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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2002 or
[ ] Transition report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period from
------------
to
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Commission File Number 1-9761
ARTHUR J. GALLAGHER & CO.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2151613
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Pierce Place, Itasca, Illinois 60143-3141
(Address of principal executive offices) (Zip code)
(630) 773-3800
(Registrant's telephone number, including area code)
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of September 30, 2002 was 87,971,772.
ARTHUR J. GALLAGHER & CO.
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Earnings for the three-month and
nine-month periods ended September 30, 2002 and 2001..........................3
Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001.............................................................4
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2002 and 2001.....................................5
Notes to Consolidated Financial Statements....................................6-15
Independent Accountant's Review Report .........................................16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................17-27
Item 3. Quantitative and Qualitative Disclosure About Market Risk ......................27
Item 4. Controls and Procedures.........................................................28
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K................................................29
Signatures ..............................................................................30
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002...............31-32
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three-month period ended Nine-month period ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- -------- --------- --------
(in thousands, except per share data)
Operating Results
Revenues:
Commissions $178,203 $136,653 $ 478,259 $384,226
Fees 101,317 84,422 282,883 238,413
Investment income (loss) and other:
Interest income from fiduciary funds 2,415 2,836 7,071 10,388
Income (loss) from investment strategies
and marketable securities (9,757) 1,514 (8,268) 7,152
Income (loss) from equity investments
and partnerships (17,158) 2,500 (13,823) 5,630
Gain on sale of portion of
minority interest in investment -- -- 11,848 --
Installment gains from alternative
energy partnership sales 10,760 4,306 24,789 5,012
Income from real estate ventures 1,717 1,975 6,974 10,381
Other income 690 1,458 4,707 5,061
-------- -------- --------- --------
Total investment income (loss) and other (11,333) 14,589 33,298 43,624
-------- -------- --------- --------
Total revenues 268,187 235,664 794,440 666,263
-------- -------- --------- --------
Expenses:
Salaries and employee benefits 147,637 115,139 419,292 337,063
Other operating expenses 75,399 63,530 211,170 183,700
Operating expenses of alternative
energy partnerships 1,406 8,259 4,485 18,971
Expenses of real estate ventures 1,530 1,320 4,812 5,188
Depreciation 6,918 4,783 18,617 14,530
Amortization 1,997 614 5,427 1,947
-------- -------- --------- --------
Total expenses 234,887 193,645 663,803 561,399
-------- -------- --------- --------
Earnings before income taxes 33,300 42,019 130,637 104,864
Provision for income taxes 9,990 116 39,191 12,681
-------- -------- --------- --------
Net earnings $ 23,310 $ 41,903 $ 91,446 $ 92,183
======== ======== ========= ========
Net earnings per common share $ .26 $ .49 $ 1.05 $ 1.09
Net earnings per common and
common equivalent share .25 .47 1.00 1.03
Dividends declared per common share .15 .13 .45 .39
See notes to consolidated financial statements.
-3-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 128,644 $ 98,530
Restricted cash 293,265 209,509
Premiums and fees receivable 1,098,386 1,117,238
Investment strategies - trading 49,697 52,588
Marketable securities - trading 14,042 --
Other 106,644 85,142
----------- -----------
Total current assets 1,690,678 1,563,007
Marketable securities - available for sale -- 18,290
Deferred income taxes 97,514 99,263
Other investments and notes receivable 175,115 192,002
Other noncurrent assets 33,377 24,194
Fixed assets 365,556 283,807
Accumulated depreciation and amortization (120,723) (100,562)
----------- -----------
Net fixed assets 244,833 183,245
Intangible assets - net 109,053 65,341
----------- -----------
$ 2,350,570 $ 2,145,342
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance and reinsurance companies $ 1,458,710 $ 1,366,516
Accrued salaries and bonuses 41,028 56,572
Accounts payable and other accrued liabilities 108,811 111,618
Unearned fees 21,414 16,527
Income taxes payable 651 33,746
Borrowings on line of credit facilities 35,000 35,000
Borrowings on line of credit facilities - limited partnerships 11,871 3,552
Current portion of long-term debt - limited partnerships 5,719 3,152
Other 6,036 11,273
----------- -----------
Total current liabilities 1,689,240 1,637,956
Long-term debt - limited partnerships 129,153 96,698
Other noncurrent liabilities 44,365 39,075
Commitments and contingencies
Stockholders' equity:
Common stock - issued and outstanding 87,972 shares in
2002 and 85,111 shares in 2001 87,972 85,111
Capital in excess of par value 79,075 8,768
Retained earnings 335,947 283,796
Unearned deferred compensation (6,823) (3,438)
Unearned restricted stock (8,359) --
Accumulated other comprehensive earnings (loss) -- (2,624)
----------- -----------
Total stockholders' equity 487,812 371,613
----------- -----------
$ 2,350,570 $ 2,145,342
=========== ===========
See notes to consolidated financial statements.
-4-
ARTHUR J. GALLAGHER & CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine-month period ended
September 30,
-----------------------
2002 2001
--------- ---------
(in thousands)
Cash flows from operating activities:
Net earnings $ 91,446 $ 92,183
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Net loss (gain) on investments and other 19,574 (2,940)
Gain on sales of operations (2,500) (2,375)
Depreciation and amortization 24,044 16,477
Increase in restricted cash (83,756) (31,270)
Decrease (increase) in premiums receivable 26,806 (33,265)
Increase in premiums payable 80,134 86,274
Decrease in trading investments - net 3,847 4,524
Increase in other current assets (20,641) (13,893)
Decrease in accrued salaries and bonuses (13,439) (5,401)
Decrease in accounts payable and other accrued liabilities (7,246) (11,579)
Decrease in income taxes payable (33,227) (9,054)
Tax benefit from issuance of common stock 17,714 18,560
Net change in deferred income taxes 510 (583)
Other (10,051) (15,051)
--------- --------
Net cash provided by operating activities 93,215 92,607
--------- --------
Cash flows from investing activities:
Purchases of marketable securities - available for sale (16,004) (10,286)
Proceeds from sales of marketable securities - available for sale 10,568 19,470
Proceeds from maturities of marketable securities - available for sale 3,185 271
Net additions to fixed assets (32,444) (20,238)
Cash paid for acquisitions, net of cash acquired (4,309) (4,056)
Proceeds from sales of operations 2,500 2,700
Other 2,825 (18,399)
--------- --------
Net cash used by investing activities (33,679) (30,538)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 14,232 22,102
Repurchases of common stock (11,628) (67,147)
Dividends paid (37,163) (30,580)
Borrowings on line of credit facilities 231,319 100,047
Repayments on line of credit facilities (223,000) (90,700)
Borrowings of long-term debt 500 --
Repayments of long-term debt (3,682) (3,841)
Equity transactions of pooled companies prior to dates of acquisition -- (13,497)
--------- --------
Net cash used by financing activities (29,422) (83,616)
--------- --------
Net increase (decrease) in cash and cash equivalents 30,114 (21,547)
Cash and cash equivalents at beginning of period 98,530 149,387
--------- --------
Cash and cash equivalents at end of period $ 128,644 $127,840
========= ========
Supplemental disclosures of cash flow information:
Interest paid $ 8,158 $ 7,598
Income taxes paid 59,155 13,017
See notes to consolidated financial statements.
-5-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Nature of Operations and Basis of Presentation
Arthur J. Gallagher & Co. (Gallagher) 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 primarily 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. Investment income and other is
generated from Gallagher's investment portfolio, which includes fiduciary
funds, equity securities, and tax advantaged and other strategic
investments. Gallagher is headquartered in Itasca, Illinois, has more than
250 offices in seven countries and does business in more than 100 countries
around the world through a network of correspondent brokers and
consultants.
The accompanying, unaudited consolidated financial statements have been
prepared by Gallagher pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been
omitted pursuant to such rules and regulations. Gallagher believes the
disclosures are adequate to make the information presented not misleading.
