<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1998
REGISTRATION NO. 333-23897
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ARTHUR J. GALLAGHER & CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6411 36-2151613
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NO.)
ORGANIZATION)
TWO PIERCE PLACE
ITASCA, ILLINOIS 60143-3141
(630) 773-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
----------------
CARL E. FASIG
CORPORATE COUNSEL AND SECRETARY
ARTHUR J. GALLAGHER & CO.
TWO PIERCE PLACE
ITASCA, ILLINOIS 60143-3141
(630) 285-3449
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES OF ALL COMMUNICATIONS AND NOTICES TO:
KAY W. MCCURDY
LORD, BISSELL & BROOK
115 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
As permitted by Rule 429, the prospectus in this Registration Statement
constitutes Post-Effective Amendment No. 4 to Registration Statement No. 33-
76778 which became effective March 30, 1994, Post-Effective Amendment No. 3 to
Registration Statement No. 33-58101 which became effective April 24, 1995 and
Post-Effective Amendment No. 2 to Registration Statement No. 333-1435 which
became effective March 27, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ARTHUR J. GALLAGHER & CO.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K, showing the location in the
Prospectus of the answers to the items in Part I of Form S-1.
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION LOCATION IN PROSPECTUS
-------------------- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus....... Cover Page; Facing Page
2. Inside Front and Outside Back
Cover Pages of Prospectus...... Inside Front Cover; Available Information
3. Summary Information, Risk
Factors and Ratio of Earnings Prospectus Summary; Business of the
to Fixed Charges............... Company; and *
4. Use of Proceeds................ Cover Page; Securities Covered by this
Prospectus
5. Determination of Offering Cover Page; Securities Covered by this
Price.......................... Prospectus
6. Dilution....................... *
7. Selling Security Holders....... *
8. Plan of Distribution........... Cover Page; Securities Covered by this
Prospectus
9. Description of Securities to be
Registered..................... Description of Capital Stock
10. Interest of Named Experts and
Counsel........................ Legal Opinion; Experts
11. Information with Respect to the Cover Page; The Company; Price Range of
Registrant..................... Common Stock and Dividends; Selected Con-
solidated Financial Data; Selected Quar-
terly Financial Data (Unaudited); Manage-
ment's Discussion and Analysis of Financial
Condition and Results of Operations; Busi-
ness of the Company; Management; Certain
Transactions; Security Ownership of Certain
Beneficial Owners and Management; Financial
Statements and Supplementary Data
12. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities..... *
</TABLE>
- --------
*Not applicable or answer thereto is negative.
<PAGE>
PROSPECTUS
ARTHUR J. GALLAGHER & CO.
2,303,984 SHARES
COMMON STOCK, $1.00 PAR VALUE
----------------
All of the 2,303,984 shares of common stock, par value $1.00 ("Common
Stock"), of Arthur J. Gallagher & Co. (the "Company") offered hereby may be
offered and issued by the Company from time to time in connection with future
acquisitions of other businesses or properties. See "Securities Covered by
this Prospectus."
The last sales price of the Company's Common Stock on February 27, 1998 as
reported on the Consolidated Transaction Reporting System for securities
listed on the New York Stock Exchange ("NYSE") was $41.3125 per share.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS APRIL , 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy material and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy material
and other information concerning the Company can be inspected and copied at
the offices of the Commission at Room 1024, 450 5th Street, N.W., Washington,
D.C. 20549; 500 W. Madison, Suite 1400, Chicago, Illinois 60606; and Seven
World Trade Center, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 5th
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition,
electronically filed documents including reports, proxy material and other
information covering the Company can be obtained from the Commission's web
site at http://www.sec.gov. The Company's reports, proxy material and
informational filings under the Exchange Act may also be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus is a part) and exhibits
thereto which the Company has filed with the Commission in Washington, D.C.
For further information, reference is made to the Registration Statement
including the exhibits filed or incorporated as a part of it.
----------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, BY ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.............. 2
Prospectus Summary................. 3
The Company........................ 4
Securities Covered by this
Prospectus........................ 4
Price Range of Common Stock and
Dividends......................... 5
Selected Consolidated Financial
Data.............................. 6
Selected Quarterly Financial Data
(Unaudited)....................... 6
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 7
Business of the Company............ 10
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.......................... 19
Compensation of Executive Officers
and Directors...................... 21
Summary Compensation Table.......... 21
Principal Holders of Securities..... 25
Description of Capital Stock........ 26
Legal Opinion....................... 29
Experts............................. 29
Index to Financial Statements and
Supplementary Data................. F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
THE COMPANY
The Company is engaged in the insurance brokerage business and provides risk
management and other insurance-related services to its clients in the United
States and abroad. The Company's principal activity is the negotiation and
placement of insurance for its clients. The Company also specializes in
furnishing risk management services. The Company operates through approximately
200 offices throughout the United States and six countries abroad and through a
network of correspondent brokers and consultants in more than 80 countries
around the world. The Company believes that it is the fifth largest insurance
broker worldwide in terms of total revenues. See "Business of the Company".
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered................ 2,303,984 shares which may be offered and
issued from time to time in connection with
future acquisitions by the Company.
NYSE symbol......................... AJG
Common Stock Outstanding on
February 27, 1998.................. 16,703,990 shares
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF EARNINGS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commissions and fees.............. $455,040 $438,124 $424,007 $387,869 $350,946
Investment income and other....... 32,988 23,898 21,816 13,632 20,601
-------- -------- -------- -------- --------
Total revenues.................... 488,028 462,022 445,823 401,501 371,547
Net earnings...................... 53,316 43,144 42,391 37,129 31,489
Net earnings per common share..... 3.24 2.62 2.57 2.24 1.85
Net earnings per common and common
equivalent share................. 3.13 2.52 2.43 2.14 1.75
Dividends declared per common
share............................ 1.24 1.16 1.00 .88 .72
Book value per common share....... 9.88 8.14 7.63 6.46 7.39
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Total assets................................................. $641,752 $592,288
Total stockholders' equity................................... 163,907 133,901
</TABLE>
The financial information for all periods prior to 1997 has been restated for
the acquisition in 1997 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.
3
<PAGE>
THE COMPANY
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 services and other related
services to clients in the United States and abroad. The Company's principal
activity is the negotiation and placement of insurance for its clients. The
Company also specializes in furnishing risk management services. Risk
management involves assisting clients in analyzing risks and in determining
whether proper protection is best obtained through the purchase of insurance
or through retention of all or a portion of those risks and the adoption of
corporate risk management policies and cost-effective loss control and
prevention programs. Risk management services also include claims management,
loss control consulting, property appraisals and insurance related
investigative services. The Company believes that its ability to deliver
comprehensively structured risk management and brokerage services is one of
its major strengths.
The Company operates through a network of approximately 200 offices located
throughout the United States and six countries abroad and through a network of
correspondent brokers and consultants in more than 80 countries around the
world. 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.
SECURITIES COVERED BY THIS PROSPECTUS
The shares of Common Stock of the Company covered by this Prospectus may be
offered and issued by the Company from time to time in connection with future
acquisitions of other businesses or properties.
The Company reasonably expects that it will offer and sell the shares
covered by this Prospectus in connection with future acquisitions within two
years from the initial effective dates of the Registration Statements of which
this Prospectus is a part. It is anticipated that future acquisitions by the
Company will consist principally of additional insurance brokerage and related
businesses. The consideration for acquisitions may include cash (including
installment payments), shares of Common Stock, other securities including
securities which may be converted into Common Stock, guarantees, assumptions
of liabilities or any two or more of the foregoing, as determined from time to
time by negotiations between the Company and the owners or controlling persons
of the businesses or properties to be acquired. In addition, the Company may
enter into employment contracts and non-competition agreements with former
owners and key executive personnel of these acquired businesses. The Company
at this time is engaged in preliminary discussions with a number of candidates
for possible future acquisitions.
