EXHIBIT 99.1
Audited Consolidated Financial Statements
Arthur J. Gallagher & Co.
Years Ended December 31, 2002, 2001 and 2000
INDEX
.. REPORT OF INDEPENDENT AUDITORS .................................................. 1
.. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements Of Earnings ........................................ 2
Consolidated Balance Sheets ................................................ 3
Consolidated Statements Of Cash Flows ...................................... 4
Consolidated Statements Of Stockholders' Equity ............................ 5
.. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary Of Significant Accounting Policies ........................ 6
Note 2: Business Combinations ............................................. 9
Note 3: Reclassifications Of Previously Reported Financial Statements .....10
Note 4: Investments .......................................................11
Note 5: Fixed Assets ......................................................15
Note 6: Intangible Assets .................................................15
Note 7: Credit And Other Debt Agreements ..................................16
Note 8: Capital Stock And Stockholders' Rights Plan .......................17
Note 9: Earnings Per Share ................................................17
Note 10: Stock Option Plans ................................................18
Note 11: Deferred Compensation .............................................19
Note 12: Restricted Stock Awards ...........................................19
Note 13: Retirement Plans ..................................................19
Note 14: Postretirement Benefits Other Than Pensions .......................21
Note 15: Commitments, Contingencies And Financial Guarantees ...............22
Note 16: Income Taxes ......................................................24
Note 17: Quarterly Operating Results .......................................25
Note 18: Segment Information ...............................................26
REPORT OF
INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Arthur J. Gallagher & Co.
We have audited the accompanying consolidated balance sheets of Arthur J.
Gallagher & Co. (Gallagher) as of December 31, 2002 and 2001, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of Gallagher's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Arthur J. Gallagher & Co. at December 31, 2002 and 2001, and
the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
January 29, 2003
1
CONSOLIDATED
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
---------------------------------------
(in thousands, except per share data) 2002 2001 2000
- ------------------------------------------------------------------------ ----------- ----------- -----------
OPERATING RESULTS
Revenues:
Commissions $ 662,857 $ 537,933 $ 472,878
Fees 389,480 325,954 282,439
Investment income and other:
Interest income from fiduciary funds 9,289 13,166 19,468
Income (loss) from investment strategies and marketable securities (5,851) 8,255 6,574
Income (loss) from equity investments and partnerships (15,534) 8,049 3,243
Gain on sale of portion of minority interest in investment 11,848 -- --
Installment gains from alternative energy partnership sales 34,580 11,703 9,200
Income from real estate ventures 9,324 12,115 3,121
Other income 5,229 5,813 3,657
----------- ----------- -----------
Total investment income and other 48,885 59,101 45,263
----------- ----------- -----------
Gross revenues 1,101,222 922,988 800,580
Less brokerage (41,015) (34,959) (26,048)
----------- ----------- -----------
Total revenues 1,060,207 888,029 774,532
----------- ----------- -----------
Expenses:
Salaries and employee benefits 586,975 489,290 426,147
Other operating expenses 242,064 206,021 193,253
Operating expenses of alternative energy partnerships 6,131 21,079 --
Expenses of real estate ventures 7,265 6,640 1,967
Depreciation 25,784 19,641 15,780
Amortization 6,646 3,505 3,646
----------- ----------- -----------
Total expenses 874,865 746,176 640,793
----------- ----------- -----------
Earnings before income taxes 185,342 141,853 133,739
Provision for income taxes 55,603 16,597 40,784
----------- ----------- -----------
Net earnings $ 129,739 $ 125,256 $ 92,955
=========== =========== ===========
Basic net earnings per share $ 1.49 $ 1.48 $ 1.11
Diluted net earnings per share 1.41 1.39 1.04
Dividends declared per common share .60 .52 .46
See notes to consolidated financial statements.
2
CONSOLIDATED
BALANCE SHEETS
DECEMBER 31,
-------------------------
(in thousands) 2002 2001
- ------------------------------------------------------------------------ ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 152,536 $ 98,530
Restricted cash 256,323 209,509
Premiums and fees receivable 1,183,737 1,117,238
Investment strategies -- trading 55,937 52,588
Marketable securities -- trading 14,619 --
Other 110,458 85,142
----------- -----------
Total current assets 1,773,610 1,563,007
Marketable securities -- available for sale -- 18,290
Deferred income taxes 102,361 99,263
Other investments and notes receivable 168,413 192,002
Other noncurrent assets 33,133 24,194
Fixed assets 367,273 283,807
Accumulated depreciation and amortization (116,278) (100,562)
----------- -----------
Net fixed assets 250,995 183,245
Goodwill -- net 84,217 55,475
Amortizable intangible assets -- net 50,845 9,866
----------- -----------
$ 2,463,574 $ 2,145,342
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance and reinsurance companies $ 1,488,222 $ 1,366,516
Accrued salaries and bonuses 58,066 56,572
Accounts payable and other accrued liabilities 107,542 111,618
Unearned fees 19,427 16,527
Income taxes payable 11,036 33,746
Borrowings on line of credit facility 25,000 35,000
Borrowings on line of credit facilities -- limited partnerships 16,996 3,552
Current portion of long-term debt -- limited partnerships 5,786 3,152
Other 17,529 11,273
----------- -----------
Total current liabilities 1,749,604 1,637,956
Long-term debt -- limited partnerships 128,349 96,698
Other noncurrent liabilities 57,466 39,075
Commitments and contingencies -- Note 15
Stockholders' equity:
Common stock -- issued and outstanding 88,548 shares in 2002
and 85,111 shares in 2001 88,548 85,111
Capital in excess of par value 92,716 8,768
Retained earnings 360,958 283,796
Unearned deferred compensation (6,544) (3,438)
Unearned restricted stock (7,523) --
Accumulated other comprehensive earnings (loss) -- (2,624)
----------- -----------
Total stockholders' equity 528,155 371,613
----------- -----------
$ 2,463,574 $ 2,145,342
=========== ===========
See notes to consolidated financial statements.
3
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------ ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 129,739 $ 125,256 $ 92,955
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Net loss (gain) on investments and other 13,562 (2,895) (2,006)
Gain on sales of operations (2,500) (2,375) (1,823)
Depreciation and amortization 32,430 23,146 19,426
Increase in restricted cash (46,814) (50,863) (29,350)
Increase in premiums receivable (57,705) (297,758) (53,395)
Increase in premiums payable 103,000 380,464 97,105
(Increase) decrease in trading investments -- net (1,758) 1,051 6,498
(Increase) decrease in other current assets (21,787) (9,160) 7,876
Increase in accrued salaries and bonuses 4,534 18,094 14,073
Decrease in accounts payable and other accrued liabilities (8,795) (1,478) (1,479)
(Decrease) increase in income taxes payable (22,842) 23,456 105
Tax benefit from issuance of common stock 18,683 24,806 20,027
Net change in deferred income taxes (6,577) (77,751) (30,613)
Other 16,513 (22,452) 30,019
----------- ----------- -----------
Net cash provided by operating activities 149,683 131,541 169,418
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (16,004) (13,957) (25,832)
Proceeds from sales of marketable securities 10,568 23,051 22,471
Proceeds from maturities of marketable securities 3,185 398 762
Net additions to fixed assets (45,430) (31,457) (20,649)
Cash paid for acquisitions, net of cash acquired (5,443) (17,893) (14,801)
Proceeds from sales of operations 2,500 2,700 2,334
Other 1,897 (47,804) (35,632)
----------- ----------- -----------
Net cash used by investing activities (48,727) (84,962) (71,347)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 15,546 27,255 27,837
Repurchases of common stock (11,662) (104,122) (31,344)
Dividends paid (50,359) (41,618) (33,759)
Borrowings on line of credit facilities 271,444 210,252 45,000
Repayments on line of credit facilities (268,000) (171,700) (60,000)
Borrowings of long-term debt 500 -- 12,410
Repayments of long-term debt (4,419) (4,006) (2,315)
Equity transactions of pooled companies prior to dates of acquisition -- (13,497) (4,937)
----------- ----------- -----------
Net cash used by financing activities (46,950) (97,436) (47,108)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 54,006 (50,857) 50,963
Cash and cash equivalents at beginning of year 98,530 149,387 98,424
----------- ----------- -----------
Cash and cash equivalents at end of year $ 152,536 $ 98,530 $ 149,387
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 10,743 $ 10,477 $ 4,937
Income taxes paid 63,067 36,470 25,371
See notes to consolidated financial statements.