The unaudited consolidated financial statements included herein are, in the
opinion of management, prepared on a basis consistent with the audited
consolidated financial statements for the year ended December 31, 2001,
except for the conforming reclassifications discussed in Note 3, and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information set forth. The
quarterly results of operations are not necessarily indicative of results
of operations for subsequent quarters or the full year. These unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in
Gallagher's Annual Report on Form 10-K for the year ended December 31,
2001.
2. Effect of New Pronouncements
In June 2001, the FASB issued Statements of Financial Accounting Standards
No. 141 (SFAS 141), "Business Combinations," and No. 142 (SFAS 142),
"Goodwill and Other Intangible Assets." SFAS 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting. In addition, SFAS 141 further clarifies the
criteria to recognize intangible assets separately from goodwill. The
requirements of SFAS 141 were effective for any business combination
accounted for by the purchase method that was completed after June 30,
2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized, but are subject to periodic review for impairment (at
least annually or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their estimated useful lives. The
amortization provisions of SFAS 142 initially only applied to goodwill and
intangible assets related to business combinations accounted for by the
purchase method that were completed after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, companies
were required to adopt SFAS 142 in their fiscal year beginning after
December 15, 2001 (i.e., January 1, 2002 for calendar year companies).
Because of the different transition dates for goodwill and intangible
assets acquired before June 30, 2001 and those acquired after that date,
pre-existing goodwill and intangible assets were amortized during the
transition period (June 30 to December 31, 2001). Effective January 1,
2002, Gallagher adopted the remaining provisions of SFAS 142 with respect
to pre-existing goodwill and intangible assets, the effect of which was not
material to Gallagher's consolidated operating results or financial
position.
Gallagher will test goodwill for impairment using the two-step process
prescribed in SFAS 142. The first step is to screen for potential
impairment, while the second step measures the amount of the impairment, if
any. In
-6-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
2. Effect of New Pronouncements (Continued)
performing the impairment reviews, SFAS 142 requires Gallagher to compare
the fair value of a reporting unit with its carrying amount on an annual
basis to determine if there is impairment of goodwill. If the fair value of
the reporting unit is less than its carrying value, an impairment loss
would be recorded to the extent that the fair value of the goodwill within
the reporting unit is less than its carrying value. During the third
quarter of 2002, Gallagher completed the transitional impairment test of
goodwill, which indicated that there was no goodwill impairment as of
January 1, 2002.
3. Reclassifications of Previously Reported Financial Statements
During the first quarter of 2002, Gallagher undertook a review of how it
was accounting for all of its partially owned entities. Given the current
environment regarding ownership/control relationships with respect to
partially owned entities, Gallagher determined that it would be appropriate
to consolidate three operations that were previously accounted for using
the equity method of accounting. In addition, prior to 2002, the premiums
and claims receivable and payable relating to a reinsurance intermediary
subsidiary of Gallagher were reported on a net basis in Gallagher's
consolidated balance sheets with the gross amounts disclosed in the notes
to the consolidated financial statements. During 2002, Gallagher determined
that it would be appropriate to include these amounts on a gross basis in
its consolidated balance sheets in order to conform to a more common
industry practice. Reclassifications have been made to the previously
reported financial statements in order to conform them to the current year
presentation. These reclassifications had no impact on the previously
reported net earnings or stockholders' equity. The following summarizes the
reclassifications that were made to the 2001 consolidated financial
statements (in thousands, except per share data):
Three-month period ended As Previously Amounts
September 30, 2001 Reported Reclassified As Reclassified
----------------------------- ------------- ------------ --------------
Total revenues $233,297 $ 2,367 $235,664
Total expenses 191,278 2,367 193,645
Earnings before income taxes 42,019 -- 42,019
Net earnings 41,903 -- 41,903
Net earnings per common share .49 -- .49
Net earnings per common and
common equivalent share .47 -- .47
Nine-month period ended
September 30, 2001
-----------------------------
Total revenues $656,087 $10,176 $666,263
Total expenses 551,223 10,176 561,399
Earnings before income taxes 104,864 -- 104,864
Net earnings 92,183 -- 92,183
Net earnings per common share 1.09 -- 1.09
Net earnings per common and
common equivalent share 1.03 -- 1.03
-7-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
3. Reclassifications of Previously Reported Financial Statements (Continued)
As Previously Amounts
December 31, 2001 Reported Reclassified As Reclassified
------------------------------------------- ------------- ------------ ---------------
Premiums and fees receivable $ 555,276 $561,962 $1,117,238
Net fixed assets 51,246 131,999 183,245
Total assets 1,471,823 673,519 2,145,342
Premiums payable to insurance and
reinsurance companies 805,595 560,921 1,366,516
Total long-term debt - limited partnerships -- 99,850 99,850
Total stockholders' equity 371,613 -- 371,613
4. Investments
The following is a summary of Gallagher's investments and notes receivable
and the related outstanding letters of credit, financial guarantees and
funding commitments (in thousands):
Letters of
Investments Credit and
and Financial Funding
September 30, 2002 Receivables Guarantees Commitments
---------------------------------------------------- ----------- ---------- -----------
Investment strategies - trading $ 49,697(1) $ -- $ 6,933
========
Marketable securities - trading $ 14,042(1) -- --
========
Other investments and notes receivable:
Tax advantaged investments:
Partnership interests $ 48,480 4,380 --
Notes receivable 4,009 -- --
Equity investment in Asset Alliance
Corporation 48,019 20,000 --
Venture capital investments:
Equity and partnership interests 26,995 11,131 8,465
Notes receivable 38,428 -- --
Equity investment in Allied World
Assurance Holding, Ltd. 20,000 -- --
Other notes receivable 948 -- --
-------- ------- -------
186,879(1) 35,511 8,465
Less amounts included in other current assets (11,764)
--------
Total other investments and notes receivable
per the consolidated balance sheet $175,115
========
Net invested assets, letters of credit and financial
guarantees related to investments accounted
for on a consolidated basis 34,175(1) 38,175 --
-------- ------- -------
Total net invested assets, letters of credit,
financial guarantees and funding commitments
related to Gallagher's investment portfolios $284,793(E)(1) $73,686 $15,398
======== ======= =======
(E) Denotes symbol for Sigma
-8-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
4. Investments (Continued)
Letters of
Investments Credit and
and Financial Funding
December 31, 2001 Receivables Guarantees Commitments
---------------------------------------------------- ----------- ---------- -----------
Investment strategies - trading $ 52,588(1) $ -- $ 6,650
========
Marketable securities - available for sale $ 18,290(1) -- --
========
Other investments and notes receivable:
Tax advantaged investments:
Partnership interests $ 47,219 4,380 --
Notes receivable 2,249 -- --
Equity investment in Asset Alliance
Corporation 33,595 25,000 --
Venture capital investments:
Equity and partnership interests 45,328 10,495 5,900
Notes receivable 46,010 -- --
Equity investment in Allied World
Assurance Holding, Ltd. 20,000 -- --
Other notes receivable 1,417 -- --
-------- ------- -------
195,818(1) 39,875 5,900
Less amounts included in other current assets (3,816)
--------
Total other investments and notes receivable
per the consolidated balance sheet $192,002
========
Net invested assets, letters of credit and financial
guarantees related to investments accounted
for on a consolidated basis 25,431(1) 34,175 --
-------- ------- -------
Total net invested assets, letters of credit,
financial guarantees and funding commitments
related to Gallagher's investment portfolios $292,127(E)(1) $74,050 $12,550
======== ======= =======
(E) Denotes symbol for Sigma
Investments accounted for on a consolidated basis include two real estate
partnerships and an airplane partnership (2002 only). The real estate
partnerships represent an investment in a limited partnership that owns the
building that Gallagher leases for its corporate headquarters and several
of its subsidiary operations and an investment in a limited partnership
that owns 11,000 acres of land under development near Orlando, Florida. The
airplane partnership represents a limited partnership that owns the net
assets of a leasing company that leases two cargo airplanes to the French
postal service. These three investments are consolidated into Gallagher's
operations because Gallagher's voting control in each of these investments
is greater than 50%.
See Note 10 to the consolidated financial statements for additional
commitments and contingencies.
