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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to __________________
Commission file number 1-9761
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 Number)
Two Pierce Place 60143-3141
Itasca, Illinois (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (630) 773-3800
--------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
------------------- on which registered
Common Stock, par value -------------------
$1.00 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
---------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No .
--- ---
The aggregate market value of the voting common equity held by non-affiliates of
the registrant, computed by reference to the last reported price at which the
stock was sold on June 28, 2002 (the last day of the registrant's most recently
completed second quarter) was $2,920,318,000.
The number of outstanding shares of the registrant's Common Stock, $1.00 par
value, as of February 28, 2003 was 88,809,000.
Documents incorporated by reference:
Portions of Arthur J. Gallagher & Co.'s Annual Report to Stockholders for the
year ended December 31, 2002 are incorporated by reference into this Form 10-K
in response to Parts I and II to the extent described herein.
Portions of Arthur J. Gallagher & Co.'s definitive 2003 Proxy Statement are
incorporated by reference into this Form 10-K in response to Part III to the
extent described herein.
ARTHUR J. GALLAGHER & CO.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
INDEX
Page No.
Part I.
Item 1. Business ................................................................................................... 2
Item 2. Properties ................................................................................................. 8
Item 3. Legal Proceedings .......................................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ........................................................ 8
Item 4A. Executive Officers of the Registrant ....................................................................... 9
Part II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ................................... 9
Item 6. Selected Financial Data .................................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................... 11
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .................................................. 11
Item 8. Financial Statements and Supplementary Data ................................................................ 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................... 11
Part III.
Item 10. Directors and Executive Officers of the Registrant ......................................................... 11
Item 11. Executive Compensation ..................................................................................... 11
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................................. 11
Item 13. Certain Relationships and Related Transactions ............................................................. 11
Item 14. Controls and Procedures .................................................................................... 11
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................................ 12
Signatures ................................................................................................................ 16
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .................................................. 17
Schedule II--Valuation and Qualifying Accounts ............................................................................ 19
Exhibit Index ............................................................................................................. 20
1
PART I
Item 1. Business.
General
Arthur J. Gallagher & Co. and its subsidiaries (collectively referred to as
"Gallagher" unless the context otherwise requires) are engaged in providing
insurance brokerage, risk management and related services to clients in the
United States and abroad. Gallagher's principal activity is the negotiation and
placement of insurance for its clients. Gallagher also specializes in furnishing
risk management services. Risk management involves assisting clients in
analyzing risks and determining whether proper protection is best obtained
through the purchase of insurance or through retention of all or a portion of
those risks and the adoption of corporate risk management policies and
cost-effective loss control and prevention programs. Risk management services
also include claims management, loss control consulting and property appraisals.
Gallagher believes that its ability to deliver comprehensively structured risk
management and brokerage services is one of its major strengths. In addition,
Gallagher has a financial services operation that manages Gallagher's investment
portfolio.
Gallagher operates through a network of more than 250 sales and service
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 Gallagher.
Gallagher's international operations include a Lloyd's of London broker and
affiliated companies in England and other facilities in Australia, Bermuda,
Canada, Scotland and Singapore.
Gallagher was founded in 1927 and was reincorporated as a Delaware
corporation in 1972. Gallagher's executive offices are located at Two Pierce
Place, Itasca, Illinois 60143-3141, and its telephone number is (630) 773-3800.
Information Concerning Forward-Looking Statements
This annual report contains forward-looking statements within the meaning
of that term in the Private Securities Litigation Reform Act of 1995 (the "Act")
found at Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Additional
written or oral forward-looking statements may be made by Gallagher from time to
time in filings with the Securities and Exchange Commission (SEC), 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, returns on
investments 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.
2
Operating Segments
Gallagher 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' managing of risk. This segment also provides consulting
services, for fee compensation, related to clients' risk financing programs and
includes Gallagher's retail, reinsurance and wholesale insurance brokerage
operations. Risk Management Services includes Gallagher's third party
administration, loss control and risk management consulting and insurance
property appraisal operations. Third party administration is principally the
management and processing of claims for self insurance programs for Gallagher's
clients or clients of other brokers. Financial Services 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 Gallagher.
Corporate consists primarily of the operating results of Gallagher's investment
in the limited partnership that owns its corporate headquarters building,
unallocated administrative costs and the provision for income taxes which is not
allocated to Gallagher's operating segments. Only revenues not attributable to
one of the three operating segments are recorded in the Corporate segment.
The two major sources of operating revenues for Gallagher are commissions
from insurance brokerage operations and service fees primarily from risk
management operations. Information with respect to all sources of revenue, by
operating segment, for each of the three years in the period ended December 31,
2002, is as follows (in thousands):
2002 2001 * 2000 *
------------------------- -------------------------- -------------------------
% of % of % of
Amount Total Amount Total Amount Total
------------- ------ ------------- -------- ----------- ---------
Commissions
Insurance Brokerage Services $ 662,857 60% $ 537,933 58% $ 472,878 59%
Risk Management Services 613 - 1,090 - 1,204 -
Fees
Insurance Brokerage Services 109,046 10% 62,342 8% 51,678 7%
Risk Management Services 279,821 25% 262,522 28% 229,557 29%
Investment income and other
Insurance Brokerage Services 7,879 1% 11,457 1% 17,157 2%
Risk Management Services 817 - 1,084 - 1,534 -
Financial Services 33,024 3% 39,407 4% 24,318 3%
Corporate 7,165 1% 7,153 1% 2,254 -
------------- ----- ------------- ----- ----------- -----
Total revenues $ 1,101,222 100% $ 922,988 100% $ 800,580 100%
============= ===== ============= ===== =========== =====
- --------------
* Restated to conform to the current year presentation. See Note 3 to the
Consolidated Financial Statements of Gallagher's 2002 Annual Report to
Stockholders on page 39, which is incorporated herein by reference.