4
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK CAPITAL IN UNEARNED UNEARNED
-------------------- EXCESS OF RETAINED DEFERRED RESTRICTED
(in thousands) SHARES AMOUNT PAR VALUE EARNINGS COMPENSATION STOCK
- ------------------------------------------ ------ ----------- ----------- --------- ------------ -----------
Balance at December 31, 1999 82,157 $ 82,157 $ 8,847 $ 172,466 $ -- $ --
Net earnings -- -- -- 92,955 -- --
Net change in unrealized gain (loss)
on available for sale securities -- -- -- -- -- --
COMPREHENSIVE EARNINGS
Cash dividends declared on
common stock -- -- -- (35,539) -- --
Common stock issued under stock
option plans 3,811 3,811 24,026 -- -- --
Tax benefit from issuance of
common stock -- -- 20,027 -- -- --
Common stock repurchases (1,500) (1,500) (30,987) -- -- --
Common stock issued in two
pooling acquisitions 72 72 -- -- -- --
Equity transactions of pooled companies
prior to dates of acquisition -- -- (151) (4,786) -- --
------ ----------- ---------- --------- ------------ -----------
Balance at December 31, 2000 84,540 84,540 21,762 225,096 -- --
Net earnings -- -- -- 125,256 -- --
Net change in unrealized gain (loss)
on available for sale securities -- -- -- -- -- --
COMPREHENSIVE EARNINGS
Cash dividends declared on
common stock -- -- -- (43,534) -- --
Common stock issued under stock
option plans 3,007 3,007 24,248 -- -- --
Tax benefit from issuance of
common stock -- -- 24,806 -- -- --
Common stock repurchases (3,359) (3,359) (90,151) (9,470) -- --
Common stock issued in three
pooling acquisitions 93 93 -- -- -- --
Common stock issued in three
purchase acquisitions 678 678 24,200 -- -- --
Common stock issued under
deferred compensation 152 152 3,848 -- (3,438) --
Equity transactions of pooled companies
prior to dates of acquisition -- -- 55 (13,552) -- --
------ ----------- ---------- --------- ------------ -----------
Balance at December 31, 2001 85,111 85,111 8,768 283,796 (3,438) --
Net earnings -- -- -- 129,739 -- --
Net change in unrealized gain (loss)
on available for sale securities -- -- -- -- -- --
COMPREHENSIVE EARNINGS
Cash dividends declared on
common stock -- -- -- (52,577) -- --
Common stock issued under stock
option plans 1,896 1,896 13,650 -- -- --
Tax benefit from issuance of
common stock -- -- 18,683 -- -- --
Common stock repurchases (478) (478) (11,184) -- -- --
Common stock issued in seven
purchase acquisitions 1,590 1,590 49,166 -- -- --
Common stock issued under
deferred compensation 123 123 3,908 -- (3,106) --
Common stock issued under
restricted stock 306 306 9,725 -- -- (7,523)
------ ----------- ---------- --------- ------------ -----------
Balance at December 31, 2002 88,548 $ 88,548 $ 92,716 $ 360,958 $ (6,544) $ (7,523)
====== =========== ========== ========= ============ ===========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
(IN THOUSANDS) EARNINGS (LOSS) EQUITY
- ---------------------------------------- ----------------- -------------
Balance at December 31, 1999 $ (2,669) $ 260,801
-------------
Net earnings -- 92,955
Net change in unrealized gain (loss)
on available for sale securities 171 171
-------------
COMPREHENSIVE EARNINGS 93,126
Cash dividends declared on
common stock -- (35,539)
Common stock issued under stock
option plans -- 27,837
Tax benefits from issuance of
common stock -- 20,027
Common stock repurchases -- (32,487)
Common stock issued in two
pooling acquisitions -- 72
Equity transactions of pooled companies
prior to dates of acquisition -- (4,937)
---------------- -------------
Balance at December 31, 2000 (2,498) 328,900
-------------
Net earnings -- 125,256
Net change in unrealized gain (loss)
on available for sale securities (126) (126)
-------------
125,130
COMPREHENSIVE EARNINGS
Cash dividends declared on
common stock -- (43,534)
Common stock issued under stock
option plans -- 27,255
Tax benefit from issuance of
common stock -- 24,806
Common stock repurchases -- (102,980)
Common stock issued in three
pooling acquisitions -- 93
Common stock issued in three
purchase acquisitions -- 24,878
Common stock issued under
deferred compensation -- 562
Equity transactions of pooled companies
prior to dates of acquisition -- (13,497)
--------------- -------------
Balance at December 31, 2001 (2,624) 371,613
-------------
Net earnings -- 129,739
Net change in unrealized gain (loss)
on available for sale securities 2,624 2,624
-------------
132,363
COMPREHENSIVE EARNINGS
Cash dividends declared on
common stock -- (52,577)
Common stock issued under stock
option plans -- 15,546
Tax benefit from issuance of
common stock -- 18,683
Common stock repurchases -- (11,662)
Common stock issued in seven
purchase acquisitions -- 50,756
Common stock issued under
deferred compensation -- 925
Common stock issued under
restricted stock -- 2,508
---------------- -------------
Balance at December 31, 2002 $ -- $ 528,155
================ =============
See notes to consolidated financial statements.
5
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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
revenue 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 operations
in seven countries and does business in more than 100 countries around the
world through a network of correspondent brokers and consultants.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Gallagher and all of its majority owned subsidiaries (50% or greater
ownership). Investments in partially owned entities in which Gallagher's
ownership is less than 50% are accounted for using either the lower of
amortized cost/cost or fair value, or the equity method, whichever is
appropriate depending on the legal form of Gallagher's ownership interest
and the applicable percentage of the entity owned. For partially owned
entities accounted for using the equity method, Gallagher's share of the
net earnings of these entities is included in consolidated net earnings.
All material intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior years'
financial statements in order to conform to the current year presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Such estimates
and assumptions could change in the future as more information becomes
known which could impact the amounts reported and disclosed herein.
REVENUE RECOGNITION
Gallagher's revenues are derived from commissions, fees and investment
income.
Commission revenues, as well as the related premiums receivable and
premiums payable to insurance companies, are recognized at the latter of
the billing or the effective date of the related insurance policies, net of
an allowance for estimated policy cancellations. Commission revenues
related to installment premiums are recognized periodically as billed.
Contingent commissions and commissions on premiums directly billed by
insurance companies are recognized as revenue when the data necessary to
reasonably determine such amounts has been obtained by Gallagher.
Typically, these types of commission revenues cannot be reasonably
determined until the cash or the related detail is received by Gallagher
from the insurance company. A contingent commission is a commission, paid
by an insurance company, that is based on the overall estimated profit
and/or volume of the business placed with that insurance company.
Commissions on premiums billed directly by insurance companies relates to a
large number of small premium transactions, whereby the billing and policy
issuance process is controlled entirely by the insurance company. The
income effects of subsequent premium adjustments are recorded when the
adjustments become known.
Fee revenues are recognized ratably as the services are rendered. Fee
revenues generated from the Insurance Brokerage Services segment primarily
relate to fees negotiated in lieu of commissions, which are recognized in
the same manner as commission revenues. Fee revenues generated from the
Risk Management Services segment relate to third-party claims
administration, loss control and other risk management consulting services,
which are provided over a period of time, typically one year. The income
effects of subsequent fee adjustments are recorded when the adjustments
become known.
Premiums and fees receivable in the accompanying consolidated balance
sheets are net of allowances for estimated policy cancellations and
doubtful accounts. The allowance for estimated policy cancellations was
$3,000,000 and $2,500,000 at December 31, 2002 and 2001, respectively,
which represents a reserve for future reversals in commission and fee
revenues related to the potential cancellation of client insurance policies
that were in force as of year end. The allowance for doubtful accounts was
$2,025,000 and $1,730,000 at December 31, 2002 and 2001, respectively.
Gallagher periodically reviews the adequacy of the allowances for estimated
policy cancellations and doubtful accounts and adjusts them as deemed
necessary.
Investment income and other primarily includes interest income, dividend
income, net realized and unrealized gains (losses), income (loss) from
equity investments, and gains on sales of operations and invested assets.
Interest income is recorded as earned. Dividend income is recognized as
income based on the date that the underlying security trades "ex-dividend."
For revenue recognition policies pertaining to net realized and unrealized
gains (losses), see the accounting policy on investments below. Income
(loss) from equity investments represents Gallagher's proportionate share
of income or losses from investments accounted for using the equity method.
EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the respective
period. Diluted net earnings per share is computed by dividing net earnings
by the weighted average number of common and common equivalent shares
outstanding during the respective period. Common equivalent shares include
incremental shares from dilutive stock options, which are calculated from
the date of grant under the treasury stock method using the average market
price for the period.
CASH AND CASH EQUIVALENTS
Short-term investments, consisting principally of commercial paper and
certificates of deposit that have a maturity of 90 days or less at date of
purchase, are considered cash equivalents.
RESTRICTED CASH
In its capacity as an insurance broker, Gallagher collects premiums from
insureds and, after deducting its commissions and/or fees, remits these
premiums to insurance carriers. Unremitted insurance premiums are held in a
fiduciary capacity until disbursed by Gallagher. Various state and foreign
6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
agencies that regulate insurance brokers provide specific requirements that
limit the type of investments that may be made with such funds.
Accordingly, Gallagher invests these funds in cash, money market accounts,
commercial paper and certificates of deposit. Gallagher earns interest
income on these unremitted funds, which is reported as interest income from
fiduciary funds in the accompanying consolidated statements of earnings.
Premiums collected from insureds, but not yet remitted to insurance
carriers, are restricted as to use by laws in certain states and foreign
jurisdictions in which Gallagher's subsidiaries operate. These unremitted
amounts are reported as restricted cash in the accompanying consolidated
balance sheets, with the related liability reported as premiums payable to
insurance companies. Additionally, one of Gallagher's United Kingdom
subsidiaries is required by Lloyd's of London to meet certain liquidity
requirements.
INVESTMENTS
Investment strategies and marketable securities are considered trading
securities. Investment strategies consist primarily of limited
partnerships, which invest in common and preferred stocks and bonds.
Marketable securities consist primarily of common and preferred stocks and
bonds. Investments designated as trading are carried at fair value in the
accompanying consolidated balance sheets, with unrealized gains and losses
included in the consolidated statements of earnings. The fair value of
investment strategies is determined by reference to the fair values of the
underlying common and preferred stocks and bonds, which are based primarily
on quoted market prices. The fair value of marketable securities is based
primarily on quoted market prices.
Effective September 30, 2002, Gallagher reclassified its marketable
securities portfolio which consists primarily of common and preferred
stocks and bonds, from available for sale to trading based on changes in
its investment philosophy. Prior to September 30, 2002, marketable
securities were considered available for sale and were carried at fair
value in the accompanying consolidated balance sheets, with unrealized
gains and losses, less related deferred income taxes, excluded from net
earnings and reported as accumulated other comprehensive earnings (loss).
Gains and losses were recognized in net earnings when realized using the
specific identification method. The fair value of marketable securities
held as available for sale were based primarily on quoted market prices. As
a result of this reclassification, $425,000 of net pretax unrealized
losses, previously classified in accumulated other comprehensive earnings
(loss), was recognized in earnings before income taxes in the third quarter
of 2002.
FIXED ASSETS
Fixed assets are carried at cost in the accompanying consolidated balance
sheets. Gallagher periodically reviews long-lived assets for impairment
whenever events or changes in business circumstances indicate that the
carrying value of the assets may not be recoverable. Under those
circumstances, if the fair value were less than the carrying amount of the
asset, a loss would be recognized for the difference. Depreciation for
fixed assets is computed using the straight-line method over the following
estimated useful lives:
YEARS
---------------------------------------------------------------------------
Furniture and equipment 3-10 years
Buildings and improvements 3-40 years
Airplanes of the leasing company 15 years
Leasehold improvements Lesser of remaining life of
the asset or life of lease
INTANGIBLE ASSETS
Intangible assets consist of the excess of cost over the value of net
tangible assets of acquired businesses, expiration lists and non-compete
agreements. Expiration lists and non-compete agreements are amortized using
the straight-line method over their estimated useful lives (5 to 15 years
for expiration lists and 5 to 6 years for non-compete agreements). In
accordance with Statement of Financial Accounting Standards No. 142 (SFAS
142), "Goodwill and Other Intangible Assets," goodwill and indefinite lived
assets are not amortized, but are subject to periodic reviews for
impairment (at least annually or more frequently if impairment indicators
arise). Gallagher reviews goodwill and other intangible assets for
impairment periodically and whenever events or changes in business
circumstances indicate that the carrying value of the assets may not be
recoverable. Under those circumstances, if the fair value were less than
the carrying amount of the asset, a loss would be recognized for the
difference.