-9-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
5. Business Combinations
During the nine-month period ended September 30, 2002, Gallagher acquired
substantially all of the net assets of the following insurance brokerage
and risk management firms in exchange for its common stock and/or cash
using the purchase accounting method for recording business combinations
(in thousands):
Common Common Recorded
Name and Effective Shares Share Cash Escrow Purchase Contingent
Date of Acquisitions Issued Value Paid Deposited Price Payable
--------------------------- ------ ------- ------ --------- -------- ----------
Life Plans Unlimited, Inc.
February 28, 2002 127 $ 3,987 $ -- $ 443 $ 4,430 $ 3,000
Tom Sherwin Insurance
Agency
February 28, 2002 -- -- 720 80 800 600
NiiS/APEX Group
Holdings, Inc.
April 1, 2002 643 18,968 -- 2,108 21,076 2,000
Cornwall & Stevens
Co., Inc.
April 30, 2002 -- -- 1,800 200 2,000 --
Manning & Smith
Insurance, Inc.
May 31, 2002 274 8,664 -- 992 9,656 7,500
Roberts & Roberts
Insurance Agency, Inc.
May 31, 2002 87 2,773 -- 308 3,081 1,700
MountainView Software
Corporation
May 31, 2002 15 491 -- 55 546 1,100
Craig M. Ferguson & Co.
July 31, 2002 -- -- 2,600 100 2,700 2,300
----- ------- ------ ------ ------- -------
1,146 $34,883 $5,120 $4,286 $44,289 $18,200
===== ======= ====== ====== ======= =======
Common shares exchanged in connection with these acquisitions were valued
at closing market prices as of the effective date of the respective
acquisition. Escrow deposits that are returned to Gallagher as a result of
purchase price adjustment provisions are recorded as downward adjustments
to intangible assets when the escrows are settled. The contingent payables
that are disclosed in the foregoing table represent the maximum amount of
additional consideration that could be paid per the purchase agreements.
These contingent obligations are primarily based upon future earnings of
the acquired entities and were not included in the purchase price that was
recorded for these acquisitions at their respective date of acquisition.
Future payments made under these arrangements will be recorded as upward
adjustments to intangible assets when the contingencies are settled.
-10-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
5. Business Combinations (Continued)
These acquisitions allow Gallagher to expand into desirable geographic
locations, further extend its presence in the retail and wholesale
insurance brokerage services industry and increase the volume of general
services currently provided. The excess of the purchase price over the
estimated fair value of the tangible net assets acquired at the acquisition
date was allocated to goodwill and expiration lists in the amounts of
$22,313,000 and $22,313,000, respectively. With the exception of the
intangible assets related to the MountainView Software acquisition, which
were allocated to the Risk Management Services segment, all of the goodwill
and expiration lists were allocated to the Insurance Brokerage Services
segment. Purchase price allocations were preliminarily established at the
time of the acquisition and will be subsequently reviewed within the first
year of operation to determine the necessity for allocation adjustments.
Expiration lists related to these acquisitions are currently being
amortized on a straight-line basis over an estimated useful life of 10
years.
Gallagher's consolidated financial statements for the three and nine-month
periods ended September 30, 2002 include the operations of these companies
from the date of their respective acquisition. The following is a summary
of the unaudited proforma historical results, as if these purchase
acquisitions had been acquired at January 1, 2002 and 2001, respectively
(in thousands, except per share data):
Three-month period ended Nine-month period ended
September 30, September 30,
------------------------ -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Total revenues $268,598 $245,020 $805,110 $692,757
Net earnings 23,207 43,026 92,408 95,155
Net earnings per common share .26 .50 1.06 1.11
Net earnings per common and
common equivalent share .25 .47 1.00 1.04
The unaudited proforma results above have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisitions occurred
as of January 1, 2002 and 2001, respectively, nor is it necessarily
indicative of future operating results.
-11-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
6. 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):
Three-month period ended Nine-month period ended
September 30, September 30,
------------------------ -----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net earnings $23,310 $41,903 $91,446 $92,183
======= ======= ======= =======
Weighted average number of
common shares outstanding 88,047 84,785 86,966 84,705
Dilutive effect of stock options using
the treasury stock method 4,004 5,289 4,755 5,218
------- ------- ------- -------
Weighted average number of common
and common equivalent shares
outstanding 92,051 90,074 91,721 89,923
======= ======= ======= =======
Net earnings per common share $ .26 $ .49 $ 1.05 $ 1.09
Net earnings per common and
common equivalent share .25 .47 1.00 1.03
Options to purchase 478,000 and 141,000 shares of common stock were
outstanding at September 30, 2002 and 2001, respectively, but were not
included in the computation of the dilutive effect of stock options for the
three-month period then ended. Options to purchase 226,000 and 345,000
shares of common stock were outstanding at September 30, 2002 and 2001,
respectively, but were not included in the computation of the dilutive
effect of stock options for the nine-month period then ended. These options
were excluded from the computations because the options' exercise prices
were greater than the average market price of the common shares during the
respective periods and, therefore, would be antidilutive to earnings per
share under the treasury stock method.
-12-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
7. Comprehensive Earnings
The components of comprehensive earnings and accumulated other
comprehensive earnings (loss) are as follows (in thousands):
Three-month period ended Nine-month period ended
September 30, September 30,
------------------------ -----------------------
2002 2001 2002 2001
------- ------- ------- -------
Net earnings $23,310 $41,903 $91,446 $92,183
Net change in unrealized gain (loss)
on available for sale securities, net
of income taxes of $2,271, ($630),
$1,749 and ($204), respectively 3,407 (945) 2,624 (306)
------- ------- ------- -------
Comprehensive earnings $26,717 $40,958 $94,070 $91,877
======= ======= ======= =======
Accumulated other comprehensive
earnings (loss) at beginning of
period $(3,407) $(1,859) $(2,624) $(2,498)
Net change in unrealized gain (loss)
on available for sale securities, net
of income taxes 3,407 (945) 2,624 (306)
------- ------- ------- -------
Accumulated other comprehensive
earnings (loss) at end of period $ -- $(2,804) $ -- $(2,804)
======= ======= ======= =======
Effective September 30, 2002, Gallagher reclassified its marketable
securities portfolio from available for sale to trading based on changes to
its investment philosophy. As a result of this reclassification, changes in
unrealized gains and losses on this portfolio will now be recorded in
investment income in the accompanying consolidated statements of earnings,
instead of in stockholders' equity as accumulated other comprehensive
earnings or losses. As a result of this reclassification, $425,000 of net
pretax unrealized losses, previously classified in accumulated other
comprehensive earnings, was recognized in earnings before income taxes in
the third quarter of 2002. In addition, the net carrying value of the
marketable securities portfolio is now presented as a current asset,
instead of as a noncurrent asset in the accompanying consolidated balance
sheet as of September 30, 2002. During the three and nine-month periods
ended September 30, 2002, Gallagher recognized other-than-temporary
impairments of $9.5 million and $10.6 million, respectively, in the
accompanying consolidated statements of earnings related to its marketable
securities portfolio.
8. Deferred Compensation
In 2001, Gallagher implemented the Deferred Equity Participation Plan,
which is a non-qualified plan that provides for distributions to certain
key executives of Gallagher upon their normal retirement. Under the
provisions of the plan, Gallagher contributes shares of its common stock,
in an amount approved by Gallagher's Board of Directors, to a rabbi trust
on behalf of the executives participating in the plan. Distributions under
the plan may not normally be made until the participant reaches age 62 and
are subject to forfeiture in the event of voluntary termination of
employment prior to age 62. All distributions from the plan are made in the
form of Gallagher common stock.
Effective on March 31, 2002, Gallagher contributed $4.0 million to the plan
through the issuance of 122,000 shares of Gallagher common stock. In June
2001, Gallagher contributed $4.0 million to the plan through the issuance
of 152,000 shares of Gallagher common stock. Gallagher accounts for the
common stock issued to the plan in accordance with the provisions of
Emerging Issues Task Force (EITF) Issue No. 97-14, "Accounting for Deferred
Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust
-13-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
8. Deferred Compensation (Continued)
and Invested." EITF 97-14 requires that the Gallagher common stock issued
to the trust be valued at historical cost (fair market value at the date of
grant) and the unearned deferred compensation obligation be classified as
an equity instrument, with no recognition of changes in the fair value of
the amount owed to the participants. The unearned deferred compensation
balance is shown as a reduction of stockholders' equity in the accompanying
2002 and 2001 consolidated balance sheets and is being amortized to salary
expense ratably over the vesting period of the participants. During the
three and nine-month periods ended September 30, 2002, $280,000 and
$646,000, respectively, were charged to expense related to this plan.