See Note 18 to the Consolidated Financial Statements of Gallagher's 2002
Annual Report to Stockholders on pages 55 and 56, which is incorporated herein
by reference for additional financial information, including earnings before
income taxes and identifiable assets, by operating segment, for 2002, 2001 and
2000.
During 2002 and 2001, Gallagher's total revenues and expenses increased
sequentially from quarter-to-quarter within the calendar years, except for the
second quarter of 2001 and the third quarter of 2002, the latter of which was
negatively impacted by $28.9 million of investment write-downs. However,
commission and fee revenues and the related expenses can vary from
quarter-to-quarter as a result of the timing of policy inception dates that
traditionally are heaviest in the third and fourth quarters. On the other hand,
salaries and employee benefits, rent, depreciation and amortization expenses
tend to be more uniform throughout the year. In addition, the timing of
acquisitions accounted for as purchases will also impact the trends in
Gallagher's quarterly operating results. See Note 17 to the Consolidated
Financial Statements of Gallagher's 2002 Annual Report to Stockholders on page
54, which is incorporated herein by reference for unaudited quarterly operating
results for 2002 and 2001.
3
Insurance Brokerage Services
The Insurance Brokerage Services segment comprises two divisions, the
Brokerage Services Division (BSD) and Gallagher Benefit Services (GBS).
BSD places insurance for and services commercial, industrial,
institutional, governmental, religious and personal accounts throughout the
United States and abroad. BSD acts as an agent in soliciting, negotiating and
effecting contracts of insurance through insurance companies worldwide, as a
broker in procuring contracts of insurance on behalf of insureds, and in setting
up and managing self-insured programs. BSD has the capability to handle
insurable risks and related coverages for all forms of property/casualty
products. BSD also places surplus lines coverages, which are coverages for
various specialized risks not available from insurance companies licensed by the
states in which the risks are located. In addition, BSD's reinsurance
intermediary operations place reinsurance coverages for its insurance company
clients.
GBS 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 primary source of Gallagher's compensation for its Insurance Brokerage
Services segment is commissions paid by insurance companies which are usually
based upon a percentage of the premium paid by insureds. Commission rates are
dependent on a number of factors including the type of insurance, the particular
insurance company and the capacity in which Gallagher acts. In some cases,
Gallagher is compensated for brokerage or advisory services directly by fees
from clients. Gallagher may also receive contingent commissions which are based
on the estimated profit the underwriting insurance company earns and/or the
overall volume of business placed by Gallagher in a given period of time.
Occasionally, Gallagher shares commissions with other brokers who have
participated with Gallagher in placing insurance or servicing insureds. GBS
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.
Risk Management Services
The Risk Management Services segment comprises two wholly-owned
subsidiaries, Gallagher Bassett Services, Inc. (GB) and Gallagher Benefit
Administrators, Inc. (GBA).
GB provides a full range of risk management services including claims
management, risk control consulting services, information management, property
appraisals on a totally integrated or select, stand-alone basis. GB provides
these services for Gallagher's clients through a network of service offices
located throughout the United States, Canada, England, Scotland and Australia.
GB primarily markets its risk management services directly to clients on an
unbundled basis independent of Gallagher. GB also markets these services to
BSD's clients who are interested in P/C risk management related services.
In connection with its risk management services, GB provides
"self-insurance" programs for large institutions, risk sharing pools and
associations, and large commercial and industrial customers. Self-insurance, as
administered by GB, 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 insurance carrier that specializes
in these less predictable exposures.
GBA is a third-party administrator that serves the self-funded employee
health benefit marketplace by integrating effective managed care and quality
assurance programs with claims administration services. The employee health
benefit services provided by GBA are, in many instances, directly supported by
GBS.
GB's and GBA's revenues for risk management services are substantially in
the form of fees. These fees are typically negotiated in advance on an annual
basis based upon the estimated volume of the services to be performed.
4
Financial Services
Financial Services is primarily responsible for Gallagher's diversified
investment portfolio which includes investment strategies--trading, marketable
securities--trading, tax advantaged investments, real estate partnerships, an
investment in Allied World Assurance Holdings, Ltd., venture capital equity
investments, a minority investment in an alternative fund manager, notes
receivable from investees, and an investment in an airplane leasing company that
leases two cargo airplanes to the French postal service. Financial Services
manages the invested assets of Gallagher in order to maximize the long-term
after-tax return to Gallagher. See Note 4 to the Consolidated Financial
Statements of Gallagher's 2002 Annual Report to Stockholders on pages 40 to 43,
which is incorporated herein by reference for a summary of Gallagher's
investments and notes receivable and for a summary of the assets and liabilities
related to Gallagher's unconsolidated investment portfolio, accounted for using
the equity method.
