked with worldwide catastrophes
causing billions of dollars of insured losses. Substantial mergers, both
domestically and internationally, have resulted in fewer companies in the
insurance industry. In spite of these forces which would tend to increase
underwriting losses and reduce competition, there have been offsetting factors
including favorable investment income, increased underwriting capital and
economies of scale after consolidations. The net result has shown no apparent
increase in property/casualty rates. Management believes the competitive
environment will continue and insurance pricing will not change significantly
in 1998.
Because of soft market conditions, the growth of the alternative insurance
market has slowed during the past two years. Although the property/casualty
pricing environment has resulted in some insurance buyers returning to first-
dollar coverage, management believes movement from this traditional approach
of purchasing insurance will continue. The Company anticipates that new sales
in the areas of risk management, benefits, insurance captive and self-
insurance services will be a major factor in fee revenue growth in 1998.
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 generally have the effect of generating
higher premiums to clients and higher commissions to the Company. In recent
years, lower rates of inflation along with business downsizing, reduced sales
and lower payrolls have resulted in lower levels of exposure to insure. In
general, the downward trend in premium rates has had a greater effect on the
Company's revenues than inflation.
The Company is looking to the future and exploring not only the core
businesses of brokering insurance and risk management services, but is also
expanding within the alternative insurance markets and financial and related
investment services. Management believes these areas hold opportunities for
diversification and future, profitable growth.
RESULTS OF OPERATIONS
The Company's results of operations for all periods prior to December 31,
1997 have been restated to include the operations of Byerly & Company, Inc. on
a combined basis as if it had operated as part of the Company. The Company
continues to search for merger partners which complement existing operations
and provide entry into new market niches and geographic areas. For the effect
of this restatement in the aggregate on year-to-year comparisons, see Note 2
to the Consolidated Financial Statements.
Commission revenues increased by $7.8 million or 3% in 1997. This increase
is the result of new business production partially offset by lost business.
Commission revenues increased by $4.4 million or 2% in 1996. This increase is
the result of new business partially offset by lost business and modest
renewal rate decreases.
Fee revenues increased by $9.1 million or 5% in 1997. This increase,
generated primarily by Gallagher Bassett Services, Inc., resulted from new
business production and increases in existing business partially offset by
lost business. Fee revenues increased by $9.7 million or 6% in 1996. This
increase, again generated primarily
by Gallagher Bassett, resulted from new business production and modest
increases in existing business partially offset by lost business. The rate of
increase in fee revenues in 1997 and 1996 has been adversely affected by
strong price competition within the insurance industry, causing some buyers to
choose first-dollar coverage over self-funded plans.
10
<PAGE>
Investment income and other increased by $9.1 million or 38% in 1997. This
increase is due primarily to gains of $6.8 million recognized on the sale of
underperforming or geographically undesirable operations during the year, a
$1.8 million gain on a real estate transaction recorded in the second quarter
and net realized gains on marketable securities of $1.9 million. Investment
income and other increased by $2.1 million or 10% 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.
Salaries and employee benefits increased by $4.8 million or 2% in 1997 due
principally to salary increases and higher employee benefit costs partially
offset by a $4.8 million non-recurring gain recognized in the second quarter
of 1997 from the settlement of a defined benefit pension plan at one of the
Company's United Kingdom subsidiaries and a 3% reduction in employee head
count between December 31, 1997 and 1996. Salaries and employee benefits
increased by $9.3 million or 4% in 1996 due principally to salary increases
and the annualized effect of prior year new hires along with a corresponding
increase in employee benefit expenses. These increases were mitigated by a
wage freeze for certain management employees. In 1997, 1996 and 1995, salaries
and employee benefits have represented 51%, 53% and 53%, respectively, as a
percentage of total revenues.
Other operating expenses increased by $6.1 million or 4% in 1997. This
increase is due primarily to higher business insurance costs, additional rent
and utility expenses resulting from leasing new office space, expanding and
upgrading existing office facilities and the costs associated with closing
certain underperforming operations. Other operating expenses increased by $9.4
million or 7% 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, expanding and upgrading existing office
facilities and increased bad debt write-offs.
The Company's overall tax rate of 34% in 1997 and 1996 is less than the
statutory federal rate due primarily to the effect of tax benefits generated
by certain investments which are substantially offset by state and foreign
taxes. The Company's overall tax rate of 38% in 1995 is greater than the
statutory federal rate due primarily to the net effect of state and foreign
taxes which were 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 12 to the Consolidated Financial Statements.
The Company's foreign operations recorded earnings before income taxes of
$6.6 million, $4.2 million and $3.4 million in 1997, 1996 and 1995,
respectively. The 1997 increase is due to the non-recurring gains associated
with the foreign benefit plan and real estate transactions mentioned above.
The 1996 increase is due primarily to a decrease in compensation-related costs
at the Company's London subsidiaries. See Notes 12 and 13 to the 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 14 to the
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 $65.6 million and $44.9 million for the years ended
December 31, 1997 and 1996, respectively. Because of the
variability related to the timing of fees receivable and premiums receivable
and payable, net cash flow from operations for the Company can vary
substantially from period to period. Funds restricted as to the Company's use,
primarily premiums held as fiduciary funds, have not been included in
determining the Company's liquidity.
The Company maintains a $20.0 million unsecured revolving credit agreement
(the "Credit Agreement") requiring repayment of any loans under the agreement
no later than June 30, 2001. As of December 31, 1997
11
<PAGE>
and 1996, there were no borrowings existing under this agreement. The Company
also has two term loan agreements (the "Term Loan Agreements") that had
outstanding balances of $630,000 and $500,000 at December 31, 1997. Loans
under the Term Loan Agreements are due in 1998. In January 1998, the Company
retired the remaining loan balance of $630,000 on one of the Term Loan
Agreements.
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, 1998. Periodically, the Company will make short-term borrowings
under these credit facilities to meet short-term cash flow needs and as of
December 31, 1997 and 1996, $15.0 million and $10.0 million, respectively, in
short-term borrowings existed under these facilities. These borrowings were
used to finance expanded investment activity.
The Company has made commitments to invest additional funds in several of
its equity and tax advantaged investments. At December 31, 1997, the Company
has commitments to invest $26.0 million in these investments in 1998. In
addition, the Company has contingently committed to invest an additional $3.0
million in 1998 related to a line of credit arrangement with one of its equity
investments. At December 31, 1997, the Company has agreed to unconditionally
guarantee $30.0 million of debt that will be incurred by two of the Company's
equity investments in 1998.
The Company paid $20.0 million in cash dividends on its common stock in
1997. 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 1997, the
Company's Board of Directors declared a dividend of $.31 per share which is
$.02 or 7% greater than each quarterly dividend in 1996. In January 1998, the
Company announced a first quarter dividend of $.35 per share, a 13% increase
over the quarterly dividend in 1997.