During the three-month and nine-month periods ended September 30, 2001,
$188,000 and $375,000, respectively, were charged to expense related to
this plan.
9. Restricted Stock Awards
In 2001, Gallagher adopted an incentive compensation plan for several of
its key executives and management personnel. The compensation under this
plan is determined by a formula applied to the pretax profitability of
certain operating divisions and may include an equity award as part of such
incentive compensation.
Effective on March 31, 2002, Gallagher contributed 274,000 shares of
Gallagher common stock to the plan, with an aggregate value of $8.9 million
as of that date. Also, effective on March 31, 2002, Gallagher granted, to
its Chief Executive Officer, a restricted stock award of 32,000 shares of
Gallagher common stock with an aggregate value of $1.1 million at the time
of grant. All of the 2002 restricted stock awards vest over a three year
period at the rate of 33 1/3% per year beginning on March 31, 2003.
Gallagher accounts for restricted stock at historical cost which equals its
fair market value at the date of grant. When restricted shares are issued,
an unearned restricted stock obligation is recorded as a reduction of
stockholders' equity, which will be ratably charged to salary expense over
the vesting period of the participants. During the three-month and
nine-month periods ended September 30, 2002, $836,000 and $1.7 million,
respectively, were charged to expense related to these awards.
10. Commitments And Contingencies
Gallagher generally operates in leased premises. Certain office space
leases have options permitting renewals for additional periods. For minimum
aggregate rental commitments as of December 31, 2001, see Note 12 to the
Consolidated Financial Statements included in Gallagher's Annual Report on
Form 10-K for the year ended December 31, 2001.
As of September 30, 2002, Gallagher had funding commitments of $15.4
million related to several of its investment strategies and venture capital
equity investments.
Gallagher 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 Gallagher's consolidated financial position or
operating results. A subsidiary of Gallagher is party to a lawsuit relating
to its investment in the synthetic fuel industry which, if determined
adversely to the subsidiary on substantially all claims and for a
substantial amount of the damages asserted, could have a material adverse
effect on Gallagher. However, Gallagher believes that the plaintiff's
claims lack merit. The subsidiary is vigorously defending such claims and
has asserted counterclaims against the plaintiff.
-14-
ARTHUR J. GALLAGHER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
11. Quarterly Operating Results
Quarterly operating results for 2001 were reclassified to conform to the
current year presentation, which had no impact on previously reported net
earnings. The reclassified results for 2001, were as follows (in thousands,
except per share data):
1st 2nd 3rd 4th
-------- -------- -------- --------
Revenues:
Commissions $121,610 $125,963 $136,653 $154,797
Fees 76,437 77,554 84,422 86,451
Investment income and other:
Interest income from fiduciary funds 4,286 3,266 2,836 2,778
Income from investment strategies
and marketable securities 1,806 3,832 1,514 1,103
Income from equity investments
and partnerships 2,362 768 2,500 2,419
Gain on sale of portion of minority
interest in investment -- -- -- --
Installment gains (losses) from alternative
energy partnership sales 789 (83) 4,306 6,691
Income from real estate ventures 6,551 1,855 1,975 1,734
Other income 2,811 792 1,458 752
-------- -------- -------- --------
Total investment income and other 18,605 10,430 14,589 15,477
-------- -------- -------- --------
Total revenues 216,652 213,947 235,664 256,725
-------- -------- -------- --------
Expenses:
Salaries and employee benefits 110,923 111,001 115,139 141,500
Other operating expenses 60,227 59,943 63,530 68,007
Operating expenses of alternative
energy partnerships 3,246 7,466 8,259 2,108
Expenses of real estate ventures 2,520 1,348 1,320 1,452
Depreciation 5,059 4,688 4,783 5,111
Amortization 604 729 614 1,558
-------- -------- -------- --------
Total expenses 182,579 185,175 193,645 219,736
-------- -------- -------- --------
Earnings before income taxes 34,073 28,772 42,019 36,989
Provision for income taxes 6,990 5,575 116 3,916
-------- -------- -------- --------
Net earnings $ 27,083 $ 23,197 $ 41,903 $ 33,073
======== ======== ======== ========
Net earnings per common share $ .32 $ .27 $ .49 $ .39
Net earnings per common and common
equivalent share .30 .26 .47 .36
-15-
ARTHUR J. GALLAGHER & CO.
REVIEW BY INDEPENDENT AUDITORS
The consolidated financial statements as of September 30, 2002 and for the
three-month and nine-month periods ended September 30, 2002 and 2001 have been
reviewed, prior to filing, by Ernst & Young LLP, Gallagher's independent
auditors, and their report is included herein.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Arthur J. Gallagher & Co.
We have reviewed the accompanying consolidated balance sheet of Arthur J.
Gallagher & Co. as of September 30, 2002 and the related consolidated statements
of earnings for the three-month and nine-month periods ended September 30, 2002
and 2001, and the consolidated statements of cash flows for the nine-month
periods ended September 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with accounting principles generally accepted in
the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Arthur J.
Gallagher & Co. as of December 31, 2001, and the related consolidated statements
of earnings, stockholders' equity, and cash flows for the year then ended, not
presented herein, and in our report dated January 23, 2002 we expressed an
unqualified opinion on those consolidated financial statements prior to certain
reclassifications. The information set forth in the audited consolidated balance
sheet as of December 31, 2001 has been reclassified to reflect the items
described in Note 3 to the financial statements described in the first paragraph
of this letter. Based on our review of these reclassifications, it is our
opinion that the accompanying consolidated balance sheet as of December 31,
2001, as reclassified, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
---------------------------------
Ernst & Young LLP
Chicago, Illinois
November 14, 2002
-16-
Item 2.
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONSOLIDATED
The insurance industry was jolted by the tragic terrorist attacks that occurred
on September 11, 2001. The destruction and devastation of those events have
resulted in the largest insurance loss in America's history and has caused the
reshaping of the insurance marketplace more rapidly than expected. Along with
this historic insurance loss, larger than anticipated loss experience across all
risks, stock market declines, lower interest rates and diminished risk capacity
have led to unprecedented premium rate increases. Higher premium rates are
referred to as a "hard market" and generally result in increased commission
revenues. Fluctuations in premiums charged by insurance companies have a direct
and potentially material impact on the insurance brokerage industry. Commission
revenues are generally based on a percentage of the premiums paid by insureds
and normally follow premium levels. Thus, a hard market will generally
contribute positively to Gallagher's operating results, and since September
11th, the premium rates charged by insurance companies have increased
significantly, having a positive impact on Gallagher's 2002 operating results in
spite of some insurance companies' efforts to reduce commission rates during the
upturn in premium pricing. Although management believes this hard market will
continue into 2003, the longevity of the hard market and its future effect on
Gallagher's business is difficult to predict.
In a period of rising insurance costs, there is resistance among certain "risk"
buyers (Gallagher's clients) to pay increased premiums and the higher
commissions generated by these premiums. Such resistance may cause some buyers
to raise their deductibles and/or reduce the overall amount of insurance
coverage that they purchase. In addition, some buyers may switch to negotiated
fee in lieu of commission arrangements with Gallagher for placing the risk.
These factors will reduce commission revenue to Gallagher. Other buyers may move
toward the alternative insurance market, which would tend to have a favorable
effect on Gallagher's Risk Management Services segment. Gallagher anticipates
that new sales and renewal increases in the areas of risk management, claims
management, insurance captive and self-insurance services will continue to be a
factor in Gallagher's fee revenue growth during 2002.
During the nine-month period ended September 30, 2002, Gallagher acquired eight
companies which were accounted for as purchases. Gallagher 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
information concerning business combinations, see Note 5 to the Consolidated
Financial Statements.
