<PAGE>
As filed with the Securities and Exchange Commission on March 29, 1999
Registration No.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
ARTHUR J. GALLAGHER & CO.
(Exact name of Registrant as specified in its charter)
DELAWARE 6411 36-2151613
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code No.)
organization) Two Pierce Place
Itasca, Illinois 60143-3141
(630) 773-3800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
---------------
John C. Rosengren
Vice President and General Counsel
Arthur J. Gallagher & Co.
Two Pierce Place
Itasca, Illinois 60143-3141
(630) 773-3800
(Name, address, including zip code and telephone number, including area code,
of agent for service)
---------------
Approximate Date of Commencement of Proposed Sale to the Public: From time
to time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Proposed maximum
Amount maximum aggregate Amount of
Title of each class or securities to be to be offering price offering registration
registered registered(1) per share(2) price(2) fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,200,000
Common Stock, $1.00 par value.............. shares $47.0625 $56,475,000 $15,700.05
- ------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) In addition to the 1,200,000 shares being registered hereby, the
prospectus contained herein also relates to shares previously registered
on the Registrant's Registration Statements Nos. 33-58101, 333-1435 and
333-23879.
(2) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee, on the basis of the last price quoted
for the Registrant's Common Stock, as reported on the consolidated
transaction reporting system for securities listed on the New York Stock
Exchange on March 25, 1999.
As permitted by Rule 429, the prospectus in this Registration Statement
constitutes Post-Effective Amendment No. 4 to Registration Statement No. 33-
58101 which became effective April 24, 1995, Post-Effective Amendment No. 3 to
Registration Statement No. 333-1435 which became effective March 27, 1996 and
Post-Effective Amendment No. 2 to Registration Statement No. 333-23879 which
became effective March 25, 1997.
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>
PROSPECTUS
ARTHUR J. GALLAGHER & CO.
2,534,162 SHARES
COMMON STOCK, $1.00 PAR VALUE
----------------
Of the 2,534,162 shares of common stock, par value $1.00 ("Common Stock"),
of Arthur J. Gallagher & Co. (the "Company") offered hereby, 2,509,162 shares
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."
This Prospectus also includes 25,000 shares to be issued from time to time
pursuant to the exercise of options granted to The Arthur J. Gallagher
Foundation ("the Foundation"). Such options were granted to the Foundation
pursuant to the Nonqualified Stock Option Agreement ("Option Agreement") dated
August 31, 1998 between the Foundation and the Company. The Company will not
receive any of the proceeds from the sale of the shares of Common Stock sold
by the Foundation.
The Company's Common Stock is listed on the New York Stock Exchange ("NYSE")
trading under the symbol "AJG". The last sales price of the Company's Common
Stock on February 26, 1999 as reported on the Consolidated Transaction
Reporting System for securities listed on the NYSE was $47.75 per share.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS MARCH , 1999.
<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 (annual, quarterly and current 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 read 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
Room of the Commission at 450 5th Street, N.W., Washington, D.C. 20549 at
prescribed rates. Information on the operation of the Public Reference Room of
the Commission may be obtained by calling the Commission at 1-800-SEC-0330. In
addition, electronically filed documents including reports, proxy material and
other information covering the Company can be obtained from the Commission's
internet site at http://www.sec.gov. The Company's reports, proxy material and
informational filings under the Exchange Act may also be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus is a part) and exhibits
thereto which the Company has filed with the Commission in Washington, D.C.
For further information, reference is made to the Registration Statement
including the exhibits filed or incorporated as a part of it.
----------------
No person is authorized in connection with any offering made hereby to give
any information or to make any representation other than as contained in this
Prospectus, and if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, by any
person in any jurisdiction in which it is unlawful for such person to make
such an offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any time subsequent to the
date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.............. 2
Prospectus Summary................. 3
The Company........................ 4
Securities Covered by this
Prospectus........................ 4
Price Range of Common Stock and
Dividends......................... 6
Selected Consolidated Financial
Data.............................. 6
Selected Quarterly Financial Data
(Unaudited)....................... 7
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 8
Business of the Company............ 14
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.......................... 24
Compensation of Executive Officers
and Directors...................... 26
Summary Compensation Table.......... 26
Principal Holders of Securities..... 30
Description of Capital Stock........ 32
Legal Opinion....................... 35
Experts............................. 35
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 100 countries
around the world. The Company believes that it is the fourth largest insurance
broker worldwide in terms of total revenues. The Company's executive offices
and located at Two Pierce Place, Itasca, Illinois 60143-3141, and its telephone
number is (630) 773-3800. See "Business of the Company".
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered................ 2,534,162 shares; 2,509,162 shares which
may be offered and issued from time to time
in connection with future acquisitions by
the Company and 25,000 shares which may be
issued from time to time to the Foundation.
NYSE symbol......................... AJG
Common Stock Outstanding on
February 28, 1999.................. 18,100,066 shares
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF EARNINGS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commissions and fees.............. $522,148 $467,336 $449,701 $433,574 $395,860
Investment income and other....... 18,507 24,169 24,052 20,520 14,136
Non-recurring gains............... -- 8,993 -- 2,035 --
-------- -------- -------- -------- --------
Total revenues.................... 540,655 500,498 473,753 456,129 409,996
Net earnings...................... 56,501 54,900 44,227 43,011 37,712
Net earnings per common share..... 3.25 3.28 2.64 2.56 2.24
Net earnings per common and common
equivalent share................. 3.10 3.17 2.54 2.43 2.14
Dividends declared per common
share............................ 1.40 1.24 1.16 1.00 .88
Book value per common share....... 11.47 9.81 8.03 7.48 6.37
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Total assets................................................. $746,010 $652,080
Total stockholders' equity................................... 202,468 165,580
</TABLE>
The financial information for all periods prior to 1998 has been restated for
four 1998 acquisitions accounted for using the pooling of interests method.
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 100 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 include
2,509,162 shares which 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").
A material acquisition or series of acquisitions (constituting in the
aggregate a material transaction) would require the Company to 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.
This Prospectus also includes 25,000 shares to be issued from time to time
pursuant to the exercise of options granted to the Foundation. Such options
were granted to the Foundation pursuant to an Option Agreement dated August
31, 1998 between the Foundation and the Company. This is an initial grant of
options to the Foundation of which Robert E. Gallagher, J Patrick Gallagher,
Jr., and Michael J. Cloherty are trustees. The Foundation does not directly
hold other shares of the Company's stock and the Company will not receive any
of the proceeds from the sale of the shares of Common Stock sold by the
Foundation.
Sales of the Common Stock may be made by the Foundation, or by pledgees,
donees, transferees or other successors in interest thereof, in any way
permitted by law. Such sales may be made on one or more exchanges or in the
over-the-counter market or otherwise at prices and at terms then prevailing or
at prices related to the then current market price or in negotiated
transactions. The shares may be sold by one or more of the following: (a) a
block trade in which the broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (c) an exchange distribution in accordance with the rules of
such exchange; and (d) ordinary brokerage transactions and transactions in
which the broker solicits purchasers. In effecting sales, brokers or dealers
engaged by the Foundation may arrange for other brokers or dealers to
participate. Brokers or dealers will receive commissions or discounts from the
Foundation in amounts to be negotiated prior to the sale. Such brokers or
dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the 1933 Act, in connection with such
sales. In addition, any securities covered by this Prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant
to this Prospectus.
5
<PAGE>
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, 1997 through December 31,
1998 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>
1998
- ----
First............................................ $46 1/8 $33 9/16 $.35
Second........................................... 46 9/16 41 7/8 .35
Third............................................ 45 25/32 36 5/8 .35
Fourth........................................... 46 3/4 34 7/8 .35
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
</TABLE>
See the Cover Page of this Prospectus for a recent market price of the
Company's Common Stock.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 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,
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Earnings
Data:
Commissions..................... $313,131 $285,189 $276,736 $270,437 $251,344
Fees............................ 209,017 182,147 172,965 163,137 144,516
Investment income and other..... 18,507 24,169 24,052 20,520 14,136
Non-recurring gains............. -- 8,993 -- 2,035 --
-------- -------- -------- -------- --------
Total revenues.................. 540,655 500,498 473,753 456,129 409,996
Total expenses.................. 456,126 417,876 406,751 387,191 350,454
-------- -------- -------- -------- --------
Earnings before income taxes.... 84,529 82,622 67,002 68,938 59,542
Net earnings.................... 56,501 54,900 44,227 43,011 37,712
Net earnings per common share... 3.25 3.28 2.64 2.56 2.24
Net earnings per common and
common equivalent share........ 3.10 3.17 2.54 2.43 2.14
Dividends declared per common
share.......................... 1.40 1.24 1.16 1.00 .88
Consolidated Balance Sheet Data:
Total assets.................... $746,010 $652,080 $602,067 $577,067 $525,288
Long-term debt less current
portion........................ -- -- 1,130 2,260 3,390
Total stockholders' equity...... 202,468 165,580 134,566 125,884 105,344
</TABLE>
6
<PAGE>
The financial information for all periods prior to 1998 has been restated
for four 1998 acquisitions accounted for using the pooling of interests
method.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for the years ended December 31, 1998 and 1997
were as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
1998 -------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues............................. $123,702 $124,417 $143,538 $148,998
Earnings before income taxes............... 17,215 14,788 29,132 23,394
Net earnings............................... 11,494 9,892 19,859 15,256
Net earnings per common share.............. .68 .57 1.13 .87
Net earnings per common and common
equivalent share.......................... .65 .54 1.08 .83
<CAPTION>
1997
<S> <C> <C> <C> <C>
Total revenues............................. $114,594 $119,695 $133,518 $132,691
Earnings before income taxes............... 14,457 19,840 28,587 19,738
Net earnings............................... 9,631 13,185 18,958 13,126
Net earnings per common share.............. .57 .79 1.13 .78
Net earnings per common and common
equivalent share.......................... .56 .77 1.09 .75
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Fluctuations in premiums charged by insurance companies have a material
effect on the insurance brokerage industry. Commission revenues are based on a
percentage of the premiums paid by insureds and generally follow premium
levels. For more than a decade, lower premium rates have prevailed 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.
In recent years insured losses have reached into the billions of dollars.
Substantial mergers, both domestically and internationally, have resulted in
fewer insurance companies. Increased underwriting losses and reduced
competition tend to raise premium rates. In spite of these forces, there have
been mitigating factors including a favorable equity market, increased
underwriting capital (more supply of insurance product) and economies of scale
after consolidations, all of which tend to lower premium rates. The net result
is that property/casualty premium rates have remained low. Management believes
these conditions in the insurance marketplace will continue and overall premium
pricing will remain under pressure and not improve in 1999.
Historically, increased property replacement costs due to inflation and
increasingly large litigation awards have caused 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 increased underwriting
capital have resulted in a highly competitive insurance marketplace and flat to
lower premiums. In general, the downward trend in premium rates has had a
greater effect on the Company's revenues than inflation.
Although the property/casualty insurance pricing environment has resulted in
some "risk" buyers returning to first-dollar coverage, management believes the
overall trend will continue to move toward the alternative insurance market,
which would tend to have a favorable effect on our Risk Management Services
segment. The Company anticipates that new sales in the areas of risk
management, claims management, insurance captive and self-insurance services
will continue to be a major factor in the Company's fee revenue growth during
1999.
The Company continues to look to the future and to explore not only the core
segments of Insurance Brokerage and Risk Management Services, but also
expansion within the alternative insurance markets and financial and related
investment services. Management believes these areas continue to hold
opportunities for diversification and profitable growth.
Results of Operations--Consolidated
The Company's results of operations for periods prior to 1998 have been
restated for four acquisitions as if they had operated as part of the Company
prior to their joining the Company. The Company continues to search for merger
partners which complement existing operations, provide entry into new markets,
add new products and enhance local sales and service capabilities. For the
effect of these restatements, in the aggregate, on year-to-year comparisons,
see Note 2 to the Consolidated Financial Statements.
Commission revenues increased by $27.9 million or 10% in 1998. This increase
is the result of new business production of $54.1 million, significantly offset
by lost business of $35.2 million, with the balance coming from net increases
on renewals and contingent commissions. Commission revenues increased by $8.5
million or 3% in 1997. This increase is the result of new business production
partially offset by lost business.
Fee revenues increased by $26.9 million or 15% in 1998. This increase,
generated primarily from the Risk Management Services segment, resulted from
strong new business production of $39.0 million
8
<PAGE>
and favorable retention rates on existing business. Fee revenues increased by
$9.2 million or 5% in 1997. This increase, also generated primarily from Risk
Management Services, resulted from new business production partially offset by
lost business.
Investment income and other decreased by $5.7 million or 23% in 1998. This
decrease is due primarily to lower returns on funds invested with outside fund
managers which were adversely affected by volatility in global equity markets
during 1998. In addition, the Company liquidated a portion of its investment
portfolio, thereby reducing the aggregate value of these portfolios by $24.0
million during 1998. Investment income and other was virtually unchanged in
1997 from the same period in 1996.
In 1997, the Company recognized non-recurring pretax gains of $7.2 million on
the sale of underperforming or geographically undesirable operations and $1.8
million on a real estate transaction. There were no material non-recurring
pretax gains recorded in either 1998 or 1996.