Gallagher's equity investment philosophy generally consists of investing in
tax advantaged investments and venture capital equity projects which take a
long-term view toward private sale or public offering. Gallagher uses the
limited partnership or limited liability company forms of legal ownership to
fund many of its investments in order to obtain favorable tax treatment with
respect to gains, losses and distributions, while limiting its liability. Based
on the ownership structure of these investments, management believes that
Gallagher's exposure to losses related to these investments is limited to the
combination of its net carrying value, funding commitments, letters of credit
and financial guarantees. In the event that certain of these limited
partnerships or limited liability companies 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. See Note 4 (pages 40 to 43) and Note 15 (pages 51
and 52) to the Consolidated Financial Statements of Gallagher's 2002 Annual
Report to Stockholders, which is incorporated herein by reference for a summary
of outstanding letters of credit, financial guarantees and funding commitments
and Note 7 on page 45 for a summary of outstanding debt and contingent
commitments.
International Operations
Total revenues by geographic area for each of the three years in the period
ended December 31, 2002 are as follows (in thousands):
2002 2001 * 2000 *
--------------------------- ---------------------------- ----------------------------
% of % of % of
Amount Total Amount Total Amount Total
----------------- ------- ----------------- -------- ----------------- --------
United States $ 995,656 90% $ 847,361 92% $ 734,731 92%
Foreign, principally United Kingdom,
Australia and Bermuda 105,566 10% 75,627 8% 65,849 8%
----------------- ----- ----------------- ----- ----------------- ------
Total revenues $ 1,101,222 100% $ 922,988 100% $ 800,580 100%
================= ===== ================= ===== ================= ======
- --------------
* Restated to conform to the current year presentation. See Note 3 to the
Consolidated Financial Statements of Gallagher's 2002 Annual Report to
Stockholders on page 39, which is incorporated herein by reference.
The Insurance Brokerage Services segment's international operations
comprise the following: a Lloyd's of London broker and an insurance brokerage
and risk management joint-venture in the United Kingdom; an insurance brokerage
operation and a "rent-a-captive" insurance company facility in Bermuda;
reinsurance intermediary operations in Australia and Singapore; and a network of
correspondent brokers and consultants in more than 100 countries around the
world.
Arthur J. Gallagher (UK) Limited (AJG UK) is a wholly-owned London based
subsidiary of Gallagher. It provides brokerage and other services to clients
primarily located outside the United Kingdom. The principal activity of AJG UK
is to negotiate and place insurance and reinsurance with Lloyd's of London
underwriters and insurance companies worldwide. AJG UK's brokerage services
encompass most classes of business within the general categories of aviation,
marine, reinsurance (treaty and facultative) and property/casualty. The thrust
of AJG UK's business development has been with non-United Kingdom brokers,
agents and insurers rather than domestic United Kingdom retail business. Its
clients are primarily insurance and reinsurance companies, underwriters at
Lloyd's of London, Gallagher's non-United Kingdom subsidiaries, other
independent agents and brokers and major business corporations requiring direct
insurance and reinsurance placements.
5
Risk Management Partners Ltd. (RMP) is a 50% owned joint-venture between
Gallagher and Munich-American Re Corporation that markets customized insurance
and risk management products and services to United Kingdom public entities
through offices in England and Scotland. RMP was formed in 1994 and Gallagher
believes that RMP is now the third largest provider of insurance brokerage
related services to the public entity market in the United Kingdom.
Arthur J. Gallagher & Co. (Bermuda) Limited provides clients with direct
access to the risk-taking capacity of foreign insurers for both direct and
reinsurance placements. It also acts as a wholesaler to Gallagher's marketing
efforts by accessing global insurance and reinsurance companies in the placement
of United States and foreign risks. In addition, it provides services relating
to the formation and management of offshore captive insurance companies.
Gallagher has ownership interests in two Bermuda-based insurance companies
that operate "rent-a-captive" facilities; Artex Insurance Company Ltd., a
partially owned joint-venture, and Protected Insurance Company, a wholly-owned
subsidiary. Rent-a-captives enable clients to receive the benefits of owning a
captive insurance company without certain disadvantages of ownership. Captive
insurance companies are created to insure risk and capture underwriting profit
and investment income, which is then available for use by the insured generally
for reducing future costs of their insurance programs.
Arthur J. Gallagher Australasia Pty Ltd. is a wholly-owned subsidiary of
Gallagher that is headquartered in Sydney, Australia. This subsidiary provides
reinsurance placements for international or local Australian companies, and
specialty programs and coverages for Australian and other clients through
underwriting facilities with Lloyd's of London underwriters.
Arthur J. Gallagher Pte Ltd is a 51% owned joint-venture of AJG UK that is
based in Singapore. It specializes in treaty and facultative reinsurance
placements for insurance companies located throughout Asia. These placements are
made directly with reinsurance companies or through Gallagher's subsidiaries and
encompass several lines of business.
Insurance Brokerage Services also has strategic alliances with a variety of
international brokers in countries where Gallagher does not have a physical
presence. Through a network of correspondent brokers and consultants in more
than 100 countries around the world, Gallagher is able to fully serve its
clients' coverage and service needs wherever their operations are located.
The Risk Management Services segment's international operations are
principally comprised of risk management companies in the United Kingdom and
Australia.
Gallagher Bassett International Ltd. (UK) (GB UK), a wholly-owned
subsidiary of GB, provides risk management services for foreign operations, as
well as United States operations that are foreign controlled. Headquartered in
London with offices throughout England and Scotland, GB UK works with insurance
companies, reinsurance companies, overseas brokers, and risk managers of
overseas organizations. Services include consulting, claims management,
information management, loss control and property valuations.
Wyatt Gallagher Bassett Pty Ltd is a 50% owned joint-venture of GB that is
headquartered in Brisbane, Australia with facilities located throughout
Australia. Wyatt Gallagher Bassett is principally engaged in providing claims
adjusting and risk management services in Australasia.