In general, the terms of a future acquisition will be determined by
negotiations between the Company's representatives and the owners or
controlling persons of the businesses or properties to be acquired, and the
factors taken into account in an acquisition may include among others the
established quality and reputation of the business and its management, gross
commission revenues, earning power, cash flow, growth potential, location of
the business and properties to be acquired and geographical and service
diversification resulting from the acquisition. It is anticipated that shares
of Common Stock issued in any future acquisition will be valued at a price
reasonably related to the current market value of the Company's Common Stock
as reported on the Consolidated Transaction
4
<PAGE>
Reporting System for securities listed on the NYSE, either at the time the
terms of the acquisition are tentatively agreed upon or at or about the time
or times of delivery of the Company's shares. The Company does not expect to
receive any cash proceeds (other than cash balances of acquired companies) in
connection with any such issuances.
It is not expected that underwriting discounts or commissions will be paid
by the Company except that finder's fees may be paid to persons from time to
time in connection with specific acquisitions. Any person receiving any such
fees may be deemed to be an underwriter within the meaning of the Securities
Act of 1933 (the "1933 Act").
When a material acquisition or series of acquisitions constituting in the
aggregate a material acquisition occurs, the Company must file an amendment to
the Registration Statements of which this Prospectus forms a part discussing
or disclosing the acquisition or acquisitions and the effects on the Company.
That amendment must become effective under the 1933 Act before any further
shares may be sold hereunder.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is listed on the NYSE, trading under the symbol
"AJG". The following table sets forth information as to the price range of the
Company's Common Stock for the period January 1, 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 NYSE.
<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>
See the Cover Page of this Prospectus for a recent market price of the
Company's Common Stock.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1997 have been derived from the
consolidated financial statements of the Company. Such data should be read in
conjunction with the Company's audited consolidated financial statements
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS
DATA:
Commissions..................... $273,801 $265,981 $261,569 $243,891 $219,433
Fees............................ 181,239 172,143 162,438 143,978 131,513
Investment income and other..... 32,988 23,898 21,816 13,632 20,601
-------- -------- -------- -------- --------
Total revenues.................. 488,028 462,022 445,823 401,501 371,547
Total expenses.................. 407,246 396,345 377,600 342,673 318,080
-------- -------- -------- -------- --------
Earnings before income taxes.... 80,782 65,677 68,223 58,828 53,467
Net earnings.................... 53,316 43,144 42,391 37,129 31,489
Net earnings per common share... 3.24 2.62 2.57 2.24 1.85
Net earnings per common and
common equivalent share........ 3.13 2.52 2.43 2.14 1.75
Dividends declared per common
share.......................... 1.24 1.16 1.00 .88 .72
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... $641,752 $592,288 $568,075 $517,556 $544,239
Long-term debt less current
portion........................ -- 1,130 2,260 3,390 28,166
Total stockholders' equity...... 163,907 133,901 126,179 104,897 126,672
</TABLE>
The financial information for all periods prior to 1997 has been restated
for the acquisition in 1997 accounted for using the pooling of interests
method and for the required adoption on December 31, 1997 of the new standard
on earnings per share.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the quarterly operating results for the years
ended December 31, 1997 and 1996 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 requirements of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which was adopted on
December 31, 1997.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Fluctuations in premiums charged by insurance companies have a material
effect on the insurance brokerage industry. Commission revenues are based on a
percentage of the premiums paid by 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 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
7
<PAGE>
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.
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.
8
<PAGE>
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 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.
9
<PAGE>
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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This prospectus 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.
BUSINESS OF THE COMPANY
The Company is engaged in providing insurance brokerage, risk management,
employee benefits services and other related services to clients in the United
States and abroad. The Company has not presented industry segment information
as its operations are predominantly those of insurance brokerage, risk
management, employee 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/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.
10
<PAGE>
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.
The Company believes that its risk management services are an important
factor in securing new brokerage business and retaining brokerage clients. The
Company also markets these services directly to the client on an unbundled
basis independently of brokerage services in order to capitalize on the
interest in self-insurance created by market conditions. These services
include consulting on a wide range of risk management needs such as toxic
waste disposal, handling of dangerous cargo, workers' compensation, medical
cost containment, substance abuse, employment-related background
investigations, loss prevention, property appraisals, and liability reserve
reviews.
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 commissions and fee business of the Company is
derived from institutions, not-for-profit organizations, municipal and other
governmental entities and associations. In addition, the Company's clients
include large United States and multinational corporations engaged in a broad
range of commercial and industrial businesses. The Company also places
insurance for individuals. The Company services its clients through a network
of approximately 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.
11
<PAGE>
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.
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/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
12
<PAGE>
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 throughout the world. The combination of
Gallagher Bassett offices and affiliated locations provides one of the most
comprehensive worldwide service networks available.
Wyatt Gallagher Bassett Pty Ltd ("WGB"), a 50% owned joint venture formed on
April 1, 1997, is headquartered in Australia and has additional offices in
Papua New Guinea. WGB provides loss adjusting, risk management and related
services throughout Australasia. The Company also has facilities in Canada and
Scotland 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.
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>
- --------
*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 upon a
percentage of the premium paid by the insured. Commission rates are dependent
on a number of factors including the type of insurance, the particular
insurance company and the capacity in which the Company acts. In some cases
the Company is compensated for brokerage or advisory services directly by a
fee from a client, particularly when insurers do not pay commissions. The
Company may also receive contingent commissions which are based on the profit
the insurance company makes on the overall volume of business placed by the
Company in a given period of time. Occasionally, the Company shares
commissions with other brokers who have participated with the Company in
placing insurance or servicing insureds.
13
<PAGE>
The Company's compensation for risk management services is in the form of
fees and commissions. The Company typically negotiates fees in advance with
its risk management clients on an annual basis based upon the estimated value
of the services to be performed. In some cases, the Company receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.
The Company's revenues vary significantly from quarter to quarter as a
result of the timing of policy renewals and the net effect of new/lost
business production, 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--PAST
From January 1, 1993 through December 31, 1997, the Company 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.
On May 31, 1997, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Trinder & Norwood, Inc., a New York
corporation engaged in the insurance brokerage and services business in
exchange for 57,600 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. Three principals entered into two
year employment agreements with the Company.
On April 2, 1997, a wholly-owned subsidiary of the Company acquired 50% of
the assets of Wyatt Group Pty Ltd, an Australian Company engaged in loss
adjusting and loss prevention services in exchange for the Company's 75%
ownership interest in Gallagher Bassett Australia Pty Ltd and an initial cash
payment of Australian $620,000. This acquisition was accounted for as a
purchase. Two principals entered into four year employment agreements with a
subsidiary of the Company.
On January 2, 1997, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Arnold & Company, Inc., a Michigan
corporation engaged in retirement planning and actuarial services in exchange
for 41,080 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. The principal entered into a three
year employment agreement with the Company.
On January 1, 1997, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Byerly & Company, Inc., a Colorado
corporation engaged in the group benefits consulting business in exchange for
164,370 shares of the Company's Common Stock. This acquisition was accounted
for as a pooling of interests. Four principals entered into two year
employment agreements with the Company.
On November 29, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of R.W. Stephens & Company Inc., a California
corporation engaged in the pension consulting business in exchange for 33,600
shares of the Company's Common Stock. This acquisition was accounted for as a
pooling of interests. The principal entered into a three year employment
agreement with the Company and four key employees entered into two year
employment agreements with the Company.