Salaries and employee benefits increased by $27.1 million or 11% in 1998 due
primarily to an 8% increase in employee head count, salary increases, the
annualized effect of prior year new hires along with a corresponding increase
in employee benefit expenses, and a $4.8 million non-recurring gain recognized
in 1997 from the settlement of a defined benefit pension plan at one of the
Company's United Kingdom subsidiaries. Salaries and employee benefits increased
by $4.8 million or 2% in 1997 due to salary increases and the annualized effect
of prior year new hires substantially offset by a 3% reduction in employee head
count in 1997, the non-recurring pension gain mentioned above and a wage freeze
for certain management employees in 1997.
Other operating expenses increased by $11.2 million or 7% in 1998. This
increase is due primarily to increases associated with travel, entertainment
and temporary personnel costs for new business, technology upgrades, office
consolidation expenses and commissions paid to sub-brokers. Other operating
expenses increased by $6.4 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.
The Company's effective income tax rates of 33.2%, 33.6% and 34.0% in 1998,
1997 and 1996, respectively, are less than the statutory federal income tax
rate of 35% due primarily to the effect of tax benefits generated by certain
investments which are substantially offset by state and foreign taxes. See Note
12 to the Consolidated Financial Statements.
The Company's foreign operations recorded earnings before income taxes of
$5.4 million, $6.6 million and $5.2 million in 1998, 1997 and 1996,
respectively. The decrease in 1998 is due to the non-recurring gains recognized
in 1997 associated with the pension and real estate transactions mentioned
above, substantially offset by growth in operating results generated by new
business. The 1997 increase is due to the non-recurring gains associated with
the pension and real estate transactions mentioned above. See Notes 12 and 14
to the Consolidated Financial Statements.
The Company's revenues vary from quarter to quarter generally as a result of
the timing of policy inception dates which traditionally are heaviest in the
third quarter. Expenses, on the other hand, are fairly uniform throughout the
year. See Note 13 to the Consolidated Financial Statements.
Results of Operations--Segment Information
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments
of an Enterprise and Related Information." SFAS 131 establishes standards for
the way that public business enterprises report information about operating
segments and related disclosures. The following discussion describes and
compares the results of operations and geographic data between 1998, 1997 and
1996 with respect to the way the Company views its operating segments.
9
<PAGE>
Insurance Brokerage Services includes the Company's retail, reinsurance and
wholesale brokerage operations. Total revenues in 1998 were $362.5 million, a
9% increase over 1997. This increase is due primarily to new business
production and the positive effect of acquisitions, significantly offset by
lost business. U.S. revenues of $330.2 million were up 9% over 1997. Revenues
in 1998 from foreign operations, principally in the United Kingdom were up 8%
or $2.3 million over 1997 due mainly to new business partially offset by lost
business. Earnings before income taxes in 1998 increased 19% over 1997 as a
result of increased revenues. Total revenues in 1997 were $333.8 million, an
increase of 4% over 1996. This increase again is due to new business production
partially offset by lost business. U.S. revenues of $303.8 million were up 4%
over 1996. Revenues in 1997 from foreign operations, primarily in the United
Kingdom, were virtually flat with 1996. Earnings before income taxes of $57.4
million in 1997 increased 9% over 1996 due mainly to increased revenues.
Risk Management Services includes the Company's third party claims
administration operations which are principally engaged in providing claims
management services for the Company's clients. Total revenues in 1998 were
$168.8 million or 18% over 1997 due to strong new business production and
favorable retention rates on existing business. U.S. revenues of $156.8 million
in 1998 were up 15% over 1997 due primarily to new business. In 1998, foreign
revenues of $12.0 million, principally from the United Kingdom and Australia,
increased 107% over 1997 due mainly to new business and significant revenues
from Australian operations for claim work performed as a result of a pervasive
and extended power outage in New Zealand. Earnings before income taxes in 1998
increased 50% over 1997 due primarily to large revenue increases. Total
revenues in 1997 were $142.7 million or 3% over 1996 due to new business
production partially offset by lost business. In 1997, U.S. revenues increased
1% over 1996 due primarily to new business partially offset by lost business.
Earnings before income taxes in 1997 decreased 18% from 1996 due primarily to
lost business partially offset by new business.
Financial Services is responsible for investments and certain non-recurring
events. The Company's comprehensive investment portfolio includes investment
strategies held as trading, marketable securities held as available for sale,
tax advantaged investments, investments on the equity method of accounting,
real estate partnerships and notes receivable from investees. Revenues in 1998
were $9.3 million or $14.7 million less than revenues in 1997 and earnings
before income taxes decreased $16.9 million or 76% from 1997. These decreases
relate to $9.0 million and $13.8 million of non-recurring gains in revenues and
earnings before taxes, respectively, recognized in 1997 and less favorable
returns on funds invested with outside fund managers due to equity market
conditions in 1998. Revenues in 1997 increased 80% over 1996 and earnings
before income taxes in 1997 increased 166% over 1996 due primarily to the non-
recurring gains mentioned above and favorable returns on funds invested with
outside fund managers. Financial Services' revenues are generated principally
in the U.S.
Corporate consists of unallocated administrative costs and the provision for
income taxes which is not allocated to the Company's operating entities.
Revenues are not recorded in this segment and all costs are generated in the
U.S. See Note 14 to the Consolidated Financial Statements.
Financial Condition and Liquidity
The insurance brokerage industry is not capital intensive. The Company has
historically been profitable, and cash flows from operations and short-term
borrowings under various credit agreements have been sufficient to fund
operating, investment and capital expenditure needs of the Company. Cash
generated from operating activities was $56.4 million, $67.0 million and $45.6
million in 1998, 1997 and 1996, respectively. Because of the variability
related to the timing of premiums and fees receivable and premiums payable, net
cash flows from operations vary substantially from year to year. Funds
restricted as to the Company's use, primarily premiums held as fiduciary funds,
have not been included in determining the Company's overall 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. During 1998, the Company borrowed and repaid $15.0
million of short-term borrowings under the
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Credit Agreement. These borrowings were primarily used on a short-term basis to
finance a portion of the Company's expanded investment activity. As of December
31, 1998, there were no borrowings outstanding under this agreement. During
1997, the Company made no borrowings under this agreement. The Credit Agreement
requires the maintenance of certain financial covenants. The Company is
currently in compliance with these covenants. The Company also had two term
loan agreements. In 1998, the Company retired the remaining loan balances on
these term loan agreements.
The Company also has line of credit facilities of $27.5 million which expire
on April 30, 1999. Periodically, the Company will make short-term borrowings
under these credit facilities to meet short-term cash flow needs. During 1998
and 1997, the Company borrowed $60.0 million and $30.9 million and repaid $60.0
million and $25.9 million of short-term borrowings, respectively, under these
facilities. As of December 31, 1998 and 1997, $15.0 million was outstanding
under these facilities. These borrowings were primarily used on a short-term
basis to finance a portion of the Company's expanded investment activity.
At December 31, 1997, the Company had commitments to invest $26.0 million in
several of its equity and tax advantaged investments. In addition, the Company
had contingently committed to invest an additional $3.0 million in 1998 related
to a line of credit arrangement with one of its equity investments. As of
December 31, 1998, approximately $29.0 million had been invested under these
arrangements, which were funded primarily from the $24.0 million of proceeds
from the sales and maturities of trading and marketable securities investments.
At December 31, 1998, the Company has committed to invest an additional $7.5
million related to two letter of credit arrangements with one of its equity
investments and to unconditionally guarantee $30.0 million of debt that will be
incurred by another of its equity investments. In addition, the Company has
guaranteed an aggregate $8.7 million of funds through letters of credit or
other arrangements related to several investments and insurance programs of the
Company.
The Company paid $23.2 million in cash dividends on its common stock in 1998.
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 1998, the Company's
Board of Directors declared a dividend of $.35 per share which was $.04 or 13%
greater than each quarterly dividend in 1997. In January 1999, the Company
announced a first quarter dividend of $.40 per share, a 14% increase over the
first quarter dividend in 1998.
Net capital expenditures were $14.0 million, $11.4 million and $10.4 million
in 1998, 1997 and 1996, respectively. In 1999, the Company expects to make
expenditures for capital improvements of approximately $14.5 million. Capital
expenditures by the Company are related primarily to office moves and
expansions and updating computer systems and equipment.
In 1988, the Company adopted a plan which has been extended through June 30,
1999 to repurchase its common stock. Under the plan, the Company repurchased
215,000 shares at a cost of $8.7 million, 522,000 shares at a cost of $17.1
million and 645,000 shares at a cost of $21.3 million in 1998, 1997 and 1996,
respectively. The repurchased shares are held for reissuance in connection with
exercises of options under the Company's stock option plans. Under the
provisions of the plan, the Company is authorized to repurchase approximately
535,000 additional shares through June 30, 1999. 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.
Effective with changes in the United States federal income tax laws in 1997,
the Company no longer provides for U.S. income taxes on the undistributed
earnings of its foreign subsidiaries which are considered permanently invested
outside the United States. At December 31, 1998, the Company had $21.8 million
of undistributed earnings from its foreign subsidiaries which is a decrease of
$5.4 million from the undistributed earnings at December 31, 1997. This
decrease is due primarily to $7.7 million of aggregate dividend payments
received by the Company from two of its foreign subsidiaries partially offset
by the 1998 net earnings of its foreign subsidiaries. These dividend payments
are
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subject to United States federal income tax which have been provided for by the
Company. See Note 12 to the Consolidated Financial Statements. Although not
considered available for domestic needs, the undistributed earnings generated
by certain foreign subsidiaries referred to above may be used to finance
foreign operations and acquisitions.
Year 2000 Compliance
Computer programs that have time sensitive software may recognize the date
"00" as the Year 1900, rather than the Year 2000 which could result in system
failures or miscalculations causing disruptions of operations. With respect to
this issue, the Company has completed an assessment of its computer systems and
software and has substantially completed the necessary modifications or
replacements of its existing software so that its computer systems will
function properly in the Year 2000 and beyond. Testing and live use have taken
place and will continue into 1999. Any additional modifications found necessary
will be made at that time. No contingency plans are deemed necessary.
The Company has evaluated the impact on operations of the Year 2000 on non-
information technology systems and has determined that any potential impact
would not be material to the Company's operations.
Generally, system modifications and replacements and the associated costs
were contemplated with normal enhancements and improvements being made in
conjunction with updating financial reporting and operating systems. To date,
the cost of compliance has not been material and is not expected to be material
in the future.
The Company also has an ongoing program to review the status of Year 2000
compliance efforts of its business partners and vendors. While the Company
believes it is taking the appropriate steps to assure the Company's Year 2000
compliance, it is also dependent on business partner, vendor and client
compliance to some extent. Consequently, any Year 2000 compliance problems that
may be experienced by the Company's business partners, vendors or clients could
have a material adverse effect on the Company's future financial condition and
future operating results. No assurance can be given that the Company's and
these other entities' efforts will completely address the Year 2000 issue.
Market Risk Exposure
The Company is exposed to various market risks, including changes in interest
rates and foreign currency exchange rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest and
foreign currency exchange rates and equity prices. The Company does not enter
into derivatives or other similar financial instruments for trading or
speculative purposes. The following analysis presents the hypothetical loss in
fair value of the financial instruments held by the Company at December 31,
1998 that are sensitive to changes in interest rates and equity prices. The
range of changes in interest rates used in the analysis reflects the Company's
view of changes that are reasonably possible over a one year period. This
discussion of market risks related to the Company's consolidated balance sheet
includes estimates of future economic environments caused by changes in market
risks. The effect of actual changes in these risk factors may differ materially
from the Company's estimates. In the ordinary course of business, the Company
also faces risks that are either nonfinancial or nonquantifiable, including
credit risk and legal risk. These risks are not included in the following
analysis.
The Company has a comprehensive and diversified investment portfolio. The
Company's invested assets are held as cash and cash equivalents, investment
strategies held as trading and marketable securities held as available for
sale. Accordingly, these assets are subject to various market risk exposures
such as interest rate risk and equity price risk.
The fair value of the Company's cash and cash equivalents investment
portfolio at December 31, 1998 approximated its carrying value due to its
short-term duration. Market risk was estimated as the potential decrease in
fair value resulting from a hypothetical one percentage point increase in
interest rates for the instruments contained in the cash and cash equivalents
investment portfolio and the resulting fair value was not materially different
from the December 31, 1998 carrying value.
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<PAGE>
At December 31, 1998, the fair value of the Company's investment strategies
portfolio was $57.4 million. From an investment management perspective, this
portfolio, which is managed by several outside fund managers, consists of two
different components: an equity portfolio of $7.3 million and an alternative
investment strategies portfolio of $50.1 million. The equity portfolio is
subject to equity price risk. This portfolio, which is not hedged, consists of
common stocks and is primarily managed to produce realized gains for the
Company. The estimated potential loss in fair value of this equity component
at December 31, 1998 resulting from a hypothetical decrease in prices quoted
by stock exchanges of 10% would be approximately $730,000. The Company's
alternative investment strategies portfolio is also subject to equity pricing
risk. However, these investments are actively managed in order to minimize the
Company's exposure to equity pricing risk. The objective of this portfolio is
to maximize the overall return to the Company, while minimizing the downward
price risk in order to preserve the investment's underlying principal balance.