Gallagher also has risk management service facilities in Canada that are
not material to Gallagher's Risk Management Services segment.
See Note 16 (pages 53 and 54) and Note 18 (pages 55 and 56) to the
Consolidated Financial Statements of Gallagher's 2002 Annual Report to
Stockholders which is incorporated herein by reference for additional financial
information related to Gallagher's foreign operations, including earnings before
income taxes and identifiable assets, by operating segment, for 2002, 2001 and
2000.
Markets and Marketing
A large portion of the commission and fee business of Gallagher is derived
from all types of business institutions, not-for-profit organizations,
associations and municipal and other governmental entities. Gallagher's clients
include United States and multi-national corporations engaged in a broad range
of commercial and industrial businesses. Gallagher also places insurance for
individuals, although this portion of the business is not material to
Gallagher's operations. Gallagher services its clients through its network of
more than 250 sales and service offices in the United States and six countries
abroad. No material part of Gallagher's business is dependent upon a single
customer or on a few customers. The loss of any one customer would not have a
materially adverse effect on Gallagher. In 2002, the largest single customer
represented less than 2% of total revenues.
6
Gallagher believes that its ability to deliver comprehensively structured
risk management and brokerage services, including the placement of insurance and
reinsurance, is one of its major strengths. Gallagher also believes that its
risk management business enhances and attracts insurance brokerage business due
to the nature and strength of business relationships that it forms with clients
when providing a variety of risk management services on an ongoing basis.
Gallagher requires its employees serving in a sales or marketing capacity,
including all executive officers of Gallagher, to enter into agreements with
Gallagher restricting disclosure of confidential information and solicitation of
clients and prospects of Gallagher 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 Gallagher, as defined therein.
Competition
Gallagher believes it is the fourth largest insurance broker worldwide
(third largest in the United States) 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 Gallagher in every area of its business. Two
competing firms are significantly larger and have several times the commission
and/or fee revenues of Gallagher. There are firms in a particular region or
locality that are as large or larger than the particular local office of
Gallagher. Gallagher believes that the primary factors determining its
competitive position with other organizations in its industry are the quality of
the services rendered and the overall costs to its clients.
Gallagher is also in competition with certain insurance companies that
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 Gallagher. To date, such
direct writing and government benefits have had, in the opinion of Gallagher,
relatively little effect on its business and operations, but Gallagher can make
no prediction as to their effect in the future.
Regulation
In every state and foreign jurisdiction in which Gallagher does business,
Gallagher or an employee is required to be licensed or receive regulatory
approval in order for Gallagher to conduct business. In addition to licensing
requirements applicable to Gallagher, most jurisdictions require that
individuals who engage in brokerage and certain insurance service activities be
personally licensed.
Gallagher's insurance brokerage and risk management 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. Generally such authorities are vested with relatively broad and
general discretion as to the granting, renewing and revoking of licenses and
approvals.
2002 Acquisitions
In 2002, Gallagher acquired the net assets of ten insurance brokerage and
risk management firms in exchange for its common stock and/or cash using the
purchase method for recording business combinations. See Note 2 to the
Consolidated Financial Statements of Gallagher's 2002 Annual Report to
Stockholders on pages 38 and 39, which is incorporated herein by reference for a
summary of the entities acquired, the amount and nature of the consideration
paid and the dates of acquisition.
2003 Acquisitions
The following acquisitions accounted for as purchases have occurred since
December 31, 2002:
Effective on January 1, 2003, Gallagher acquired substantially all of the
net assets of W. E. Kingsley Company, Inc., a Kentucky corporation engaged in
the wholesale insurance brokerage and services business, in exchange for 101,000
shares of Gallagher's common stock.
Effective on January 1, 2003, Gallagher acquired substantially all of the
net assets of McRory & Company and Harman & McRory Company, Washington
corporations engaged in the insurance brokerage and services business, in
exchange for 54,000 and 49,000 shares of Gallagher's common stock, respectively.
Effective on March 1, 2003, Gallagher acquired substantially all of the net
assets of Benefits Planning & Insurance Agency, Inc., a California corporation
engaged in the benefits insurance business, in exchange for 577,000 shares of
Gallagher's common stock and a contingent obligation of $8,500,000 that, if any
is earned, will be paid in additional shares of Gallagher common stock.
7
Gallagher believes that the net effect of these acquisitions has been and
will be to expand the volume of general services rendered by Gallagher and the
geographical areas in which Gallagher renders such services and not to change
substantially the nature of the services performed by Gallagher.
Gallagher is considering and intends to consider from time to time,
additional acquisitions and divestitures on terms that it deems advantageous.
Gallagher at this time is engaged in preliminary discussions with a number of
candidates for possible future acquisitions and has received signed, non-binding
letters of intent from three acquisition candidates. No assurances can be given
that any additional acquisitions or divestitures will be consummated, or, if
consummated, will be advantageous to Gallagher.
Employees
As of December 31, 2002, Gallagher employed approximately 7,100 employees,
none of whom is represented by a labor union. Gallagher continuously reviews
benefits and other matters of interest to its employees and considers its
relations with its employees to be satisfactory.
Available Information
Gallagher makes available free of charge on its website at www.ajg.com its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a)or 15(d) of the Exchange Act, as soon as reasonably practicable after
electronically filing or furnishing such material to the Securities and Exchange
Commission.
Item 2. Properties.