On August 31, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Morgan, Read & Coleman (Holdings) Limited,
and Morgan Insurance Services Limited, U.K. companies engaged in the insurance
brokerage and administrative services businesses, respectively, in exchange
for 436,000 shares of the Company's Common Stock. These acquisitions were
accounted for as poolings of interests. Ten principals entered into two year
employment agreements with a subsidiary of the Company.
14
<PAGE>
On August 30, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Beymer & Bond Investigations, Inc., a
Florida company engaged in the investigative services business, in exchange
for 78,510 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. Two principals entered into three
year employment agreements with the Company.
On August 12, 1996, a wholly-owned subsidiary of the Company acquired 75% of
the assets of National Risk Control Services Pty Ltd, a Victoria, Australia
Company engaged in the loss prevention services business, in exchange for
Australian $450,000. This acquisition was accounted for as a purchase. Two
principals entered into two year employment agreements with a subsidiary of
the Company and one principal and four key employees entered into one year
employment agreements with this subsidiary.
On July 1, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Lamberson Koster & Company, a California
corporation engaged in the risk management and insurance brokerage business in
exchange for 391,163 shares of the Company's Common Stock. This acquisition
was accounted for as a pooling of interests. One principal entered into a two
year employment agreement with the Company and six principals and one key
employee entered into three year employment agreements with the Company.
On May 31, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of the Alliance Insurance Group, Inc., an
Arizona corporation engaged in the insurance brokerage business in exchange
for 63,640 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. The principal entered into a three
year employment agreement with the Company.
On February 29, 1996, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of the Levitt/Kristan Company, a California
corporation engaged in the insurance brokerage business in exchange for
112,100 shares of the Company's Common Stock. This acquisition was accounted
for as a pooling of interests. Two principals entered into two year employment
agreements with the Company.
On December 29, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Planning Corporation and Environmental
Claims Management Incorporated, Virginia corporations engaged in the insurance
brokerage and claim handling business, in exchange for 15,000 shares and 2,300
shares, respectively, of the Company's Common Stock. These acquisitions were
accounted for as poolings of interests. Three principals entered into two year
employment agreements with the Company.
On November 30, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Schadow Agency, Inc., a Minnesota
corporation engaged in the insurance brokerage business, in exchange for
61,800 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. The principal entered into a two year employment
agreement with the Company.
On August 31, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Mintz & Josephson Insurance Agency and
Brokerage, Inc., a California corporation engaged in the insurance brokerage
business, in exchange for 92,100 shares of the Company's Common Stock. The
acquisition was accounted for as a pooling of interests. Two principals
entered into three year employment agreements with the Company.
On August 31, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of IMC Risk Management Group, Inc. and W.
Lawrence Pfeiffer & Associates, Inc., Missouri corporations engaged in the
insurance brokerage business, in exchange for 308,000 shares and 40,200
15
<PAGE>
shares, respectively, of the Company's Common Stock. These acquisitions were
accounted for as poolings of interests. Two principals entered into three year
employment agreements with the Company.
On May 31, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of BHK&R, Inc., a Minnesota corporation
engaged in the insurance brokerage and service business, in exchange for
63,850 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. Two principals entered into two year employment
agreements with the Company.
On February 28, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Walter Bryce Insurance Agency, Inc., an
Oklahoma corporation engaged in the insurance brokerage business, in exchange
for 90,795 shares of the Company's Common Stock. The acquisition was accounted
for as a pooling of interests. Two principals entered into two year employment
agreements with the Company.
On January 1, 1995, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of RMI Insurance Services, Inc., a California
corporation engaged in the insurance brokerage business, in exchange for
48,765 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. The principal and one key employee entered into two
year employment agreements with the Company.
On November 30, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Kaler, Carney, Liffler & Co., a
Massachusetts corporation engaged in the insurance brokerage business, in
exchange for 184,560 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. The principal entered into a two year
employment agreement with the Company.
On August 31, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of James S. Pipino Insurance Agency, Inc., an
Ohio corporation engaged in the insurance brokerage business, in exchange for
31,400 shares of the Company's Common Stock. The acquisition was accounted for
as a pooling of interests. Two principals and one key employee entered into
two year employment agreements with the Company.
On April 29, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Turtleoak Corporation, a South Carolina
corporation engaged in the insurance brokerage business, in exchange for
100,000 shares of the Company's Common Stock. The acquisition was accounted
for as a pooling of interests. Three principals and two key employees entered
into three year employment agreements with the Company.
On February 28, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Steel Agency, a New Jersey corporation
engaged in the insurance brokerage business, in exchange for 258,015 shares of
the Company's Common Stock. The acquisition was accounted for as a pooling of
interests. Four principals entered into two year employment agreements with
the Company.
On February 28, 1994, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Donald P. Pipino and Associates, Inc., an
Ohio corporation engaged in the insurance brokerage business, in exchange for
245,000 shares of the Company's Common Stock. The acquisition was accounted
for as a pooling of interests. Three principals entered into three year
employment agreements with the Company.
On August 31, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Welling Associates, Inc., a New York
corporation engaged in the retirement and pension consulting business, in
exchange for 113,000 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. The principal entered into a two year
employment agreement with the Company.
16
<PAGE>
On August 31, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Stark, Johnson & Stinson, Inc., a
Massachusetts corporation engaged in the insurance brokerage business, in
exchange for 63,000 shares of the Company's Common Stock. The acquisition was
accounted for as a pooling of interests. Three principals entered into three
year employment agreements with the Company.
On May 28, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of L. C. Thoelecke, Inc., an Illinois
corporation engaged in the insurance brokerage business, in exchange for
181,000 shares of the Company's Common Stock. The acquisition was accounted
for as a pooling of interests. The principal entered into a two year
employment agreement with the Company.
On May 28, 1993, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Woodsmall Companies, Inc., a Missouri
corporation engaged in the insurance brokerage and employee benefits services
business, in exchange for 350,000 shares of the Company's Common Stock. The
acquisition was accounted for as a pooling of interests. Six principals
entered into two year employment agreements with the Company.
As indicated in the foregoing, the Company attempts to retain the services
of certain of the principals and key personnel connected with the acquired
businesses in its acquisitions. In all such cases, such individuals and such
businesses were unaffiliated with the Company at the time of the respective
acquisitions.
The Company believes that the net effect of these acquisitions has been, and
will be, to expand significantly the volume of general services rendered by
the Company and the geographical areas in which the Company renders such
services and not to change substantially the nature of the services performed
by the Company.
ACQUISITIONS--CURRENT
Effective on February 28, 1998, a wholly-owned subsidiary of the Company
acquired substantially all of the assets of EBC, Inc., d/b/a Employee Benefits
of the Carolinas, a North Carolina corporation engaged in the benefits
insurance business in exchange for 51,350 shares of the Company's Common
Stock. This acquisition was accounted for as a pooling of interests. The
principal entered into a three year employment agreement with the Company.
Effective on February 28, 1998, a wholly-owned subsidiary of the Company
acquired substantially all of the assets of Martin Gordon & Jones, Inc., a
Mississippi corporation engaged in the insurance brokerage and services
business in exchange for 44,750 shares of the Company's Common Stock. This
acquisition was accounted for as a pooling of interests. Two principals
entered into three year employment agreements with the Company.
Effective on February 28, 1998, a wholly-owned subsidiary of the Company
acquired substantially all of the assets of Gardner Marine Agency, Inc., a
Missouri corporation engaged in the marine insurance brokerage business in
exchange for 17,800 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. The principal entered into a three
year employment agreement with the Company.