The outside fund managers for these alternative investment strategies hedge
their strategies by "selling short" common equity securities in order to
mitigate the effects of changes in equity prices thereby making any such
fluctuations immaterial. Accordingly, hypothetical changes in equity prices
would not cause the resulting fair value to be materially different from the
December 31, 1998 carrying value for this portfolio.
At December 31, 1998, the fair value of the Company's marketable securities
portfolio was $20.1 million, which was $1.3 million less than its aggregate
amortized cost. The overall objective of this portfolio is to provide the
Company with a stable after tax yield. This portfolio, which is not hedged,
primarily consists of dividend yielding preferred stocks. Accordingly, this
portfolio is more sensitive to interest rate risk than it is to equity pricing
risk. The estimated potential loss in fair value resulting from a hypothetical
one percentage point increase in short-term interest rates at December 31,
1998 would be approximately $2.1 million.
At December 31, 1998, the fair value of the Company's borrowings under the
line of credit facilities approximated the carrying value due to their short-
term duration and variable interest rates. Market risk was estimated as the
potential increase in the fair value resulting from a hypothetical one
percentage point decrease in the Company's weighted average short-term
borrowing rate at December 31, 1998 and the resulting fair value was not
materially different from the year end carrying value.
The Company is subject to foreign currency exchange rate risk primarily due
to the fact that its United Kingdom based subsidiaries incur expenses
denominated in British pounds while receiving their revenues in U.S. dollars.
The Company does not hedge this foreign currency exchange rate risk. The
foreign currency gains (losses) related to this market risk are recorded in
earnings before income taxes as they are incurred. Assuming a hypothetical
adverse change of 10% in the average foreign currency exchange rate for 1998
(a weakening of the U.S. dollar), earnings before income taxes would decrease
by approximately $2.0 million. The Company is also subject to foreign currency
exchange rate risk associated with the translation of its foreign subsidiaries
into U.S. dollars. However, it is management's opinion that this foreign
currency exchange risk is not material to the Company's consolidated operating
results or financial position. The Company manages the balance sheets of its
foreign subsidiaries such that foreign liabilities are matched with equal
foreign assets thereby maintaining a "balanced book" which minimizes the
effects of currency fluctuations.
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 (low premium rates) thereby
reducing commissions; lower interest rates will reduce the Company's income
earned on invested funds; the insurance brokerage and service businesses are
extremely competitive with three competitors being substantially larger than
the Company; the alternative insurance market continues to grow which could
unfavorably impact commission and favorably impact fee revenue; the Company's
revenues vary significantly from period
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to period as a result of the timing of policy inception dates 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 operating results and financial position may be adversely impacted
by exposure to various market risks such as interest rate, equity pricing and
foreign exchange rates; and the Company's Year 2000 compliance efforts depend
upon compliance efforts of the Company's business partners, vendors and
clients. 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 has identified three operating segments in addition to its
corporate operations. Insurance Brokerage Services encompasses operations
that, for commission or fee compensation, place or arrange to place insurance
directly related to the clients' funding of risk. This segment also provides
consulting, for fee compensation, related to clients' risk financing programs.
Risk Management Services includes the Company's third party administration,
loss control and risk management consulting, workers' compensation
investigations and insurance property appraisal operations. Third party
administration is principally claims management services for the Company's
clients. Financial Services includes the Company's investment operations and
certain non-recurring events. Corporate consists primarily of unallocated
administrative costs and the provision for income taxes which is not allocated
to the Company's operating segments.
INSURANCE BROKERAGE SERVICES
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
worldwide, and also as a broker in procuring contracts of insurance on behalf
of insureds. Specific coverages include all forms of property and casualty,
marine, employee benefits, pension and life insurance products.
The Company places surplus lines coverages, which are coverages not
available from insurance companies licensed by the states in which the risks
are located, for various specialized risks. The Company also places
reinsurance coverages for its clients.
The Company's Gallagher Benefit Services ("GBS") division specializes in the
management of employee benefit programs through fully insured and self-insured
programs. GBS provides 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.
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, Canada, England, Scotland, Australia and Papua
New Guinea.
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The Company believes that its risk management services are an important
factor in securing new brokerage business and retaining brokerage clients. The
Company also markets these services directly to the client on an unbundled
basis independent of brokerage services in order to capitalize on the interest
in self-insurance created by market conditions. These services include
consulting on a wide range of risk management needs such as toxic waste
disposal, handling of dangerous cargo, workers' compensation, medical cost
containment, substance abuse, employment-related background investigations,
loss prevention, property appraisals and liability reserve reviews.
In connection with its risk management services, the Company provides self-
insurance programs for large institutions, risk sharing pools and
associations, and large commercial and industrial customers. Self-insurance,
as administered by the Company, is a program in which the client assumes a
manageable portion of its insurance risks, usually (although not always)
placing the less predictable and larger loss exposures with an excess carrier.
The Company's offices are staffed to provide services relating to claims,
property appraisals, loss control consulting and computerized record keeping
in administering the clients' programs.
FINANCIAL SERVICES
Financial Services is responsible for all of the Company's investment
operations and certain non-recurring events. The Company's comprehensive and
diversified investment portfolio includes investment strategies, marketable
securities, tax advantaged investments, equity investments, real estate
partnerships and notes receivable from investees. Tax advantaged investments
represent amounts invested by the Company in limited partnerships that operate
qualified affordable housing or alternative energy projects. The Company
receives tax benefits in the form of tax deductions for operating losses and
tax credits from these investments. Investments in real estate partnerships
primarily represent an investment in a limited partnership that owns 10,000
acres of land to be developed near Orlando, Florida. Notes receivable from
investees represent secured loans made by the Company to several of its equity
and limited partnership investments. Financial Services is primarily
responsible for the management of the Company's own investments but is
expanding these investment management services in conjunction with the
insurance products the Company markets to its clients. These investments and
the associated returns are for the benefit of the Company.
INTERNATIONAL OPERATIONS
The Company's international operations are principally comprised of a
Lloyd's broker and a risk management services company in London, a risk
management services company in Australia and Papua New Guinea, and an
insurance brokerage operation and a rent-a-captive facility in Bermuda.
Arthur J. Gallagher (UK) Limited, a wholly-owned Lloyd's brokerage
subsidiary of the Company based in London, provides brokerage and other
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, marine, reinsurance (treaty and facultative) and
property and casualty (risks predominantly located in North America).
Although Arthur J. Gallagher (UK) Limited is located in London, the thrust
of its business development has been with non-U.K. brokers, agents and
insurers rather than domestic U.K. retail business. Its clients are primarily
insurance and reinsurance companies, underwriters at Lloyd's, the Company and
its non-U.K. subsidiaries, other independent agents and brokers and major
business corporations requiring direct insurance and reinsurance placement.
Wyatt Gallagher Bassett Pty Ltd ("Wyatt GB") is a 50% owned subsidiary of
Gallagher Bassett that is headquartered in Brisbane, Australia with facilities
located throughout Australia and Papua New Guinea. Wyatt GB is principally
engaged in providing claims adjusting and risk management services.
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
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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.
The Company has helped to develop Artex Insurance Company Ltd., a partially-
owned, Bermuda-based insurance company that operates a "rent-a-captive"
facility. Rent-a-captives enable clients to receive the benefits of owning a
captive insurance company without the disadvantages of ownership. Captive
insurance companies are created to insure risk and capture underwriting profit
and investment income, which is then returned to the insured.
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 with
offices throughout England and Scotland, 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.
The Company also has facilities in Canada that are not material to the
Company's consolidated operations. Additional information relating to the
Company's foreign operations is contained in Notes 12 and 14 to the
Consolidated Financial Statements.
MARKETS AND MARKETING
A substantial portion of the commission and fee business of the Company is
derived from institutions, not-for-profit organizations, municipal and other
governmental entities and associations. In addition, the Company's clients
include large United States and multinational corporations engaged in a broad
range of commercial and industrial businesses. The Company also places
insurance for individuals. The Company services its clients through its
network of approximately 200 offices in the United States and six countries
abroad. No material part of the Company's business is dependent upon a single
customer or on a few customers, the loss of any one or more of which would
have a materially adverse effect on the Company. In 1998, the largest single
customer represented approximately 1% of total revenues.
The Company believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of
reinsurance, is one of its major strengths. The Company also believes that its
risk management business enhances and attracts other brokerage business due to
the nature and strength of business relationships which it forms with clients
when providing a variety of risk management services on an on-going basis.
The Company requires its employees serving in a sales or marketing capacity,
including certain executive officers of the Company, to enter into agreements
with the Company restricting disclosure of confidential information and
solicitation of clients and prospects of the Company upon their termination of
employment. The confidentiality and non-solicitation provisions of such
agreements terminate in the event of a hostile change in control of the
Company, as defined therein.
COMPETITION
The Company believes it is the fourth 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. Three competing firms are
significantly larger and 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.
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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.
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, including non-recurring gains, are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997* 1996*
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Commissions........................ $313,131 58 $285,189 57 $276,736 58
Fees............................... 209,017 39 182,147 36 172,965 37
Investment income and other........ 18,507 3 24,169 5 24,052 5
Non-recurring gains................ -- -- 8,993 2 -- --
-------- --- -------- --- -------- ---
$540,655 100 $500,498 100 $473,753 100
======== === ======== === ======== ===
</TABLE>
- --------
*Restated for poolings of interests
The primary source of the Company's compensation for its brokerage services
is commissions paid by insurance companies which are usually based on a
percentage of the premium paid by the insured. Commission rates are dependent
on a number of factors including the type of insurance, the particular
insurance company and the capacity in which the Company acts. In some cases
the Company is compensated for brokerage or advisory services directly by a
fee from a client, particularly when insurers do not pay commissions. The
Company may also receive contingent commissions which are generally based on
the profit the insurance company makes on the overall volume of business
placed by the Company in a given period of time. Occasionally, the Company
shares commissions with other brokers who have participated with the Company
in placing insurance or servicing insureds.
The Company's compensation for risk management services is in the form of
fees and commissions. The Company typically negotiates fees in advance with
its risk management clients on an annual basis based on the estimated value of
the services to be performed. In some cases the Company receives a fee for
acting in the capacity of advisor and administrator with respect to employee
benefit programs and receives commissions in connection with the placement of
insurance under such programs.
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The Company's revenues vary significantly from quarter to quarter as a
result of the timing of policy inception dates which traditionally are
heaviest in the third quarter, whereas expenses are fairly uniform throughout
the year. See Note 13 to the Consolidated Financial Statements for unaudited
quarterly operating results for 1998 and 1997.
See Note 14 to the Consolidated Financial Statements for revenue information
by operating segment for 1998, 1997 and 1996.
Acquisitions--Past
From January 1, 1994 through December 31, 1998, the Company acquired forty-
two insurance service businesses and disposed of seven insurance service
businesses. See Note 2 to the Consolidated Financial Statements for further
information concerning acquisitions in 1998 and 1997.
On November 30, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of R&R/Select Inc., and its subsidiary, Harbor
Excess & Surplus, Inc., Oklahoma and Arkansas corporations, respectively,
engaged in the wholesale insurance brokerage business in exchange for 109,371
shares of the Company's Common Stock. This acquisition was accounted for as a
pooling of interests. Three principals entered into three year employment
agreements with the Company.
On November 30, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Robinson, Julienne & Bailey, Inc., a
Mississippi corporation engaged in the insurance brokerage and benefits
consulting business in exchange for 91,826 shares of the Company's Common
Stock. This acquisition was accounted for as a pooling of interests. Four
principals entered into three year employment agreements with the Company.
On November 30, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Man-Morris Insurors, Inc., a Missouri
corporation engaged in the insurance brokerage and services business in
exchange for 52,407 shares of the Company's Common Stock. This acquisition was
accounted for as a pooling of interests. Three principals entered into three
year employment agreements with the Company.
On November 30, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of The Insurance Workshop, Inc., a Florida
corporation engaged in the insurance brokerage and services business in
exchange for 17,090 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 November 10, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Nelson, Gordon & James Insurance Services,
Inc., a California corporation engaged in the wholesale insurance brokerage
and services business in exchange for 38,108 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 October 15, 1998, wholly-owned subsidiaries of the Company acquired
substantially all of the assets of Gow & Hanna, Inc. of Upstate New York and
Gow & Hanna, Inc. of Connecticut, New York and Connecticut corporations,
respectively, engaged in the insurance brokerage services business in exchange
for an initial cash payment of $1,500,000 and a contingent note payable of
$1,300,000. This acquisition was accounted for as a purchase. Two principals
entered into three year employment agreements with the Company.
On September 30, 1998 a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Caesar Lesniak, Inc., an Illinois
corporation engaged in the insurance brokerage business in exchange for 6,120
shares of the Company's Common Stock. This acquisition was accounted for as a
pooling of interests. The principal entered into a one year employment
agreement with the Company.