Net capital expenditures for fixed assets amounted to $11.3 million, $10.2
million and $10.4 million in 1997, 1996 and 1995, respectively. In 1998, the
Company expects to make expenditures for capital improvements of approximately
$11.5 million. The planned capital expenditures by the Company in 1998 are
related primarily to expanded offices and updating computer systems and
equipment. With respect to dates in the year 2000 and thereafter, the Company
has completed an assessment of its computer systems and software. The Company
plans to modify or replace portions of its existing software so that its
computer systems will function properly in the year 2000. Generally, these
modifications and replacements were contemplated with normal system
enhancements and improvements. The cost of compliance is not expected to be
material and the Company plans to complete the required software modifications
or replacements in 1998.
In 1988, the Company adopted a plan, which has been extended through June
30, 1998, to repurchase its common stock. Under the plan, the Company
repurchased 522,000 shares at a cost of $17.1 million, 645,000 shares at a
cost of $21.3 million, and 437,000 shares at a cost of $15.1 million in 1997,
1996 and 1995, respectively. The repurchased shares 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
300,000 additional shares through June 30, 1998. 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.
During the period from 1994 to 1996, the Company provided for U.S. income
taxes on the undistributed earnings of its foreign subsidiaries. Due to
changes in the United States federal income tax laws effective in 1997, the
Company no longer provides for U. S. income taxes on these undistributed
earnings ($27.2 million at December 31, 1997), which are considered
permanently invested outside the United States. See Note 12 to the
Consolidated Financial Statements. Although not available for domestic needs,
the undistributed earnings generated by certain foreign subsidiaries referred
to above may be used to finance foreign operations and acquisitions.
12
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This annual report contains forward-looking statements. Forward-looking
statements made by or on behalf of the Company are subject to risks and
uncertainties, including but not limited to the following: the Company's
commission revenues are highly dependent on premiums charged by insurers,
which are subject to fluctuation; the property/casualty insurance industry
continues to experience a prolonged soft market despite high losses; continued
low interest rates will reduce income earned on invested funds; the insurance
brokerage and service businesses are extremely competitive with a number of
competitors being substantially larger than the Company; the alternative
insurance market continues to grow; the Company's revenues vary significantly
from quarter to quarter as a result of the timing of policy renewals and the
net effect of new and lost business production; the general level of economic
activity can have a substantial impact on the Company's renewal business. The
Company's ability to grow has been enhanced through acquisitions, which may or
may not be available on acceptable terms in the future and which, if
consummated, may or may not be advantageous to the Company. Accordingly,
actual results may differ materially from those set forth in the forward-
looking statements. Attention is also directed to other risk factors set forth
in documents filed by the Company with the Securities and Exchange Commission.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Consolidated Financial Statements:
Consolidated Statement of Earnings...................................... 15
Consolidated Balance Sheet.............................................. 16
Consolidated Statement of Cash Flows.................................... 17
Consolidated Statement of Stockholders' Equity.......................... 18
Notes to Consolidated Financial Statements.............................. 19-31
Management's Report....................................................... 32
Report of Independent Auditors............................................ 33
</TABLE>
14
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
OPERATING RESULTS
Revenues:
Commissions....................................... $273,801 $265,981 $261,569
Fees.............................................. 181,239 172,143 162,438
Investment income and other....................... 32,988 23,898 21,816
-------- -------- --------
Total revenues.................................. 488,028 462,022 445,823
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 249,882 245,064 235,759
Other operating expenses.......................... 157,364 151,281 141,841
-------- -------- --------
Total expenses.................................. 407,246 396,345 377,600
-------- -------- --------
Earnings before income taxes........................ 80,782 65,677 68,223
Provision for income taxes.......................... 27,466 22,533 25,832
-------- -------- --------
Net earnings.................................... $ 53,316 $ 43,144 $ 42,391
======== ======== ========
Net earnings per common share....................... $ 3.24 $ 2.62 $ 2.57
Net earnings per common and common equivalent share. 3.13 2.52 2.43
Dividends declared per common share................. 1.24 1.16 1.00
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 67,178 $ 57,017
Restricted cash.......................................... 81,160 87,224
Premiums and fees receivable............................. 217,555 237,640
Investment strategies--trading........................... 62,681 53,409
Other.................................................... 40,267 30,003
-------- --------
Total current assets................................... 468,841 465,293
Marketable securities--available for sale.................. 39,203 36,881
Deferred income taxes and other noncurrent assets.......... 95,528 52,783
Fixed assets............................................... 86,758 80,794
Accumulated depreciation and amortization.................. (58,948) (54,556)
-------- --------
Net fixed assets....................................... 27,810 26,238
Intangible assets--net..................................... 10,370 11,093
-------- --------
$641,752 $592,288
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Premiums payable to insurance companies.................. $312,349 $323,867
Accrued salaries and bonuses............................. 18,385 14,922
Accounts payable and other accrued liabilities........... 89,846 69,706
Unearned fees............................................ 11,608 13,043
Income taxes payable..................................... 10,783 4,965
Other.................................................... 23,067 20,305
-------- --------
Total current liabilities.............................. 466,038 446,808
Other noncurrent liabilities............................... 11,807 11,579
Stockholders' equity:
Common stock--issued and outstanding 16,591 shares in
1997 and
16,457 shares in 1996................................... 16,591 16,457
Capital in excess of par value........................... 4,349 2,140
Retained earnings........................................ 141,309 114,415
Unrealized gain on available for sale securities--net of
income taxes............................................ 1,658 889
-------- --------
Total stockholders' equity............................. 163,907 133,901
-------- --------
$641,752 $592,288
======== ========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 53,316 $ 43,144 $ 42,391
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net gain on investments and other............ (13,485) (3,928) (2,317)
Depreciation and amortization................ 11,055 10,521 10,412
Decrease (increase) in restricted cash....... 6,064 8,164 (5,335)
Decrease (increase) in premiums receivable... 15,367 (5,689) (22,023)
(Decrease) increase in premiums payable...... (11,518) 2,807 23,902
Increase in trading investments--net......... (6,217) (4,128) (2,353)
Increase in other current assets............. (6,737) (7,733) (1,714)
Increase in accrued salaries and bonuses..... 3,463 1,274 1,278
Increase in accounts payable and other
accrued liabilities......................... 19,722 8,510 9,406
Increase (decrease) in income taxes payable.. 5,818 (5,664) (1,416)
Net change in deferred income taxes.......... (9,604) (2,660) (1,317)
Other........................................ (1,597) 313 (2,091)
-------- -------- --------
Net cash provided by operating activities.. 65,647 44,931 48,823
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities............. (30,170) (23,679) (21,918)