Commission revenues increased by 30% to $178.2 million in the third quarter of
2002 and by 24% to $478.3 million in the first nine months of 2002 over the
respective periods in 2001. These increases are due principally to new business
production of $40.5 million in the third quarter of 2002 and $107.0 million in
the first nine months of 2002, and to renewal commission increases from
increased premiums partially offset by lost business. Organic growth represents
the increase in revenues before the impact of the 2002 and 2001 acquisitions
accounted for as purchases. Organic growth in commission revenues was 22% for
the third quarter of 2002 and 19% year-to-date. Organic growth in commission
revenues was 16% and 17% for the first and second quarters of 2002,
respectively. Commission revenues from purchase acquisitions completed in 2002
and 2001 totaled $9.3 million for the third quarter of 2002 and $21.7 million
year to date.
Fee revenues increased by 20%, or $16.9 million, to $101.3 million in the third
quarter of 2002 and by 19%, or $44.5 million, to $282.9 million in the first
nine months of 2002 over the respective periods in 2001. These increases,
primarily generated by the Insurance Brokerage Services segment, reflect new
business production of approximately $16.3 million in the third quarter of 2002
and $46.3 million in the first nine months of 2002, and renewal rate increases
partially offset by lost business. Organic growth in fee revenues was 15% in the
third quarter of 2002 and 14% year-to-date. Organic growth in fee revenues was
16% and 12% for the first and second quarters of 2002, respectively. Fee
revenues from purchase acquisitions completed in 2002 and 2001 totaled $4.6
million for the third quarter of 2002 and $11.0 million year to date.
-17-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - CONSOLIDATED (Continued)
In the third quarter and first nine months of 2002, interest income from
fiduciary funds, primarily interest on cash and restricted funds, was down
$421,000 or 15% and $3.3 million or 32%, respectively, from the same periods in
2001 due primarily to declining short-term interest rates. Rates of return on
interest bearing accounts and certificates of deposit are down over 60% on a
year-over-year basis putting considerable pressure on short-term interest
returns.
In the third quarter and first nine months of 2002, income from investment
strategies and marketable securities decreased $11.3 million, to a loss of $9.8
million and decreased $15.4 million, to a loss of $8.3 million, respectively,
from the same periods in 2001. These decreases were substantially due to
other-than-temporary impairments that resulted from a sharp decline in the
equity markets during the third quarter of 2002. During the three and nine-month
periods ended September 30, 2002, Gallagher recognized other-than-temporary
impairments of $9.5 million and $10.6 million, respectively, in the consolidated
statements of earnings related to its marketable securities portfolio. Effective
September 30, 2002, Gallagher reclassified its marketable securities portfolio
from available for sale to trading. As a result of this reclassification,
changes in unrealized gains and losses on this portfolio will now be recorded in
investment income in the consolidated statements of earnings, instead of in
stockholders' equity as accumulated other comprehensive earnings or losses. As a
result of this reclassification, $425,000 of net pretax unrealized losses,
previously classified in accumulated other comprehensive earnings, was
recognized in earnings before income taxes in the third quarter of 2002.
In the third quarter and first nine months of 2002, income from equity
investments and partnerships decreased $19.7 million, to a loss of $17.2
million, and $19.5 million, to a loss of $13.8 million, respectively, from the
same periods in 2001. These decreases are substantially due to a $15.4 million
write-down of loans and equity holdings in four venture capital investments that
was recognized in the third quarter of 2002. In addition, a $3.6 million loss
was incurred in the third quarter of 2002 on the sale of a venture capital
investment because the $2.8 million of cash proceeds received were less than its
carrying value.
The $11.8 million gain on the sale of a portion of a minority interest in an
investment relates to the gain recognized on the sale of a portion of
Gallagher's minority equity position in Asset Alliance Corporation (AAC) to an
international financial institution. As a result of the sale that was completed
in April 2002, Gallagher recognized a pretax gain of $11.8 million in its
results for the first nine months. After the sale and subsequent equity
transactions of AAC, Gallagher owns approximately 25% of AAC.
On November 7, 2002, one of the major fund managers of AAC, Beacon Hill Asset
Management LLC (Beacon Hill), agreed to the entry of a preliminary injunction in
an action by the Securities and Exchange Commission (SEC). In accordance with
the court's order, Beacon Hill withdrew from managing its hedge funds, which
recently reported approximately $400 million in losses. AAC reports that assets
under management by AAC and its 14 affiliate fund managers are currently in
excess of $4.0 billion. While Gallagher does not have a direct investment in
Beacon Hill or its hedge funds, Gallagher will recognize a loss in the fourth
quarter of 2002 through the equity method of accounting for AAC's write-down of
its investment in Beacon Hill. Gallagher anticipates that this nonrecurring loss
will be approximately $3.5 million. Gallagher is monitoring these developments
but there can be no assurance that as the result of further SEC action against
Beacon Hill or otherwise, including investor claims, that there will not be
further negative developments which could be material to Gallagher.
Installment gains from alternative energy partnership sales primarily relate to
two sales of a portion of Gallagher's interests in limited partnerships that
operate synthetic fuel facilities that were completed in the third and fourth
quarters of 2001. In the third quarter of 2002, these installment gains
increased 150%, or $6.5 million, to $10.8 million over the same period in 2001.
In the first nine months of this year, these gains increased 395%, or $19.8
million, to $24.8 million over the same period in 2001. Gallagher expects to
continue to recognize additional installment gains over time through 2007 based
on qualified fuel production generated by these facilities. Production at these
facilities, which ultimately determines the amount of the gains realized,
exceeded the
-18-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - CONSOLIDATED (Continued)
annualized expected rate of production in the third quarter of 2002. However,
total production for the first nine months of 2002 did not meet full
expectations due to the unusually mild winter and a short-term shut down of
production in the first quarter of 2002 as the movable facilities were moved to
permanent sites to accommodate the ultimate synthetic fuel purchaser.
Income from real estate ventures represents revenue related to Gallagher's
consolidation of its investments in two real estate partnerships. These real
estate partnerships represent an investment in a limited partnership that owns
the building that Gallagher leases for its corporate headquarters and several of
its subsidiary operations and an investment in a limited partnership that owns
11,000 acres of land under development near Orlando, Florida. Income from real
estate ventures in the third quarter of 2002 was relatively unchanged compared
to the same period in 2001. In the first nine months of 2002, income from real
estate ventures decreased 33% to $7.0 million, due primarily to a one-time gain
of $4.5 million generated from the sale of land by the Florida real estate
partnership that was reported in the first quarter of 2001.
Other income consists primarily of gains on the sales of books of insurance
brokerage and benefits business and interest income on employee loans and
compensation arrangements. Other income in the third quarter of 2002 decreased
$768,000, to $690,000 from the same period in 2001. For the first nine months of
2002, other income decreased $354,000 to $4.7 million from the same period in
2001. Given the nature of the items that comprise other income, income levels
will fluctuate from period to period due to timing differences.
Salaries and employee benefits increased by 28%, or $32.5 million, to $147.6
million in the third quarter of 2002 and 24%, or $82.2 million, to $419.3
million in the first nine months of 2002 over the respective periods in 2001.
These increases are higher than usual and reflect salary increases and
associated employee benefit costs, and a 17% increase in employee headcount from
6,000 to 7,030 in the fifteen month period from June 30, 2001 to September 30,
2002. The increase in employee headcount relates to the hiring of additional
staff to support the new business growth previously discussed, the hiring of 130
additional production personnel over the past 15 months to generate future
revenue growth, and to 450 employees associated with the acquisitions accounted
for as purchases that were made in the last 12 months. Salaries and employee
benefits as a percentage of commission and fee revenues increased 0.7% to 52.8%
from 52.1% in the third quarter of 2002, and 1.0% to 55.1% from 54.1%
year-to-date. These percentages are higher-than-normal primarily due to the
investments made in new personnel during the past 15 months. It takes some time
for the commission and fee revenues generated from the new production personnel
to cover their fixed costs and to contribute favorably to pretax earnings.