On August 31, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Flynn Associates Insurance Marketing,
Incorporated, a California corporation engaged in the
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<PAGE>
wholesale life insurance brokerage business in exchange for 131,000 shares of
the Company's Common Stock. This acquisition was accounted for as a pooling of
interests. Three principals entered into three year employment agreements with
the Company.
On August 1, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Surety Insurance Services Co., a California
corporation engaged in the insurance brokerage business for an initial cash
payment of $350,000. This acquisition was accounted for as a purchase. The
principal entered into a one year employment agreement with the Company.
On May 29, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of McElveen Insurance Agency, Inc., a
Louisiana corporation engaged in the insurance brokerage and services business
in exchange for 108,050 shares of the Company's Common Stock. This acquisition
was accounted for as a pooling of interests. Three principals entered into
three year employment agreements and three principals entered into two year
employment agreements with the Company.
On March 26, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Pickard, Tate & Allen, Inc., an Oklahoma
corporation engaged in the insurance brokerage business for an initial cash
payment of $70,000 and a contingent note payable of $300,000. This acquisition
was accounted for as a purchase. Two principals and one key employee entered
into three year employment agreements with the Company.
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.
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 and two key employees
entered into three year and two year employment agreements, respectively, with
the Company.
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.
On February 27, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Paul Burston Corporation, an Illinois
corporation engaged in the insurance brokerage business in exchange for 8,481
shares of the Company's Common Stock. This acquisition was accounted for as a
pooling of interests. The principal entered into a one year employment
agreement with the Company.
On January 2, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Robert P. Powers Agency, Inc., an Illinois
corporation engaged in the insurance brokerage business in exchange for 3,450
shares of the Company's Common Stock. This acquisition was accounted for as a
pooling of interests.
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.
19
<PAGE>
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.
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, an Australian 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.
20
<PAGE>
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
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
21
<PAGE>
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.
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. 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
On February 28, 1999, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Goodman Insurance Agency, Inc., a
California corporation engaged in the insurance brokerage and services
business in exchange for 157,385 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 28, 1999, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Dodson-Bateman & Company, a Texas
corporation engaged in the insurance brokerage and
22
<PAGE>
services business in exchange for 147,480 shares of the Company's Common
Stock. This acquisition was accounted for as a pooling of interests. Two
principals and one key employee entered into three year employment agreements
with the Company.
On February 28, 1999, a wholly-owned subsidiary of the Company acquired
substantially all of the assets of Associated Risk Managers of California,
Insurance Producers, a California corporation engaged in the insurance
brokerage and services business in exchange for 99,054 shares of the Company's
Common Stock. This acquisition was accounted for as a pooling of interests.
One 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 a non-binding letter of intent with one
candidate. No assurances can be given that any additional acquisitions or
divestitures will be consummated, or if consummated, will be advantageous to
the Company.
Employees
As of December 31, 1998, the Company and its subsidiaries employed
approximately 4,300 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 virtually
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, 1998.
Stock Repurchases
In 1988, the Company adopted a plan, which has been extended through June
30, 1999, to repurchase its Common Stock. Under the plan, the Company
repurchased 215,000 shares at a cost of $8.7 million, 522,000 shares at a cost
of $17.1 million and 645,000 shares at a cost of $21.3 million in 1998, 1997
and 1996, 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
535,000 additional shares through June 30, 1999. 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.
23
<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).. 76 Director since 1950, Chief Executive 2001
Officer 1963-1994, Chairman since 1990
J. Patrick Gallagher, 47 Director since 1986, President since 2000
Jr.(1)................. 1990, Chief Executive Officer since
1995
James J. Braniff III.... 59 Vice President since 1995 --
T. Kimball Brooker...... 59 Director since 1994 2000
Michael J. Cloherty..... 51 Director since 1982, Executive Vice 1999
President since 1996, Vice President--
Finance 1981 to 1996
Peter J. Durkalski...... 48 Director since March 18, 1999 2001
Vice President since 1990
James W. Durkin, Jr..... 49 Vice President since 1985 --
Jack M. Greenberg....... 56 Director since 1985 1999
Frank M. Heffernan, Jr.. 68 Director since 1996, Vice President 2001
since 1987
Philip A. Marineau...... 52 Director since 1991 1999
Walter F. McClure....... 65 Director since 1981, Senior Vice 2001
President since 1993
David E. McGurn, Jr. ... 45 Vice President since 1993 --
James R. Wimmer......... 70 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 President and Chief Executive Officer since August 1998
of McDonald's Corporation. He was Chief Executive Officer from 1997 to August
1998 and Chairman from 1996 to August 1998 of McDonald's U.S.A., Vice Chairman
from 1992 to August 1998; and Chief Financial Officer from 1982 to 1996 of
McDonald's Corporation. He has been a Director of McDonald's Corporation since
he joined that company in 1982 and is also a Director of Harcourt General,
Inc. 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 is a Director of Meredith Corporation.
24
<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
J. Patrick Gallagher, Jr., President and Chief Executive Officer and Robert
E. Gallagher, Chairman of the Company, respectively, serve on the Compensation
Committee and abstain from discussion and voting on matters concerning their
respective compensation. James R. Wimmer, a director of the Company, is of
counsel to Lord, Bissell & Brook, a law firm which provides legal services to
the Company.
25
<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 five 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>
J. Patrick Gallagher, Jr. ..... 1998 500,000 250,000 10,000 5,000
President and Chief Executive
Officer 1997 356,000 300,000 -- 5,100
1996 356,000 25,000 10,000 4,200
Michael J. Cloherty............ 1998 475,000 250,000 10,000 6,100
Executive Vice President and 1997 346,000 500,000 -- 6,200
Chief
Financial Officer 1996 346,000 25,000 10,000 4,900
James J. Braniff III........... 1998 320,000 165,000 10,000 7,400
Vice President 1997 265,700 236,900 -- 7,300
1996 265,700 151,700 10,000 7,300
Peter J. Durkalski............. 1998 290,000 115,000 10,000 4,500
Vice President 1997 261,500 104,600 -- 4,500
1996 261,500 20,000 10,000 4,500
James W. Durkin, Jr............ 1998 290,000 -- 10,000 4,500
Vice President 1997 270,000 108,000 -- 4,500
1996 250,000 30,000 10,000 4,400
David E. McGurn, Jr............ 1998 275,000 125,000 10,000 3,900
Vice President 1997 250,000 100,000 -- 3,900
1996 250,000 15,000 10,000 3,300
</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 1998 and 1997 and
$3,000 in 1996, 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-
26
<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 1999 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 19, 1998, 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 $22.813 per share. Such options are exercisable at the rate
of one-fourth of such grant each successive quarter commencing August 19,
1998. In addition, on August 31, 1998, the Company granted a Discretionary
Option for 6,000 shares of the Company's Common Stock to each of Messrs.
Brooker, Greenberg, Marineau and Wimmer at an exercise price of $37.00 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 August 31, commencing August 31, 1999.
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.
The Company approved a supplemental deferred compensation arrangement,
effective September 18, 1998, with Walter F. McClure and John G. Campbell upon
their respective retirements, and to their respective surviving spouses upon
their respective deaths, providing for a payment of $75,000 annually,
exclusive of any Company pension plan payments, to be paid until the death of
each such beneficiary.
27
<PAGE>
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
who have attained age 21 and completed a year of service may generally
contribute up to the lesser of $10,000 in 1998 and 1999 or 15% of their gross
earnings on a pre-tax basis under the 401(k) "salary reduction" feature of the
plan. 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 1998,
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.
Participating employees may borrow up to 50% of their account balance, subject
to certain limitations.
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
1998 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 $37,500
175,000............................................. 26,250 35,000 43,750
200,000............................................. 30,000 40,000 50,000
225,000............................................. 33,750 45,000 56,250
250,000............................................. 37,500 50,000 62,500
</TABLE>
For purposes of estimating potential pension benefits using the foregoing
table, the number of years of credited service as of December 31, 1998 for the
executive officers named in the Summary Compensation Table are as follows: J.
Patrick Gallagher, Jr. (23 years), Michael J. Cloherty (16 years), James J.
Braniff III (10 years), Peter J. Durkalski (23 years), James W. Durkin, Jr.
(22 years) and
28
<PAGE>
David E. McGurn, Jr. (19 years). Such pension benefits are in addition to the
amounts payable to such persons under the Company's savings and thrift plan on
their retirement and are subject to certain limitations as required under the
Internal Revenue Code.
Stock Option Plans
The Company maintains a 1988 Incentive Stock Option Plan and a 1988
Nonqualified Stock Option Plan. The following table sets forth certain
information regarding options to purchase shares of Common Stock granted to
the executive officers of the Company named in the Summary Compensation Table
during the Company's 1998 fiscal year. Members of the Option Committee are,
currently, Messrs. Brooker, Greenberg and Marineau, non-employee Directors of
the Company. The exercise price of the options equals the closing price of a
share of the Company's Common Stock on the date of the option grant.
Option Grants in the Last Fiscal Year(1)
<TABLE>
<CAPTION>
Individual Grants
---------------------
Potential
% of Realizable Value at
Number of Total Assumed Annual
Securities Options Rates of Stock
Underlying Granted to Price Appreciation
Options Employees for Option Term(2)
Granted in Fiscal Exercise Expiration -------------------
Name (#) Year Price ($) Date 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Patrick Gallagher,
Jr..................... 10,000 1.34 37.00 8/30/08 233,000 590,000
Michael J. Cloherty..... 10,000 1.34 37.00 8/30/08 233,000 590,000
James J. Braniff III.... 10,000 1.34 37.00 8/30/08 233,000 590,000
Peter J. Durkalski...... 10,000 1.34 37.00 8/30/08 233,000 590,000
James W. Durkin, Jr..... 10,000 1.34 37.00 8/30/08 233,000 590,000
David E. McGurn, Jr..... 10,000 1.34 37.00 8/30/08 233,000 590,000
</TABLE>
- --------
(1) Nonqualified options granted August 31, 1998, exercisable at the rate of
10% of the total option for each calendar year after 1998.
(2) Based on actual option term and annual compounding.
The following table sets forth certain information regarding options to
purchase shares of Common Stock exercised during the Company's 1998 fiscal
year and the number and value of unexercised options to purchase shares of
Common Stock held at the end of the Company's 1998 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 Value of
Securities Securities Unexercised Value of
Underlying Underlying In-the- Unexercised
Unexercised Unexercised Money In-the-Money
Number of Options at Options at Options at Options at
Shares FY-End FY-End FY-End FY-End
Acquired on Value Exercisable Unexercisable Exercisable Unexercisable
Name Exercise(#) Realized($)(1) (#) (#) ($)(2) ($)(2)
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Patrick Gallagher,
Jr..................... 5,000 130,000 56,000 68,000 960,000 932,000
Michael J. Cloherty..... 1,000 25,000 30,500 61,500 403,000 814,000
James J. Braniff III.... -- -- 11,000 32,500 148,000 364,000
Peter J. Durkalski...... 1,000 28,000 35,000 63,500 505,000 860,000
James W. Durkin, Jr..... 1,500 32,000 52,600 63,500 908,000 860,000
David E. McGurn, Jr..... 7,500 179,000 31,000 38,500 579,000 482,000
</TABLE>
29
<PAGE>
- --------
(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 Arrangements
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 later than 10
days after termination of employment.
Each of the executive officers of the Company named in the Summary
Compensation Table has entered into a change in control agreement with the
Company. A severance benefit is payable under the agreement if the executive
officer's employment with the Company is terminated by (i) the Company for any
reason other than death, physical or mental incapacity, or cause within 24
months following a change in control of the Company; or (ii) the resignation
of the executive officer within 24 months following a change in control of the
Company upon the occurrence of a material change in the nature or scope of the
executive's authorities, powers, functions or duties or a reduction in the
executive's total compensation. In the event of any such termination of the
executive officer's employment, under the agreement the Company is required to
pay the executive a severance allowance equal to his then salary and bonus
payments for a 24 calendar month period. Additionally, the executive will also
continue to participate for a period of two years in the Company's welfare
benefit plans. Cash benefits are payable in a lump sum not later than seven
days after termination of employment.
PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 1998, there were no beneficial owners of more than 5% of
the Company's Common Stock, par value $1.00 per share, which is its only class
of issued and outstanding capital stock. The following tabulation shows with
respect to each of the directors of the Company, the executive officers named
in the Summary Compensation Table, and all directors and executive officers
30
<PAGE>
as a group, thirteen in number, (i) the total number of shares of Common Stock
beneficially owned as of February 28, 1999; and (ii) the percent of Common
Stock so owned as of the same date.