Proceeds from sales of marketable securities... 30,368 28,747 20,078
Proceeds from maturities of marketable
securities.................................... 1,645 1,958 2,213
Net additions to fixed assets.................. (11,295) (10,175) (10,364)
Other.......................................... (26,144) (16,969) (5,121)
-------- -------- --------
Net cash used by investing activities...... (35,596) (20,118) (15,112)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 10,964 7,966 7,044
Tax benefit from issuance of common stock...... 2,429 1,955 1,837
Repurchases of common stock.................... (17,126) (21,290) (15,068)
Dividends paid................................. (19,990) (17,530) (14,666)
Retirement of long-term debt................... (1,130) (1,130) (1,130)
Borrowings on line of credit facilities........ 30,900 10,000 --
Repayments on line of credit facilities........ (25,900) -- --
Equity transactions of pooled companies prior
to dates of acquisition....................... (37) (6,684) (2,996)
-------- -------- --------
Net cash used by financing activities...... (19,890) (26,713) (24,979)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 10,161 (1,900) 8,732
Cash and cash equivalents at beginning of year... 57,017 58,917 50,185
-------- -------- --------
Cash and cash equivalents at end of year......... $67,178 $ 57,017 $ 58,917
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 892 $ 724 $ 598
Income taxes paid.............................. 23,888 25,685 22,075
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
CAPITAL GAIN (LOSS)
COMMON STOCK IN EXCESS ON AVAILABLE TOTAL
---------------- OF RETAINED FOR SALE STOCKHOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS SECURITIES EQUITY
------ ------- --------- -------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 as previously
reported............... 16,071 $16,071 $ -- $ 91,113 $(2,935) $104,249
Acquisition of pooled
company............... 164 164 -- 484 -- 648
------ ------- -------- -------- --------- ---------
Balance at December 31,
1994................... 16,235 16,235 -- 91,597 (2,935) 104,897
Net earnings........... -- -- -- 42,391 -- 42,391
Cash dividends declared
on common stock....... -- -- -- (15,270) -- (15,270)
Common stock issued
under stock option
plans................. 356 356 6,688 -- -- 7,044
Tax benefit from
issuance of common
stock................. -- -- 1,837 -- -- 1,837
Common stock
repurchases........... (437) (437) (8,525) (6,106) -- (15,068)
Common stock issued in
seven pooling
acquisitions.......... 375 375 -- -- -- 375
Equity transactions of
pooled companies prior
to dates of
acquisition........... -- -- -- (2,996) -- (2,996)
Change in unrealized
gain (loss), net of
taxes of $1,951....... -- -- -- -- 2,969 2,969
------ ------- -------- -------- --------- ---------
Balance at December 31,
1995................... 16,529 16,529 -- 109,616 34 126,179
Net earnings........... -- -- -- 43,144 -- 43,144
Cash dividends declared
on common stock....... -- -- -- (18,399) -- (18,399)
Common stock issued
under stock option
plans................. 398 398 7,568 -- -- 7,966
Tax benefit from
issuance of common
stock................. -- -- 1,955 -- -- 1,955
Common stock
repurchases........... (645) (645) (7,383) (13,262) -- (21,290)
Common stock issued in
three pooling
acquisitions.......... 175 175 -- -- -- 175
Equity transactions of
pooled companies prior
to dates of
acquisition........... -- -- -- (6,684) -- (6,684)
Change in unrealized
gain, net of taxes of
$571.................. -- -- -- -- 855 855
------ ------- -------- -------- --------- ---------
Balance at December 31,
1996................... 16,457 16,457 2,140 114,415 889 133,901
Net earnings........... -- -- -- 53,316 -- 53,316
Cash dividends declared
on common stock....... -- -- -- (20,408) -- (20,408)
Common stock issued
under stock option
plans................. 557 557 10,407 -- -- 10,964
Tax benefit from
issuance of common
stock................. -- -- 2,429 -- -- 2,429
Common stock
repurchases........... (522) (522) (10,627) (5,977) -- (17,126)
Common stock issued in
two pooling
acquisitions.......... 99 99 -- -- -- 99
Equity transactions of
pooled companies prior
to dates of
acquisition........... -- -- -- (37) -- (37)
Change in unrealized
gain, net of taxes of
$512.................. -- -- -- -- 769 769
------ ------- -------- -------- --------- ---------
Balance at December 31,
1997................... 16,591 $16,591 $ 4,349 $141,309 $ 1,658 $163,907
====== ======= ======== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
18
<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 brokerage 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
200 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 of its wholly owned subsidiaries. Investments in partially
owned entities in which ownership is 50 percent or less are accounted for
using the equity method. All material 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.
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.
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 $859,000 and $889,000 at December 31, 1997 and 1996,
respectively.
Consolidated statement of cash flows
Short-term investments, consisting principally of commercial paper and
certificates of deposit which have a maturity of ninety days or less at date
of purchase, are considered cash equivalents.
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.
Investments
Marketable securities are considered available for sale and consist
primarily of preferred and common stocks. Securities designated as available
for sale are carried at fair value in the accompanying consolidated balance
sheet, with unrealized gains and losses, less related deferred income taxes,
excluded from earnings and
19
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
reported as a separate component of stockholders' equity. 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. Securities
designated as trading are carried at fair value in the accompanying
consolidated balance sheet, with unrealized gains and losses included in the
consolidated statement of earnings. The fair value of the investment
strategies is determined by reference to the fair values of the underlying
common stocks which are based on quoted market prices.
Fixed assets
Fixed assets are carried at cost in the accompanying consolidated balance
sheet. Furniture and equipment with a cost of $77,591,000 and $72,617,000 at
December 31, 1997 and 1996, respectively, are depreciated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements with a cost of $9,167,000 and $8,177,000 at December 31, 1997 and
1996, respectively, 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 of the excess of cost over the value of net
tangible assets of acquired businesses, non-compete agreements and expirations
lists. The excess of cost over the value of net tangible assets is amortized
principally over forty years using the straight-line method. Non-compete
agreements and expiration lists are amortized principally over ten years using
the straight-line method. Accumulated amortization at December 31, 1997 and
1996 was $6,029,000 and $6,335,000, respectively.
Earnings per share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share," which was required to be adopted on December 31, 1997. SFAS 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effect of stock options. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Where appropriate, all earnings per share amounts for all
periods have been restated to conform to the SFAS 128 requirements.
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.
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 (APB 25), "Accounting for Stock
Issued to Employees," and, accordingly, recognizes no compensation expense for
the stock options granted to employees.
Effect of new pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income," which is effective for
years beginning after December 15, 1997. SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set
20
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of general purpose financial statements. SFAS 130 will require that
enterprises (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and capital in excess
of par value in the stockholders' equity section of the consolidated balance
sheet. SFAS 130 will not have any impact on the Company's consolidated results
of operations, financial position or cash flows.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and
Related Information," which is effective for years beginning after December
15, 1997. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has not completed
all of the analyses required to determine the full impact of SFAS 131.