STOCK-BASED COMPENSATION
At December 31, 2002, Gallagher has four stock-based employee compensation
plans, which are described more fully in Note 10. Gallagher primarily
grants stock options for a fixed number of shares to employees, with an
exercise price equal to the fair value of the underlying shares at the date
of grant. Gallagher accounts for stock option grants under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations
and, accordingly, recognizes no compensation expense for these stock
options granted to employees. The following table illustrates the effect on
net earnings and net earnings per share if Gallagher had applied the fair
value recognition provisions of Statement of Financial Accounting Standards
Board No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
------------------------------------------------------- ---------- ---------- ----------
Net earnings, as reported $ 129,739 $ 125,256 $ 92,955
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards (see Note 10), net of related tax effects (4,013) (6,232) (2,046)
---------- ---------- ----------
Pro forma net earnings $ 125,726 $ 119,024 $ 90,909
========== ========== ==========
Basic net earnings per share -- as reported $ 1.49 $ 1.48 $ 1.11
Basic net earnings per share -- pro forma 1.44 1.40 1.09
Diluted net earnings per share -- as reported 1.41 1.39 1.04
Diluted net earnings per share -- pro forma 1.38 1.33 1.03
As presented in the table above, had Gallagher applied the fair value
recognition provisions of SFAS 123, diluted net earnings per share as
reported would have been reduced by $.03 in 2002, $.06 in 2001 and $.01 in
2000. The pro forma disclosures above only include the effect of options
granted subsequent to January 1, 1995. Accordingly, the effects of applying
the SFAS 123 pro forma disclosures to future periods may not be indicative
of future effects.
7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial assets and liabilities reported in the
accompanying consolidated balance sheets for cash and cash equivalents,
restricted cash, premiums and fees receivable, premiums payable to
insurance companies, accrued salaries and bonuses, accounts payable and
other accrued liabilities, unearned fees and income taxes payable, at
December 31, 2002 and 2001, approximate fair value because of the short
maturity of these instruments. The financial assets that comprise
investment strategies and marketable securities are carried at fair value
in the accompanying consolidated balance sheets. Fair values for other
investments and notes receivable are disclosed in Note 4. The carrying
amount of borrowings outstanding under Gallagher's credit agreement
approximates fair value at December 31, 2002 because the borrowings are at
floating interest rates.
EFFECT OF NEW PRONOUNCEMENTS
GUARANTEES
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (Interpretation 45), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which will significantly change current practice
in the accounting for, and disclosure of, guarantees. Interpretation 45
requires certain guarantees to initially be recorded as a liability at fair
value, which is different from the current practice of recording a
liability only when a loss is probable and estimable, as those terms are
defined in Statement of Financial Accounting Standards No. 5 (SFAS 5),
"Accounting for Contingencies." Interpretation 45 also requires a guarantor
to make significant new disclosures, even when the likelihood of making any
payments under the guarantee is remote, which is also a change from general
current practice.
The Interpretation's disclosure requirements are effective for all
guarantees, regardless of the initiation date, for financial statements of
interim or annual periods ending after December 15, 2002, while the initial
recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued, renewed or modified after December
31, 2002. Gallagher implemented the disclosure requirements of
Interpretation 45 in 2002, which is presented in Note 15. Gallagher is
currently evaluating the impact Interpretation 45 will have on Gallagher's
consolidated financial statements for those current guarantees that are
anticipated to renew in 2003. The adoption of Interpretation 45 could have
a material effect on Gallagher's consolidated operating results or
financial position.
CONSOLIDATION OF PARTIALLY-OWNED ENTITIES
In January 2003, the FASB issued FASB Interpretation No. 46 (Interpretation
46), "Consolidation of Variable Interest Entities." Interpretation 46
generally defines a variable interest entity (VIE) as a corporation,
partnership, trust, or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b)
has equity investors that do not provide sufficient financial resources for
the entity to support its own activities.
Prior to Interpretation 46, a partially owned entity was only consolidated
into the investor company's consolidated financial statements if it was
controlled by the investor company through voting interests. Regardless of
voting interests, Interpretation 46 generally requires a VIE to be
consolidated by an investor company if that VIE's equity is less than 10%
of its assets and the investor company is subject to a majority of the risk
of loss from the VIE's activities or entitled to receive a majority of the
VIE's residual returns or both. Interpretation 46 also requires disclosures
about VIEs in circumstances where the investor company is not required to
consolidate but in which it has a significant variable interest.
The consolidation requirements of Interpretation 46 apply immediately to
VIEs created or invested in after January 31, 2003. The consolidation
requirements apply to entities created or invested in as of January 31,
2003 or earlier, in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
VIE was created or invested in.
Gallagher has a number of investments it believes may be deemed to be VIEs.
These investments include qualified affordable housing and alternative
energy projects intended primarily to be income tax credit generators, a
synthetic fuel facility intended to produce both tax credits and pretax
income, real estate development projects intended to generate gains and
venture capital investees intended to generate equity income and realized
gains. Total assets of these investments approximates $650,000,000 in the
aggregate. Gallagher's maximum exposure to losses related to these
investments is approximately $14,000,000 including net book value, letters
of credit, financial guarantees and funding commitments. Management is
currently evaluating the impact Interpretation 46 will have on Gallagher's
consolidated financial statements. However, management anticipates that the
adoption of Interpretation 46 will not have a material effect on
Gallagher's consolidated net earnings or stockholders' equity.
INTANGIBLE ASSETS
In 2001, the FASB issued Statement of Financial Accounting Standards No.
141 (SFAS 141), "Business Combinations," and SFAS 142. 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 business
combinations accounted for by the purchase method 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 applied only 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 from 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.
8
2. BUSINESS COMBINATIONS
PURCHASE ACQUISITIONS
In 2002, Gallagher acquired substantially all of the net assets of the
following insurance brokerage and risk management firms for its common
stock and/or cash using the purchase accounting method for recording
business combinations (in thousands):
COMMON COMMON RECORDED
SHARES SHARE ESCROW PURCHASE CONTINGENT
2002 PURCHASE ACQUISITIONS ISSUED VALUE CASH PAID DEPOSITED PRICE PAYABLE
- ---------------------------------------- ------ -------- --------- --------- ---------- ----------
Life Plans Unlimited, Inc.
(LPUI), 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.
(NAGH), 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.
(MSII), May 31, 2002 274 8,664 -- 992 9,656 7,500
Roberts & Roberts Insurance
Agency, Inc. (RRIA), May 31, 2002 87 2,773 -- 308 3,081 1,700
Mountain View Software Corporation,
May 31, 2002 15 491 -- 55 546 1,100
Craig M. Ferguson & Co., Inc.,
July 31, 2002 -- -- 2,600 100 2,700 2,300
Grandy Pratt Co.
(GPC), October 31, 2002 393 9,470 -- 1,052 10,522 800
Encore Insurance & Bonding, Inc.
(EIBI), November 30, 2002 51 1,340 1,375 105 2,820 1,500
------ -------- --------- --------- ---------- ----------
1,590 $ 45,693 $ 6,495 $ 5,443 $ 57,631 $ 20,500
====== ======== ========= ========= ========== ==========
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 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 dates of acquisition.
Future payments made under these arrangements will be recorded as upward
adjustments to goodwill when the contingencies are settled.
The following is a summary of the estimated fair values of the assets
acquired at the date of each acquisition based on preliminary purchase
price allocations (in thousands):
FOUR OTHER
LPUI NAGH MSII RRIA GPC EIBI ACQUISITIONS TOTAL
- ---------------------------- -------- -------- --------- ------- -------- --------- ------------ ---------
Current assets $ 107 $ 2,626 $ 7,185 $ 52 $ 5,250 $ 1,230 $ 6,424 $ 22,874
Other noncurrent assets -- -- -- -- 15 -- 320 335
Fixed assets 7 307 196 53 341 -- 153 1,057
Goodwill 2,866 13,455 2,381 2,176 4,915 1,107 3,797 30,697
Expiration lists 1,046 4,480 4,113 691 6,143 1,384 2,343 20,200
Non-compete agreements 504 3,030 2,808 333 1,229 277 603 8,784
-------- -------- --------- ------- -------- --------- ------------ ---------
Total assets acquired 4,530 23,898 16,683 3,305 17,893 3,998 13,640 83,947
Current liabilities 100 2,617 7,027 224 5,991 1,178 7,594 24,731
Other noncurrent liabilities -- 205 -- -- 1,380 -- -- 1,585
-------- -------- --------- ------- -------- --------- ------------ ---------
Total liabilities assumed 100 2,822 7,027 224 7,371 1,178 7,594 26,316
-------- -------- --------- ------- -------- --------- ------------ ---------
Total net assets acquired $ 4,430 $ 21,076 $ 9,656 $ 3,081 $ 10,522 $ 2,820 $ 6,046 $ 57,631
======== ======== ========= ======= ======== ========= ============ =========
These acquisitions allow Gallagher to expand into desirable geographic
locations, further extend its presence in the retail insurance brokerage
services and risk management industries 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 for the 2002 acquisitions was allocated to goodwill, expiration lists
and non-compete agreements in the amounts of $30,697,000, $20,200,000 and
$8,784,000, respectively. With the exception of the intangible assets
related to the MountainView Software Corporation acquisition, which were
allocated to the Risk Management segment, all of the goodwill, expiration
lists, and non-compete agreements were allocated to the Brokerage segment.
Purchase price allocations are preliminarily established at the time of the
acquisition and are subsequently reviewed within the first year of
operation to determine the necessity for allocation adjustments. Expiration
lists and non-compete agreements related to the 2002 acquisitions are
currently being amortized on a straight-line basis over a weighted average
useful life of 14 years and 6 years, respectively. Of the $20,200,000 of
expiration lists and $8,784,000 of non-compete agreements related to the
2002 acquisitions, Gallagher expects $3,727,000 and $880,000, respectively,
to be deductible for tax purposes. Accordingly, $10,530,000 of goodwill and
a corresponding deferred tax liability related to the nondeductible
amortizable intangible assets were established in the Financial Services
segment, which is not included in the above table.
9
2. BUSINESS COMBINATIONS (CONTINUED)
Gallagher's consolidated financial statements for the years ended December
31, 2002 include the operations of these companies from the dates of their
respective acquisitions. The following is a summary of the unaudited
proforma historical results, as if these entities had been acquired at
January 1, 2002 and 2001, respectively (in thousands, except per share
data):
YEARS ENDED DECEMBER 31,
------------------------
2002 2001
------------------------------------------------ ----------- -----------
Gross revenues $ 1,119,978 $ 968,442
Net earnings 130,321 128,028
Basic net earnings per share 1.48 1.48
Diluted net earnings per share 1.41 1.40
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.
In the second quarter of 2002, a 90% owned subsidiary of Gallagher acquired
a leasing company that leases two cargo airplanes to the French postal
service. As part of this acquisition, the subsidiary 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 financial results of
this leasing company into its consolidated financial statements.