<TABLE>
<CAPTION>
AMOUNT &
NATURE OF PERCENT OF
BENEFICIAL COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP(1) STOCK
- ------------------------ ------------ ----------
<S> <C> <C>
Robert E. Gallagher................................... 657,958(2) 3.6%
James J. Braniff III.................................. 57,664 *
T. Kimball Brooker.................................... 22,050 *
Michael J. Cloherty................................... 111,502 *
Peter J. Durkalski.................................... 59,385(3) *
James W. Durkin, Jr................................... 78,700 *
J. Patrick Gallagher, Jr. ............................ 205,105(4) 1.1%
Jack M. Greenberg..................................... 28,050 *
Frank M. Heffernan, Jr. .............................. 277,400(5) 1.5%
Philip A. Marineau.................................... 24,800 *
Walter F. McClure..................................... 74,406(6) *
David E. McGurn, Jr................................... 56,546 *
James R. Wimmer....................................... 33,300(7) *
All directors and executive officers as a group (13
persons)............................................. 1,686,866 9.1%
</TABLE>
- --------
* Less than 1%
(1) Calculated pursuant to Rule 13d-3(d) under the Securities Exchange Act of
1934. Unless otherwise stated in these notes, each person has sole voting
and investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options exercisable within
sixty days are deemed outstanding for the purpose of computing the number
and percentage owned by such person, but are not deemed outstanding for
the purpose of computing the percentage owned by each other person listed.
Includes shares which the listed beneficial owner has a right to acquire
within sixty days as follows: James J. Braniff III, 15,950 shares; T.
Kimball Brooker, 12,050 shares; Michael J. Cloherty, 42,500 shares; Peter
J. Durkalski, 33,500 shares; James W. Durkin, Jr., 65,093 shares; J.
Patrick Gallagher, Jr., 69,500 shares; Jack M. Greenberg, 26,050 shares;
Frank M. Heffernan, Jr., 24,300 shares; Philip A. Marineau, 24,800 shares;
Walter F. McClure, 46,000 shares; David E. McGurn, Jr., 37,950 shares;
James R. Wimmer, 32,800 shares; all directors and executive officers as a
group (13 persons), 430,493 shares.
(2) Includes 75,000 shares held in trust for the benefit of Robert E.
Gallagher's grandchildren, 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.
(3) Includes 4,885 shares held in trust for the benefit of his minor children
by his wife, Delores Durkalski, and another as trustees.
(4) Includes 36,820 shares held in trust for the benefit of his minor children
by his wife, Anne M. Gallagher, and another as trustees and 24,619 shares
held by his wife.
(5) Includes 251,500 shares held in trust by Frank M. Heffernan, Jr. and
Lenore B. Heffernan, his wife, as trustees.
(6) Includes 14,600 shares held in trust for the benefit of Walter F. McClure
by Walter F. McClure and Alice M. McClure, his wife, as trustees and
10,500 shares held in trust for the benefit of Alice M. McClure by Walter
F. McClure and Alice M. McClure, as trustees.
(7) Includes 500 shares held by his wife, Gertrude A. Wimmer.
31
<PAGE>
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 28, 1999, there were 18,100,066 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 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
32
<PAGE>
outstanding after May 12, 1987 but prior to the earliest of the Distribution
Date (as hereinafter defined), the redemption of the Rights or the expiration
of the Rights, the Rights will be evidenced by Common Stock certificates that
contain a legend incorporating the Rights Agreement by reference.
The Rights will not be exercisable or transferable apart from the Common
Stock until the earlier to occur of (i) ten days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") acquired or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding Common Stock or (ii) ten days
following the commencement or announcement of an intention to make a tender
offer or exchange offer for 30% or more of the outstanding Common Stock (the
earlier of such dates being called the "Distribution Date"). Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates representing Common Stock
outstanding as of May 12, 1987 (or issued after May 12, 1987 but prior to the
earliest of the Distribution Date, the redemption of the Rights or the
expiration of the Rights) would also constitute the transfer of the Rights
associated with the Common Stock represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights (the "Right Certificates") would be mailed to holders of record of
the Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone would evidence the Rights.
The Rights would not be exercisable until the Distribution Date and, as
amended on July 18, 1996, would expire on May 12, 2007 unless earlier redeemed
by the Company as described below. Until a Right is exercised, the holder
thereof, as such, would have no rights as a stockholder, including, 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
33
<PAGE>
Purchase Price. No fractional shares would be issued and in lieu thereof, an
adjustment in cash would be made based on the market price of the Common Stock
on the last trading date prior to the date of exercise.
The Rights have certain anti-takeover effects. The Rights would cause
substantial dilution to a person who attempts to acquire the Company without
conditioning his offer on a substantial number of Rights being acquired. The
Rights would have no effect, however, on a person who is willing to acquire
control of the Company and wait until the Rights expire before acquiring 100%
ownership. Moreover, the Rights would not affect a transaction approved by the
Company prior to the public announcement that 20% or more of the Company's
Common Stock had been accumulated by a single acquirer or group, because the
Rights could be redeemed until that time.
Certain Charter and By-law Provisions
The Company's Restated Certificate of Incorporation contains provisions
which could deter, delay or prevent a change in control of the Company which
is opposed by the Board of Directors. Such provisions include the following:
(a) a provision for classification of the Board of Directors into three
classes and a minimum of three and a maximum of fifteen directors at any time;
(b) a requirement that a director or the entire Board of Directors may only be
removed, with or without cause, by the affirmative vote of the holders of 80%
of the outstanding shares of voting stock of the Company and of not less than
67% of the voting stock held by stockholders other than a "Related Person" as
defined below; (c) a requirement that any merger, purchase of assets or other
business combination ("Business Combination") between the Company and certain
owners of 20% or more of the outstanding voting stock of the Company ("Related
Person") in order to become effective must be approved by the affirmative vote
of not less than 80% of the shares of outstanding voting stock of the Company
and by 67% of the stock owned by stockholders other than the Related Person;
and (d) a requirement that the provisions summarized in (a), (b) and (c) may
only be repealed or amended by the affirmative vote of 80% of the outstanding
voting stock of the Company and the affirmative vote of 67% of the outstanding
voting stock owned by stockholders other than a Related Person. The 80% and
67% approval requirements do not apply if (1) two-thirds of the directors who
held office immediately prior to the date the Related Person became a Related
Person approve the Business Combination or (2) the Business Combination is
between the Company and a subsidiary at least 50% owned by the Company and in
which the Related Person has no interest, or (3) any consideration to be paid
to stockholders of the Company as part of the Business Combination meets
certain fair price tests and stockholders of the Company have received a
timely mailing containing (A) the recommendation of outside directors and
directors who held office immediately prior to the Related Person's becoming
such and (B) the opinion of a reputable investment banking or financial
services firm as to the fairness of the Business Combination. The By-laws also
provide that special meetings 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.
34
<PAGE>
LEGAL OPINION
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by John C. Rosengren, Vice President and General Counsel
for the Company. Mr. Rosengren holds options for 17,900 shares.
EXPERTS
The consolidated financial statements of the Company at December 31, 1998
and 1997, and for each of the three years in the period ended December 31,
1998, 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.
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<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-23
Report of Independent Auditors............................................. F-24
</TABLE>
F-1
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Operating Results
Revenues:
Commissions....................................... $313,131 $285,189 $276,736
Fees.............................................. 209,017 182,147 172,965
Investment income and other....................... 18,507 24,169 24,052
Non-recurring gains............................... -- 8,993 --
-------- -------- --------
Total revenues.................................. 540,655 500,498 473,753
-------- -------- --------
Expenses:
Salaries and employee benefits.................... 281,509 254,424 249,674
Other operating expenses.......................... 174,617 163,452 157,077
-------- -------- --------
Total expenses.................................. 456,126 417,876 406,751
-------- -------- --------
Earnings before income taxes........................ 84,529 82,622 67,002
Provision for income taxes.......................... 28,028 27,722 22,775
-------- -------- --------
Net earnings.................................... $ 56,501 $ 54,900 $ 44,227
======== ======== ========
Net earnings per common share....................... $ 3.25 $ 3.28 $ 2.64
Net earnings per common and common equivalent share. 3.10 3.17 2.54
Dividends declared per common share................. 1.40 1.24 1.16
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(in thousands)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 61,518 $ 72,021
Restricted cash.......................................... 86,622 81,160
Premiums and fees receivable............................. 288,276 220,972
Investment strategies--trading........................... 57,368 62,681
Other.................................................... 37,172 40,655
-------- --------
Total current assets................................... 530,956 477,489
Marketable securities--available for sale.................. 20,089 39,203
Deferred income taxes and other noncurrent assets.......... 151,033 96,748
Fixed assets............................................... 98,262 88,029
Accumulated depreciation and amortization.................. (66,801) (59,784)
-------- --------
Net fixed assets....................................... 31,461 28,245
Intangible assets--net..................................... 12,471 10,395
-------- --------
$746,010 $652,080
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Premiums payable to insurance companies.................. $372,626 $318,007
Accrued salaries and bonuses............................. 21,940 18,585
Accounts payable and other accrued liabilities........... 90,336 90,731
Unearned fees............................................ 13,616 11,778
Income taxes payable..................................... 12,621 10,799
Other.................................................... 19,517 23,260
-------- --------
Total current liabilities.............................. 530,656 473,160
Other noncurrent liabilities............................... 12,886 13,340
Stockholders' equity:
Common stock--issued and outstanding 17,645 shares in
1998 and
16,883 shares in 1997.................................. 17,645 16,883
Capital in excess of par value........................... 13,219 4,696
Retained earnings........................................ 172,381 142,343
Accumulated other comprehensive earnings (loss).......... (777) 1,658
-------- --------
Total stockholders' equity............................. 202,468 165,580
-------- --------
$746,010 $652,080
======== ========
</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,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 56,501 $ 54,900 $ 44,227
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Net gain on investments and other............ (4,144) (13,931) (3,928)
Depreciation and amortization................ 11,728 11,240 10,712
(Increase) decrease in restricted cash....... (5,462) 6,064 8,164
(Increase) decrease in premiums receivable... (58,782) 15,790 (5,775)
Increase (decrease) in premiums payable...... 54,619 (11,570) 3,280
Decrease (increase) in trading investments--
net......................................... 6,963 (6,217) (4,128)
Decrease (increase) in other current assets.. 5,583 (6,490) (8,000)
Increase in accrued salaries and bonuses..... 3,355 3,512 1,326
(Decrease) increase in accounts payable and
other accrued liabilities................. (1,428) 19,675 8,404
Increase (decrease) in income taxes payable.. 1,822 5,760 (5,575)
Net change in deferred income taxes.......... (5,474) (9,604) (2,502)
Other........................................ (8,914) (2,163) (650)
-------- -------- --------
Net cash provided by operating activities.. 56,367 66,966 45,555
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities............. (33,331) (30,170) (23,679)
Proceeds from sales of marketable securities... 47,665 30,368 28,747
Proceeds from maturities of marketable
securities.................................... 2,600 1,645 1,958
Net additions to fixed assets.................. (13,994) (11,381) (10,363)
Other.......................................... (52,146) (25,698) (16,969)
-------- -------- --------
Net cash used by investing activities...... (49,206) (35,236) (20,306)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 13,655 10,964 7,966
Tax benefit from issuance of common stock...... 4,273 2,429 1,955
Repurchases of common stock.................... (8,651) (17,126) (21,290)
Dividends paid................................. (23,185) (19,990) (17,530)
Retirement of long-term debt................... (1,130) (1,130) (1,130)
Borrowings on line of credit facilities........ 75,000 30,900 10,000
Repayments on line of credit facilities........ (75,000) (25,900) --
Equity transactions of pooled companies prior
to dates of acquisition....................... (2,626) (613) (6,807)
-------- -------- --------
Net cash used by financing activities...... (17,664) (20,466) (26,836)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents..................................... (10,503) 11,264 (1,587)
Cash and cash equivalents at beginning of year... 72,021 60,757 62,344
-------- -------- --------
Cash and cash equivalents at end of year......... $61,518 $ 72,021 $ 60,757
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.................................. $ 1,289 $ 1,018 $ 885
Income taxes paid.............................. 20,337 24,158 25,874
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Capital Other
In Compre- Total
Common Stock Excess hensive Stock-
--------------- Of Par Retained Earnings holders'
Shares Amount Value Earnings (Loss) Equity
------ ------ -------- -------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 as previously
reported............... 16,529 $16,529 $ -- $109,616 $ 34 $ 126,179
Acquisition of pooled
companies............. 292 292 267 (854) -- (295)
<CAPTION>
------ ------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 16,821 16,821 267 108,762 34 125,884
<CAPTION>
---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings........... -- -- -- 44,227 -- 44,227
Net change in
unrealized gain (loss)
on available for sale
securities............ -- -- -- -- 855 855
<CAPTION>
---------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive earnings 45,082
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........... -- -- -- (6,807) -- (6,807)
<CAPTION>
------ ------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 16,749 16,749 2,407 114,521 889 134,566
<CAPTION>
---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings........... -- -- -- 54,900 -- 54,900
Net change in
unrealized gain (loss)
on available for sale
securities............ -- -- -- -- 769 769
<CAPTION>
---------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive earnings 55,669
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........... -- -- 80 (693) -- (613)
<CAPTION>
------ ------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 16,883 16,883 4,696 142,343 1,658 165,580
<CAPTION>
---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings........... -- -- -- 56,501 -- 56,501
Net change in
unrealized gain (loss)
on available for sale
securities............ -- -- -- -- (2,435) (2,435)
<CAPTION>
---------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive earnings 54,066
Cash dividends declared
on common stock....... -- -- -- (24,218) -- (24,218)
Common stock issued
under stock option
plans................. 588 588 13,067 -- -- 13,655
Tax benefit from
issuance of common
stock................. -- -- 4,273 -- -- 4,273
Common stock
repurchases........... (215) (215) (8,436) -- -- (8,651)
Common stock issued in
nine pooling
acquisitions.......... 389 389 -- -- -- 389
Equity transactions of
pooled companies prior
to dates of
acquisition........... -- -- (381) (2,245) -- (2,626)
<CAPTION>
------ ------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998................... 17,645 $17,645 $ 13,219 $172,381 $ (777) $ 202,468
<CAPTION>
====== ======= ======== ======== =========== =========
</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 majority owned subsidiaries. Investments in
partially owned entities in which ownership is 20% to 50% are accounted for
using the equity method. Accordingly, the Company's share of the net earnings
of these entities is included in consolidated net earnings. Investments in
partially owned entities in which ownership is less than 20% are carried at
cost. 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 generally
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 $1,500,000 and $860,000 at December
31, 1998 and 1997, respectively.