2. BUSINESS COMBINATIONS
In 1997, the Company acquired substantially all of the net assets of one
insurance brokerage firm and two benefits consulting companies in exchange for
263,000 shares of its common stock. In 1996, the Company acquired
substantially all of the net assets of five insurance brokerage firms and one
investigative services company in exchange for 1,115,000 shares of its common
stock. These acquisitions were accounted for as poolings of interests and,
except for two of the 1997 acquisitions and three of the 1996 acquisitions
whose results were not significant, the consolidated 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 of the 1996 and 1995 consolidated
financial statements to reflect the operations of the 1997 acquisition (in
thousands):
<TABLE>
<CAPTION>
ATTRIBUTABLE
AS PREVIOUSLY TO
REPORTED POOLED COMPANY AS RESTATED
------------- -------------- -----------
<S> <C> <C> <C>
1996
- ----
Revenues............................ $456,679 $ 5,343 $462,022
Net earnings (loss)................. 45,803 (2,659) 43,144
1995
- ----
Revenues............................ $439,530 $ 6,293 $445,823
Net earnings (loss)................. 42,545 (154) 42,391
</TABLE>
In 1997, the Company acquired a majority equity interest in a risk
management company which was accounted for as a purchase. In 1996, the Company
also acquired a majority equity interest in a risk management company which
was accounted for as a purchase. The Company paid cash in both of these
transactions, which were not material to the consolidated financial
statements.
3. INVESTMENTS
The following is a summary of available for sale marketable securities (in
thousands):
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Preferred stocks....................... $20,776 $1,264 $ 162 $21,878
Common stocks.......................... 12,139 2,420 766 13,793
Fixed maturities....................... 3,525 161 154 3,532
------- ------- ------- -------
$36,440 $3,845 $1,082 $39,203
======= ======= ======= =======
</TABLE>
21
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Preferred stocks....................... $23,446 $1,126 $ 434 $24,138
Common stocks.......................... 6,991 1,542 634 7,899
Fixed maturities....................... 4,962 116 234 4,844
------- ------- ------- -------
$35,399 $2,784 $1,302 $36,881
======= ======= ======= =======
</TABLE>
The gross realized gains on sales of marketable securities totaled
$2,257,000, $1,652,000 and $1,079,000 for the years ended December 31, 1997,
1996 and 1995, respectively. The gross realized losses totaled $346,000,
$881,000 and $1,918,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The cost or amortized cost and fair value of fixed maturities at December
31, 1997, by contractual maturity, are as follows (in thousands):
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in 1998.................................................. $ -- $ --
Due in 1999 through 2002..................................... 1,427 1,344
Due in 2003 through 2007..................................... 504 489
Due in 2008 and thereafter................................... 1,594 1,699
------- -------
$3,525 $3,532
======= =======
</TABLE>
The expected maturities may differ from contractual maturities in the
foregoing table because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Significant components of investment income and other are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest............................................... $15,048 $16,514 $15,115
Dividends.............................................. 2,865 3,378 3,371
Net realized and unrealized gains...................... 4,938 3,928 282
Other income........................................... 10,137 78 3,048
------- ------- -------
Total investment income and other...................... $32,988 $23,898 $21,816
======= ======= =======
</TABLE>
The net change in unrealized gain (loss) on investment strategies included
in the table above amounted to ($1,813,000) in 1997, $3,928,000 in 1996 and
($171,000) in 1995. In 1997 and 1995, the Company sold several underperforming
or geographically undesirable operations and recorded aggregate gains on these
sales of $6,757,000 and $2,035,000, respectively. The gains on these sales of
operations have been included in other income in the foregoing table. The net
assets sold and the operating results included in the consolidated statement
of earnings related to these operations are not material to the consolidated
financial statements. Also in 1997, the Company recorded a gain on a real
estate transaction of $1,790,000, which has also been included in other income
in the foregoing table.
4. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1997, securities sold under agreements to repurchase the
identical securities are collateralized by government backed small business
administration loans and government securities with a
22
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--(CONTINUED)
carrying value of $22,121,000 and a fair value of $22,360,000. The securities
collateralizing the agreements were held by two primary dealers. At December
31, 1996, these securities had a carrying value of $23,034,000 and a fair
value of $23,262,000.
5. DEBT AND CREDIT AGREEMENTS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
<S> <C> <C>
6.64% unsecured term note, payable in annual installments of
$630............................................................ $ 630 $1,260
6.30% unsecured term note, payable in annual installments of
$500............................................................ 500 1,000
------ ------
1,130 2,260
Less current portion............................................. 1,130 1,130
------ ------
$ -- $1,130
====== ======
</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 1998.
The Company maintains a $20,000,000 variable-rate (based on LIBOR plus .4%)
unsecured revolving credit agreement which expires on June 30, 2001. As of
December 31, 1997 and 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, 1998. Short-term borrowings under these facilities totaled
$15,000,000 and $10,000,000 at December 31, 1997 and 1996, respectively. The
weighted average interest rate on the short-term borrowings during 1997 and
1996 were 6.5% and 6.9%, respectively.
6. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN
Capital Stock
The table below summarizes certain information about the Company's capital
stock at December 31, 1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
PAR AUTHORIZED
CLASS VALUE SHARES
- ----- ------ ----------
<S> <C> <C>
Preferred stock............................................... No par 1,000
Common stock.................................................. $ 1.00 100,000
</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, are outstanding on each share of
outstanding common stock. Under certain conditions, each Right may be
exercised to purchase one share of common stock at an exercise price of $100.
The Rights become exercisable and transferable 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 exercised gives the holder the right to purchase $200 of market
value of common stock of the surviving company for the $100 exercise price.
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 five cents per
Right at any time prior to the public announcement of the acquisition of 20%
of the common stock. At December 31, 1997 and 1996, 25,000,000 shares of
common stock were reserved for potential exercise of the Rights.
23
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of net earnings per common
share and net earnings per common and common equivalent share (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net earnings........................................ $ 53,316 $ 43,144 $ 42,391
======== ======== ========
Weighted average number of common shares
outstanding........................................ 16,454 16,447 16,509
Dilutive effect of stock options using the treasury
stock method....................................... 584 681 909
-------- -------- --------
Weighted average number of common and common
equivalent shares outstanding...................... 17,038 17,128 17,418
======== ======== ========
Net earnings per common share....................... $ 3.24 $ 2.62 $ 2.57
Net earnings per common and common equivalent share. 3.13 2.52 2.43
</TABLE>
Options to purchase 644,000, 1,313,000 and 22,000 shares of common stock
were outstanding during 1997, 1996 and 1995, respectively, but were not
included in the computation of the dilutive effect of stock options. These
options were excluded from the computation because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, would be antidilutive.
8. 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 the directors' 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 APB 25, 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 net 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
24
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTION PLANS--(CONTINUED)
fair value at the date of grant consistent with the methodology prescribed
under SFAS 123, approximate net earnings and net earnings per share would have
been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Pro forma net earnings.............................. $ 52,425 $ 42,500 $ 42,138
Pro forma net earnings per common share............. 3.19 2.58 2.55
Pro forma net earnings per common and common equiva-
lent share......................................... 3.08 2.48 2.42
For purposes of the pro forma disclosures, the estimated fair values of the
stock option grants are amortized to expense over the options' expected lives.