POOLINGS OF INTERESTS ACQUISITIONS
In 2001, Gallagher acquired substantially all of the net assets of the
following insurance brokerage firms in exchange for shares of its common
stock: The Galtney Group, Inc. dba Healthcare Insurance Services, 3,330,000
shares; MDM Insurance Associates, Inc., 752,000 shares; The InWest Group,
Inc., 407,000 shares; SKANCO International, Ltd., 263,000 shares;
Nelson/Monarch Insurance Services, Ltd., 109,000 shares: E.S. Susanin,
Inc., 109,000 shares; Burgess & Associates, Inc., 73,000 shares; Madison
Scott & Associates, Inc., 34,000 shares; Midwest Surety Services, Inc.,
32,000 shares; and Central Surety Agency, Inc., 26,000 shares.
These acquisitions were accounted for as poolings of interests and, except
for three of these acquisitions whose results were not significant, the
consolidated financial statements for all periods prior to the acquisition
dates were restated in 2001 to include the operations of these companies.
3. RECLASSIFICATIONS OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
Prior to 2003, commissions paid to sub-brokers on Gallagher's retail P/C
brokerage business were reported as other operating expenses in Gallagher's
consolidated statements of earnings. During 2003, Gallagher determined that
it would be appropriate to report these amounts as offsets to gross
revenues in the consolidated statements of earnings in order to conform to
a more common industry practice. Previously reported financial statements
have been reclassified to conform to this current year presentation and
this reclassification had no impact on the previously reported net earnings
or stockholders' equity. The impact on total revenues and expenses of this
reclassification is presented in the consolidated statements of earnings.
During the first quarter of 2003, Gallagher reviewed its historical segment
disclosures and determined that it would be appropriate to change how the
segment information is reported. Prior to 2003, Gallagher reported three
operating segments, brokerage, risk management and financial services, and
a corporate segment. For the 2003 segment disclosures, Gallagher has only
reported the three operating segments and has allocated the corporate
balances to the three operating segments. Allocations of investment income
and certain expenses are based on reasonable assumptions and estimates.
Reported operating results by segment would change if different methods
were applied. Certain assets are not individually identifiable by segment
and, accordingly, have been allocated based on formulas. Previously
reported segment information has been reclassified to conform to the
current year's presentation.
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 of 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):
AS PREVIOUSLY AMOUNTS AS
DECEMBER 31, 2002 REPORTED RECLASSIFIED 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
Borrowings on line of credit facilities -- limited partnerships -- 3,552 3,552
Total long-term debt -- limited partnerships -- 99,850 99,850
Total stockholders' equity 371,613 -- 371,613
10
4. INVESTMENTS
EQUITY INVESTMENTS
Gallagher's equity investment philosophy generally consists of investing in
tax advantaged and other investment projects that 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, letters of credit, financial
guarantees and funding commitments.
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
DECEMBER 31, 2002 RECEIVABLES GUARANTEES COMMITMENTS
- ------------------------------------------------------ -------------- ---------- -----------
Investment strategies -- trading $ 55,937(1) $ -- $ 6,516
===========
Marketable securities -- trading 14,619(1) -- --
===========
Other investments and notes receivable:
Tax advantaged investments:
Partnership interest $ 56,700 5,880 2,600
Notes receivable 20,752 -- --
Equity investment in Asset Alliance
Corporation 45,526 15,000 --
Venture capital investments:
Equity and partnership interests 27,911 14,931 2,565
Notes receivable 19,966 -- --
Equity investment in Allied World
Assurance Holdings, Ltd. 20,000 -- --
Other Notes receivable 1,251 -- --
----------- ---------- -----------
192,106(1) 35,811 5,165
Less amounts included in other current assets (23,693)
-----------
Total other investments and notes receivable
per the consolidated balance sheet $ 168,413
===========
Net investment assets, letters of credit, financial
guarantees and funding commitments related to
investments accounted for on a consolidated basis 33,166(1) 45,675 7,000
----------- ---------- -----------
Total net investment assets, letters of credit,
financial guarantees and funding commitments
related to Gallagher's investment portfolios $ 295,828(2) $ 81,486 18,681
=========== ========== ===========
DECEMBER 31, 2001
- ---------------------------------------------------------------------------------------------------
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 16,956 -- --
Equity investment in Assets Alliance
Corporation 33,595 25,000 --
Venture capital investments:
Equity and partnership interests 45,328 10,495 5,900
Notes receivable 31,303 -- --
Equity investment in Allied World
Assurance Holdings, 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, financial
guarantees and funding commitments 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(2) $ 74,050 $ 12,550
=========== ========== ===========
- --------------------------------------------------------------------------------
(2) Equals sum of (1)'s above.
11
4. INVESTMENTS (CONTINUED)
Tax advantaged investments represents amounts invested by Gallagher in 32
limited partnerships (36 in 2001) that operate qualified affordable housing
and alternative energy projects that are generating tax benefits to
Gallagher on an ongoing basis. These benefits are in the form of both tax
deductions for operating losses and tax credits. The tax advantaged
investments are primarily accounted for using the effective yield method
and are carried at amortized cost in the consolidated balance sheets. Under
the effective yield method, Gallagher recognizes the tax credits as they
are allocated by the partnerships, which are included, net of amortization
of the investments as a component of the provision for income taxes.
Gallagher's 25% equity investment in Asset Alliance Corporation, an
alternative fund manager, is accounted for using the equity method of
accounting. Accordingly, Gallagher's share of net earnings of this entity
is included in consolidated net earnings.
Venture capital investments at December 31, 2002 and 2001 consist primarily
of minority investments in 14 and 17, respectively, real estate, asset
management, insurance, energy, software and e-commerce companies, only one
of which exceeded $5,000,000 individually at December 31, 2002. Venture
capital investments included limited partnerships and other equity projects
where Gallagher's ownership is between 3% and 50%. As a result, these
investments are accounted for using either the lower of amortized cost/cost
or fair value, or the equity method, whichever is appropriate, depending on
the legal form of Gallagher's ownership interest and the applicable
percentage of the entity owned. For the investments accounted for using the
equity method, Gallagher's share of the net earnings of these entities is
included in consolidated net earnings.
The equity investment in Allied World Assurance Holding, Ltd, represents
Gallagher's minority investment in a Bermuda based insurance and
reinsurance company founded in 2001 by American International Group Inc.,
The Chubb Corporation and affiliates of Goldman, Sachs & Co.
Notes receivable from investees primarily represent secured loans made by
Gallagher of 10 of its investees (12 in 2001). Interest rates on the loans
at December 31, 2002 and 2001 ranged form 4.75% to 10.0%. The carrying
value of these loans at December 31, 2002 and 2001 approximated fair value.
Investments accounted for on a consolidated basis include two real estate
partnerships and an leasing company (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
(Harmony). The airplane leasing company is a 90% owned subsidiary 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 consolidated financial statements because Gallagher's voting
control in each of these investments is greater than 50%.
The following is a summary of the assets and liabilities of Gallagher's
unconsolidated investments, accounted for using the equity method,
reconciled to Gallagher's net carrying value (in thousands):
DECEMBER 31,
---------------------------
2002 2001
--------------------------------------------- ------------ ------------
Net current assets $ 84,321 $ 98,241
Other noncurrent assets 315,859 249,110
Net fixed assets 31,438 25,182
Net intangible assets 86,454 135,104
Debt outstanding (306,711) (327,281)
Other noncurrent liabilities (120,901) (78,735)
Interests of other shareholders (32,864) (45,778)
------------ ------------
Gallagher's net carrying value $ 57,596 $ 55,843
============ ============
12
4. INVESTMENTS (CONTINUED)
The following is a summary of the total debt outstanding and Gallagher's
commitments related to Gallagher's unconsolidated investments accounted for
using the equity method (in thousands):
DECEMBER 31,
--------------------------------------------------------------------
2002 2001
--------------------------------- ---------------------------------
LETTERS OF LETTERS OF
DEBT CREDIT GUARANTEES DEBT CREDIT GUARANTEES
- ----------------------------------------------------------- --------- ---------- ---------- --------- ---------- ----------
Convertible subordinated debentures payable:
Issued in connection with various
acquisitions made by Asset Alliance, fixed
rates of 3.09% to 6.58%, mature 2003 to 2006 $ 40,108 $ -- $ -- $ 42,605 $ -- $ --
Mortgage loan on commercial (office and retail) real
estate complex, secured by the commercial real estate:
Monthly installments through 2011, 30-year
amortization period, fixed rate of 7.40%, balloon
payment in 2011 12,763 -- -- 12,873 -- --
Line of credit facility on commercial (hotel) real
estate complex, secured by the commercial real estate:
Permits borrowing up to $8,750,000, interest only,
variable rate of LIBOR plus 4.00%, floor of 8.00%,
balloon payment April 2003 8,536 500 -- 8,037 500 --
"Warehouse" line of credit facilities of equity
investee, secured by loan portfolio:
Monthly interest-only payments, variable rates of
commercial paper rate plus 1.06%, commercial paper
rate plus .95%, LIBOR plus 3.00%, maturities in
2003 and five-day call 226,481 5,000 -- 238,824 5,000 --
Unsecured bank credit agreement of Asset Alliance:
Due in periodic equal installments through June
2003, variable rate of LIBOR plus 1.00% 14,957 -- 15,000 24,942 -- 25,000
Redevelopment loan on golf course, secured by the
property:
Interest-only, variable rate of LIBOR plus 2.25%,
balloon payment June 2004 3,866 -- -- -- -- --
Other -- 250 -- -- 250 --
--------- ---------- ---------- --------- ---------- ----------
Total debt and Gallagher's contingent commitments for
Gallagher's investments accounted for using the equity
method $ 306,711 $ 5,750 $ 15,000 $ 327,281 $ 5,750 $ 25,000
========= ========== ========== ========= ========== ==========
See Notes 7 and 15 for additional commitments and contingencies.
INVESTMENT INCOME AND OTHER
Significant components of investment income and other are as follows (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------- -------------- -------------- --------------
Interest $ 15,525 $ 18,267 $ 24,148
Dividends 1,839 2,923 2,955
Net change in unrealized gain (loss) on investment strategies 32 (110) 628
Net realized gain on investment strategies 1,518 1,852 1,244
Net realized (loss) gain on marketable securities (10,458) 1,153 134
Net change in unrealized gain (loss) on marketable securities -- trading 194 -- --
Gain on sale of portion of minority interest in investment 11,848 -- --
Realized loss on sale of equity interest in start-up venture (3,547) -- --
Income (loss) from equity investments (8,002) (332) (709)
Write-downs of notes receivables from equity investments (13,149) -- --
Income from tax advantaged investments 35,391 13,591 9,200
Income from consolidated investments 11,147 12,115 3,121
Gains on sales of operations 2,500 2,375 1,823
Other income 4,047 7,267 2,719
-------------- -------------- --------------
Total investment income and other $ 48,885 $ 59,101 $ 45,263
============== ============== ==============
13
4. INVESTMENTS (CONTINUED)
INCOME FROM TAX ADVANTAGED INVESTMENTS
Income from tax advantaged investments in 2002 and 2001 primarily relates
to the sales of interests in three alternative energy related limited
partnerships.