ACQUISITIONS--FUTURE
The Company is considering and intends to consider from time to time
acquisitions and divestitures on terms it deems advantageous. The Company has
had preliminary discussions with a number of other candidates for possible
future acquisitions and has executed non-binding letters of intent with two
candidates. No assurances can be given that any additional acquisitions or
divestitures will be consummated, or if consummated, will be advantageous to
the Company.
17
<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.
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.
STOCK REPURCHASES
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.
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.
18
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
TERM
POSITION AND YEAR AS DIRECTOR
NAME AGE FIRST ELECTED EXPIRES
---- --- ----------------- -----------
<S> <C> <C> <C>
Robert E. Gallagher(1).. 75 Director since 1950, Chief Executive 1998
Officer 1963-1994, Chairman since 1990
J. Patrick Gallagher, 46 Director since 1986, President since 2000
Jr.(1)................. 1990, Chief Executive Officer since
1995
T. Kimball Brooker...... 58 Director since 1994 2000
John G. Campbell........ 60 Director since 1981, Vice President 1998
since 1978
Michael J. Cloherty..... 50 Director since 1982, Executive Vice 1999
President since 1996, Vice President--
Finance 1981 to 1995
Peter J. Durkalski...... 47 Vice President since 1990 --
James W. Durkin, Jr..... 48 Vice President since 1985 --
Frank M. Heffernan, Jr.. 67 Director since 1996, Vice President 1998
since 1987
Jack M. Greenberg....... 55 Director since 1985 1999
Philip A. Marineau...... 51 Director since 1991 1999
Walter F. McClure....... 64 Director since 1981, Senior Vice 1998
President since 1993
John D. Stancik......... 54 Vice President since 1986 --
Gary M. Van der Voort... 52 Vice President since 1986 --
James R. Wimmer......... 69 Director since 1985 2000
</TABLE>
- --------
(1) Robert E. Gallagher is an uncle of J. Patrick Gallagher, Jr.
Each person has been principally employed by the Company in management
capacities for more than the past five years except the following non-employee
directors:
T. Kimball Brooker has served as President of Barbara Oil Company
(investments, and oil and gas exploration) since 1989. He has been a Director
of Barbara Oil Company since 1967 and also serves as a Director of Zenith
Electronics Corporation. Until 1988, he was Managing Director of Morgan
Stanley & Co. Incorporated (investment bankers) as well as Vice Chairman and
Governor of the Midwest Stock Exchange.
Jack M. Greenberg is Chief Executive Officer since July 1997 and Chairman
since November 1996 of McDonald's U.S.A. and was Vice Chairman since 1992 and
Chief Financial Officer from 1982 to 1996 of McDonald's Corporation. He has
been a Director of McDonald's Corporation since he joined the company in 1982
and is also a Director of Harcourt General, Inc. and Stone Container
Corporation. He is a member of the Chicago Bar Association, the American
Institute of Certified Public Accountants and the Illinois CPA Society.
Philip A. Marineau is President and Chief Executive Officer of Pepsi-Cola
North America since December 1997. He was President and Chief Operating
Officer of Dean Foods Co. from 1996 to 1997. He was President of The Quaker
Oats Company from 1993 to 1995 and Chief Operating Officer from 1992 to 1995.
He has been Chairman of the Board of Pete's Brewing Company since February
1997 and a Director since July 1996.
19
<PAGE>
James R. Wimmer is a lawyer, of counsel with Lord, Bissell & Brook since
retiring as Partner in 1992. He joined that firm in 1954 and was named a
Partner in 1959. From 1991 through 1993, he was also Vice Chairman and General
Counsel of Commonwealth Industries Corporation. He is a member of the
American, Illinois and Chicago Bar Associations.
Directors are divided into three classes and are elected for staggered three
year terms. All executive officers are elected annually and serve at the
pleasure of the Board of Directors.
Except as described above, there are no other family relationships between
any executive officer or director of the Company, and any director, executive
officer or person nominated or chosen by the Company to become a director or
executive officer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors maintains a Compensation Committee. Members of the
Compensation Committee are J. Patrick Gallagher, Jr. (Chairman), T. Kimball
Brooker, Robert E. Gallagher, Jack M. Greenberg, Philip A. Marineau and James
R. Wimmer. J. Patrick Gallagher, Jr. and Robert E. Gallagher are executive
officers of the Company. Both officers abstain from discussing and voting on
matters concerning their respective compensation. James R. Wimmer, a director
of the Company, is of counsel to Lord, Bissell & Brook, the Company's outside
counsel.
20
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table presents information concerning compensation paid or set
aside by the Company and its subsidiaries on an accrual basis to or for the
benefit of the Chief Executive Officer and each of the other six most highly
compensated executive officers of the Company in each of the Company's last
three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
--------------- ------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) OPTIONS (#) ($)(2)
- --------------------------- ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert E. Gallagher............ 1997 275,000 0 0 7,300
Chairman 1996 275,000 0 0 8,000
1995 275,000 0 0 7,500
J. Patrick Gallagher, Jr. ..... 1997 356,000 300,000 0 5,100
President and Chief Executive
Officer 1996 356,000 25,000 10,000 4,200
1995 356,000 25,000 10,000 2,600
Michael J. Cloherty............ 1997 346,000 500,000 0 6,200
Executive Vice President and 1996 346,000 25,000 10,000 4,900
Chief Financial Officer
1995 325,000 25,000 10,000 3,200
Gary M. Van der Voort.......... 1997 305,800 122,300 0 5,800
Vice President 1996 305,800 15,000 10,000 5,800
1995 305,800 15,000 10,000 4,200
Peter J. Durkalski............. 1997 261,500 104,600 0 4,500
Vice President 1996 261,500 20,000 10,000 4,500
1995 261,500 20,000 10,000 2,300
James W. Durkin, Jr............ 1997 270,000 108,000 0 4,500
Vice President 1996 250,000 30,000 10,000 4,400
1995 250,000 15,000 10,000 2,700
Walter F. McClure.............. 1997 260,000 104,000 0 8,500
Senior Vice President 1996 260,000 15,000 7,500 8,700
1995 260,000 15,000 7,500 6,800
</TABLE>
- --------
(1) Represents bonuses related to services rendered in the fiscal year
indicated above that were determined and paid in the subsequent fiscal
year.
(2) Includes amounts contributed by the Company under the 401(k) match feature
of the Company's Savings and Thrift Plan of $3,200 in 1997, $3,000 in 1996
and $1,500 in 1995, and the equivalent annual value of insurance premiums
paid by the Company for group term life insurance for the benefit of the
named executive officer.
DIRECTORS' COMPENSATION
Directors who are officers of the Company receive compensation in their
capacities as such officers and receive no additional compensation for serving
as directors.
Non-employee directors, currently Messrs. Brooker, Greenberg, Marineau and
Wimmer, are eligible to receive compensation consisting of nonqualified stock
options. In addition, non-employee directors receive an annual retainer of
$20,000 per year, or in lieu of the cash retainer, an option to purchase
shares of the Company's Common Stock below market value, plus fees of $500 for
attendance at each Board meeting or committee meeting on a date other than a
Board meeting date. Non-
21
<PAGE>
employee directors are reimbursed for travel and accommodation expenses
incurred in attending Board or committee meetings. Non-employee directors are
not eligible for participation in any other compensation plans of the Company.
In 1989, the Company's stockholders approved the adoption of the Company's
1989 Non-Employee Directors' Stock Option Plan (the "1989 Plan"), which was
subsequently amended in 1990, 1993, 1994, 1996 and 1998. The 1989 Plan
currently provides that non-employee directors are eligible to be granted
nonqualified options to purchase a maximum of 200,000 shares of the Company's
Common Stock. The Plan encompasses options granted to non-employee directors
at the discretion of the Option Committee of the Company's Board of Directors
("Discretionary Options") and options granted to non-employee directors
pursuant to an election made by a non-employee director to receive options in
lieu of his annual retainer ("Retainer Options"). Shares issued upon exercise
of options granted under the 1989 Plan may be repurchased shares held by the
Company or as authorized but previously unissued shares.