The fair value of stock options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividend yield...................................... 3.0% 2.9% 2.9%
Risk-free interest rate............................. 5.7% 6.3% 6.2%
Volatility.......................................... 23.9% 24.1% 24.5%
Expected life (years)............................... 8.0 8.0 8.0
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee and director stock options have characteristics
significantly different from those of traded options, and because changes in
the selective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee and director stock
options.
The pro forma disclosures above only include the effect of options granted
subsequent to January 1, 1995. Accordingly, the effects of applying the SFAS
123 pro forma disclosures to future periods may not be indicative of future
effects.
The following is a summary of all of the Company's stock option activity and
related information (in thousands, except exercise price data):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance........ 4,910 $27.18 4,770 $25.87 4,614 $24.29
Granted.................. 149 33.18 714 32.05 626 34.49
Exercised................ (557) 19.69 (398) 20.02 (356) 19.80
Canceled................. (175) 29.44 (176) 28.44 (114) 27.97
------ ------ ------ ------ ------ ------
Ending balance........... 4,327 $28.26 4,910 $27.18 4,770 $25.87
====== ====== ====== ====== ====== ======
Exercisable at end of
year.................... 1,780 1,728 1,513
====== ====== ======
</TABLE>
Options with respect to 1,525,000 shares were available for grant at
December 31, 1997.
25
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTION PLANS--(CONTINUED)
Other information regarding stock options outstanding and exercisable at
December 31, 1997 is summarized as follows (in thousands, except exercise
price data):
<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
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 7.13 - $21.25.......... 1,101 2.97 $19.53 656 $19.11
22.00 - 31.13.......... 1,090 5.15 26.92 499 25.80
31.25 - 33.75.......... 1,452 6.84 32.76 475 33.06
34.25 - 39.13.......... 684 7.83 34.87 150 34.87
-------- -------- ------ ------- ------
$ 7.13 - $39.13.......... 4,327 5.58 $28.26 1,780 $26.03
======== ======== ====== ======= ======
</TABLE>
9. 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.
The Company accounts for the defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers'
Accounting for Pensions." The difference between the present value of the
projected benefit obligation at the date of adoption of SFAS 87 and the fair
value of plan assets at that date is being amortized on a straight-line basis
over the average remaining service period of employees expected to receive
benefits.
The following table sets forth the plan's estimated funded status and
amounts recognized in the accompanying consolidated financial statements (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested...................................................... $37,329 $30,115
Nonvested................................................... 6,503 6,039
------- -------
$43,832 $36,154
======= =======
Projected benefit obligation................................. $63,747 $52,931
Assets at fair value......................................... 45,560 39,045
------- -------
Projected benefit obligation in excess of plan assets........ 18,187 13,886
Unrecognized net gain (loss) from past experience different
from that assumed and effects of changes in assumptions..... 1,416 (287)
Unamortized portion of net obligation at January 1........... (499) (555)
------- -------
Unfunded accrued pension cost................................ $19,104 $13,044
======= =======
</TABLE>
26
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RETIREMENT PLANS--(CONTINUED)
Pension expense for the plan consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost--benefits earned during the year..... $ 7,046 $ 5,790 $ 5,027
Interest cost on projected benefit obligation..... 3,985 3,322 2,775
Actual return on plan assets...................... (5,810) (3,561) (5,283)
Net amortization and deferral..................... 2,452 722 3,194
-------- -------- --------
Net pension expense............................... $ 7,673 $ 6,273 $ 5,713
======== ======== ========
</TABLE>
The following assumptions were used in determining the actuarial present
value of the plan's projected benefit obligation for 1997, 1996 and 1995:
<TABLE>
<S> <C>
Discount rate.............................................................. 7.5%
Rate of increase in future compensation levels............................. 6.5%
Expected long-term rate of return on assets................................ 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 $2,651,000, $3,151,000
and $1,179,000 in 1997, 1996 and 1995, respectively.
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.
In 1997, the Company settled a foreign defined benefit plan and enrolled the
participants into a foreign defined contribution plan. At the time of the
settlement of the foreign plan, there was a surplus of plan assets in excess
of benefit obligations. Previously vested benefits of the plan participants
were settled by the purchase of annuity policies with a life insurance
company. As a result of the defined benefit plan settlement, the Company
recognized a $4,830,000 gain in 1997 which was recorded as a reduction of
salaries and employee benefits expense.
Net expense (income) for foreign retirement plans amounted to $(3,180,000)
in 1997, $1,383,000 in 1996 and $1,703,000 in 1995.
10. 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 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost............................................ $ -- $ -- $ --
Interest cost........................................... 763 717 701
Amortization of transition obligation................... 512 512 512
Amortization of gain.................................... (89) (209) (379)
------ ------ ------
Net periodic postretirement benefit cost................ $1,186 $1,020 $ 834
====== ====== ======
</TABLE>
27
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--(CONTINUED)
The following table sets forth the estimated funded status and amounts
recognized in the accompanying consolidated financial statements (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 6,485 $ 5,276
Active eligible employees................................... 4,795 4,836
------- -------
11,280 10,112
Unrecognized transition obligation............................ (7,676) (8,188)
Unrecognized gain............................................. 729 1,611
------- -------
Accrued postretirement benefit cost........................... $ 4,333 $ 3,535
======= =======
</TABLE>
The assumed healthcare cost trend rate used for the next year is 8.5%,
scaling down to 4.5% after 11 years. A 1% increase in the assumed healthcare
cost trend rate would increase the accumulated postretirement benefit
obligation by $1,471,000 at December 31, 1997 and would increase the net
periodic postretirement benefit cost for 1997 by $98,000.
The discount rate used to measure the accumulated postretirement benefit
obligation was 7.5% at December 31, 1997 and 1996. The transition obligation
is being amortized over 20 years.
11. 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.
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, 1997 under
noncancelable operating leases having an initial term of more than one year
are as follows (in thousands):
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
1998................................................................... $ 25,693
1999................................................................... 23,183
2000................................................................... 18,627
2001................................................................... 14,853
2002................................................................... 11,605
Subsequent years....................................................... 49,508
--------
$143,469
========
</TABLE>
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $30,446,000 in 1997,
$28,519,000 in 1996 and $27,859,000 in 1995.
The Company has made commitments to invest additional funds in several of
its equity and tax advantaged investments. At December 31, 1997, the Company
has made commitments to invest $26,000,000 in these investments in 1998. In
addition, the Company has contingently committed to invest an additional
$3,000,000 in 1998 related to a line of credit arrangement with one of its
equity investments. At December 31, 1997, the Company has agreed to
unconditionally guarantee $30,000,000 of debt that will be incurred by two of
the Company's equity investments in 1998.