During the third quarter of 2001, Gallagher completed the sale of a 95%
interest in one of its synthetic fuel facilities located in South Carolina.
Under the sale agreement, Gallagher received an initial nonrefundable
down-payment of $6,700,000 and will receive additional installment payments
over time through 2007 based on qualified fuel production generated by the
facility. Gallagher recognized installment gains of $18,208,000 and
$8,242,000 on this sale transaction in 2002 and 2001 respectively.
Gallagher retains a 5% partnership interest in this synthetic fuel
facility.
During the fourth quarter of 2001 and the first and fourth quarters of
2002, Gallagher completed the sales of 95% of its interest in a partnership
that owns a 59.9% interest in a synthetic fuel facility also located in
South Carolina. Gallagher received aggregate down-payments of $4,493,000
and will receive additional installment payments over time through 2007
based on qualified fuel production generated by the facility. The buyer has
the option to put the purchased interests back to Gallagher if certain
adverse tax consequences occur through 2007. In the event of a put,
Gallagher would retain all installment payments made through the put date
and a pro-rated portion of the initial down-payments. Gallagher recognized
installment gains of $15,360,000 and $2,050,000 respectively on this sale
transaction in 2002 and 2001 respectively. Gallagher retains a 3%
partnership interest in this synthetic fuel facility.
Effective December 31, 2000, Gallagher completed the sale of its interests
in several partnerships that operate landfill gas facilities. Gallagher
received an initial down-payment of $8,706,000 and will receive additional
installment payments over time through 2007 based on qualified fuel
production generated by the facilities. Gallagher recognized installment
gains of $1,012,000 and $1,411,000 on this sale transaction in 2002 and
2001 respectively. This transaction had no impact on Gallagher's 2000
results.
In 2000, Gallagher recognized $7,200,000 of income related to the
forfeiture of a non-refundable down-payment from the termination of an
installment sale of a synthetic fuel facility and $2,000,000 of income
related to an investment development fee generated from one of Gallagher's
alternative energy investments.
INCOME FROM CONSOLIDATED INVESTMENTS
Income from consolidated investments in 2002, 2001 and 2000 primarily
represents rental income related to the airplane leasing company (2002
only) and the two real estate partnerships previously discussed. Rental
income of the corporate headquarters limited partnership was $7,165,000,
$7,428,000 and $2,351,000 in 2002, 2001 and 2000, respectively. Total
expenses associated with this income, including interest and depreciation
expenses, were $7,479,000, $7,712,000 and $2,508,000 in 2002, 2001 and
2000, respectively. In 2002, rental income of the airplane leasing company
was $1,943,000 and total expenses associated with this income, including
interest and depreciation expenses, was $2,904,000.
GAINS ON SALES OF OPERATIONS
In 2002, Gallagher sold a P/C book of business and recorded a gain on the
sale of $2,500,000. In 2001, Gallagher sold a benefits administration book
of business that was underperforming and recorded a gain on the sale of
$2,375,000. In 2000, Gallagher sold several underperforming or
geographically undesirable operations and recorded aggregate gains on these
sales of $1,823,000. The net assets sold and the operating results included
in the consolidated statements of earnings related to these operations were
not material to the consolidated financial statements.
OTHER INCOME
Other income in 2002 and 2001 consists primarily of investment related fees
paid to Gallagher for providing letters of credit and financial guarantees
to its investees. Other income in 2000 consists primarily of other income
attributable to the restatement effects of the 2001 and 2000 acquisitions
accounted for as poolings of interests.
MARKETABLE SECURITIES
The following is a summary of marketable securities -- available for sale
(in thousands):
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2001 COST GAINS LOSSES VALUE
--------------------- ----------- ------------ ------------ ---------
Preferred stocks $ 11,567 $ 215 $ 991 $ 10,791
Common stocks 6,635 228 2,161 4,702
Fixed maturities 4,461 20 1,684 2,797
----------- ------------ ------------ ---------
$ 22,663 $ 463 $ 4,836 $ 18,290
=========== ============ ============ =========
The gross realized gains on sales of marketable securities -- available for
sale totaled $527,000, $2,420,000 and $884,000 for 2002,2001 and 2000,
respectively. The gross realized losses totaled $414,000, $690,000 and
$750,000 for 2002,2001 and 2000, respectively. In addition, in 2002 and
2001, Gallagher recognized other-than-temporary impairment losses of
$10,571,000 and $577,000, respectively, related to its marketable
securities -- available for sale portfolio. Effective September 30, 2002,
Gallagher reclassified its marketable securities portfolio from available
for sale to trading based on changes in investment philosophy.
The components of other comprehensive earnings (loss), including the
related income tax effects, consist of the following (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------------------------------------------------- ---------- ---------- ----------
Change in unrealized gain (loss) on available for
sale securities during the year, net of income
taxes of ($481) and $95, respectively $ -- $ (722) $ 143
Reclassifications adjustment for losses (gains)
realized in net earnings during the year, net of
income taxes of $1,749, $397 and $19, respectively 2,624 596 28
---------- ---------- ----------
Net change in unrealized gain (loss) on available
for sale securities during the year, net of income
taxes of $1,749, ($84) and $114, respectively $ 2,624 $ (126) $ 171
========== ========== ==========
14
5. FIXED ASSETS
Major classes of fixed assets consist of the following (in thousands):
DECEMBER 31,
------------------------------
2002 2001
--------------------------------------------- ------------- -------------
Furniture and equipment $ 137,837 $ 122,325
Buildings and improvements 96,678 96,647
Land and improvements 54,306 43,254
Airplanes of leasing company 51,793 --
Leasehold improvements 26,659 21,581
------------- -------------
$ 367,273 $ 283,807
============= =============
6. INTANGIBLE ASSETS
Major classes of amortizable intangible assets of the following (in
thousands):
DECEMBER 31,
------------------------------
2002 2001
- ---------------------------------------------- ------------- -------------
Expiration lists $ 45,150 $ 11,233
Accumulated amortization --
Expiration lists (5,686) (1,444)
------------- -------------
39,464 9,789
Non-compete agreements 13,146 235
Accumulated amortization --
Non-compete agreements (1,765) (158)
------------- -------------
11,381 77
------------- -------------
$ 50,845 $ 9,866
============= =============
Estimated aggregate amortization expense for each of the next five years is
as follows:
2003 $ 7,745
2004 7,576
2005 7,244
2006 6,300
2007 5,625
-------------
Total $ 34,490
=============
The changes in the carrying amount of goodwill for the year ended
December 31, 2002 are as follows (in thousands):
INSURANCE RISK
BROKERAGE MANAGEMENT
SERVICES SERVICES CORPORATE TOTAL
- ------------------------------------------------------ --------- ---------- --------- ---------
Balance as of January 1, 2002 $ 52,475 $ 1,882 $ 1,118 $ 55,475
Goodwill acquired during the year 30,007 690 10,530 41,227
Adjustments related to independent appraisals
and other purchase accounting adjustments (12,849) -- 450 (12,399)
Goodwill written off related to sales of business
units during the year (29) (57) -- (86)
--------- ---------- --------- ---------
Balance as of December 31, 2002 $ 69,604 $ 2,515 $ 12,098 $ 84,217
========= ========== ========= =========
15
7. CREDIT AND OTHER DEBT AGREEMENTS
In 2000, Gallagher and its financial services subsidiary entered into an
unsecured Revolving Credit Agreement (the Credit Agreement), which expires
on September 10, 2003, with a group of five financial institutions. The
Credit Agreement provides for short-term and long-term revolving credit
commitments of $100,000,000 and $50,000,000, respectively. The Credit
Agreement provides for loans and letters of credit. Letters of credit are
limited to $75,000,000, of which up to $50,000,000 may be issued under the
long-term facility and up to $25,000,000 may be issued under the short-term
facility in the determination of net funds available for future borrowing.
The Credit Agreement provides for borrowings to be denominated in either
U.S. dollars or Alternative Currencies, as defined in the Credit Agreement.
In addition, the Credit Agreement has two borrowing options, Domestic Rate
Loans and Eurocurrency Loans, as defined in the 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 .40% for short-term and
long-term revolving credit commitments. The facility fee related to the
Credit Agreement is .10% of the used and unused portions of the short-term
and long-term revolving credit commitments. Terms of the Credit Agreement
include various covenants that require Gallagher to maintain specified
levels of net worth and restrict the amount of payments on certain
expenditures and debt outside the facility. Gallagher was in compliance
with these covenants as of December 31, 2002.
As of December 31, 2002, under the Credit Agreement, Gallagher has
contingently committed to funding $54,250,000 through letter of credit
arrangements related to its corporate insurance programs and several of its
equity and other strategic investments. Also, as of December 31, 2002 and
2001 respectively, there were $25,000,000 and $35,000,000 of short-term
borrowings outstanding under the Credit Agreement. Accordingly, Gallagher
had $70,750,000 available at December 31, 2002 for future borrowing.
The following is a summary of Gallagher's Credit Agreement and limited
partnership consolidated debt (in thousands):
DECEMBER 31,
----------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
LETTERS OF FINANCIAL LETTERS OF FINANCIAL
DEBT CREDIT GUARANTEES DEBT CREDIT GUARANTEES
- ----------------------------------------- ----------- ---------- ---------- ---------- ---------- ----------
Gallagher's line of credit facility:
Periodic payments of interest and
principal, prime for daily borrowings,
.40% plus LIBOR for 30 day plus
borrowings, expires September 2003 $ 25,000 $ -- $ -- $ 35,000 $ -- $ --
Line of credit facility on Harmony:
Permits borrowings up to $17,000,000,
monthly interest-only payments,
variable rate of LIBOR plus 1.45%,
expires 2004 16,996 -- 17,000 3,552 -- 8,500
Line of credit facility on Harmony:
Permits borrowings up to $3,000,000,
quarterly interest-only, rate of prime
with a collar of 3.00% and 6.00%,
expires 2004 -- -- 3,000 -- -- --
Bonds payable on Harmony:
Monthly interest-only payments through
2010, variable rate based on
commercial paper rate, balloon payment
2010 12,410 12,575 -- 12,410 12,575 --
Mortgage loan on Harmony:
Annual installments, fixed rate of
8.00%, expires 2004 5,700 -- -- 8,165 -- --
Equipment loan on Harmony:
Fixed monthly payments, fixed rate of
7.00%, expires 2005 421 -- -- -- -- --
Government-issued community development
bonds on Harmony:
Guaranteed through 2032 -- 5,000 5,100 -- 5,000 5,100
Loan on airplanes leased to French postal
service:
Monthly principal and interest
payments, variable rate of LIBOR plus
1.62%, balloon payment 2006 37,021 -- -- -- -- --
Mortgage loan on Gallagher's corporate
headquarters building:
Monthly installments of principal and
interest, fixed rate of 8.35%, 30 year
amortization, balloon payment 2008 78,583 3,000 -- 79,275 3,000 --
----------- ---------- ---------- ---------- ---------- ----------
$ 176,131 $ 20,575 $ 25,100 $ 138,402 $ 20,575 $ 13,600
=========== ========== ========== ========== ========== ==========
See Note 15 for additional discussion on commitments and contingencies.