Gallagher's executive offices and certain subsidiary and branch facilities
are located at Two Pierce Place, Itasca, Illinois, where Gallagher leases
approximately 264,000 square feet of space. The lease commitment on this
property expires February 28, 2006. Gallagher has an equity interest in the
limited partnership that owns the Two Pierce Place property. See Note 4 (pages
40 to 43), Note 7 (page 45) and 15 (pages 51 and 52) to the Consolidated
Financial Statements of Gallagher's 2002 Annual Report to Stockholders which is
incorporated herein by reference for additional information with respect to this
ownership interest. Gallagher 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 annual escalation
clauses generally related to increases in an inflation index. See Note 15 to the
Consolidated Financial Statements of Gallagher's 2002 Annual Report to
Stockholders on pages 51 and 52, which is incorporated herein by reference for
information with respect to Gallagher's lease commitments at December 31, 2002.
Item 3. Legal Proceedings.
Information regarding legal proceedings of Gallagher is included in Note 15
to the Consolidated Financial Statements on page 52 of Gallagher's 2002 Annual
Report to Stockholders and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during Gallagher's
fourth fiscal quarter ended December 31, 2002.
8
Item 4A. Executive Officers of the Registrant.
The executive officers of Gallagher are as follows:
Name Age Position and Year First Elected
---- ------ -------------------------------
Robert E. Gallagher 80 Chairman since 1990, Chief Executive Officer from 1963 until 1995
J. Patrick Gallagher, Jr. 51 President since 1990, Chief Executive Officer since 1995
James J. Braniff III 63 Vice President since 1995, President and Chief Operating Officer of
BSD from 1999 to June 2002
Elizabeth J. Brinkerhoff 59 Vice President since 1993
Richard C. Cary 40 Chief Accounting Officer since 2001, Acting Chief Financial Officer
since September 2002
James W. Durkin, Jr. 53 Vice President since 1985, President of GBS since 1985
Nicholas M. Elsberg 60 Vice President since 1994
James S. Gault 51 Vice President since 1992, President and Chief Operating Officer of
BSD since June 2002
David E. McGurn, Jr. 49 Vice President from 1993, President--Specialty Marketing and
International Division since 2001
Richard J. McKenna 56 Vice President since 1994, President of GB since 2000
John C. Rosengren 56 Vice President and General Counsel since 1995
Each such person has been principally employed by Gallagher in management
capacities for more than the past five years. All executive officers are elected
annually and serve at the pleasure of the Board of Directors.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Gallagher's common stock is listed on the New York Stock Exchange, trading
under the symbol "AJG." The following table sets forth information as to the
price range of Gallagher's common stock for the two-year period January 1, 2001
through December 31, 2002 and the dividends declared per common share for such
period. The table reflects the range of high and low sales prices per share as
reported on the New York Stock Exchange composite listing.
Dividends
Declared
Per Common
High Low Share
-------- -------- ----------
Quarterly Periods
- -----------------
2002
- ----
First $ 37.240 $ 31.000 $ .150
Second 37.200 32.150 .150
Third 34.900 21.700 .150
Fourth 29.800 22.100 .150
2001
- ----
First 32.094 21.875 $ .130
Second 29.200 22.230 .130
Third 34.000 25.370 .130
Fourth 38.820 32.900 .130
As of February 28, 2003, there were approximately 700 holders of record of
Gallagher's common stock.
9
Item 6. Selected Financial Data.
The following selected consolidated financial data for each of the five
years in the period ended December 31, 2002 have been derived from Gallagher's
consolidated financial statements. Such data should be read in conjunction with
Gallagher's audited Consolidated Financial Statements and related notes thereto,
which have been incorporated by reference in Item 8 of this annual report.
Year Ended December 31, (1)
-----------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
(In thousands, except per share and employee data)
Consolidated Statement of Earnings Data:
Commissions $ 663,470 $ 539,023 $ 474,082 $ 440,828 $ 421,256
Fees 388,867 324,864 281,235 235,879 213,360
Investment income and other 48,885 59,101 45,263 39,230 24,980
---------------- ---------------- ---------------- ---------------- ----------------
Total revenues 1,101,222 922,988 800,580 715,937 659,596
Total expenses 915,880 781,135 666,841 588,913 576,430
---------------- ---------------- ---------------- ---------------- ----------------
Earnings before income taxes 185,342 141,853 133,739 127,024 83,166
Provision for income taxes 55,603 16,597 40,784 43,784 16,287
---------------- ---------------- ---------------- ---------------- ----------------
Net earnings $ 129,739 $ 125,256 $ 92,955 $ 83,240 $ 66,879
================ ================ ================ ================ ================
Per Share Data:
Basic net earnings per share (2) $ 1.49 $ 1.48 $ 1.11 $ 1.02 $ .83
Diluted net earnings per share (3) 1.41 1.39 1.04 .97 .80
Dividends declared per common share (4) .60 .52 .46 .40 .35
Share Data:
Shares outstanding at year end 88,548 85,111 84,540 82,157 81,169
Weighted average number of common share
outstanding 87,303 84,795 83,558 81,678 80,757
Weighted average number of common and
common equivalent shares outstanding 91,861 90,127 88,967 85,606 83,973
Consolidated Balance Sheet Data:
Total assets $ 2,463,574 $ 2,145,342 $ 1,626,771 $ 1,364,302 $ 1,243,946
Long-term debt less current portion 128,349 96,698 103,856 13,900 15,500
Total stockholders' equity 528,155 371,613 328,900 260,801 268,668
Return on Beginning Stockholders'
Equity (5) 35% 38% 36% 31% 28%
Employee Data:
Number of employees at year end 7,111 6,499 5,714 5,344 5,128
Total revenue per employee (6) $ 155 $ 142 $ 140 $ 134 $ 129
Net earnings per employee (6) $ 18 $ 19 $ 16 $ 16 $ 13
- ------------------------------------------------
(1) Restated to conform to the current year presentation. See Note 3 to the
Consolidated Financial Statements of Gallagher's 2002 Annual Report to
Stockholders on page 39, which is incorporated herein by reference.