28
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES
Significant components of earnings before income taxes and the provision for
income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Earnings before income taxes:
Domestic........................................... $74,147 $61,478 $64,822
Foreign............................................ 6,635 4,199 3,401
------- ------- -------
$80,782 $65,677 $68,223
======= ======= =======
Provision for income taxes:
Federal:
Current.......................................... $30,264 $19,716 $22,332
Deferred......................................... (10,284) (3,737) (2,716)
------- ------- -------
19,980 15,979 19,616
------- ------- -------
State and local:
Current.......................................... 6,300 5,335 5,295
Deferred......................................... (1,469) (415) (384)
------- ------- -------
4,831 4,920 4,911
------- ------- -------
Foreign:
Current.......................................... 1,318 729 1,524
Deferred......................................... 1,337 905 (219)
------- ------- -------
2,655 1,634 1,305
------- ------- -------
Total provision for income taxes..................... $27,466 $22,533 $25,832
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Leveraged leases.............................................. $ 444 $ 1,324
Unrealized investment gain.................................... 1,105 593
Other......................................................... 1,124 4,555
------- -------
Deferred tax liabilities.................................... 2,673 6,472
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits....... 15,138 12,620
Accrued liabilities........................................... 13,938 11,132
Other......................................................... 2,079 1,872
------- -------
Total deferred tax assets................................... 31,155 25,624
Valuation allowance for deferred tax assets................. -- --
------- -------
Deferred tax assets......................................... 31,155 25,624
------- -------
Net deferred tax assets......................................... $28,482 $19,152
======= =======
</TABLE>
29
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES--(CONTINUED)
A reconciliation of the provision for income taxes with the U.S. federal
income tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate... $28,274 35.0 $22,987 35.0 $23,878 35.0
State income taxes--net
of federal.............. 2,921 3.6 3,148 4.8 3,428 5.0
Pre-acquisition earnings
of pooled companies
taxed to previous
owners.................. (84) (0.1) (468) (0.7) (1,065) (1.6)
Foreign taxes............ 592 0.7 208 0.3 215 0.3
General business credits. (2,697) (3.3) (2,242) (3.4) (778) (1.1)
Other--net............... (1,540) (1.9) (1,100) (1.7) 154 0.3
------- ----- ------- ----- ------- -----
Provision for income
taxes................... $27,466 34.0 $22,533 34.3 $25,832 37.9
======= ===== ======= ===== ======= =====
</TABLE>
During the period from 1994 to 1996, the Company provided for U.S. income
taxes on the undistributed earnings of its foreign subsidiaries. Due to
changes in the U.S. federal income tax laws effective in 1997 the Company no
longer provides for U.S. income taxes on the undistributed earnings
($27,200,000 at December 31, 1997) 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 $6,500,000 at
December 31, 1997.
13. FOREIGN OPERATIONS
Financial data by geographic areas of operation are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Commissions and fees
United States................................. $422,416 $411,658 $396,772
Foreign, principally United Kingdom........... 32,624 26,466 27,235
-------- -------- --------
455,040 438,124 424,007
Investment income and other..................... 32,988 23,898 21,816
-------- -------- --------
$488,028 $462,022 $445,823
======== ======== ========
Earnings before income taxes:
Operating earnings (loss)
United States................................. $ 76,138 $ 68,135 $ 69,895
Foreign, principally United Kingdom........... 1,683 48 (1,285)
-------- -------- --------
77,821 68,183 68,610
Net general corporate income (expense),
including interest expense and investment
income and other............................. 2,961 (2,506) (387)
-------- -------- --------
$ 80,782 $ 65,677 $ 68,223
======== ======== ========
</TABLE>
30
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
13. FOREIGN OPERATIONS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C> <C>
Identifiable assets:
United States......... $255,905 $281,623
Foreign, principally
United Kingdom....... 158,153 133,368
-------- --------
414,058 414,991
Corporate............. 227,694 177,297
-------- --------
$641,752 $592,288
======== ========
</TABLE>
The accompanying consolidated financial statements include liabilities of
$127,048,000 and $107,053,000 at December 31, 1997 and 1996, respectively,
after elimination of intercompany balances, applicable to foreign operations.
Net foreign exchange gains were $74,000 in 1997, $253,000 in 1996 and
$85,000 in 1995.
14. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1997 and 1996 were as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
-------- -------- -------- --------
1997
<S> <C> <C> <C> <C>
Total revenues............................. $111,477 $116,578 $130,401 $129,572
Earnings before income taxes............... 13,998 19,381 28,128 19,275
Net earnings............................... 9,238 12,792 18,565 12,721
Net earnings per common share.............. .56 .78 1.13 .77
Net earnings per common and common
equivalent share.......................... .54 .76 1.08 .74
<CAPTION>
1996
<S> <C> <C> <C> <C>
Total revenues............................. $108,177 $109,841 $123,116 $120,888
Earnings before income taxes............... 14,029 11,566 25,000 15,082
Net earnings............................... 8,534 7,001 17,685 9,924
Net earnings per common share.............. .51 .42 1.08 .60
Net earnings per common and common
equivalent share.......................... .49 .41 1.04 .59
</TABLE>
The 1996 and first three quarters of 1997 net earnings per share amounts
have been restated to conform to the SFAS 128 requirements.
31
<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 consolidated
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 consolidated 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 on written policies and procedures, appropriate divisions
of responsibility and authority, careful selection and training of personnel
and the utilization of an internal audit function. 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
consolidated 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 20, 1998
/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
32
<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, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
January 20, 1998
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding directors and nominees for directors of the Company is
included under the caption entitled "Election of Directors" in the Proxy
Statement dated March 27, 1998 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of the Company's directors and
executive officers is included in the Proxy Statement dated March 27, 1998
under the caption entitled "Compensation of Executive Officers and Directors,"
and is incorporated herein by reference; provided, however, the report of the
Compensation Committee on executive compensation and the stock performance
graph shall not be deemed to be incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of the Company is included under the
caption entitled "Principal Holders of Securities" in the Proxy Statement
dated March 27, 1998 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements of Arthur J. Gallagher & Co.
consisting of:
(a) Consolidated Statement of Earnings for each of the three years
in the period ended December 31, 1997.
(b) Consolidated Balance Sheet as of December 31, 1997 and 1996.
(c) Consolidated Statement of Cash Flows for each of the three years
in the period ended December 31, 1997.
(d) Consolidated Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 1997.
(e) Notes to Consolidated Financial Statements.
(f) Report of Independent Auditors.
2. Consolidated Financial Statement Schedules consisting of:
(a) Schedule II--Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included in
the Consolidated Financial Statements or the Notes thereto.
3. Exhibits:
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the same exhibit number to
Company's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 1996, File No. 1-9761).
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
3.2 By-Laws of the Company (incorporated by reference to the same
exhibit number to Company's Form S-1 Registration Statement No.
33-10447).
3.3 Rights Agreement between the Company and Bank of America
Illinois (formerly Continental Illinois National Bank and Trust
Company of Chicago) (incorporated by reference to Exhibits 1
and 2 to Company's Form 8-A Registration Statement filed May
12, 1987, File No. 0-13480).