Under the 1989 Plan, a Discretionary Option shall be exercisable at such
rate and price fixed by the Option Committee. Discretionary Options terminate
if not exercised by the date set forth in the 1989 Plan or by such date
established by the Option Committee at the time it makes the grant.
Pursuant to the terms of the 1989 Plan, Messrs. Marineau and Wimmer have
elected to receive their annual retainers for 1997 in the form of an option to
purchase the Company's Common Stock. Each year on or before two weeks
preceding the Company's Annual Meeting of Stockholders, the Option Committee
shall determine the number of shares of Common Stock with respect to which a
non-employee director may be granted a Retainer Option. The non-employee
director's option exercise price per share shall be equal to the Fair Market
Value of the Common Stock subject to the Retainer Option less the Annual
Retainer, divided by the number of shares subject to the Retainer Option. The
option exercise price per share shall be not less than the par value of the
Common Stock. "Fair Market Value" is defined as the closing price of the
Company's Common Stock as reported on the NYSE Consolidated Transaction
Reporting System for the day on which the option is granted.
On May 20, 1997, the Company granted a Retainer Option for 1,000 shares of
the Company's Common Stock to each of Messrs. Marineau and Wimmer at an
exercise price of $11.50 per share. Such options are exercisable at the rate
of one-fourth of such grant each successive quarter commencing August 20,
1997. In addition, on September 1, 1997, the Company granted a Discretionary
Option for 5,000 shares of the Company's Common Stock to each of Messrs.
Brooker, Greenberg, Marineau and Wimmer at an exercise price of $35.75 per
share, which was the closing price for a share of Common Stock as reported on
the Consolidated Transaction Reporting System for securities listed on the
NYSE on that date. Such options are exercisable at the rate of one-third of
such grant each successive September 1, commencing September 1, 1998.
The Company approved a supplemental deferred compensation arrangement,
effective July 1, 1996, with Robert E. Gallagher, upon his retirement, and to
his surviving spouse, upon his death, and the surviving spouse of John P.
Gallagher, providing for a payment of $100,000 annually inclusive of any
Company pension plan payments to be paid until the death of each such
beneficiary.
SAVINGS AND THRIFT PLAN
The Company maintains a savings and thrift plan covering substantially all
U.S. employees which is qualified under the Internal Revenue Code. Employees
are covered by the plan on their date of hire and, until June 30, 1997, could
generally contribute up to 10% of total compensation on an after-tax basis to
the plan. Effective July 1, 1997 the Company discontinued the after-tax
feature of the plan. As of January 1, 1994, after-tax contributions are
limited to employees with total annual compensation
22
<PAGE>
of no more than $66,000 ($80,000 after January 1, 1997). Employees who have
attained age 21 and completed a year of service may generally contribute up to
the lesser of $9,500 in 1997 and $10,000 in 1998 or 8% (15% after June 30,
1997) of their gross earnings on a pre-tax basis under the 401(k) "salary
reduction" feature of the plan up to a maximum salary of $160,000. Effective
for plan years beginning after 1994, the maximum includible compensation for
an employee for any year may not exceed an overall salary maximum as
determined by the Internal Revenue Service of $160,000. In 1997, the Company
matched 50% of any employee's pre-tax contributions up to a maximum 4% of such
employee's gross earnings, resulting in a possible maximum matched
contribution from the Company of 2% of such employee's gross earnings.
PENSION PLAN
The Company also maintains a non-contributory defined benefit pension plan
covering substantially all domestic employees which is qualified under the
Internal Revenue Code. The plan provides an annual pension benefit on normal
retirement at age 65 which, when paid in the form of a single life annuity,
will equal 1% of final average earnings multiplied by the number of years of
credited service, not to exceed 25 years (without any deduction for social
security or other offset amounts). A person's earnings for purposes of the
plan include all compensation other than allowances such as moving expenses
plus any pre-tax contributions under the 401(k) feature of the savings and
thrift plan. Effective for plan years beginning after 1988, the maximum
includible compensation for a participant for any year may not exceed an
overall salary maximum as determined by the Internal Revenue Service of
$160,000. The remuneration for executive officers shown under "Salary" and
"Bonus" in the Summary Compensation Table constitutes their earnings during
1997 for purposes of the plan without regard to the Internal Revenue Service's
limitations. "Final average earnings" are the highest average earnings
received in any five consecutive full calendar years before retirement.
Employee's pension rights are fully vested after the earlier of (i) 5 years of
service with the Company or (ii) the attainment of age 65.
The following table shows the estimated annual benefits (which are not
subject to deduction for social security or other offset amounts) payable on
retirement under the Company's defined benefit plan to persons in specific
remuneration and credited years of service classifications assuming (i) the
person elects the single life annuity basis providing monthly payments without
benefits to his survivors and (ii) the person continues in the employ of the
Company at his present rate of remuneration until age 65:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AERAGE REMUNERATIONV YEARS OF CREDITED
DURING HIGHEST SERVICE
FIVE -----------------------
CONSECUTIVE YEARS 25 OR
BEFORE RETIREMENT 15 20 MORE
- -------------------- ------- ------- -------
<S> <C> <C> <C>
$150,000............................................. $22,500 $30,000 $37,500
175,000............................................. 26,250 35,000 43,750
200,000............................................. 30,000 40,000 50,000
225,000............................................. 33,750 45,000 56,250
250,000............................................. 37,500 50,000 62,500
</TABLE>
For purposes of estimating potential pension benefits using the foregoing
table, the number of years of credited service as of December 31, 1997 for the
executive officers named in the Summary Compensation Table are as follows:
Robert E. Gallagher (25 years), J. Patrick Gallagher, Jr. (22 years), Michael
J. Cloherty (15 years), Peter J. Durkalski (22 years), James W. Durkin, Jr.
(21 years), Walter F. McClure (20 years), and Gary M. Van der Voort (25
years). Such pension benefits are in addition to the amounts payable to such
persons under the Company's savings and thrift plan on their retirement and
are subject to certain limitations as required under the Internal Revenue
Code.
23
<PAGE>
STOCK OPTION PLANS
The Company maintains a 1988 Incentive Stock Option Plan and a 1988
Nonqualified Stock Option Plan. During the Company's 1997 fiscal year, no
executive officers of the Company named in the Summary Compensation Table
received an option grant.
The following table sets forth certain information regarding options to
purchase shares of Common Stock exercised during the Company's 1997 fiscal
year and the number and value of unexercised options to purchase shares of
Common Stock held at the end of the Company's 1997 fiscal year by the
executive officers of the Company named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SECURITIES SECURITIES VALUE OF VALUE OF
UNDERLYING UNDERLYING UNEXERCISED UNEXERCISED
NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY
SHARES VALUE OPTIONS AT OPTIONS AT OPTIONS AT OPTIONS AT
ACQUIRED ON REALIZED FY-END (#) FY-END (#) FY-END ($) FY-END ($)
NAME EXERCISE (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE(2)
---- ------------ -------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Gallagher..... -- -- -- -- -- --
J. Patrick Gallagher,
Jr..................... -- -- 47,500 71,500 401,000 403,000
Michael J. Cloherty..... 8,000 99,000 19,500 63,500 34,000 335,000
Gary M. Van der Voort... 25,000 495,000 59,000 66,000 603,000 368,000
Peter J. Durkalski...... 4,000 55,000 23,500 66,000 87,000 368,000
James W. Durkin, Jr..... 1,300 25,000 41,800 65,800 332,000 363,000
Walter F. McClure....... 10,500 211,000 37,800 39,800 406,000 210,000
</TABLE>
- --------
(1) Market value of underlying securities at exercise, minus the exercise
price.