Comprehensive earnings
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive earnings
and its components; however, the adoption of SFAS 130 had no impact on the
Company's consolidated net earnings or total stockholders' equity. SFAS 130
requires unrealized gains or losses on the Company's available for sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive earnings. Prior year consolidated
financial statements have been reclassified to conform to the requirements of
SFAS 130.
Earnings per share
Earnings per share are computed based on the weighted average number of
common and common equivalent shares outstanding during the respective period.
Common equivalent shares include incremental shares from dilutive stock
options, which are calculated from the date of grant under the treasury stock
method using the average market price for the period.
F-6
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(Continued)
Segment information
As of December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments of an
Enterprise and Related Information," which superseded Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." 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 adoption of SFAS 131 had no
impact on the Company's consolidated operating results or financial position,
but did affect the disclosure of segment information. Prior year segment
information has been reclassified to conform to the requirements of SFAS 131.
See Note 14 to the consolidated financial statements.
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
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 investment strategies is determined by reference
to the fair values of the underlying common stocks which are based on quoted
market prices.
Marketable securities are considered available for sale and consist primarily
of preferred and common stocks. Securities designated as available for sale are
carried at fair value in the accompanying consolidated balance sheet, with
unrealized gains and losses, less related deferred income taxes, excluded from
net earnings and reported as accumulated other comprehensive earnings. Gains
and losses are recognized in net earnings when realized using the specific
identification method. The fair value for marketable securities is 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 $86,862,000 and $78,839,000 at
December 31, 1998 and 1997, respectively, are depreciated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements with a cost of $11,400,000 and $9,190,000 at December 31, 1998 and
1997, respectively, are amortized using the straight-line method over the
shorter of the estimated useful lives of the assets or the lease terms.
F-7
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Summary of Significant Accounting Policies--(Continued)
Intangible assets
Intangible assets consist of the excess of cost over the value of net
tangible assets of acquired businesses, non-compete agreements and expiration
lists. The excess of cost over the value of net tangible assets is amortized
over twenty to 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, 1998 and
1997 was $4,618,000 and $6,487,000, respectively.
Stock based compensation
The Company primarily 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
these stock options granted to employees.
Effect of new pronouncement
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of SFAS 133 will
have a significant effect on the Company's consolidated operating results or
financial position.
2. Business Combinations
In 1998, the Company acquired substantially all of the net assets of twelve
insurance brokerage firms and one benefits consulting company in exchange for
681,000 shares of its common stock. 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. These
acquisitions were accounted for as poolings of interests and, except for nine
of the 1998 acquisitions and two of the 1997 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 1997 and 1996 consolidated
financial statements to reflect the operations of the 1998 acquisitions (in
thousands, except per share data):
<TABLE>
<CAPTION>
As Attributable
Previously to Pooled As
1997 Reported Companies Restated
- ---- ---------- ------------ --------
<S> <C> <C> <C>
Total revenues................................ $488,028 $ 12,470 $500,498
Net earnings.................................. 53,316 1,584 54,900
Net earnings per common share................. 3.24 .04 3.28
Net earnings per common and common equivalent
share........................................ 3.13 .04 3.17
1996
- ----
Total revenues................................ $462,022 $ 11,731 $473,753
Net earnings.................................. 43,144 1,083 44,227
Net earnings per common share................. 2.62 .02 2.64
Net earnings per common and common equivalent
share........................................ 2.52 .02 2.54
</TABLE>
In 1998, the Company acquired the net assets of three insurance brokerage
firms in exchange for cash and notes payable. These acquisitions were accounted
for as purchases. In 1997, the Company acquired a majority equity interest in a
risk management company which was also accounted for as a purchase. The Company
paid cash in this transaction. These purchase transactions were not material to
either the 1998 or 1997 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, 1998 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Preferred stocks........................ $ 14,487 $ 529 $ 646 $14,370
Common stocks........................... 4,735 57 1,218 3,574
Fixed maturities........................ 2,161 71 87 2,145
<CAPTION>
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
$ 21,383 $ 657 $ 1,951 $20,089
<CAPTION>
========= ========== ========== =======
December 31, 1997
- -----------------
<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
<CAPTION>
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
$ 36,440 $ 3,845 $ 1,082 $39,203
<CAPTION>
========= ========== ========== =======
The gross realized gains on sales of marketable securities totaled
$3,054,000, $2,257,000 and $1,652,000 for 1998, 1997 and 1996, respectively.
The gross realized losses totaled $1,179,000, $346,000 and $881,000 for 1998,
1997 and 1996, respectively.
The cost or amortized cost and fair value of fixed maturities at December 31,
1998, by contractual maturity, are as follows (in thousands):
Cost or
Amortized Fair
Cost Value
---------- -------
<S> <C> <C> <C> <C>
Due in 1999.................................................. $ -- $ --
Due in 2000 through 2003..................................... 1,540 1,524
Due in 2004 through 2008..................................... 152 152
Due in 2009 and thereafter................................... 469 469
<CAPTION>
---------- -------
<S> <C> <C> <C> <C>
$ 2,161 $ 2,145
<CAPTION>
========== =======
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.
The following is a summary of deferred income taxes and other noncurrent
assets (in thousands):
December 31,
------------------
1998 1997
---------- -------
<S> <C> <C> <C> <C>
Tax advantaged investments................................... $ 51,400 $34,413
Investments on equity method of accounting................... 20,017 15,736
Real estate partnerships..................................... 10,732 405
Notes receivable from investees.............................. 30,855 12,545
Noncurrent deferred income taxes............................. 21,669 19,349
Other investments............................................ 9,466 8,656
Other........................................................ 6,894 5,644
<CAPTION>
---------- -------
<S> <C> <C> <C> <C>
$151,033 $96,748
<CAPTION>
========== =======
</TABLE>
F-9
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments--(Continued)
Tax advantaged investments represent amounts invested by the Company in
limited partnerships that operate qualified affordable housing or alternative
energy projects. The Company receives tax benefits in the form of tax
deductions for operating losses and tax credits from these investments. The tax
advantaged investments are primarily accounted for using the effective yield
method and are carried at amortized cost in the consolidated balance sheet.
Under the effective yield method, the Company recognizes the tax credits as
they are allocated by the partnerships, which are included, net of amortization
of the investment, as a component of the provision for income taxes. During
1998 and 1997, the Company received tax benefits related to $20,159,000 and
$21,934,000 of the aggregate amount invested in the tax advantaged investments
at December 31, 1998 and 1997, respectively. Investments in real estate
partnerships primarily represent an investment in a limited partnership that
owns 10,000 acres of land to be developed near Orlando, Florida. Investments in
real estate partnerships are carried at cost in the consolidated balance sheet,
which approximated fair value at December 31, 1998. Notes receivable from
investees represent secured loans made by the Company to several of its equity
and limited partnership investments. Interest rates on the loans at December
31, 1998 ranged from 6% to 9.75%. The carrying value of these loans at December
31, 1998 approximated fair value.
Significant components of investment income and other, including non-
recurring gains, are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest.............................................. $11,112 $13,993 $15,817
Dividends............................................. 2,809 3,814 4,229
Net realized and unrealized gains..................... 4,144 4,938 3,928
Other income.......................................... 1,206 1,155 189
Income (loss) from equity investments................. (764) 269 (111)
Non-recurring gains................................... -- 8,993 --
------- ------- -------
Total investment income and other..................... $18,507 $33,162 $24,052
======= ======= =======
</TABLE>
The net change in unrealized gain (loss) on investment strategies included in
the above table amounted to ($611,000) in 1998, ($1,813,000) in 1997 and
$3,905,000 in 1996. In 1997, the Company sold several underperforming or
geographically undesirable operations and recorded aggregate gains on these
sales of $7,203,000. The gains on these sales of operations have been included
in non-recurring gains in the foregoing table. The net assets sold and the
operating results included in the consolidated statement of earnings related to
these operations were 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 non-recurring gains in the
foregoing table.
F-10
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments -- (Continued)
The components of other comprehensive earnings, including the related income
tax effects, consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Change in unrealized gain (loss) on available for
sale securities during the year, net of income taxes
of ($844), $872 and $830, respectively.............. $(1,267) $1,308 $1,245
Reclassification adjustment for gains realized in net
earnings during the
year, net of income taxes of ($778), ($360) and
($259), respectively................................ (1,168) (539) (390)
------- ------ ------
Net change in unrealized gain (loss) on available for
sale securities during the year, net of income taxes
of ($1,622), $512 and $571, respectively............ $(2,435) $ 769 $ 855
======= ====== ======
</TABLE>
4. Securities Sold Under Agreements to Repurchase
At December 31, 1998, 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
$21,714,000 and a fair value of $21,817,000. The securities collateralizing
the agreements were held by two primary dealers. At December 31, 1997, these
securities had a carrying value of $22,121,000 and a fair value of
$22,360,000.
5. Credit and Debt Agreements
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, 1998 and 1997, there were no borrowings outstanding under this
agreement. Terms of the revolving credit agreement include various covenants
which require the Company to maintain specified levels of tangible net worth
and restrict the amount of payments on certain expenditures.
The Company also has line of credit facilities of $27,500,000 which expire
on April 30, 1999. Short-term borrowings under these facilities totaled
$15,000,000 at December 31, 1998 and 1997. The weighted average interest rate
on the short-term borrowings were 5.9% and 6.5% during 1998 and 1997,
respectively.
At December 31, 1997, the Company had two unsecured term loan agreements
with outstanding balances of $630,000 and $500,000 and stated interest rates
of 6.64% and 6.30%, respectively. In 1998, the Company retired the remaining
balances on these term loan agreements.
6. Capital Stock and Stockholders' Rights Plan
Capital Stock
The table below summarizes certain information about the Company's capital
stock at December 31, 1998 and 1997 (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>
F-11
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Capital Stock and Stockholders' Rights Plan--(Continued)
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, 1998 and 1997, 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,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net earnings........................................ $ 56,501 $ 54,900 $ 44,227
======== ======== ========
Weighted average number of common shares
outstanding........................................ 17,402 16,746 16,739
Dilutive effect of stock options using the treasury
stock method....................................... 804 584 681
-------- -------- --------
Weighted average number of common and common
equivalent shares outstanding...................... 18,206 17,330 17,420
======== ======== ========
Net earnings per common share....................... $ 3.25 $ 3.28 $ 2.64
Net earnings per common and common equivalent share. 3.10 3.17 2.54
</TABLE>
Options to purchase 20,000, 644,000 and 1,313,000 shares of common stock
were outstanding during 1998, 1997 and 1996, respectively, but were not
included in the computation of the dilutive effect of stock options. These
options were excluded from the computation because the options' exercise
prices were greater than the average market price of the common shares and,
therefore, would be antidilutive.
8. Stock Option Plans
The Company has incentive and nonqualified stock option plans for officers
and key employees of the Company and its subsidiaries. The options are
primarily granted at the fair value of the underlying shares at the date of
grant. Options granted under the nonqualified plan primarily 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.
In addition, the Company has a non-employee directors' 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
F-12
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Stock Option Plans--(Continued)
Option at the end of each full fiscal quarter succeeding the date of grant. The
excess of fair 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.
In 1998, all of the aforementioned stock option plans were modified to
provide for the immediate vesting of all outstanding stock option grants in the
event of a change in control of the Company. A change in control of the Company
is defined as the acquisition by a person (or entity) of the beneficial
ownership of 50% or more of the Company's common stock; the cessation, for any
reason, of a majority of directors of the Company to serve as directors during
any two year period; or the approval by the stockholders of the Company of the
sale of substantially all of the assets of the Company.