3.4 Assignment and Assumption Agreement of Rights Agreement by and
among Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago), Harris Trust and
Savings Bank and the Company (incorporated by reference to the
same exhibit number to Company's Form S-8 Registration
Statement No. 33-38031).
3.5 Amendment No. 1 to Exhibit 3.3 (incorporated by reference to
the same exhibit number to Company's Form 10-Q Quarterly Report
for the quarterly period ended June 30, 1996, File No. 1-9761).
4.1 Instruments defining the rights of security holders (relevant
portions contained in the Restated Certificate of Incorporation
and By-Laws of the Company and the Rights Agreement in Exhibits
3.1, 3.2, and 3.3, respectively, hereby incorporated by
reference).
4.4 Credit Agreement dated February 16, 1993 (incorporated by
reference to the same exhibit number to the Company's Form 10-K
Annual Report for 1992, File No.
1-9761).
**10.1 Arthur J. Gallagher & Co. Incentive Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form S-1
Registration Statement No. 2-89195).
**10.1.1 Amendment No. 1 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3 to Company's Form S-8 Registration
Statement No. 33-604).
**10.1.2 Amendment No. 2 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3.1 to Company's Form S-8 Registration
Statement No. 33-14625).
**10.2 Arthur J. Gallagher & Co. Nonqualified Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form S-1
Registration Statement No. 2-89195).
**10.2.1 Amendment No. 1 to Exhibit No. 10.2 (incorporated by reference
to Exhibit No. 10.4 to Company's Form S-8 Registration
Statement No. 33-604).
**10.2.2 Amendment No. 2 to Exhibit No. 10.2 (incorporated by reference
to Exhibit No. 10.4.1 to Company's Form S-8 Registration
Statement No. 33-14625).
**10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan and related form of stock option agreement (incorporated
by reference to the same exhibit number to Company's Form 10-K
Annual Report for 1986, File No. 0-13480).
**10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan
(incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 33-22029).
**10.26.1 Amendment No. 1 to Exhibit No. 10.26 (incorporated by reference
to Exhibit No. 10.3 to Company's Form S-8 Registration
Statement No. 33-24251).
**10.26.2 Amendment No. 2 to Exhibit No. 10.26 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan
(incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 33-22029).
**10.27.1 Amendment No. 1 to Exhibit No. 10.27 (incorporated by reference
to Exhibit No. 10.4 to Company's Form S-8 Registration
Statement No. 33-30762).
**10.27.2 Amendment No. 2 to Exhibit No. 10.27 (incorporated by reference
to Exhibit No. 10.5 to Company's Form S-8 Registration
Statement No. 33-38031).
**10.27.3 Amendment No. 3 to Exhibit No. 10.27 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
**10.27.4 Amendment No. 5 to Exhibit No. 10.27 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.27.5 Amendment No. 6 to Exhibit 10.27 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 333-06359).
**10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors' Stock
Option Plan (incorporated by reference to Exhibit No. 10.1 to
Company's Form S-8 Registration Statement No. 33-30816).
**10.28.1 Amendment No. 1 to Exhibit 10.28 (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report
for 1990, File No. 1-9761).
**10.28.2 Amendment No. 3 to Exhibit No. 10.28 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-64614).
**10.28.3 Amendment No. 5 to Exhibit No. 10.28 (incorporated by reference
to the same exhibit number to Company's Form S-8 Registration
Statement No. 33-80648).
**10.28.4 Amendment No. 6 to Exhibit 10.28 (incorporated by reference to
the same exhibit number to Company's Form S-8 Registration
Statement No. 333-06359).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and Itasca
Center III Limited Partnership, a Texas limited partnership,
dated July 26, 1989 (incorporated by reference to the same
exhibit number to Company's Form 10-K Annual Report for 1989,
File No. 1-9761).
10.7 Letter dated December 31, 1983 from Arthur J. Gallagher & Co.
to Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago) regarding Common
Stock Purchase Financing Program including exhibits thereto and
related letters (incorporated by reference to the same exhibit
number to Company's Form S-1 Registration Statement No. 2-
89195).
10.71 Amendment to Exhibit No. 10.7 dated September 11, 1985
(incorporated by reference to the same exhibit number to
Company's Form 10-K Annual Report for 1985, File No. 0-13480).
**10.10 Board of Directors' Resolution from meeting on January 26, 1984
relating to consulting and retirement benefits for certain
directors (incorporated by reference to the same exhibit number
to Company's Form S-1 Registration Statement No. 2-89195).
**10.11 Form of Indemnity Agreement between the Company and each of its
directors and corporate officers (incorporated by reference to
Attachment A to the Company's Proxy Statement dated April 10,
1987 for its Annual Meeting of Stockholders, File No.
0-13480).
**10.13 Arthur J. Gallagher & Co. Stock Option Agreements dated May 10,
1988 between the Company and each of Robert H. B. Baldwin, Jack
M. Greenberg and James R. Wimmer (incorporated by reference to
the same exhibit number to Company's Form 10-K Annual Report
for 1988, File No. 1-9761).
*21.0 Subsidiaries of the Company, including state or other
jurisdiction of incorporation or organization and the names
under which each does business.
*23.1 Consent of Ernst & Young LLP, as independent auditors.
*24.0 Powers of Attorney.
*27.0 Financial Data Schedule.
</TABLE>
All other exhibits are omitted because they are not applicable, or not
required, or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
- --------
*Filed as exhibits to this Form 10-K with the Securities and Exchange
Commission; only Exhibits 21.0 and 23.1 are included in this book.
**Such exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to item 601 of
Regulation S-K.
37
<PAGE>
(b) Reports on Form 8-K
Not applicable
38
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THE 26TH DAY OF
FEBRUARY, 1998.
Arthur J. Gallagher & Co.
/s/ J. Patrick Gallagher, Jr.
By___________________________________
J. Patrick Gallagher, Jr.
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON THE 26TH DAY OF FEBRUARY, 1998 BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
*Robert E. Gallagher Chairman and Director
_________________________________________
Robert E. Gallagher
/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/ Jack H. Lazzaro Vice President--Finance (Chief Accounting
___________________________________________ Officer)
Jack H. Lazzaro
*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
39
<PAGE>
SCHEDULE II
ARTHUR J. GALLAGHER & CO.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED BALANCE
BEGINNING TO AT END
OF YEAR EXPENSE ADJUSTMENTS OF YEAR
--------- --------- ----------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts... $ 889 $ 635 $ (665)(1) $ 859
Accumulated amortization of
goodwill......................... 3,419 237 (279)(2) 3,377
Accumulated amortization of non-
compete agreements and expiration
lists............................ 2,916 756 (1,020)(3) 2,652
Year ended December 31, 1996
Allowance for doubtful accounts... $ 729 $2,111 $(1,951)(1) $ 889
Accumulated amortization of
goodwill......................... 4,006 361 (948)(2) 3,419
Accumulated amortization of non-
compete agreements and expiration
lists............................ 3,851 699 (1,634)(3) 2,916
Year ended December 31, 1995
Allowance for doubtful accounts... $ 846 $ 77 $ (194)(1) $ 729
Accumulated amortization of
goodwill......................... 3,760 364 (118)(2) 4,006
Accumulated amortization of non-
compete agreements and expiration
lists............................ 4,184 540 (873)(3) 3,851
</TABLE>
- --------
(1) Bad debt write-offs net of recoveries.