(2) Market value of underlying securities at year end, minus the exercise
price.
SEVERANCE PAY PLAN
The Company has a plan for severance compensation to employees after a
hostile takeover. The plan defines a hostile takeover to include, among other
events, the following events, if not approved by two-thirds of the members of
the Board of Directors in office immediately prior to any such events: the
election of directors not nominated by the Board of Directors, a business
combination, such as a merger, not approved by the holders of 80% or more of
the Common Stock and the Board of Directors or not meeting various "fair
price" criteria, or the acquisition of 20% or more of the combined voting
power of the Company's stock by any person or entity. All full-time and part-
time employees who are regularly scheduled to work 20 or more hours per week
and who have completed at least two years of continuous employment with the
Company are participants in the plan. A severance benefit is payable under the
plan if a participant's employment with the Company terminates voluntarily or
involuntarily within two years after a hostile takeover for reasons such as
reduction in compensation, discontinuance of employee benefit plans without
replacement with substantially similar plans, change in duties or status,
certain changes in job location and involuntary termination of employment for
reasons other than just cause. For participants who have completed two but
less than five years of employment, the benefit is equal to the employee's
annual compensation during the year immediately preceding the termination of
employment. For employees who have completed five or more years of employment,
the benefit is equal to two and one-half times the employee's annual
compensation during the 12 months ending on the date of termination of
employment, but may not exceed 2.99 times average annual compensation during
the preceding five years. Annual compensation is defined for purposes of the
plan as the amount of the employee's wages, salary, bonuses and other
incentive compensation. Benefits are payable in a lump sum not less than 10
days after termination of employment.
24
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following tabulation shows with respect to any person who is known to be
the beneficial owner as of December 31, 1997 of more than 5% of the Company's
Common Stock, par value $1.00 per share, which is its only class of issued and
outstanding capital stock, (i) the total number of shares of Common Stock
beneficially owned as of such date; and (ii) the percent of Common Stock so
owned as of the same date.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT & NATURE PERCENT OF
OF OF BENEFICIAL COMMON
BENEFICIAL OWNER OWNERSHIP STOCK
---------------- --------------- ----------
<S> <C> <C>
Franklin Resources, Inc............................ 1,047,400(1) 6.3%
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 94403-7777
</TABLE>
The following tabulation shows with respect to each of the directors of the
Company, the executive officers named in the Summary Compensation Table, and
all directors and executive officers as a group, fourteen in number, (i) the
total number of shares of Common Stock beneficially owned as of February 27,
1998; and (ii) the percent of Common Stock so owned as of the same date.
<TABLE>
<CAPTION>
AMOUNT &
NATURE OF PERCENT OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP(2) STOCK
- ------------------------ ------------ ----------
<S> <C> <C>
Robert E. Gallagher................................... 757,338(3) 4.5%
T. Kimball Brooker.................................... 17,380 *
John G. Campbell...................................... 32,135 *
Michael J. Cloherty................................... 99,502 *
Peter J. Durkalski.................................... 60,885(4)
James W. Durkin, Jr................................... 66,200
J. Patrick Gallagher, Jr. ............................ 191,790(5) 1.1%
Jack M. Greenberg..................................... 27,380 *
Frank M. Heffernan, Jr. .............................. 282,200(6) 1.7%
Philip A. Marineau.................................... 19,130 *
Walter F. McClure..................................... 70,906(7) *
Gary M. Van der Voort................................. 144,825(8) *
James R. Wimmer....................................... 31,130(9) *
All directors and executive officers as a group (14
persons)............................................. 1,857,633 10.8%
</TABLE>
- --------
* Less than 1%
25
<PAGE>
(1) Information obtained from a Schedule 13G dated January 27, 1998 filed with
the Securities and Exchange Commission by Franklin Resources, Inc., its
subsidiaries, Franklin Mutual Advisers, Inc. and Franklin Advisors, Inc.,
and its principal shareholders, Charles B. Johnson and Rupert H. Johnson,
Jr. The Company has been informed that Franklin Resources, Inc., through
its subsidiaries, is considered the beneficial owner in the aggregate of
1,047,400 shares, or 6.3% of shares outstanding of the Company's voting
Common Stock.
(2) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of
1934. Unless otherwise stated in these notes, each person has sole voting
and investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options exercisable within
sixty days are deemed outstanding for the purpose of computing the number
and percentage owned by such person, but are not deemed outstanding for
the purpose of computing the percentage owned by each other person listed.
Includes shares which the listed beneficial owner has a right to acquire
within sixty days as follows: T. Kimball Brooker, 7,380 shares; John G.
Campbell, 15,250 shares; Michael J. Cloherty, 31,500 shares; Peter J.
Durkalski, 36,000 shares; James W. Durkin, Jr. 54,093 shares; J. Patrick
Gallagher, Jr., 61,000 shares; Jack M. Greenberg, 25,380 shares; Frank M.
Heffernan, Jr., 20,100 shares; Philip A. Marineau, 19,130 shares; Walter
F. McClure, 45,500 shares; Gary M. Van der Voort, 71,500 shares; James R.
Wimmer, 27,130 shares; all directors and executive officers as a group (14
persons), 436,463 shares.
(3) Includes 75,000 shares held in trust for the benefit of Robert E.
Gallagher's grandchildren, 100,000 shares held by a limited partnership of
which Robert E. Gallagher and Isabel Gallagher, his wife, are the general
partners, 100,000 shares held in trust for the benefit of Isabel
Gallagher, 100,000 shares held by a charitable trust under which Robert E.
Gallagher is the trustee; and 69,012 shares held in the Lauren E.
Gallagher Trust under which Robert E. Gallagher is a trustee.
(4) Includes 4,885 shares held in trust for the benefit of his minor children
by his wife, Delores Durkalski, and another as trustees.
(5) Includes 35,220 shares held in trust for the benefit of his minor children
by his wife, Anne M. Gallagher, and another as trustees and 24,404 shares
held by his wife.
(6) Includes 260,500 shares held in trust by Frank M. Heffernan, Jr. and
Lenore B. Heffernan, his wife, as trustees.
(7) Includes 11,600 shares held in trust by Walter F. McClure and Alice M.
McClure, his wife, as trustees and 10,500 shares held by his wife.
(8) Includes 3,600 shares held as custodian for the benefit of his children
under the Uniform Gift to Minors Act.
(9) Includes 4,000 shares held by his wife, Gertrude A. Wimmer.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock, $1.00
par value per share, and 1,000,000 shares of Preferred Stock without par
value.
COMMON STOCK
As of February 27, 1998, there were 16,703,990 shares of Common Stock
outstanding held by approximately 650 stockholders of record.
Holders of the outstanding Common Stock are entitled to one vote for each
share held of record on all matters presented to stockholders. The shares of
Common Stock have no cumulative voting rights in the election of directors,
and accordingly holders of a majority of the outstanding voting stock are
entitled to elect the entire Board. The holders of Common Stock have no
conversion, preemptive or subscription rights. Subject to the rights of
holders of Preferred Stock, upon liquidation of the Company, the net assets
will be distributed ratably among the holders of Common Stock. Subject to
26
<PAGE>
the prior payment of all preferred dividends on shares of outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
out of funds legally available therefor dividends at such time and in such
amounts as the Board of Directors may from time to time determine. All shares
of Common Stock currently outstanding are, and when the shares of Common Stock
offered by the Company hereby are sold, such shares will be, fully paid and
nonassessable.