Other operating expenses increased by 19%, or $11.9 million, to $75.4 million in
the third quarter of 2002 and by 15%, or $27.5 million, to $211.2 million in the
first nine months of 2002 over the same periods in 2001. These increases are
primarily due to increases in business insurance costs and commissions paid to
sub-brokers on the retail property casualty brokerage business, both of which
are due to the effects of the hard market. Also contributing to the increase in
other expenses, are increases in travel and entertainment costs, due primarily
to new business development from new producers, and interest expense, due to
increased levels of short-term borrowings in 2002.
Operating expenses of alternative energy partnerships represent Gallagher's
portion of the ongoing expenses associated with the operations of the synthetic
fuel facilities owned by the partnerships. In the third quarter of 2002, these
expenses decreased 83%, or $6.9 million, to $1.4 million and 76%, or $14.5
million, to $4.5 million in the first nine months of 2002 from the same periods
in 2001. These decreases are directly attributable to the two sales of a portion
of Gallagher's interests in limited partnerships that operate these facilities
that were completed in the third and fourth quarters of 2001. Because of the
sales, Gallagher's portion of the operating expenses associated with these
partnerships was substantially reduced.
-19-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - CONSOLIDATED (Continued)
Expenses of real estate ventures represent expenses related to Gallagher's
consolidation of its investments in two real estate partnerships discussed
above. Expenses of real estate ventures in the third quarter of 2002 were
relatively unchanged compared to the same period in 2001. For the first nine
months of 2002, expenses of real estate ventures decreased 7%, or $376,000, to
$4.8 million due primarily to a decrease in minority interest expense associated
with the two investments in real estate partnerships.
Depreciation increased 45%, or $2.1 million, to $6.9 million and 28%, or $4.1
million, to $18.6 million in the third quarter of 2002 and first nine months of
2002, respectively, over the same periods in 2001. These increases are due
primarily to additional capital expenditures made in the fourth quarter of 2001
and the first nine months of 2002.
Amortization increased 225%, or $1.4 million, to $2.0 million and 179%, or $3.5
million, to $5.4 million in the third quarter and first nine months of 2002,
respectively, over the same periods in 2001. These increases are due primarily
to amortization expense associated with acquisitions accounted for as purchases
that were made in the fourth quarter of 2001 and the first nine months of 2002.
Approximately 50% of the acquisitions' excess purchase price are currently
allocated to goodwill and 50% to amortizable intangible assets. Amortizable
intangible assets are being amortized on a straight-line basis over an estimated
useful life of 10 years. These allocations were initially established as of the
acquisition dates and are to be reviewed within the first year of operation to
determine the necessity for allocation adjustments. Any necessary adjustments
will be based on valuations obtained from qualified independent appraisers and
will be made in the fourth quarter of 2002.
The overall effective income tax rate was 30% for the third quarter and first
nine months of 2002, and essentially 0% for the third quarter and 12% for the
first nine months of 2001. These rates reflect the effect of tax credits
generated by investments in limited partnerships that operate qualified
affordable housing and alternative energy projects, which are partially offset
by state and foreign taxes. The increase in the effective income tax rates in
2002 over the prior year is due to a reduction in the amount of tax credits
earned in 2002. This decrease in tax credits earned is directly attributable to
the two sales of a portion of Gallagher's interests in limited partnerships that
operate synthetic fuel facilities that were completed in the third and fourth
quarters of 2001.
Net earnings per common and common equivalent share decreased by 47%, or $.22,
to $.25 from $.47 in the third quarter of 2002 and by 3%, or $.03, to $1.00 in
the first nine months of 2002 over the respective periods in 2001. These
decreases are primarily due to investment write-downs, increased expenses and an
increase in the effective income tax rate in 2002 partially offset by the 2002
growth in commission and fee revenues and the $11.8 million pretax gain on the
sale of a portion of a minority interest in an equity investment.
-20-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - SEGMENT INFORMATION
Financial information relating to Gallagher's operating segments is as follows
(in thousands):
Insurance Risk
Brokerage Management Financial
Services Services Services Corporate Total
---------- ---------- --------- --------- ----------
Three-month period ended
September 30, 2002
Total revenues $ 210,352 $ 71,579 $(15,406) $ 1,662 $ 268,187
Earnings (loss) before
income taxes 48,929 6,921 (16,366) (6,184) 33,300
September 30, 2001
Total revenues 155,844 67,812 10,274 1,734 235,664
Earnings (loss) before
income taxes 35,878 10,079 (2,052) (1,886) 42,019
Nine-month period ended
September 30, 2002
Total revenues 558,198 209,396 21,440 5,406 794,440
Earnings (loss) before
income taxes 107,138 27,206 5,231 (8,938) 130,637
September 30, 2001
Total revenues 433,705 198,900 28,178 5,480 666,263
Earnings (loss) before
income taxes 84,916 28,003 (1,788) (6,267) 104,864
Total Identifiable Assets at
September 30, 2002 1,624,275 80,170 381,355 264,770 2,350,570
September 30, 2001 1,183,502 72,901 273,045 198,334 1,727,782
Insurance Brokerage Services
The Insurance Brokerage Services segment encompasses operations that, for
commission or fee compensation, place or arrange to place insurance directly
related to the clients' managing of risk. This segment also provides consulting,
for fee compensation, related to the clients' risk financing programs and
includes Gallagher's retail, reinsurance and wholesale insurance brokerage
operations.
Total revenues for this segment in the three and nine-month periods ended
September 30, 2002 increased 35% to $210.4 million and 29% to $558.2 million,
respectively, over the same periods in 2001. These increases are due principally
to new business of approximately $46.2 and $122.8 million, respectively, renewal
rate increases and the effect of acquisitions accounted for as purchases that
were made in the fourth quarter of 2001 and the first nine months of 2002,
partially offset by lost business. Earnings before income taxes for this segment
increased 36% to $48.9 million and 26% to $107.1 million in the three and
nine-month periods ended September 30, 2002, due primarily to the new business
production and rate increases mentioned above.
-21-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - SEGMENT INFORMATION (Continued)
Risk Management Services
The Risk Management Services segment includes Gallagher'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 programs for Gallagher's
clients or clients of other brokers.
Total revenues for this segment in the three and nine-month periods ended
September 30, 2002 increased 6% to $71.6 million and 5% to $209.4 million,
respectively, over the comparable periods in 2001, due primarily to new business
production of approximately $10.6 million and $30.4 million, respectively. These
increases in business production were substantially offset by lost business and
reductions in existing business volume. The slow down in the revenue growth from
historical double-digit to recent single-digit percentages is primarily the
result of the events of September 11, 2001 combined with a general economic slow
down in the United States. Gallagher Bassett (GB) provides services to several
airline, hospitality and restaurant-related clients, all of whose businesses
were particularly hard hit following 9-11. Because those clients experienced
declines in their business, the rate of increase in new GB claim counts slowed,
and in some cases, actual claim counts decreased from the same period in 2001.
In addition, the hard market had an unfavorable impact on GB's claim business,
as several of its managing general agent programs (MGAs) were unable to renew
their programs in the insurance marketplace during 2002. As GB's revenues are
generally based on the number of new claims it handles, the reduction in claims
has had a direct impact on revenue. As revenues slow, expenses in the short term
do not experience the same immediate reduction. The net result of the above is
that pretax earnings are down for the quarter and year, compared with the same
periods in 2001. Earnings before income taxes for this segment in the three and
nine-month periods ended September 30, 2002 decreased 31% to $6.9 million and 3%
to $27.2 million, respectively.
Financial Services
The Financial Services segment is responsible for the management of Gallagher's
diversified investment portfolio, which includes fiduciary funds, marketable and
other equity securities, and tax advantaged and other strategic investments. The
invested assets of Gallagher are managed in this segment in order to maximize
the long-term after-tax return to the company.
Total revenues for this segment in the three-month period ended September 30,
2002 decreased 250% to a loss of $15.4 million from the same period in 2001.