(2) Based on the weighted average number of common shares outstanding during
the year.
(3) Based on the weighted average number of common and common equivalent shares
outstanding during the year.
(4) Based on the total dividends declared on a share of common stock
outstanding during the entire year.
(5) Represents annual net earnings divided by stockholders' equity as of the
beginning of the year.
(6) Based on the number of employees at year end.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations is included in Gallagher's 2002 Annual
Report to Stockholders under the caption entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 22 to 30 and
is incorporated herein by reference. All of such information should be read in
conjunction with Gallagher's Consolidated Financial Statements and related notes
thereto, which have been incorporated by reference in Item 8 of this annual
report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information regarding Quantitative and Qualitative Disclosures About Market
Risk is included in Gallagher's 2002 Annual Report to Stockholders under the
caption entitled "Market Risk Exposure" on page 30 and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data.
Gallagher's Consolidated Financial Statements, the related notes thereto,
Management's Report and Report of Independent Auditors are included in
Gallagher's 2002 Annual Report to Stockholders on pages 31 to 58 and are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on accounting
and financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding directors and nominees for directors of Gallagher is
included under the caption entitled "Election of Directors" in the 2003 Proxy
Statement and is incorporated herein by reference. Information regarding
executive officers of Gallagher is included under the caption entitled
"Executive Officers of the Registrant" in Part I of this annual report.
Item 11. Executive Compensation.
Information regarding executive compensation of Gallagher's directors and
executive officers is included in the 2003 Proxy Statement under the caption
entitled "Compensation of Executive Officers and Directors," and is incorporated
herein by reference; provided, however, the report of the Compensation Committee
on executive compensation and the stock performance graph shall not be deemed to
be incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding beneficial ownership of the Common Stock by certain
beneficial owners and by management of Gallagher is included under the caption
entitled "Principal Holders of Securities" in the 2003 Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
Item 14. 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 were
effective as of the date of such evaluation.
There have been no significant changes in Gallagher's internal controls or
in other factors that could significantly affect the internal controls
subsequent to the date of Gallagher's evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
11
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements from Gallagher's 2002 Annual Report
to Stockholders which are incorporated herein by reference:
(a) Consolidated Statements of Earnings for each of the three years
in the period ended December 31, 2002 (page 31)
(b) Consolidated Balance Sheets as of December 31, 2002 and 2001
(page 32).
(c) Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2002 (page 33).
(d) Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2002 (page 34).
(e) Notes to Consolidated Financial Statements (pages 35 to 56).
(f) Management's Report (page 57).
(g) Report of Independent Auditors (page 58).
2. Consolidated Financial Statement Schedules required to be filed by
Item 8 of this Form:
(a) Schedule II--Valuation and Qualifying Accounts.
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included in
the Consolidated Financial Statements or the Notes thereto.
3. Exhibits:
Included in this Form 10-K
10.8.9 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Ninth
Amendment to Credit Agreement Dated as of November 13, 2002.
13.0 Pages 21 to 58 of Gallagher's 2002 Annual Report to Stockholders
incorporated herein by reference.
21.0 Subsidiaries of Gallagher, including state or other jurisdiction
of incorporation or organization and the names under which each
does business.
23.1 Consent of Ernst & Young LLP, independent auditors.
24.0 Powers of Attorney.
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.
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.
Not included in this Form 10-K
3.1 Restated Certificate of Incorporation of Gallagher (incorporated
by reference to the same exhibit number to Gallagher's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1996,
File No. 1-9761).
3.1.1 Certificate of Amendment of Restated Certificate of Incorporation
of Arthur J. Gallagher & Co., Amended as of May 18, 2000
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 2000, File No. 1-9761).
12
3.1.2 Certificate of Amendment of Restated Certificate of Incorporation
of Arthur J. Gallagher & Co., Amended as of May 23, 2001
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 2001, File No. 1-9761).
3.2 By-Laws of Gallagher (incorporated by reference to the same
exhibit number to Gallagher's Form S-1 Registration Statement
No. 33-10447).
3.3 Rights Agreement between Gallagher and Bank of America Illinois
(formerly Continental Illinois National Bank and Trust Company of
Chicago) (incorporated by reference to Exhibits 1 and 2 to
Gallagher'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 Gallagher (incorporated by reference to the same
exhibit number to Gallagher'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 Gallagher'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 Gallagher and the Rights Agreement in Exhibits
3.1, 3.2, and 3.3, respectively, hereby incorporated by
reference).
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 Gallagher'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
Gallagher'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
Gallagher's Form 10-K Annual Report for 1985, File No. 0-13480).
10.8 Credit Agreement Dated as of September 11, 2000 Among Arthur J.
Gallagher & Co., AJG Financial Services, Inc., The Banks Party
Thereto, Harris Trust and Savings Bank, as Agent and Lead
Arranger, Citibank, N.A., as Co-Lead Arranger and Syndication
Agent, and Bank of America, N.A. as Co-Lead Arranger and
Documentation Agent (incorporated by reference to the same
exhibit number to Gallagher's Form 10-Q Quarterly Report for the
quarterly period ended September 30, 2000, File No. 1-9761).