PREFERRED STOCK
The Company also is authorized to issue 1,000,000 shares of Preferred Stock
without par value, issuable in series. The Board of Directors is authorized to
designate each series and the number of shares within the series and to
determine and fix the relative rights and preferences of the shares of each
series. No shares of Preferred Stock are currently issued or outstanding.
Preferred Stock, when and if issued, will be senior to Common Stock with
respect to dividend and liquidation rights. The relative rights and
preferences which may hereafter be fixed by resolution of the Board for any
series of Preferred Stock may provide that the shares of such series shall be
senior to the other series of Preferred Stock with respect to dividends,
liquidation or other rights and that such shares may be redeemable or may be
convertible into Common Stock or other securities.
COMMON SHARE PURCHASE RIGHTS
On March 10, 1987, the Board of Directors adopted a Common Share Purchase
Rights Plan (the "Plan"), which Plan was approved by the Company's
stockholders at their Annual Meeting on May 12, 1987. The description and
terms of the Rights are set forth in a Rights Agreement (the "Rights
Agreement") between the Company and Harris Trust & Savings Bank. The
description of the Rights contained herein is qualified in its entirety by
reference to the form of Rights Agreement which has been included as an
exhibit to the Registration Statement of which this Prospectus is a part.
Under the Plan, Common Share Purchase Rights (the "Rights") were distributed
as a dividend at the rate of one Right for each share of Common Stock held by
stockholders of record as of May 12, 1987 (the "Record Date"). The Company
also will issue one Right with respect to each share of Common Stock that
becomes outstanding after May 12, 1987, but prior to the earliest of the
Distribution Date (as hereinafter defined), the redemption of the Rights or
the expiration of the Rights. Each Right entitles the registered holder to
purchase from the Company one share of Common Stock at the price of $100 per
share, subject to certain adjustments (the "Purchase Price").
With respect to the shares of Common Stock outstanding as of May 12, 1987,
the Rights are evidenced by the Common Stock certificates. With respect to the
shares of Common Stock that become outstanding after May 12, 1987 but prior to
the earliest of the Distribution Date (as hereinafter defined), the redemption
of the Rights or the expiration of the Rights, the Rights will be evidenced by
Common Stock certificates that contain a legend incorporating the Rights
Agreement by reference.
The Rights will not be exercisable or transferable apart from the Common
Stock until the earlier to occur of (i) ten days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") acquired or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding Common Stock or (ii) ten days
following the commencement or announcement of an intention to make a tender
offer or exchange offer for 30% or more of the outstanding Common Stock (the
earlier of such dates being called the "Distribution Date"). Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates representing Common Stock
outstanding as of May 12, 1987 (or issued after May 12, 1987 but prior to the
earliest of the Distribution Date, the redemption of the Rights or the
expiration of the Rights) would also constitute the transfer of the Rights
associated with the Common Stock represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights (the "Right Certificates") would be mailed to holders of record of
the Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone would evidence the Rights.
27
<PAGE>
The Rights would not be exercisable until the Distribution Date and, as
amended on July 18, 1996, would expire on May 12, 2007 unless earlier redeemed
by the Company as described below. Until a Right is exercised, the holder
thereof, as such, would have no rights as a stockholder, including, without
limitation, the right to vote or to receive dividends. The Rights would be
redeemable by the Company in whole, but not in part, at a price of $0.05 per
Right (the "Redemption Price") prior to the public announcement that 20% or
more of the Company's Common Stock had been accumulated by a single acquirer
or group.
In the event that the Company were acquired in a merger or other business
combination transaction or 50% or more of its assets or earning power were
sold, proper provision would be made so that each holder of a Right thereafter
would have the right to receive, upon the exercise thereof at the then current
exercise price of the Right, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the exercise price of the Right. In the event that the
Company were the surviving corporation in a merger and its Common Stock was
not changed or exchanged, or in the event that an Acquiring Person engages in
one of a number of self-dealing transactions specified in the Rights
Agreement, such as certain sales of assets to the Company or obtaining certain
financial benefits from the Company, proper provision would be made so that
each holder of a Right, other than Rights that were beneficially owned by the
Acquiring Person on the Distribution Date (which would thereafter be void)
would thereafter have the right to receive upon exercise that number of shares
of Common Stock having a market value of two times the exercise price of the
Right.
The Purchase Price payable and the number of shares of Common Stock or other
securities or property purchasable, upon exercise of the Rights would be
subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend on, or a subdivision, combination or reclassification of
the Common Stock, (ii) upon the grant to holders of shares of the Common Stock
of certain rights or warrants to subscribe for shares of Common Stock or
convertible securities at less than the current market price of the Common
Stock, or (iii) upon the distribution to holders of shares of the Common Stock
of evidences of indebtedness or assets (excluding regular periodic cash
dividends out of earnings or retained earnings at a rate not in excess of 125%
of the rate of the last cash dividend theretofore paid or dividends payable in
shares of Common Stock) or of subscription rights or warrants (other than
those referred to above). With certain exceptions, no adjustment in the
Purchase Price would be required until cumulative adjustments required an
adjustment of at least 1% in such Purchase Price. No fractional shares would
be issued and in lieu thereof, an adjustment in cash would be made based on
the market price of the Common Stock on the last trading date prior to the
date of exercise.
The Rights have certain anti-takeover effects. The Rights would cause
substantial dilution to a person who attempts to acquire the Company without
conditioning his offer on a substantial number of Rights being acquired. The
Rights would have no effect, however, on a person who is willing to acquire
control of the Company and wait until the Rights expire before acquiring 100%
ownership. Moreover, the Rights would not affect a transaction approved by the
Company prior to the public announcement that 20% or more of the Company's
Common Stock had been accumulated by a single acquirer or group, because the
Rights could be redeemed until that time.
CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Restated Certificate of Incorporation contains provisions
which could deter, delay or prevent a change in control of the Company which
is opposed by the Board of Directors. Such provisions include the following:
(a) a provision for classification of the Board of Directors into three
classes and a minimum of three and a maximum of fifteen directors at any time;
(b) a requirement that a director or the entire Board of Directors may only be
removed, with or without cause, by the affirmative vote of the holders of 80%
of the outstanding shares of voting stock of the Company and of
28
<PAGE>
not less than 67% of the voting stock held by stockholders other than a
"Related Person" as defined below; (c) a requirement that any merger, purchase
of assets or other business combination ("Business Combination") between the
Company and certain owners of 20% or more of the outstanding voting stock of
the Company ("Related Person") in order to become effective must be approved
by the affirmative vote of not less than 80% of the shares of outstanding
voting stock of the Company and by 67% of the stock owned by stockholders
other than the Related Person; and (d) a requirement that the provisions
summarized in (a), (b) and (c) may only be repealed or amended by the
affirmative vote of 80% of the outstanding voting stock of the Company and the
affirmative vote of 67% of the outstanding voting stock owned by stockholders
other than a Related Person. The 80% and 67% approval requirements do not
apply if (1) two-thirds of the directors who held office immediately prior to
the date the Related Person became a Related Person approve the Business
Combination or (2) the Business Combination is between the Company and a
subsidiary at least 50% owned by the Company and in which the Related Person
has no interest, or (3) any consideration to be paid to stockholders of the
Company as part of the Business Combination meets certain fair price tests and
stockholders of the Company have received a timely mailing containing (A) the
recommendation of outside directors and directors who held office immediately
prior to the Related Person's becoming such and (B) the opinion of a reputable
investment banking or financial services firm as to the fairness of the
Business Combination. The By-laws also provide that special meetings of
stockholders may be called by the President or by the Secretary at the request
in writing of the majority of the Board of Directors. On May 14, 1991 the
stockholders approved a proposal to amend the Company's Restated Certificate
of Incorporation to require all stockholder action take place at a meeting of
the stockholders.