Total revenues in the nine-month period ended September 30, 2002 decreased 24%,
or 6.7 million, to $21.4 million from the same period in 2001. These decreases
are primarily due to the following, which were previously discussed above:
. Other-than-temporary impairments that resulted from an extraordinary
decline in the equity markets during the third quarter of 2002. During
the three and nine-month periods ended September 30, 2002, Gallagher
recognized other-than-temporary impairments of $9.5 million and $10.6
million, respectively, in the consolidated statements of earnings
related to its marketable securities portfolio.
. An unrealized loss of $425,000 that was recognized in the third
quarter of 2002 related to reclassifying the marketable securities
portfolio from available for sale to trading.
. A $15.4 million write-down of loans and equity holdings in four
venture capital investments that was recognized in the third quarter
of 2002. In addition, a $3.6 million loss was incurred in the third
quarter of 2002 on the sale of a venture capital investment because
the $2.8 million of cash proceeds received were less than its carrying
value.
-22-
ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - SEGMENT INFORMATION (Continued)
Financial Services (Continued)
. A one-time gain of $4.5 million generated from the sale of land by the
Florida real estate partnership that was recognized in the first
quarter of 2001.
These decreases were partially offset by installment gains from the two sales of
a portion of Gallagher's interests in limited partnerships that operate
synthetic fuel facilities that were completed in the third and fourth quarters
of 2001. In the third quarter of 2002, these installment gains increased 150%,
or $6.5 million, to $10.8 million over the same period in 2001. In the first
nine months of this year, these gains increased 395%, or $19.8 million, to $24.8
million over the same period in 2001. In addition, the $11.8 million gain on the
sale of a portion of Gallagher's minority interest in AAC also offset the
decreases in the year to date balances discussed above.
Earnings before income taxes for this segment decreased $14.3 million to a loss
of $16.4 million in the three-month period ended September 30, 2002. This
decrease is primarily due to the impairments and write-downs discussed above,
which were partially offset by the $6.9 million reduction in the operating
expenses of alternative energy partnerships in the third quarter of 2002.
Earnings before income taxes for this segment increased $7.0 million to $5.2
million in the nine-month period ended September 30, 2002. This increase is
primarily due to the $14.5 million reduction in the operating expenses of
alternative energy partnerships in the first nine months of 2002, the increases
in the installment gains and the $11.8 million gain on the sale of a portion of
Gallagher's minority interest in AAC; all of which were partially offset by the
impairments and write-downs discussed above.
Corporate
The Corporate segment consists of the operating results of the real estate
limited partnership that owns the building that Gallagher leases for its
corporate headquarters and several of its subsidiary operations, unallocated
administrative costs and the provision for income taxes which is not allocated
to Gallagher's operating entities. Only revenues not attributable to one of the
three operating segments are recorded in the Corporate segment. All costs are
generated in the United States.
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND LIQUIDITY
The insurance brokerage industry is not capital intensive. The capital used to
fund Gallagher's investment portfolio has been primarily generated from the
excess cash provided by its operations, including tax credits generated from tax
advantaged investments. Cash generated from operating activities was $93.2
million and $92.6 million for the nine months ended September 30, 2002 and 2001,
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 period to period. Funds restricted as to Gallagher's use,
primarily premiums held as fiduciary funds, have not been included in
determining Gallagher's overall liquidity. Currently, Gallagher believes it has
sufficient capital to meet its cash flow needs. However, in the event that
Gallagher needs capital to fund its operations and investing requirements, it
would use borrowings under its credit agreement to meet its short-term needs and
would consider other alternatives for its long-term needs. Such alternatives
would include raising capital through public markets or restructuring its
operations in the event that cash flows from operations are reduced dramatically
due to lost business. However, Gallagher has historically been profitable and
cash flows from operations and short-term borrowings under its credit agreements
have been sufficient to fund Gallagher's operating, investment and capital
expenditure needs. Gallagher expects this favorable cash flow trend to continue
in the future.
On May 31, 2002, a ninety percent owned limited partnership of Gallagher
acquired the net assets of a leasing company that leases two cargo airplanes to
the French postal service. As part of this acquisition, the limited partnership
acquired assets of $47.0 million and assumed non-recourse long-term debt of
$38.2 million, in exchange for $3.1 million of cash and $5.7 million of other
assets. During the second quarter of 2002, Gallagher consolidated the operations
of this leasing company into its operations.
In 2000, Gallagher and one of its significant subsidiaries entered into an
unsecured Revolving Credit Agreement (the Revolving Credit Agreement), which
expires on September 10, 2003, with a group of five financial institutions. The
Revolving Credit Agreement provides for short-term and long-term revolving
credit commitments of $100.0 million and $50.0 million, respectively. The
facility provides for loans and letters of credit. Letters of credit, in the
aggregate, are limited to $75.0 million of which up to $50.0 million may be
issued under the long-term facility and up to $25.0 million may be issued under
the short-term credit facility in the determination of net funds available for
future borrowing. The Revolving Credit Agreement provides for borrowings to be
denominated in either U.S. dollars or Alternative Currencies, as defined in the
Revolving Credit Agreement. In addition, the Revolving Credit Agreement has two
borrowing options, Domestic Rate Loans and Eurocurrency Loans, as defined in the
Revolving Credit Agreement. Interest rates on borrowings under the Domestic Rate
Loan option are based on the prime commercial rate and interest rates on
borrowings under the Eurocurrency Loan option are based on LIBOR plus .400% for
short-term and long-term revolving credit commitments. The facility fee related
to the Revolving Credit Agreement is .100% of the used and unused portions of
the short-term and long-term revolving credit commitments.
As of September 30, 2002, under the long-term credit facility, Gallagher has
contingently committed to funding $47.2 million through letter of credit
arrangements related to its corporate insurance programs and several of its
equity and other strategic investments, of which $36.1 million was included in
the disclosures in Note 4 to the consolidated financial statements. Also, as of
September 30, 2002, there were $35.0 million of borrowings outstanding under the
Revolving Credit Agreement. Accordingly, Gallagher had $67.8 million available
for future borrowing. In 2002, Gallagher borrowed and repaid $223.0 million of
short-term borrowings under this facility. These borrowings were used on a
short-term basis to finance a portion of Gallagher's operating and investment
activities. Terms of the Revolving Credit Agreement include various covenants
that require Gallagher to maintain specified levels of net worth and restrict
the amount of payments on certain expenditures. Gallagher was in compliance with
these covenants as of September 30, 2002.
As of September 30, 2002, there were $11.9 million of borrowings on a line of
credit facility and $134.9 million of long-term debt (of which $5.7 million is
current) related to Gallagher's investments in the two previously
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION AND LIQUIDITY (Continued)
discussed real estate partnerships and one airplane partnership. In 2002, these
partnerships borrowed $8.8 million on the line of credit facility and repaid
$500,000 of the long-term debt. These borrowing were used by the three
partnerships for their own operating, investing and financing activities.
Borrowings under these facilities are not available to Gallagher and as such
have not been included in determining Gallagher's overall liquidity. Based on
the ownership structure of these three investments, management believes that
Gallagher's exposure to losses related to these investments is limited to the
combination of its net carrying value of the investments, letters of credit and
financial guarantees. With the exception of the debt related to the airplane
partnership discussed above, there have been no material changes in Gallagher's
exposure to losses for these investments since December 31, 2001.
In the event that these limited partnerships were to default on their debt
obligations and Gallagher's net carrying value became impaired, the amount to be
written-off could have a material effect on Gallagher's consolidated financial
position or operating results. For additional information, see Note 4 to the
Consolidated Financial Statements included in Gallagher's Annual Report on Form
10-K for the year ended December 31, 2001.
Through the first nine months of 2002, Gallagher paid $37.2 million in cash
dividends on its common stock. Gallagher's dividend policy is determined by the
Board of Directors. Quarterly dividends are declared after considering
Gallagher's available cash from earnings and its anticipated cash needs. On
October 15, 2002, Gallagher paid a third quarter dividend of $.15 per share to
shareholders of record as of September 30, 2002, a 15% increase over the third
quarter dividend per share in 2001.