10.8.1 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. First
Amendment to Credit Agreement Dated as of November 10, 2000
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended September 30, 2000, File No. 1-9761).
10.8.2 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Second
Amendment to Credit Agreement Dated as of May 31, 2001
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 2001, File No. 1-9761).
10.8.3 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Third
Amendment to Credit Agreement Dated as of September 7, 2001
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended September 30, 2001, File No. 1-9761).
10.8.4 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Fourth
Amendment to Credit Agreement Dated as of November 7, 2001
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended September 30, 2001, File No. 1-9761).
10.8.5 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Fifth
Amendment to Credit Agreement Dated as of February 21, 2002
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-K Annual Report for 2001, File No. 1-9761).
13
10.8.6 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Sixth
Amendment to Credit Agreement Dated as of April 23, 2002
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended March 31, 2002, File No. 1-9761).
10.8.7 Arthur J. Gallagher & Co. and AJG Financial Services, Inc.
Seventh Amendment to Credit Agreement Dated as of August 9, 2002
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 2002, File No. 1-9761).
10.8.8 Arthur J. Gallagher & Co. and AJG Financial Services, Inc.
Eighth Amendment to Credit Agreement Dated as of August 29, 2002
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended September 30, 2002, File No. 1-9761).
*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 Gallagher's Form S-1 Registration Statement No. 2-89195).
*10.11 Form of Indemnity Agreement between Gallagher and each of its
directors and corporate officers (incorporated by reference to
Attachment A to Gallagher's Proxy Statement dated April 10, 1987
for its Annual Meeting of Stockholders, File No. 0-13480).
*10.14 Form of Change in Control Agreement between Gallagher and each of
its Executive Officers (incorporated by reference to the same
exhibit number to Gallagher's Form 10-K Annual Report for 1998,
File No. 1-9761).
*10.15 Arthur J. Gallagher & Co. Supplemental Savings and Thrift Plan
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-K Annual Report for 1999, File No. 1-9761).
*10.16 Arthur J. Gallagher & Co. Deferred Equity Participation Plan and
Deferred Equity Trust Agreement dated March 22, 2001
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-K Annual Report for 2000, File No. 1-9761).
*10.17 Executive Bonus Agreement dated June 2, 2000 between Gallagher
and Michael J. Cloherty (incorporated by reference to the same
exhibit number to Gallagher's Form 10-K Annual Report for 2000,
File No. 1-9761).
*10.18 Promissory Note dated March 15, 2001 in the principal amount of
$2,382,900 from Michael J. Cloherty, payable to Gallagher
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-K Annual Report for 2000, File No. 1-9761).
*10.19 Employment Agreement dated January 1, 1999 between Gallagher and
James J. Braniff III (incorporated by reference to the same
exhibit number to Gallagher's Form 10-K Annual Report for 2000,
File No. 1-9761).
*10.20 Secured Promissory Note dated June 19, 1996 in the principal
amount of $1,155,000 from James J. Braniff III, payable to
Gallagher (incorporated by reference to the same exhibit number
to Gallagher's Form 10-K Annual Report for 2000, File No.
1-9761).
*10.21 Promissory Note dated February 1, 1999 in the principal amount of
$100,000 from James J. Braniff III, payable to Gallagher
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-K Annual Report for 2000, File No. 1-9761).
*10.22 Arthur J. Gallagher & Co. Brokerage Services Division Management
Bonus Plan Amended and Restated as of March 21, 2002
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended March 31, 2002, File No. 1-9761).
*10.22.1 Employment Agreement dated September 3, 2002 between Gallagher
and Michael J. Cloherty (incorporated by reference to the same
exhibit number to Gallagher's Form 10-Q Quarterly Report for the
quarterly period ended September 30, 2002, File No. 1-9761).
*10.25 Arthur J. Gallagher & Co. United Kingdom Incentive Stock Option
Plan, Amended and restated as of January 22, 1998 and approved by
the Inland Revenue on June 12, 1998 (incorporated by reference to
the same exhibit number to Gallagher's Form 10-Q Quarterly Report
for the quarterly period ended June 30, 1998, File No. 1-9761).
14
*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 Gallagher'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 Gallagher's Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1998,
File No. 1-9761).
*10.27.1 Amendment No. 1 to the Arthur J. Gallagher & Co. Restated 1988
Nonqualified Stock Option Plan, Amended as of January 20, 2000
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 2000, File No. 1-9761).
*10.27.2 Amendment No. 2 to the Arthur J. Gallagher & Co. Restated 1988
Nonqualified Stock Option Plan, Amended as of January 18, 2001
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 2001, File No. 1-9761).
*10.27.3 Amendment No. 3 to the Arthur J. Gallagher & Co. Restated 1988
Nonqualified Stock Option Plan, Amended as of January 17, 2002
(incorporated by reference to the same exhibit number to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 2002, File No. 1-9761).
*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 to
Gallagher's Form 10-Q Quarterly Report for the quarterly period
ended June 30, 1998, File No. 1-9761).
*10.28.1 Amendment No. 2 to the Arthur J. Gallagher & Co. Restated 1989
Non-Employee Directors' Stock Option Plan, Amended as of
January 20, 2000 (incorporated by reference to the same exhibit
number to Gallagher's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 2000, File No. 1-9761).