The foregoing provisions of the Restated Certificate of Incorporation and
By-laws could have the effect of perpetuating current management or preventing
approval by the holders of a majority of the Company's voting stock. In
addition, it would be possible for the Board of Directors to authorize
issuance of the Preferred Stock, without further approval by the stockholders,
with rights and preferences which could impede a takeover of the Company. The
foregoing summary is qualified in its entirety by reference to the provisions
of the Restated Certificate of Incorporation and By-laws, as amended, which
have been included as exhibits to the Registration Statement of which this
Prospectus is a part.
LEGAL OPINION
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Carl E. Fasig, Corporate Counsel and Secretary for the
Company. Mr. Fasig holds options with respect to 4,100 shares that are
exercisable within 60 days from the date of this Prospectus.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997
and 1996, and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
29
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Consolidated Financial Statements:
Consolidated Statement of Earnings...................................... F- 2
Consolidated Balance Sheet.............................................. F- 3
Consolidated Statement of Cash Flows.................................... F- 4
Consolidated Statement of Stockholders' Equity.......................... F- 5
Notes to Consolidated Financial Statements.............................. F- 6
Management's Report....................................................... F-20
Report of Independent Auditors............................................ F-21
</TABLE>
F-1
<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.
F-2
<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.
F-3
<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.
F-4
<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.
F-5
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Arthur J. Gallagher & Co. (the Company) provides insurance 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
F-6
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
income taxes, excluded from earnings and 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.
F-7
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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.
F-8
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
======== ======== ======== =======
<CAPTION>
DECEMBER 31, 1996
- -----------------
<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>
F-9
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS--(CONTINUED)
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 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.
F-10
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-11
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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>
F-12
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTION PLANS--(CONTINUED)
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.
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
F-13
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RETIREMENT PLANS--(CONTINUED)
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>
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.
F-14
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RETIREMENT PLANS--(CONTINUED)
The Company also has a foreign defined contribution plan which provides for
basic contributions by the Company and voluntary contributions by employees
which are matched 100% by the Company, up to a maximum of 5% of salary, as
defined.
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>
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.
F-15
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-16
<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>
F-17
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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>
F-18
<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.
F-19
<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
F-20
<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
F-21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the securities
being registered, all of which will be paid by the Registrant, are estimated
as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $11,955
Printing Expenses................................................ 15,000
Legal Fees and Expenses.......................................... 5,000
Accountant's Fees and Expenses................................... 5,000
Miscellaneous Costs.............................................. 5,000
-------
Total........................................................ $41,955
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Seventh of the Registrant's By-laws (filed as Exhibit 3.2) and
Article Thirteenth of the Company's Restated Certificate of Incorporation
(filed as Exhibit 3.1) provide in effect for the indemnification by the
Registrant of each director, officer, employee or agent of the Registrant to
the full extent permitted by the General Corporation Law of Delaware.
Article Seventh of the Registrant's By-laws provides that the Registrant
shall indemnify any person in connection with any action, suit, or proceeding
brought or threatened by reason of the fact that he is or was a director,
officer, employee or agent of the Registrant, or is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
enterprise against all costs actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Similar indemnity is permitted to be provided to such persons in connection
with an action or suit by or in the right of the Registrant, and provided
further that such person shall not have been adjudged liable for negligence or
misconduct in the performance of his duty to the Registrant, unless, in view
of all the circumstances of the case, the court in which the action or suit
was brought determines that such person despite the adjudication of liability
is fairly and reasonably entitled to indemnity for such expenses.
Article Thirteenth of the Company's Restated Certificate of Incorporation
eliminates the liability of the Company's directors for monetary damages for
breach of fiduciary duty as a director except where a director breaches his
duty of loyalty to the Company and its stockholders, fails to act in good
faith or engages in intentional misconduct or a knowing violation of law,
authorizes the payment of a dividend or stock repurchase which is illegal
under Section 174 of the Delaware General Corporation Laws or obtains an
improper personal benefit.
The Registrant also maintains and pays premiums on a directors' and
officers' liability insurance policy and entered into an Indemnity Agreement
with each of the directors and officers of the Company. The provisions of the
Indemnity Agreement alter or clarify the statutory indemnity in the following
respect: (1) indemnity will be explicitly provided for settlements in
derivative actions; (2) prompt payment of litigation expenses will be provided
in advance of indemnification; (3) prompt indemnification of advances of
expenses will be provided unless a determination is made that the director or
officer has not met the required standard; (4) the director or officer will be
permitted to petition a court to determine whether his actions meet the
standards required; and (5) partial indemnification will be permitted in the
event that the director or officer is not entitled to full indemnification. In
addition, the Indemnity Agreement specifically includes indemnification with
II-1
<PAGE>
respect to actions, suits or proceedings brought under and/or predicated upon
the Securities Act of 1933, as amended, and/or the Securities Exchange Act of
1934, as amended.
The preceding summary is qualified in its entirety by the Company's Restated
Certificate of Incorporation, By-laws and Indemnity Agreement which are filed
as exhibits to this Registration Statement and for further information,
reference is made thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has not sold securities which
were not registered under the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A list of exhibits and financial statement schedules included as part of
this Registration Statement is set forth in the list which immediately
precedes such exhibits and schedules and is hereby incorporated herein by
reference.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement,
including (but not limited to) any addition or deletion of a managing
underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to any provision of the
Registrant's By-laws, Directors' and Officers' Liability Insurance Policy,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ITASCA, AND STATE OF
ILLINOIS, ON THE 19TH DAY OF MARCH, 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 ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON MARCH 19, 1998 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Robert E. Gallagher* Chairman and Director
___________________________________________
(Robert E. Gallagher)
/s/ J. Patrick Gallagher, Jr. President and Director (Chief Executive
___________________________________________ Officer)
(J. Patrick Gallagher, Jr.)
/s/ Michael J. Cloherty Executive Vice President and Director
___________________________________________ (Chief Financial Officer)
(Michael J. Cloherty)
/s/ 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
II-3
<PAGE>
LIST OF EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<C> <S> <C>
*21.0 Subsidiaries of the Company, including state or other ju-
risdiction of incorporation or organization and the names
under which each does business.
*23.1 Consent of Ernst & Young LLP, as independent auditors.
**27.0 Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules:
**Schedule II Valuation and Qualifying Accounts
All other exhibits and schedules 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 herewith.
**Incorporated herein by reference to the Company's Form 10-K Annual Report
for 1997, File No. 1-9761.
II-4
<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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
Gallagher Bassett International Ltd. (UK)................... England
Gallagher Bassett Adjusters Canada, Inc.(3)................. Canada
Gallagher Bassett Argentina S.A............................. Argentina
Gallagher Bassett 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. of 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
Gallagher Benefit Services of the Carolinas, Inc.............. North Carolina
</TABLE>
<PAGE>
- --------
(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) 25% of the Common Stock of this subsidiary of the Company is owned by two
third parties.
(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
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 20, 1998 in the Post-Effective Amendment
No. 1 to Registration Statement on Form S-1 (No. 333-23897) and related
Prospectus of Arthur J. Gallagher & Co. and subsidiaries for the registration
of 2,303,984 shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated January 20, 1998 with respect to the consolidated financial statement
schedule of Arthur J. Gallagher & Co. and subsidiaries for the years ended
December 31, 1997, 1996 and 1995 included in the Annual Report (Form 10-K) for
1997 filed with the Securities and Exchange Commission.
Ernst & Young LLP
Chicago, Illinois
March 19, 1998