Net capital expenditures were $32.4 million and $20.2 million for each of the
nine-month periods ended September 30, 2002 and 2001, respectively. These
amounts include net capital expenditures related to Gallagher's investments in
the two real estate partnerships previously discussed. In the first nine months
of 2002, the Florida real estate partnership made net capital expenditures of
$9.3 million related to its land development project. In 2002, exclusive of the
net capital expenditures related to the two real estate partnerships, Gallagher
expects total expenditures for capital improvements to be approximately $30.0
million. Capital expenditures by Gallagher are related primarily to office moves
and expansions and updating computer systems and equipment. The capital
expenditures related to office moves and expansions in 2002 is running higher
than expected due to the increase in employee headcount related the hiring of
additional production personnel and to the acquisitions that were made in the
last 15 months.
In 1988, Gallagher adopted a common stock repurchase plan that has been extended
through June 30, 2003. Under the plan, Gallagher repurchased 477,000 shares at a
cost of $11.6 million and 2.5 million shares at a cost of $72.8 million in the
first nine months of 2002 and 2001, respectively. Repurchased shares are held
for reissuance in connection with exercises of options under its stock option
plans. Under the provisions of the repurchase plan, Gallagher is authorized to
repurchase 4.5 million additional shares through June 30, 2003. Gallagher 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.
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ARTHUR J. GALLAGHER & CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
In connection with its operating and investing activities, Gallagher has entered
into certain contractual obligations, as well as commitments to fund certain
investments. Gallagher's future cash payments associated with its contractual
obligations pursuant to the Revolving Credit Agreement and other debt
obligations as of September 30, 2002 are as follows (in thousands):
Payments Due by Period
---------------------------------------------------
Contractual Obligations 2002 2003 to 2004 2005 to 2006 Thereafter Total
- --------------------------------- -------- ------------ ------------ ---------- ---------
Revolving Credit Agreement $35,000 $ -- $ -- $ -- $ 35,000
Florida real estate limited
partnership debt 38 17,903 89 12,410 30,440
Corporate headquarters limited
partnership mortgage loan 176 1,558 1,840 75,188 78,762
Airplane limited partnership debt 520 4,531 32,490 -- 37,541
------- ------- ------- ------- --------
Total contractual obligations $35,734 $23,992 $34,419 $87,598 $181,743
======= ======= ======= ======= ========
The debt of the limited partnerships disclosed in the table above represents the
debt directly associated with three of Gallagher's investments that are
accounted for on a consolidated basis in the accompanying consolidated balance
sheets. This is the debt of the limited partnerships in which Gallagher is
invested; it is secured by the partnerships' assets; and supports their
operations. Approximately $29 million of limited partnership debt is recourse to
Gallagher through the letters of credit and financial guarantees disclosed
below.
Gallagher's commitments associated with outstanding letters of credit, financial
guarantees and funding commitments as of September 30, 2002 are as follows (in
thousands):
Amount of Commitment Expiration by Period Total
-------------------------------------------------- Amounts
Other Commitments 2002 2003 to 2004 2005 to 2006 Thereafter Committed
- ----------------------- ------- ------------ ------------ ---------- ---------
Letters of credit $ 645 $ 6,279 $3,550 $36,752 $ 47,226
Financial guarantees 12,500 20,000 -- 5,100 37,600
Funding commitments -- 15,398 -- -- 15,398
------- ------- ------ ------- --------
Total other commitments $13,145 $41,677 $3,550 $41,852 $100,224
======= ======= ====== ======= ========
Since commitments may expire unused, the amounts presented in the table above do
not necessarily reflect the actual future cash funding requirements of
Gallagher. As outlined in the table above, Gallagher has commitments associated
with outstanding letters of credit, financial guarantees and funding commitments
as of September 30, 2002 of $100.2 million in the aggregate, of which $89.1
million was previously disclosed in Note 4 to the consolidated financial
statements.
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ARTHUR J. GALLAGHER & CO.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of that term
in the Private Securities Litigation Reform Act of 1995 found at Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Additional written or oral forward-looking statements may be made by
Gallagher from time to time in filings with the Securities Exchange Commission,
press releases, or otherwise. Statements contained in this report that are not
historical facts are forward-looking statements made pursuant to the safe harbor
provisions of the Act. Forward-looking statements may include, but are not
limited to, discussions concerning revenues, expenses, earnings, cash flow,
capital structure, financial losses, as well as market and industry conditions,
premium rates, financial markets, interest rates, foreign exchange rates,
contingencies and matters relating to Gallagher's operations and income taxes.
In addition, when used in this report, the words "anticipates," "believes,"
"should," "estimates," "expects," "intends," "plans" and variations thereof and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements are based on available current market and industry
material, experts' reports and opinions and long-term trends, as well as
management's expectations concerning future events impacting Gallagher.
Forward-looking statements made by or on behalf of Gallagher are subject to
risks and uncertainties, including but not limited to the following: Gallagher's
commission revenues are highly dependent on premiums charged by insurers, which
are subject to fluctuation; lower interest rates reduce Gallagher's income
earned on invested funds; the alternative insurance market continues to grow
which could unfavorably impact commission and favorably impact fee revenue;
Gallagher's revenues vary significantly from period 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 Gallagher's renewal business; Gallagher's operating results, return on
investment and financial position may be adversely impacted by exposure to
various market risks such as interest rate, equity pricing, foreign exchange
rates and the competitive environment, and changes in income tax laws.
Gallagher'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 Gallagher. Accordingly, actual
results may differ materially from those set forth in the forward-looking
statements.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained in this report, which speak only as of the date set forth
on the signature page hereto. Gallagher undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after such date or to reflect the
occurrence of anticipated or unanticipated events.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has been no material change with respect to market risk from that
described in Item 7A of Gallagher's Annual Report on Form 10-K for the year
ended December 31, 2001.
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ARTHUR J. GALLAGHER & CO.
Item 4.
CONTROLS AND PROCEDURES
Within the 90-day period prior to filing this report, Gallagher management
carried out an evaluation, under the supervision and with the participation of
Gallagher's Chief Executive Officer ("CEO") and Acting Chief Financial Officer
("ACFO"), of the effectiveness of Gallagher's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based on this evaluation, the CEO and ACFO
have concluded that Gallagher's disclosure controls and procedures are effective
to ensure that information required to be disclosed by Gallagher in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
There have been no significant changes in Gallagher's internal controls or in
other factors that could significantly affect the internal controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
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ARTHUR J. GALLAGHER & CO.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 10.8.8 - Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Eighth Amendment to Credit
Agreement Dated as of August 29, 2002.
Exhibit 10.22 - Employment Agreement dated September 3, 2002 between Gallagher and Michael J. Cloherty.
Exhibit 15.1 - Letter re: unaudited interim financial information.
Exhibit 99.1 - Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification of Acting CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K. No Reports on Form 8-K were filed during the three-month period ended September 30, 2002.
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ARTHUR J. GALLAGHER & CO.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 14th day of
November, 2002.
ARTHUR J. GALLAGHER & CO.
/s/ Richard C. Cary
-----------------------------------------
Richard C. Cary
Acting Chief Financial Officer and Chief
Accounting Officer
(principal financial officer and duly
authorized officer)
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ARTHUR J. GALLAGHER & CO.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, J. Patrick Gallagher, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arthur J. Gallagher &
Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b.) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b.) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ J. Patrick Gallagher, Jr.
--------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive Officer
(principal executive officer)
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ARTHUR J. GALLAGHER & CO.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002 (Continued)
CERTIFICATION
I, Richard C. Cary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arthur J. Gallagher &
Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a.) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b.) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c.) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a.) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b.) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Richard C. Cary
-----------------------------------------
Richard C. Cary
Acting Chief Financial Officer and Chief
Accounting Officer
(principal financial officer)
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ARTHUR J. GALLAGHER & CO.
EXHIBIT INDEX
Exhibit 10.8.8 - Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Eighth Amendment to Credit
Agreement Dated as of August 29, 2002.
Exhibit 10.22 - Employment Agreement dated September 3, 2002 between Gallagher and Michael J. Cloherty.
Exhibit 15.1 - Letter re: unaudited interim financial information.
Exhibit 99.1 - Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification of Acting CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.