(2)Reversal of fully amortized goodwill.
(3) Reversal of fully amortized non-compete agreements and expiration lists.
<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 those indicated by footnote,
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
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
Artex Insurance Company Ltd(5).............................. Bermuda
Artex Underwriting Managers Ltd............................. 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
Gallagher Bassett of New York, Inc.......................... New York
Gallagher Bassett International Ltd......................... Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
Gallagher Bassett International Ltd. (UK).................. England
Gallagher Bassett Adjusters Canada, Inc.(3)................ Canada
Gallagher Bassett Argentina S.A............................ Argentina
Gallagher Benefit Administrators, Inc...................... Illinois
Wyatt Gallagher Bassett Pty Ltd(3)......................... Australia
Gallagher Bassett Australia Pty Ltd(4)................... Australia
Wyatt Emerson Pty Ltd.................................... Australia
Wyatt Group (PNG) Pty Ltd................................ New Guinea
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
Gallagher ABOW, Inc.......................................... Michigan
Arthur J. Gallagher & Co. of Wisconsin, Inc.................. Wisconsin
Gallagher Woodsmall, Inc..................................... Missouri
Woodsmall Benefit Services, Inc............................ Delaware
GBS Retirement Services, 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
Arthur J. Gallagher & Co. of Kentucky, Inc................... Kentucky
AJG Premium Finance, Inc..................................... Illinois
Risk Management Products Canada Inc.(3)...................... Canada
Gallagher Benefit Services of New York, Inc.................. New York
</TABLE>
- --------
(1) The Company conducts some of its operations under the following names:
Gallagher Benefit Services, Gallagher Bassett Information Services,
Gallagher Risk Management Services, Pacific Atlantic Administrators, The
Boston Insurance Center, Gallagher Heffernan, Gallagher Newman, Broussard,
Bush & Hurst, Henley, Williams & Associates, Gallagher Steel Agency, Bryce
Insurance, CMC Claims Management Corporation, The Planning Corporation,
Environmental Claims Management Incorporated, Byerly & Company, Inc., and
Risk Placement Services, Inc.
(2) 10% of the Common Stock of this subsidiary of the Company is owned by an
unrelated party.
(3) 50% of the Common Stock of this subsidiary of the Company is owned by an
unrelated party.
(4) 75% of the Common Stock of this subsidiary of the Company is owned by an
unrelated party.
(5) 76% of the Common Stock of this subsidiary of the Company is owned by two
third parties.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
Our audits included the consolidated financial statement schedule of Arthur
J. Gallagher & Co. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, with respect to which the date is January 20,
1998, the consolidated financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We consent to the incorporation by reference in the Registration Statements
(Form S-8, No. 33-604 and Form S-8, No. 33-14625) pertaining to the Arthur J.
Gallagher & Co. Incentive, United Kingdom Incentive and Nonqualified Stock
Option Plans, in the Registration Statement (Form S-8, No. 33-30762)
pertaining to the Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option
Plan, in the Registration Statements (Form S-8, No. 33-24251 and Form S-8, No.
33-38031) pertaining to the Arthur J. Gallagher & Co. 1988 Incentive and 1988
Nonqualified Stock Option Plans, in the Registration Statement (Form S-8, No.
33-30816) pertaining to the Arthur J. Gallagher & Co. Non-Employee Directors'
Stock Option Plan, in the Registration Statements (Form S-8, No. 33-64614 and
Form S-8, No. 33-80648) pertaining to the Arthur J. Gallagher & Co. 1988
Incentive, 1988 Nonqualified, and Non-Employee Directors' Stock Option Plans,
in the Registration Statement (Form S-8, No. 333-06359) pertaining to the
Arthur J. Gallagher & Co. 1988 Nonqualified and Non-Employee Directors' Stock
Option Plans, and in the related Prospectuses, of our report dated January 20,
1998 with respect to the consolidated financial statements included herein,
and our report included in the preceding paragraph with respect to the
consolidated financial statement schedule included in this Annual Report (Form
10-K) of Arthur J. Gallagher & Co.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
February 26, 1998
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ FRANK M. HEFFERNAN, JR.
----------------------------
FRANK M. HEFFERNAN, JR.
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ T. KIMBALL BROOKER
----------------------------
T. KIMBALL BROOKER
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ JOHN G. CAMPBELL
----------------------------
JOHN G. CAMPBELL
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ ROBERT E. GALLAGHER
----------------------------
ROBERT E. GALLAGHER
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ JACK M. GREENBERG
----------------------------
JACK M. GREENBERG
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ PHILIP A. MARINEAU
----------------------------
PHILIP A. MARINEAU
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ WALTER F. MC CLURE
----------------------------
WALTER F. MC CLURE
<PAGE>
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints Carl E. Fasig his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him, and in his name, place and
stead, in any and all capacities (i) to sign the Arthur J. Gallagher & Co.
Annual Report on Form 10-K for the fiscal year ending December 31, 1997 and any
and all amendments thereto and (ii) to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in such connection, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has duly executed this instrument as
of this 23rd day of February, 1998.
/s/ JAMES R. WIMMER
----------------------------
JAMES R. WIMMER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Arthur J. Gallagher & Co. Consolidated Financial Statements included in the
Form 10-K Annual Report for the fiscal year ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 148,338 144,241 154,305
<SECURITIES> 62,681 53,409 46,123
<RECEIVABLES> 218,414 238,529 228,544
<ALLOWANCES> (859) (889) (729)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 468,841 465,293 450,768
<PP&E> 86,758 80,794 73,750
<DEPRECIATION> (58,948) (54,556) (48,814)
<TOTAL-ASSETS> 641,752 592,288 568,075
<CURRENT-LIABILITIES> 466,038 446,808 426,720
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 16,591 16,457 16,529
<OTHER-SE> 147,316 117,444 109,650
<TOTAL-LIABILITY-AND-EQUITY> 641,752 592,288 568,075
<SALES> 455,040 438,124 424,007
<TOTAL-REVENUES> 488,028 462,022 445,823
<CGS> 249,882 245,064 235,759
<TOTAL-COSTS> 249,882 245,064 235,759
<OTHER-EXPENSES> 155,837 148,446 141,166
<LOSS-PROVISION> 635 2,111 77
<INTEREST-EXPENSE> 892 724 598
<INCOME-PRETAX> 80,782 65,677 68,223
<INCOME-TAX> 27,466 22,533 25,832
<INCOME-CONTINUING> 53,316 43,144 42,391
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 53,316 43,144 42,391
<EPS-PRIMARY> 3.24 2.62 2.57
<EPS-DILUTED> 3.13 2.52 2.43
</TABLE>