The Company accounts for stock option grants in accordance with APB 25 and,
accordingly, recognizes no compensation expense for stock options that are
granted to employees at the fair value of the underlying shares at the date of
grant. 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,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro forma net earnings.............................. $ 55,449 $ 54,009 $ 43,583
Pro forma net earnings per common share............. 3.19 3.23 2.60
Pro forma net earnings per common and common
equivalent share................................... 3.08 3.15 2.53
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,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Dividend yield...................................... 3.1% 3.0% 2.9%
Risk-free interest rate............................. 4.9% 5.7% 6.3%
Volatility.......................................... 24.1% 23.9% 24.1%
Expected life (years)............................... 8.0 8.0 8.0
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee and director stock options have characteristics
significantly different from those of traded options, and because changes in
the selective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models
F-13
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Stock Option Plans--(Continued)
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,
-----------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
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........ 4,327 $28.26 4,910 $27.18 4,770 $25.87
Granted.................. 761 37.91 149 33.18 714 32.05
Exercised................ (588) 23.20 (557) 19.69 (398) 20.02
Canceled................. (39) 32.83 (175) 29.44 (176) 28.44
------ ------ ------ ------ ------ ------
Ending balance........... 4,461 $30.52 4,327 $28.26 4,910 $27.18
====== ====== ====== ====== ====== ======
Exercisable at end of
year.................... 1,743 1,780 1,728
====== ====== ======
</TABLE>
Options with respect to 1,328,000 shares were available for grant at December
31, 1998.
Other information regarding stock options outstanding and exercisable at
December 31, 1998 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 - $22.38.......... 1,078 2.25 $20.70 703 $20.59
22.81 - 31.88.......... 1,262 6.44 30.50 434 30.05
32.00 - 34.38.......... 1,170 5.33 33.87 534 33.74
34.75 - 44.06.......... 897 9.18 37.08 72 36.10
45.13 - 45.38.......... 54 9.91 45.35 -- --
-------- -------- -------- -------- --------
$ 7.13 - $45.38.......... 4,461 5.73 $30.52 1,743 $27.62
======== ======== ======== ======== ========
</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. 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
pension 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.
F-14
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Retirement Plans--(Continued)
A reconciliation of the beginning and ending balances of the pension benefit
obligation and fair value of plan assets and the funded status of the plan is
as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C> <C>
Change in pension benefit obligation:
Pension benefit obligation at beginning of
year........................................ $ 63,747 $ 52,931
Service cost................................. 7,355 7,046
Interest cost................................ 4,560 3,985
Actuarial (gain) loss........................ (9,141) 657
Benefits paid................................ (1,206) (872)
------------ ------------
Pension benefit obligation at end of year.... 65,315 63,747
------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of
year........................................ 45,560 39,045
Actual return on plan assets................. 5,832 5,802
Company contributions........................ 4,868 1,585
Benefits paid................................ (1,206) (872)
------------ ------------
Fair value of plan assets at end of year..... 55,054 45,560
------------ ------------
Funded status of the plan (underfunded)...... (10,261) (18,187)
Unrecognized net actuarial gain.............. (13,433) (2,628)
Unrecognized prior service cost.............. 1,102 1,212
Unrecognized transition obligation........... 443 499
------------ ------------
Accrued pension benefit cost................. $ (22,149) $ (19,104)
============ ============
The components of the net periodic pension benefit cost for the plan consists
of the following (in thousands):
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
------- ------------ ------------
<S> <C> <C> <C>
Service cost--benefits earned during
the year............................ $ 7,355 $ 7,046 $ 5,790
Interest cost on benefit obligation.. 4,560 3,985 3,322
Expected return on plan assets....... (4,168) (3,550) (3,057)
Amortization of prior service cost... 110 110 110
Amortization of transition
obligation.......................... 56 56 56
Other................................ 26 26 52
------- ------------ ------------
Net periodic pension benefit cost.... $ 7,939 $ 7,673 $ 6,273
======= ============ ============
The following assumptions were used in determining the plan's pension benefit
obligation for 1998, 1997 and 1996:
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
F-15
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Retirement Plans--(Continued)
the maximum amount deductible for federal income tax purposes. The Company
contributed $2,823,000, $2,760,000 and $3,220,000 in 1998, 1997 and 1996,
respectively. The Company also has a foreign defined contribution plan which
provides for basic contributions by the Company and voluntary contributions by
employees which are matched 100% by the Company, up to a maximum of 5% of
salary, as defined. Net expense (income) for foreign retirement plans amounted
to $3,128,000 in 1998, ($2,922,000) in 1997 and $1,485,000 in 1996.
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.
10. Postretirement Benefits Other Than Pensions
In 1992, the Company amended its health benefits plan to eliminate retiree
coverage, except for retirees at the time of the amendment 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.
A reconciliation of the beginning and ending balances of the postretirement
benefit obligation and the funded status of the plan is as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Change in postretirement benefit obligation:
Postretirement benefit obligation at beginning of
year.............................................. $ 11,280 $ 10,112
Service cost....................................... -- --
Interest cost...................................... 803 763
Actuarial (gain) loss.............................. (346) 793
Benefits paid...................................... (460) (388)
------------ ------------
Postretirement benefit obligation at end of year... 11,277 11,280
Fair value of plan assets at beginning and end of
year.............................................. -- --
------------ ------------
Funded status of the plan (underfunded)............ (11,277) (11,280)
Unrecognized net actuarial gain.................... (1,075) (729)
Unrecognized prior service cost.................... -- --
Unrecognized transition obligation................. 7,164 7,676
------------ ------------
Accrued postretirement benefit cost................ $ (5,188) $ (4,333)
============ ============
</TABLE>
F-16
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Postretirement Benefits Other Than Pensions--(Continued)
The components of the net periodic postretirement benefit cost include the
following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service cost--benefits earned during the year........... $ -- $ -- $ --
Interest cost on benefit obligation..................... 803 763 717
Amortization of transition obligation................... 512 512 512
Amortization of gain.................................... -- (89) (209)
------ ------ ------
Net periodic postretirement benefit cost................ $1,315 $1,186 $1,020
====== ====== ======
</TABLE>
The discount rate used to measure the postretirement benefit obligation was
7.5% at December 31, 1998 and 1997. The transition obligation is being
amortized over a 20 year period. For measurement purposes, an 8.5% annual rate
of increase in the per capita cost of covered health care benefits was assumed
for 1999. This rate was assumed to gradually scale down to 4.5% for 2009 and
remain at that level thereafter. The assumed health care cost trend rate has a
significant effect on the amounts reported and disclosed herein. A one
percentage point change in the assumed health care cost trend rate would have
the following effects (in thousands):
<TABLE>
<CAPTION>
One Percentage Point
----------------------
Increase (Decrease)
--------- -----------
<S> <C> <C>
Effect on the net periodic postretirement benefit cost
in 1998.............................................. $ 96 $ (342)
Effect on the postretirement benefit obligation at
December 31, 1998.................................... 1,377 (4,900)
</TABLE>
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 consolidated 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, 1998 under
noncancelable operating leases having an initial term of more than one year
are as follows (in thousands):
<TABLE>
<CAPTION>
Total
--------
<S> <C>
1999................................................................... $ 27,757
2000................................................................... 22,729
2001................................................................... 18,719
2002................................................................... 15,462
2003................................................................... 11,733
Subsequent years....................................................... 34,337
--------
$130,737
========
</TABLE>
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $32,057,000 in 1998,
$30,724,000 in 1997 and $28,796,000 in 1996.
F-17
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies--(Continued)
At December 31, 1998, the Company has contingently committed to invest an
additional $7,500,000 in 1999 related to two letter of credit arrangements with
one of its equity investments. At December 31, 1998, the Company has agreed to
unconditionally guarantee $30,000,000 of debt that will be incurred by one of
the Company's equity investments in 1999. In addition, the Company has
guaranteed an aggregate $8,700,000 of funds through letters of credit or other
arrangements related to several investment and insurance programs of the
Company.
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,
--------------------------
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Earnings before income taxes:
Domestic........................................... $79,087 $ 75,987 $61,838
Foreign............................................ 5,442 6,635 5,164
------- -------- -------
$84,529 $ 82,622 $67,002
======= ======== =======
Provision for income taxes:
Federal:
Current........................................... $27,314 $ 30,514 $19,953
Deferred.......................................... (7,049) (10,284) (3,737)
------- -------- -------
20,265 20,230 16,216
------- -------- -------
State and local:
Current........................................... 7,081 6,306 5,340
Deferred.......................................... (1,007) (1,469) (415)
------- -------- -------
6,074 4,837 4,925
------- -------- -------
Foreign:
Current........................................... 2,629 1,318 729
Deferred.......................................... (940) 1,337 905
------- -------- -------
1,689 2,655 1,634
------- -------- -------
Total provision for income taxes.................... $28,028 $ 27,722 $22,775
======= ======== =======
</TABLE>
F-18
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Income Taxes--(Continued)
A reconciliation of the provision for income taxes with the U.S. federal
income tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate...... $29,585 35.0 $28,918 35.0 $23,451 35.0
State income taxes--net of
federal.................... 3,731 4.4 2,925 3.6 3,151 4.7
Pre-acquisition earnings of
pooled companies taxed to
previous owners............ (509) (0.6) (84) (0.1) (468) (0.7)
Foreign taxes............... 349 0.4 592 0.7 208 0.3
General business credits.... (4,866) (5.8) (2,697) (3.3) (2,242) (3.3)
Other--net.................. (262) (0.2) (1,932) (2.3) (1,325) (2.0)
<CAPTION>
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes.. $28,028 33.2 $27,722 33.6 $22,775 34.0
<CAPTION>
======= ====== ======= ====== ======= ======
</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 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Leveraged leases............................................... $ 444 $ 444
Unrealized investment gain..................................... -- 1,105
Other.......................................................... 2,104 1,124
------- -------
Deferred tax liabilities...................................... 2,548 2,673
------- -------
Deferred tax assets:
Accrued and unfunded compensation and employee benefits........ 20,706 15,138
Accrued liabilities............................................ 13,305 13,938
Unrealized investment loss..................................... 517 --
Other.......................................................... 1,968 2,079
------- -------
Total deferred tax assets..................................... 36,496 31,155
Valuation allowance for deferred tax assets................... -- --
------- -------
Deferred tax assets........................................... 36,496 31,155
------- -------
Net deferred tax assets......................................... $33,948 $28,482
======= =======
</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 ($21,800,000 at
December 31, 1998) 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 $6,100,000 at December 31,
1998.
F-19
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 1998 and 1997 were as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
-------- -------- -------- --------
1998
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues................. $123,702 $124,417 $143,538 $148,998
Earnings before income taxes... 17,215 14,788 29,132 23,394
Net earnings................... 11,494 9,892 19,859 15,256
Net earnings per common share.. .68 .57 1.13 .87
Net earnings per common and
common equivalent share....... .65 .54 1.08 .83
<CAPTION>
1997
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues................. $114,594 $119,695 $133,518 $132,691
Earnings before income taxes... 14,457 19,840 28,587 19,738
Net earnings................... 9,631 13,185 18,958 13,126
Net earnings per common share.. .57 .79 1.13 .78
Net earnings per common and
common equivalent share....... .56 .77 1.09 .75
</TABLE>
14. SEGMENT INFORMATION
The Company has identified three operating segments in addition to its
corporate operations. Insurance Brokerage Services encompasses operations
that, for commission or fee compensation, place or arrange to place insurance
directly related to the clients' funding of risk. This segment also provides
consulting, for fee compensation, related to clients' risk financing programs.
Risk Management Services includes the Company's third party administration,
loss control and risk management consulting, workers' compensation
investigations and insurance property appraisal operations. Third party
administration is principally claims management services for the Company's
clients. Financial Services includes alternative investment strategies and tax
advantaged investments. It manages the Company's own investment portfolio
while expanding these services in conjunction with the insurance products the
Company markets. Corporate consists primarily of unallocated administrative
costs and the provision for income taxes which is not allocated to the
Company's operating segments.