16
8. CAPITAL STOCK AND STOCKHOLDERS' RIGHTS PLAN
CAPITAL STOCK
The table below summarizes certain information about Gallagher's capital
stock at December 31, 2002 and 2001 (in thousands, except par value data):
AUTHORIZED
CLASS PAR VALUE SHARES
---------------------------------------------- ----------- ----------
Preferred stock No Par 1,000
Common stock $ 1.00 400,000
STOCKHOLDERS' RIGHTS PLAN
Non-voting Rights, authorized by the Board of Directors on March 10, 1987
and approved by stockholders on May 12, 1987, are outstanding on each share
of Gallagher's outstanding common stock. The Rights Plan was amended in
1996 to extend the expiration of the Rights to May 12, 2007. Under certain
conditions, each Right may be exercised to purchase one share of common
stock at an exercise price of $25. The Rights become exercisable and
transferable after a public announcement that a person or group (as
defined) has acquired 20% or more of the common stock or after commencement
or public announcement of a tender offer for 30% or more of the common
stock. If Gallagher is acquired in a merger or business combination each
Right exercised gives the holder the right to purchase $50 of market value
of common stock of surviving company for the $25 exercise price. The Rights
may be redeemed by Gallagher at $.0125 per Right at any time prior to the
public announcement of the acquisition of 20% of the common stock.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net
earnings per share (in thousands, except per share data):
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------------------------------------------------- ------------ ------------ ------------
Net earnings $ 129,739 $ 125,256 $ 92,955
============ ============ ============
Weighted average number of common shares outstanding 87,303 84,795 83,558
Dilutive effect of stock options using the treasury
stock method 4,558 5,332 5,409
------------ ------------ ------------
Weighted average number of common and common equivalent
shares outstanding 91,861 90,127 88,967
============ ============ ============
Basic net earnings per share $ 1.49 $ 1.48 $ 1.11
Diluted net earnings per share 1.41 1.39 1.04
Options to purchase 252,000, 231,000 and 313,000 shares of common stock
were outstanding at December 31, 2002, 2001 and 2000, respectively, but
were not included in the computation of the dilutive effect of stock
options. These options were excluded from the computation because the
options' exercise prices were greater than the average market price of the
common shares during the respective year and, therefore, would be
antidilutive to earnings per share under the treasury stock method.
17
10. STOCK OPTION PLANS
Gallagher has incentive and nonqualified stock option plans for officers
and key employees of Gallagher and its subsidiaries. The options are
primarily granted at the fair value of the underlying shares at the date of
grant. Options granted under the nonqualified plan primarily become
exercisable at the rate of 10% per year beginning the calendar year after
the date of grant or earlier in the event of death, disability or
retirement. Options expire 10 years from the date of grant, or earlier in
the event of termination of the employee.
In addition, Gallagher has a non-employee directors' stock option plan,
which currently authorizes 1,025,000 shares for grant, with Discretionary
Options granted at the direction of the Compensation Committee and Retainer
Options granted in lieu of the directors' annual retainer. Discretionary
Options shall be exercisable at such rates as shall be determined by the
Committee on the date of grant. Retainer Options shall be cumulatively
exercisable at the rate of 25% of the total Retainer Option at the end of
each full fiscal quarter succeeding the date of grant. The excess of fair
value at the date of grant over the option price for these nonqualified
stock options is considered compensation and is charged against earnings
ratably over the vesting period.
Gallagher also has an incentive stock option plan for its officers and key
employees resident in the United Kingdom. The United Kingdom plan is
essentially the same as Gallagher's domestic employee stock option plans,
with certain modifications to comply with United Kingdom law and to provide
potentially favorable tax treatment for grantees resident in the United
Kingdom.
All of the aforementioned stock option plans provide for the immediate
vesting of all outstanding stock option grants in the event of a change in
control of Gallagher. A change in control of Gallagher is defined as the
acquisition by a person (or entity) of the beneficial ownership of 50% or
more of Gallagher's common stock; the cessation, for any reason, of a
majority of directors of Gallagher to serve as directors during any two
year period; or the approval by the stockholders of Gallagher of the sale
of substantially all of the assets of Gallagher.
For purposes of the pro forma disclosures (see Note 1), the estimated fair
values of the stock option grants are amortized to expense over the
options' expected lives. The fair value of stock options at the date of
grant was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------------------------------- ------ ------ ------
Dividend yield 3.0% 3.0% 2.5%
Risk-free interest rate 3.8% 5.0% 5.1%
Volatility 26.1% 24.5% 24.6%
Expected life (in years) 6.0 5.3 6.0
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because Gallagher's employee and director
stock options have characteristics significantly different from those of
traded options, and because changes in the selective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee and director stock options.
The following is a summary of Gallagher's stock option activity and related
information (in thousands, except exercise price data):
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
----------------------------------- ------ -------- ------ -------- ------ --------
Beginning balance 14,117 $ 13.63 14,419 $ 10.43 15,800 $ 8.05
Granted 2,342 24.30 2,842 24.95 2,642 19.98
Exercised (1,896) 8.16 (3,007) 9.00 (3,811) 7.22
Canceled (113) 17.15 (137) 14.17 (212) 9.68
------ -------- ------ -------- ------ --------
Ending balance 14,450 $ 16.05 14,117 $ 13.63 14,419 $ 10.43
====== ======== ====== ======== ====== ========
Exercisable at end of year 5,107 4,808 5,229
====== ====== ======
Options with respect to 6,686,000 shares were available for grant at
December 31, 2002.
18
10. STOCK OPTION PLANS (CONTINUED)
Other information regarding stock options outstanding and exercisable at
December 31, 2002 is summarized as follows (in thousands, except exercise
price data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
------------------------------------ ----------- --------------- -------- ----------- --------
$ 1.11 -- $ 8.44 3,627 2.09 $ 7.87 2,353 $ 7.89
8.56 -- 12.36 3,661 4.75 9.52 1,709 9.61
12.56 -- 22.70 3,834 8.47 20.41 468 17.51
22.87 -- 36.94 3,328 8.43 27.10 577 26.01
-------- ------- ----------- --------------- -------- ----------- --------
$ 1.11 -- $ 36.94 14,450 5.91 $ 16.05 5,107 $ 11.39
=========== =============== ======== =========== ========
11. DEFERRED COMPENSATION
In 2001, Gallagher implemented the Deferred Equity Participation Plan,
which is a nonqualified 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
normally may not 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's common stock.
In 2002 and 2001, Gallagher contributed $4,031,000 and $4,000,000,
respectively, to the plan through the issuance of 123,000 and 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
Arrangement Where Amounts Earned are Held in Rabbi Trust and Invested."
EITF 97-14 requires that the Gallagher common stock issued to the trust be
value 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 ratably over the
vesting period of the participants. During 2002 and 2001, $925,000 and
$562,000, respectively, were charged to expense related to this plan.
12. 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 $8,972,000
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 $1,059,000 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 2002, $2,508,000 was
charged to expense related to these awards.
13. RETIREMENT PLANS
Gallagher has a noncontributory defined benefit pension plan that covers
substantially all domestic employees who have attained a specified age and
one year of employment. Benefits under the plan are based on years of
service and salary history. Plan assets consist primarily of common stocks
and bonds invested under the terms of a group annuity contract managed by a
life insurance company.
Gallagher accounts for the defined benefit pension plan in accordance with
Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers'
Accounting for Pensions." The difference the present value of the pension
benefit obligation at the date of adoption of SFAS 87 and the fair value of
plan assets at that date is being amortized on a straight-line basis over
the average service period of employees expected to receive benefits.
19
13. RETIREMENT PLANS (CONTINUED)
A reconciliation of the beginning and ending balances of the pension
benefit obligation and fair value of plan assets and the funded status of
the plan is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------
2002 2001
----------------------------------------------- ----------- -----------
CHANGE IN PENSION BENEFIT OBLIGATION:
Pension benefit obligation at beginning of year $ 98,787 $ 92,792
Service cost 11,368 9,108
Interest cost 7,575 6,316
Plan amendments 2,958 --
Net actuarial loss (gain) 4,558 (7,711)
Benefits paid (1,960) (1,718)
----------- -----------
Pension benefit obligation at end of year 123,286 98,787
----------- -----------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 66,231 66,137
Actual return on plan assets (6,129) (3,481)
Company contributions 24,573 5,293
Benefits paid (1,960) (1,718)
----------- -----------
Fair value of plan assets at end of year 82,715 66,231
----------- -----------
Funded status of the plan (underfunded) (40,571) (32,556)
Unrecognized net actuarial loss (gain) 14,080 (3,069)
Unrecognized prior service cost 3,345 772
Unrecognized transition obligation 219 275
----------- -----------
Accrued pension benefit cost $ (22,927) $ (34,578)
=========== ===========
The components of the net periodic pension benefit cost for the plan
consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
------------------------------------------ ----------- ----------- -----------
Service cost -- benefits earned during the
year $ 11,368 $ 9,108 $ 7,754
Interest cost on benefit obligation 7,575 6,316 6,002
Expected return on plan assets (6,462) (5,911) (5,935)
Recognized net actuarial gain -- (412) (495)
Amortization of prior service cost 385 110 110
Amortization of transition obligation 56 56 56
Other 26 26 26
----------- ----------- -----------
Net periodic pension benefit cost $ 12,948 $ 9,293 $ 7,518
=========== =========== ===========
The following assumptions were used in determining the plan's pension
benefit obligation:
2002 2001 2000
---------------------------------------------- ---- ---- ----
Discount rate 6.75% 7.50% 7.50%
Weighted average rate of increase in
future compensation levels 6.30% 6.50% 6.50%
Expected long-term rate of return on assets 8.50% 9.00% 9.00%
Gallagher has a qualified contributory savings and thrift (401(k)) plan
covering the majority of its domestic employees. Gallagher's matching
contributions (up to a maximum of 2% of eligible compensation) are at the
discretion of Gallagher's Board of Directors and may not exceed the maximum
amount deductible for federal income tax purposes. Gallagher contributed
$5,347,000, $4,605,000, and $4,638,000 in 2002, 2001 and 2000,
respectively. Effective January 1, 1999, Gallagher implemented a
nonqualified deferred compensation plan for certain employees who, due to
Internal Revenue Service rules, cannot take full advantage of the Gallagher
matching contributions under the savings and thrift plan. The plan permits
these employees to annually elect to defer a portion of their compensation
until their retirement. Gallagher's matching contributions to this plan are
also at the discretion of Gallagher's Board of Directors. Gallagher
contributed $430,000, $471,000 and $316,000 to the plan in 2002, 2001, and
2000, respectively. The fair value of the plan's assets as of December 31,
2002, and 2001 respectively, including employee contributions and
investment earnings thereon, was $16,040,000 and $12,461,000, respectively,
and has been included in other noncurrent assets and the corresponding
liability has been included in other noncurrent liabilities in the
accompanying consolidated balance sheets.