*10.28.2 Amendment No. 3 to the Arthur J. Gallagher & Co. Restated 1989
Non-Employee Directors' Stock Option Plan, Amended as of
January 18, 2001 (incorporated by reference to the same exhibit
number to Gallagher's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 2001, File No. 1-9761).
*10.28.3 Amendment No. 4 to the Arthur J. Gallagher & Co. Restated 1989
Non-Employee Directors' Stock Option Plan, Amended as of
January 17, 2002 (incorporated by reference to the same exhibit
number to Gallagher's Form 10-Q Quarterly Report for the
quarterly period ended June 30, 2002, File No. 1-9761).
All other exhibits are omitted because they are not applicable, or not
required, or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
- -------
* Such exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this form pursuant
to item 601 of Regulation S-K.
(b) Reports on Form 8-K
Not applicable.
15
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 24th day of
March, 2003.
ARTHUR J. GALLAGHER & CO.
By /S/ J. PATRICK GALLAGHER, JR.
------------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 24th day of March, 2003 by the following
persons on behalf of the Registrant in the capacities indicated.
Name Title
---- -----
*ROBERT E. GALLAGHER Chairman and Director
- ----------------------------------------------------
Robert E. Gallagher
/S/ J. PATRICK GALLAGHER, JR. President and Director (Principal Executive Officer)
- ----------------------------------------------------
J. Patrick Gallagher, Jr.
/S/ RICHARD C. CARY Acting Chief Financial Officer and Controller
- ---------------------------------------------------- (Principal Financial and Accounting Officer)
Richard C. Cary
*JAMES J. BRANIFF III Director
- ----------------------------------------------------
James J. Braniff III
*T. KIMBALL BROOKER Director
- ----------------------------------------------------
T. Kimball Brooker
*GARY P. COUGHLAN Director
- ----------------------------------------------------
Gary P. Coughlan
*JAMES W. DURKIN, JR. Director
- ----------------------------------------------------
James W. Durkin, Jr.
*ILENE S. GORDON Director
- ----------------------------------------------------
Ilene S. Gordon
*ELBERT O. HAND Director
- ----------------------------------------------------
Elbert O. Hand.
*DAVID E. MCGURN, JR. Director
- ----------------------------------------------------
David E. McGurn, Jr.
*RICHARD J. MCKENNA Director
- ----------------------------------------------------
Richard J. McKenna
*JAMES R. WIMMER Director
- ----------------------------------------------------
James R. Wimmer
*By: /S/ JOHN C. ROSENGREN
----------------------------------------------
John C. Rosengren, Attorney-in-Fact
16
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 annual report on Form 10-K of Arthur J. Gallagher &
Co.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c.) Presented in this annual 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
annual 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: March 24, 2003
/s/ J. PATRICK GALLAGHER, JR.
---------------------------------------------
J. Patrick Gallagher, Jr.
President and Chief Executive Officer
(principal executive officer)
17
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 annual report on Form 10-K of Arthur J. Gallagher &
Co.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c.) Presented in this annual 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
annual 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: March 24, 2003
/s/ RICHARD C. CARY
---------------------------------------------
Richard C. Cary
Acting Chief Financial Officer and Chief
Accounting Officer
(principal financial officer)
18
SCHEDULE II
ARTHUR J. GALLAGHER & CO.
VALUATION AND QUALIFYING ACCOUNTS
Balance Additions Balance
at Charged at
Beginning to End
of Year Earnings Adjustments of Year
--------- --------- -------------- -------
(In thousands)
Year ended December 31, 2002
Allowance for doubtful accounts $ 1,730 $ 4,691 $(4,396)(1) $ 2,025
Allowance for estimated policy cancellations 2,500 500 - 3,000
Accumulated amortization of goodwill 7,129 - (9)(2) 7,120
Accumulated amortization of expiration
lists and noncompete agreements 1,602 6,647 (798)(3) 7,451
Year ended December 31, 2001
Allowance for doubtful accounts $ 3,132 $ 1,657 $(3,059)(1) $ 1,730
Allowance for estimated policy cancellations 2,000 500 - 2,500
Accumulated amortization of goodwill 5,836 2,624 (1,331)(2) 7,129
Accumulated amortization of expiration
lists and noncompete agreements 4,089 881 (3,368)(3) 1,602
Year ended December 31, 2000
Allowance for doubtful accounts $ 1,531 $ 4,456 $(2,855)(1) $ 3,132
Allowance for estimated policy cancellations - 2,000 - 2,000
Accumulated amortization of goodwill 5,588 2,363 (2,115)(2) 5,836
Accumulated amortization of expiration
lists and noncompete agreements 3,118 1,283 (312)(3) 4,089
- -----------------------------------------------------------
(1) Bad debt write-offs net of recoveries.
(2) Elimination of fully amortized goodwill and intangible asset/amortization
reclassifications.
(3) Elimination of fully amortized expiration lists and non-compete agreements
and intangible asset/amortization reclassifications.
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ARTHUR J. GALLAGHER & CO.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
EXHIBIT INDEX
10.8.9 Arthur J. Gallagher & Co. and AJG Financial Services, Inc. Ninth
Amendment to Credit Agreement Dated as of November 13, 2002.
13.0 Pages 21 to 58 of Gallagher's 2002 Annual Report to Stockholders
incorporated herein by reference.
21.0 Subsidiaries of Gallagher, including state or other jurisdiction of
incorporation or organization and the names under which each does
business.
23.1 Consent of Ernst & Young LLP, independent auditors.
24.0 Powers of Attorney.
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.
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.
20