F-20
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Segment Information--(Continued)
Allocations of investment income and certain expenses are based on
assumptions and estimates, and reported operating results by segment would
change if different methods were applied. Certain assets are not individually
identifiable by segment and, accordingly, have been allocated based on
formulas. Financial information relating to the Company's operating segments
for 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
--------- ---------- --------- --------- --------
Year Ended December 31, 1998
- ----------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions............... $312,664 $ 467 $ -- $ -- $313,131
Fees...................... 41,640 167,377 -- -- 209,017
Investment income and
other.................... 8,179 1,000 9,328 -- 18,507
-------- --------- -------- -------- --------
Total revenues.......... $362,483 $ 168,844 $ 9,328 $ -- $540,655
======== ========= ======== ======== ========
Earnings before income
taxes...................... $ 68,268 $ 15,427 $ 5,270 $ (4,436) $ 84,529
Provision for income taxes.. -- -- -- 28,028 28,028
-------- --------- -------- -------- --------
Net earnings............ $ 68,268 $ 15,427 $ 5,270 $(32,464) $ 56,501
======== ========= ======== ======== ========
Income (loss) from equity
investments................ $ 215 $ -- $ (979) $ -- $ (764)
Depreciation and
amortization expense....... 7,660 3,732 -- 336 11,728
Interest expense............ 136 88 11 1,054 1,289
Net foreign exchange gain
(loss)..................... (176) 126 -- 2 (48)
----------------------------------------------------
Revenues:
United States............. $330,153 $ 156,836 $ 8,902 $ -- $495,891
Foreign, principally
United Kingdom........... 32,330 12,008 426 -- 44,764
-------- --------- -------- -------- --------
Total revenues.......... $362,483 $ 168,844 $ 9,328 $ -- $540,655
======== ========= ======== ======== ========
<CAPTION>
At December 31, 1998
- --------------------
<S> <C> <C> <C> <C> <C>
Identifiable assets:
United States............. $301,471 $ 40,774 $195,302 $ 40,006 $577,553
Foreign, principally
United Kingdom........... 156,701 7,373 4,383 -- 168,457
-------- --------- -------- -------- --------
Total identifiable
assets................. $458,172 $ 48,147 $199,685 $ 40,006 $746,010
======== ========= ======== ======== ========
Identifiable assets
related to equity
investments.............. $ (120) $ -- $ 20,137 $ -- $ 20,017
</TABLE>
F-21
<PAGE>
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Segment Information--(Continued)
<TABLE>
<CAPTION>
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
--------- ---------- --------- --------- --------
Year Ended December 31, 1997
- ----------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions................... $284,808 $ 381 $ -- $ -- $285,189
Fees.......................... 40,744 141,403 -- -- 182,147
Investment income and other... 8,253 912 15,004 -- 24,169
Non-recurring gains........... -- -- 8,993 -- 8,993
-------- --------- -------- -------- --------
Total revenues.............. $333,805 $ 142,696 $ 23,997 $ -- $500,498
======== ========= ======== ======== ========
Earnings before income taxes.... $ 57,384 $ 10,273 $ 22,129 $ (7,164) $ 82,622
Provision for income taxes...... -- -- -- 27,722 27,722
-------- --------- -------- -------- --------
Net earnings................ $ 57,384 $ 10,273 $ 22,129 $(34,886) $ 54,900
======== ========= ======== ======== ========
Income (loss) from equity
investments.................... $ (154) $ -- $ 423 $ -- $ 269
Depreciation and amortization
expense........................ 7,486 3,425 -- 329 11,240
Interest expense................ 178 69 561 210 1,018
Net foreign exchange gain
(loss)......................... 75 1 -- -- 76
---------------------------------------------------
Revenues:
United States................. $303,824 $ 136,899 $ 21,609 $ -- $462,332
Foreign, principally United
Kingdom...................... 29,981 5,797 2,388 -- 38,166
-------- --------- -------- -------- --------
Total revenues.............. $333,805 $ 142,696 $ 23,997 $ -- $500,498
======== ========= ======== ======== ========
<CAPTION>
At December 31, 1997
- --------------------
<S> <C> <C> <C> <C> <C>
Identifiable assets:
United States................. $245,817 $ 34,084 $168,907 $ 44,928 $493,736
Foreign, principally United
Kingdom...................... 148,967 5,054 4,323 -- 158,344
-------- --------- -------- -------- --------
Total identifiable assets... $394,784 $ 39,138 $173,230 $ 44,928 $652,080
======== ========= ======== ======== ========
Identifiable assets related to
equity investments........... $ (627) $ -- $ 16,363 $ -- $ 15,736
<CAPTION>
Year Ended December 31, 1996
- ----------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions................... $276,295 $ 441 $ -- $ -- $276,736
Fees.......................... 36,458 136,507 -- -- 172,965
Investment income and other... 9,742 943 13,367 -- 24,052
-------- --------- -------- -------- --------
Total revenues.............. $322,495 $ 137,891 $ 13,367 $ -- $473,753
======== ========= ======== ======== ========
Earnings before income taxes.... $ 52,705 $ 12,494 $ 8,317 $ (6,514) $ 67,002
Provision for income taxes...... -- -- -- 22,775 22,775
-------- --------- -------- -------- --------
Net earnings................ $ 52,705 $ 12,494 $ 8,317 $(29,289) $ 44,227
======== ========= ======== ======== ========
Income (loss) from equity
investments.................... $ (204) $ -- $ 93 $ -- $ (111)
Depreciation and amortization
expense........................ 7,270 3,080 -- 362 10,712
Interest expense................ 485 5 362 33 885
Net foreign exchange gain
(loss)......................... (267) 72 -- 14 (181)
---------------------------------------------------
Revenues:
United States................. $292,538 $ 135,044 $ 12,925 $ -- $440,507
Foreign, principally United
Kingdom...................... 29,957 2,847 442 -- 33,246
-------- --------- -------- -------- --------
Total revenues.............. $322,495 $ 137,891 $ 13,367 $ -- $473,753
======== ========= ======== ======== ========
<CAPTION>
At December 31, 1996
- --------------------
<S> <C> <C> <C> <C> <C>
Identifiable assets:
United States................. $290,663 $ 36,595 $117,352 $ 21,163 $465,773
Foreign, principally United
Kingdom...................... 129,727 2,926 3,641 -- 136,294
-------- --------- -------- -------- --------
Total identifiable assets... $420,390 $ 39,521 $120,993 $ 21,163 $602,067
======== ========= ======== ======== ========
Identifiable assets related to
equity investments........... $ (473) $ -- $ 6,065 $ -- $ 5,592
</TABLE>
F-22
<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 this 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 19, 1999
/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-23
<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, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Arthur J. Gallagher & Co. at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
-------------------------------------
ERNST & YOUNG LLP
Chicago, Illinois
January 19, 1999
F-24
<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.............. $15,700
Printing Expenses................................................ 15,000
Legal Fees and Expenses.......................................... 5,000
Accountant's Fees and Expenses................................... 6,500
Miscellaneous Costs.............................................. 5,000
-------
Total........................................................ $47,200
=======
</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
(filed as Exhibit 10.11) 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
II-1
<PAGE>
indemnification with 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 26th day of March, 1999.
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 26, 1999 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)
Peter J. Durkalski* Director
___________________________________________
(Peter J. Durkalski)
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/ John C. Rosengren
*By: ________________________________
John C. Rosengren,
Attorney-in-Fact
II-3
<PAGE>
LIST OF EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<C> <S>
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the same exhibit number to
Company's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 1996, File No. 1-9761).
3.2 By-Laws of the Company (incorporated by reference to the same
exhibit number to Company's Form S-1 Registration Statement No.
33-10447).
3.3 Rights Agreement between the Company and Bank of America
Illinois (formerly Continental Illinois National Bank and Trust
Company of Chicago) (incorporated by reference to Exhibits 1
and 2 to Company's Form 8-A Registration Statement filed May
12, 1987, File No. 0-13480).
3.4 Assignment and Assumption Agreement of Rights Agreement by and
among Bank of America Illinois (formerly Continental Illinois
National Bank and Trust Company of Chicago), Harris Trust and
Savings Bank and the Company (incorporated by reference to the
same exhibit number to Company's Form S-8 Registration
Statement No. 33-38031).
3.5 Amendment No. 1 to Exhibit 3.3 (incorporated by reference to
the same exhibit number to Company's Form 10-Q Quarterly Report
for the quarterly period ended June 30, 1996, File No. 1-9761).
4.1 Instruments defining the rights of security holders (relevant
portions contained in the Restated Certificate of Incorporation
and By-Laws of the Company and the Rights Agreement in Exhibits
3.1, 3.2, and 3.3, respectively, hereby incorporated by
reference).
4.4 Credit Agreement dated February 16, 1993 (incorporated by
reference to the same exhibit number to the Company's Form 10-K
Annual Report for 1992, File No. 1-9761).
*5.0 Opinion of John C. Rosengren, Vice President and General
Counsel to the Company, including consent.
10.1 Arthur J. Gallagher & Co. Incentive Stock Option Plan and
related form of stock option agreement (incorporated by
reference to the same exhibit number to Company's Form S-1
Registration Statement No. 2-89195).
10.1.1 Amendment No. 1 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3 to Company's Form S-8 Registration
Statement No. 33-604).
10.1.2 Amendment No. 2 to Exhibit No. 10.1 (incorporated by reference
to Exhibit No. 10.3.1 to Company's Form S-8 Registration
Statement No. 33-14625).
10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan, amended and restated as of January 22, 1998 and approved
by Inland Revenue on June 12, 1998 (incorporated by reference
to the same exhibit number to Company's Form 10-Q Quarterly
Report for the quarterly period ended June 30, 1998, File No.
1-9761).
10.26 Arthur J. Gallagher & Co. 1988 Incentive Stock Option Plan,
amended and restated as of May 19, 1998 (incorporated by
reference to the same exhibit number to Company's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1998,
File No. 1-9761).
10.27 Arthur J. Gallagher & Co. 1988 Nonqualified Stock Option Plan,
amended and restated as of January 22, 1998 (incorporated by
reference to the same exhibit number to Company's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1998,
File No. 1-9761).
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S> <C>
10.28 Arthur J. Gallagher & Co. 1989 Non-Employee Directors'
Stock Option Plan, amended and restated as of January 22,
1998 (incorporated by reference to the same exhibit
number of the Company's Form 10-Q Quarterly Report for
the quarterly period ended June 30, 1998, File No. 1-
9761).
10.5 Lease Agreement between Arthur J. Gallagher & Co. and
Itasca Center III Limited Partnership, a Texas limited
partnership, dated July 26, 1989 (incorporated by
reference to the same exhibit number to Company's Form
10-K Annual Report for 1989, File No. 1-9761).
10.7 Letter dated December 31, 1983 from Arthur J. Gallagher &
Co. to Bank of America Illinois (formerly Continental
Illinois National Bank and Trust Company of Chicago)
regarding Common Stock Purchase Financing Program
including exhibits thereto and related letters
(incorporated by reference to the same exhibit number to
Company's Form S-1 Registration Statement No. 2-89195).
10.7.1 Amendment to Exhibit No. 10.7 dated September 11, 1985
(incorporated by reference to the same exhibit number to
Company's Form 10-K Annual Report for 1985, File No. 0-
13480).
10.10 Board of Directors' Resolution from meeting on January
26, 1984 relating to consulting and retirement benefits
for certain directors (incorporated by reference to the
same exhibit number to Company's Form S-1 Registration
Statement No. 2-89195).
10.11 Form of Indemnity Agreement between the Company and each
of its directors and corporate officers (incorporated by
reference to Attachment A to the Company's Proxy
Statement dated April 10, 1987 for its Annual Meeting of
Stockholders, File No. 0-13480).
10.13 Arthur J. Gallagher & Co. Stock Option Agreements dated
May 10, 1988 between the Company and each of Robert H. B.
Baldwin, Jack M. Greenberg and James R. Wimmer
(incorporated by reference to the same exhibit number to
Company's Form 10-K Annual Report for 1988, File No. 1-
9761).
10.14 Form of Change in Control Agreement between the Company
and each of its Executive Officers (incorporated by
reference to the same exhibit number to Company's Form
10-K Annual Report for 1998, File No. 1-9761).
21.0 Subsidiaries of the Company (incorporated by reference to
the same Exhibit number to the Company's Form 10-K Annual
Report for 1998, File No. 1-9761).
*23.1 Consent of Ernst & Young LLP, as independent auditors.
23.2 Consent of John C. Rosengren, Vice President and General
Counsel to the Company, included in Exhibit 5.0.
*24.0 Powers of Attorney.
**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 1998, File No. 1-9761.
II-5
<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 19, 1999 in the Registration Statement on
Form S-1 and related Prospectus of Arthur J. Gallagher & Co. and subsidiaries
for the registration of 1,200,000 shares of its Common Stock.
We also consent to the incorporation by reference therein of our report
dated January 19, 1999 with respect to the consolidated financial statement
schedule of Arthur J. Gallagher & Co. and subsidiaries for the years ended
December 31, 1998, 1997 and 1996 included in the Annual Report (Form 10-K) for
1998 filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
---------------------------------------
Ernst & Young LLP
Chicago, Illinois
March 26, 1999
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ Robert E. Gallagher
-----------------------
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ T. Kimball Brooker
----------------------
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ Peter J. Durkalski
----------------------
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ Jack M. Greenberg
---------------------
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ Frank M. Heffernan, Jr.
---------------------------
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ Philip A. Marineau
----------------------
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ Walter F. McClure
---------------------
<PAGE>
POWER OF ATTORNEY
WHEREAS, ARTHUR J. GALLAGHER & CO., a Delaware corporation (the "Company"),
has prepared and proposes to file with the Securities and Exchange Commission
(the "Commission") under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations promulgated thereunder, a
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the offer and sale pursuant to Rule 415 under the Act of up to 1,200,000
additional shares of Common Stock, $1.00 par value, of the Company in connection
with business combinations; and
WHEREAS, the Company may from time to time file with the Commission under
the provisions of the Act and the rules and regulations promulgated thereunder
Appendices, Amendments and Post-Effective Amendments to the Registration
Statement;
NOW, THEREFORE, the undersigned hereby:
(1) designates, constitutes and appoints John C. Rosengren, Vice President
and General Counsel of the Company, his attorney, with full power to act for and
on behalf of the undersigned in connection with, and to sign the name of the
undersigned in his capacity as a Director of the Company to the Registration
Statement and to any and all Appendices, Amendments and Post-Effective
Amendments to the Registration Statement which the Company may hereafter file
with the Commission under the provisions of the Act and the rules and
regulations promulgated thereunder; and
(2) ratifies, confirms and approves any and all acts and things which John
C. Rosengren may lawfully take or do, or cause to be taken or done, by virtue of
the powers granted to him hereunder.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 18th day
of March, 1999.
/s/ James R. Wimmer
-------------------