Gallagher also has a foreign defined contribution plan that provides for
basic contributions by Gallagher and voluntary contributions by employees
resident in the United Kingdom, which are matched 100% by Gallagher, up to
a maximum of 5% of eligible compensation. Net expense for foreign
retirement plans amounted to $4,332,000 in 2002, $3,392,000 in 2001 and
$2,921,000 in 2000.
20
14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In 1992, Gallagher amended its health plan to eliminate retiree coverage,
except for retirees and those employees who had already attained as
specified age and length of services at the time of the amendment. The
retiree health plan is contributory, with contributions adjusted annually,
and is funded on a pay-as-you-go basis.
A reconciliation of the beginning and ending balance of the postretirement
benefit obligation and the funded status of the plan is as follows (in
thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
2002 2001
------------------------------------------------------- ------------- -------------
CHANGE IN POSTRETIREMENT BENEFIT OBLIGATION:
Postretirement benefit obligation at beginning of year $ 6,861 $ 6,852
Service cost -- --
Interest cost 416 493
Net actuarial gain (798) (280)
Benefits paid (299) (204)
------------- ------------
Postretirement benefit obligation at end of year 6,180 6,861
Fair value of plan assets at beginning and end of year -- --
------------- ------------
Funded status of the plan (underfunded) (6,180) (6,861)
Unrecognized net actuarial gain (5,685) (5,306)
Unrecognized prior service cost -- --
Unrecognized transition obligation 5,116 5,628
------------- ------------
Accrued postretirement benefit cost $ (6,749) $ (6,539)
============= ============
The components of the net periodic postretirement benefit cost include the
following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------------------------------------ ------------ ------------- ------------
Service cost -- benefits earned during the
year $ -- $ -- $ --
Interest cost on benefit obligation 416 493 491
Amortization of transition obligation 512 512 512
Amortization of net actuarial gain (419) (331) (325)
------------ ------------- ------------
Net periodic postretirement benefit cost $ 509 $ 674 $ 678
============ ============= ============
The discount rate used to measure the postretirement benefit obligation was
6.75% at December 31, 2002, and 7.50% at December 31,2001 and 2000. The
transition obligation is being amortized over a 20-year period. For
measurement purposes, a 6.50% annual rate of increase in the per capita
cost of covered healthcare benefits was assumed for 2003. This rate was
assumed to gradually scale down to 4.50% for 2009 and remain at that level
thereafter. The assumed healthcare cost trend rate has a significant effect
on the amounts reported and disclosed herein. A one percentage point change
in the assumed healthcare cost trend rate would have the following effects
(in thousands):
ONE PERCENTAGE POINT
-----------------------------
INCREASE (DECREASE)
------------------------------------------------------- ------------- ------------
Effect on the net periodic postretirement benefit cost
in 2002 $ 44 $ (37)
Effect on the postretirement benefit obligation at
December 31, 2002 681 (590)
21
15. COMMITMENTS, CONTINGENCIES AND FINANCIAL GUARANTEES
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.
Total rent expense, including rent relating to cancelable leases and leases
with initial terms of less than one year, amounted to $49,900,000 in 2002,
$46,721,000 in 2001 and $40,231,000 in 2000.
In connection with its investing and operating activities, Gallagher has
entered into certain contractual obligations as well as commitments to fund
certain investments. Gallagher's future cash payments, excluding interest,
associated with its contractual obligations pursuant to the Credit
Agreement, limited partnership debt obligations and operating leases as of
December 31, 2002 are as follows (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER TOTAL
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
Credit Agreement $ 25,000 $ - $ - $ - $ - $ - $ 25,000
Florida real estate limited
partnership debt 7,857 15,161 99 - - 12,410 35,527
Corporate headquarters limited
partnership mortgage loan 746 811 882 958 1,041 74,145 78,583
Airplane leasing company debt 2,180 2,351 2,553 29,937 - - 37,021
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total debt obligations 35,783 18,323 3,534 30,895 1,041 86,555 176,131
Operating leases 51,006 46,237 40,593 27,008 25,041 41,019 230,904
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 86,789 $ 64,560 $ 44,127 $ 57,903 $ 26,082 $ 127,574 $ 407,035
========== ========== ========== ========== ========== ========== ==========
The debt of the limited partnerships and the airplane leasing company
disclosed in the table above represents the debt of three of Gallagher's
investments that are accounted for on a consolidated basis in the
accompanying consolidated balance sheets. This debt is secured by the
partnerships' assets and supports their operations. Approximately $32.4
million of the limited partnership debt is recourse to Gallagher through
the letters of credit and financial guarantees which are included below.
Gallagher's commitments associated with outstanding letters of credit
(LOC), financial guarantees and funding commitments as of December 31, 2002
are as follows (all dollar amounts in table and related footnotes are in
thousands):
COMPENSATION
DESCRIPTION AND PURPOSE TYPE MATURITY TRIGGER COLLATERAL TO GALLAGHER
- -------------------------------------- ---------- ---------- ---------------------------- ---------- ------------------
INVESTMENTS
Investment strategies -- trading
Funding commitments to Commitment 2004 Agreed conditions met None None
two funds
Marketable securities -- trading
Funding commitment to investee Commitment 2004 Agreed conditions met None None
Tax advantaged investments
Credit support for investee's loan Guarantee 2003 Investee defaults on loan None None
to develop landfill gas projects
"Reclamation" collateral for land LOC After 2007 Activities cease and (3) None
owned by Gallagher Gallagher does not proceed
with the reclamation process
Funding commitments to two Commitment 2004 Agreed conditions met None None
synthetic fuel facilities
Asset Alliance Corporation Guarantee 2003 Asset Alliance None $2,000 fee
Credit support for Asset Alliance's defaults on loan received in the
loan used for acquisitions second quarter
of 2002
Venture capital investments
Credit support for investee's debt LOC 2003 and Investee defaults on loan (4) None
facility used to acquire and after 2007
develop landfill gas sites
Collateral for investee's debt LOC 2003 Investee defaults on loan None None
on landfill gas site capital
improvement projects
Credit support for e-commerce LOC 2003 Investee defaults None None
investee office space lease on rent payments
Credit support for franchise finance LOC after 2007 Investee defaults on loan None 1.75% per year
investee "warehouse" loans on amount of
guarantee
Credit support for property 3 LOCs 2004 Investee defaults on loan (4) 18.5% of two
developer investee loans used projects and 37.0%
to purchase and develop retail of one project
properties, two of which are
anchored by a large, national,
well-known retailer
Credit support for investee's LOC after 2007 Investee defaults on mortgage None None
mortgage on hotel
Funding commitment to investee Commitment 2003 Agreed conditions met None None
MAXIMUM LIABILITY
DESCRIPTION AND PURPOSE EXPOSURE RECORDED
- -------------------------------------- ------------------- ----------------
INVESTMENTS
Investment strategies -- trading
Funding commitments to $ 6,516 $ --
two funds
Marketable securities -- trading
Funding commitment to investee 2,365 --
Tax advantaged investments
Credit support for investee's loan 1,500(1) --
to develop landfill gas projects
"Reclamation" collateral for land 4,380 --
owned by Gallagher
Funding commitments to two 2,600 --
synthetic fuel facilities
Asset Alliance Corporation
Credit support for Asset Alliance's 15,000 --
loan used for acquisitions
Venture capital investments
Credit support for investee's debt 4,100 --
facility used to acquire and
develop landfill gas sites
Collateral for investee's debt 645 --
on landfill gas site capital
improvement projects
Credit support for e-commerce 250 250
investee office space lease
Credit support for franchise finance
investee "warehouse" loans 5,000 --
Credit support for property 4,450 --
developer investee loans used
to purchase and develop retail
properties, two of which are
anchored by a large, national,
well-known retailer
Credit support for investee's 500 --
mortgage on hotel
Funding commitment to investee 200 --
22
15. COMMITMENTS, CONTINGENCIES AND FINANCIAL GUARANTEES (CONTINUED)
COMPENSATION
DESCRIPTION AND PURPOSE TYPE MATURITY TRIGGER COLLATERAL TO GALLAGHER
- --------------------------------------- ------------ ---------- ---------------------------- ---------- ------------------
Investments accounted for on a
consolidated basis
Credit support for Gallagher's LOC 2005 Manager (partial owner) None None
corporate headquarters defaults on mortgage payment
building mortgage
Credit support for Harmony 3 LOCs and 2004 Harmony or Community (5) (6)
property development bonds, 2 Guarantees through Development District
loans and lines of credit used 2032 default on payments
for project development
Funding commitment to Harmony Commitment 2004 Agreed conditions met None None
OTHER
Credit support for deductibles due LOC After 2007 Gallagher does not reimburse None None
by Gallagher on its own the insurance company for
insurance coverages deductibles the insurance
company advances on
behalf of Gallagher
Credit support for deductibles due 2 LOCs 2004 and Client does not fund its (7) Outstanding
by client of Gallagher on the after 2007 deductibles guarantee
client's insurance plan multiplied by
the current prime
interest rate
Credit enhancement for two of 2 LOCs 2003 and Dissolution or catastrophic (8) Reimbursement
Gallagher's Bermuda captive after 2007 financial results of the of LOC fees
insurance operations to meet operations
minimum statutory capital
requirements
Credit support for Gallagher's LOC 2006 Subsidiary defaults on its None None
subsidiary's line of credit payments
MAXIMUM LIABILITY
DESCRIPTION AND PURPOSE EXPOSURE RECORDED
- -------------------------------------- ------------ ----------
Investments accounted for on a
consolidated basis
Credit support for Gallagher's $ 3,000 $ --
corporate headquarters
building mortgage
Credit support for Harmony 42,675(2) --
property development bonds,
loans and lines of credit used
for project development
Funding commitment to Harmony 7,000 --
OTHER
Credit support for deductibles due 5,197 3,200
by Gallagher on its own
insurance coverages
Credit support for deductibles due 5,263 --
by client of Gallagher on the
client's insurance plan
Credit enhancement for two of 3,330 --
Gallagher's Bermuda captive
insurance operations to meet
minimum statutory capital
requirements
Credit support for Gallagher's 560 560
subsidiary's line of credit
------------ ----------
$ 114,531 $ 4,010
============ ==========
(1) Plus interest and collection expenses.
(2) Plus interest and collection expenses on $20,000 of the total.
(3) The land.
(4) The property secures the loan.
(5) A portion of the property secures one of the lines of credit and the
two bond issues.
(6) Gallagher is in the process of negotiating a retroactive, annual,
cumulative fee for $30,100 of the LOCs and guarantees. The remaining
$12,575 LOC has a fee of $750 plus an interest rate differential.
(7) Lien on real property with an appraised value of approximately
$12,500.
(8) The majority owners of the operation that has $3,100 of the LOCs
pledge their percentage ownership portion of any draw.
Since commitments may expire unused, the amounts presented in the table
above do not necessarily reflect the actual future cash funding
requirements of Gallagher.
LITIGATION
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. Gallagher's financial services subsidiary 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.
See Notes 4 and 7 for additional discussion on commitments and
contingencies.
23
16. INCOME TAXES
Significant components of earnings before income taxes and the provision
for income taxes are as follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------------------------------------------------- ---------- ---------- ----------
Earnings before income taxes:
Domestic $ 171,528 $ 133,350 $ 125,874
Foreign, principally United Kingdom, Australia and
Bermuda 13,814 8,503 7,865
---------- ---------- ----------
$ 185,342 $ 141,853 $ 133,739
========== ========== ==========
Provision for income taxes:
Federal:
Current $ 44,950 $ 78,995 $ 63,919
Deferred (5,691) (73,552) (33,305)
---------- ---------- ----------
39,259 5,443 30,614
---------- ---------- ----------
State and local:
Current 14,213 20,240 10,540
Deferred (1,203) (10,507) (4,683)
---------- ---------- ----------
13,010 9,733 5,857
---------- ---------- ----------
Foreign:
Current 2,731 1,518 4,787
Deferred 603 (97) (474)
---------- ---------- ----------
3,334 1,421 4,313
---------- ---------- ----------
Total provision for income taxes $ 55,603 $ 16,597 $ 40,784
========== ========== ==========
A reconciliation of the provision for income taxes with the United States
federal income tax rate is as follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ ------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Federal statutory rate $ 64,870 35.0 $ 49,649 35.0 $ 46,809 35.0
State income taxes --
net of federal benefit 8,456 4.6 6,326 4.5 3,807 2.8
Pre-acquisition earnings of
pooled companies taxed
to previous owners -- -- (699) (0.5) (293) (0.2)
Foreign taxes (1,509) (0.8) (1,561) (1.1) 1,570 1.2
Affordable housing and
alternative energy tax credits (19,059) (10.3) (40,125) (28.3) (26,341) (19.7)
Amortization expense of affordable
housing and alternative energy
investment, net of tax benefit 2,421 1.3 4,821 3.4 14,462 10.8
Other -- net 424 0.2 (1,814) (1.3) 770 0.6
---------- ---------- ---------- ---------- ---------- ----------
Provision for income taxes $ 55,603 30.0 $ 16,597 11.7 $ 40,784 30.5
========== ========== ========== ========== ========== ==========
24
16. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of Gallagher's deferred tax liabilities and assets
are as follows (in thousands):
DECEMBER 31,
-----------------------
2002 2001
-------------------------------------------------------------- ---------- ----------
Deferred tax assets:
Alternative minimum tax (AMT) and other credit carryforwards $ 46,617 $ 42,724
Accrued and unfunded compensation and employee benefits 44,265 41,968
Investment-related partnerships 40,319 46,370
Accrued liabilities 23,960 13,922
Unrealized investment loss -- 1,749
Other 4,822 5,675
---------- ----------
Total deferred tax assets 159,983 152,408
Valuation allowance for deferred tax assets -- --
---------- ----------
Deferred tax assets 159,983 152,408
---------- ----------
Deferred tax liabilities:
Nondeductible amortizable intangible assets 10,277 450
Accrued and unfunded compensation and employee benefits 956 1,209
Accrued liabilities 5,095 2,900
Investment-related partnerships 7,811 5,852
---------- ----------
Total deferred tax liabilities 24,139 10,411
---------- ----------
Net deferred tax assets $ 135,844 $ 141,997
========== ==========
At December 31, 2002 and 2001, $57,622,000 and $53,145,000 respectively, of
deferred tax assets have been included in other current assets in the
accompanying consolidated balance sheets. AMT credits and other have an
indefinite and 20 year life, respectively. Gallagher expects to fully
utilize the amounts carried forward. During the period from 1994 to 1996,
Gallagher provided for United States federal income taxes on the
undistributed earnings of its foreign subsidiaries. Due to changes in the
United States federal income tax laws effective in 1997, Gallagher no
longer provides for United States federal income taxes on the undistributed
earnings ($42,000,000 at December 31, 2002) of certain foreign subsidiaries
which are considered permanently invested outside of the United States. The
amount of unrecognized deferred tax liability on these undistributed
earnings is $9,000,000 at December 31, 2002.
17. QUARTERLY OPERATING RESULTS (UNAUDITED)
Quarterly operating results for 2002 and 2001 were as follows (in
thousands, except per share data):
1ST 2ND 3RD 4TH
- ----------------------------------- ---------- ---------- ---------- ----------
2002
Total revenues $ 238,996 $ 266,781 $ 256,508 $ 297,922
Total expenses 190,191 218,249 223,208 243,217
Earnings before income taxes 48,805 48,532 33,300 54,705
Net earnings 33,675 34,461 23,310 38,293
Basic earnings per share .39 .39 .26 .43
Diluted net earnings per share .37 .37 .25 .42
2001
Total revenues $ 209,246 $ 205,132 $ 225,807 $ 247,844
Total expenses 175,173 176,360 183,788 210,855
Earnings before income taxes 34,073 28,772 42,019 36,989
Net earnings 27,083 23,197 41,903 33,073
Basic earnings per share .32 .27 .49 .39
Diluted net earnings per share .30 .26 .47 .36
25
18. SEGMENT INFORMATION
Gallagher has identified three operating segments: Brokerage, Risk
Management and Financial Services. The Brokerage Segment represents three
operating divisions: Retail Brokerage Services, Wholesale Brokerage
Services and Gallagher Benefit Services. The Brokerage segment, for
commission or fee compensation, places commercial property/casualty and
employee benefit-related insurance on behalf of its customers. The Risk
Management segment provides property/casualty and health claim third-party
administration, loss control and risk management consulting and insurance
property appraisals. Third-party administration is principally the
management and processing of claims for self-insurance programs of
Gallagher's clients or clients of other brokers. The Financial Services
segment is responsible for managing Gallagher's diversified investment
portfolio to maximize long-term after-tax returns.
Allocations of investment income and certain expenses are based on
assumptions and estimates. Reported operating results by segment would
change if different methods were applied. Certain assets are not
individually identifiable by segment and, accordingly, have been allocated
based on formulas. Financial information relating to Gallagher's operating
segments for 2002, 2001 and 2000 is as follows (in thousands):
RISK FINANCIAL
BROKERAGE MANAGEMENT SERVICES TOTAL
- ------------------------------------------ -------------- -------------- -------------- ---------------
YEAR ENDED DECEMBER 31, 2002
Revenues:
Commissions $ 662,857 $ -- $ -- $ 662,857
Fees 109,046 280,434 -- 389,480
Investment income and other 9,240 817 38,828 48,885
-------------- -------------- -------------- --------------
Gross revenues 781,143 281,251 38,828 1,101,222
Less brokerage (41,015) -- -- (41,015)
-------------- -------------- -------------- --------------
Total revenues $ 740,128 $ 281,251 $ 38,828 $ 1,060,207
============== ============== ============== ==============
Earnings (loss) before income taxes $ 148,661 $ 31,459 $ 5,222 $ 185,342
Provision for income taxes 44,564 9,469 1,570 55,603
-------------- -------------- -------------- --------------
Net earnings (loss) $ 104,097 $ 21,990 $ 3,652 $ 129,739
============== ============== ============== ==============
Income (loss) from equity investments $ (581) $ -- $ (7,421) $ (8,002)
Depreciation expense 10,924 9,316 5,544 25,784
Amortization expense 6,606 40 -- 6,646
Interest expense 183 123 9,182 9,488
Net foreign exchange gain (loss) 265 (10) -- 255
- -----------------------------------------------------------------------------------------------------------------
Revenues:
United States $ 660,976 $ 256,726 $ 36,939 $ 954,641
Foreign, principally United Kingdom,
Australia and Bermuda 79,152 24,525 1,889 105,566
-------------- -------------- -------------- --------------
Total revenues $ 740,128 $ 281,251 $ 38,828 $ 1,060,207
============== ============== ============== ==============
AT DECEMBER 31, 2002
Identifiable assets:
United States $ 1,259,675 $ 53,500 $ 598,062 $ 1,911,237
Foreign, principally United Kingdom,
Australia and Bermuda 483,464 20,079 48,794 552,337
-------------- -------------- -------------- --------------
Total Identifiable assets $ 1,743,139 $ 73,579 $ 646,856 $ 2,463,574
============== ============== ============== ==============
Goodwill -- net $ 70,722 $ 2,515 $ 10,980 $ 84,217
Amortizable Intangible assets -- net 50,195 650 -- 50,845
Identifiable assets related to equity
investments 375 -- 58,422 58,797
26
18. SEGMENT INFORMATION (CONTINUED)
RISK FINANCIAL
BROKERAGE MANAGEMENT SERVICES TOTAL
- ------------------------------------------ -------------- -------------- -------------- ---------------
YEAR ENDED DECEMBER 31, 2001
Revenues:
Commissions $ 537,933 $ -- $ -- $ 537,933
Fees 62,342 263,612 -- 325,954
Investment income and other 12,070 1,084 45,947 59,101
-------------- -------------- -------------- --------------
Gross revenues 612,345 264,696 45,947 922,988
Less brokerage (34,959) -- -- (34,959)
-------------- -------------- -------------- --------------
Total revenues $ 577,386 $ 264,696 $ 45,947 $ 888,029
============== ============== ============== ==============
Earnings (loss) before income taxes $ 117,490 $ 31,327 $ (6,964) $ 141,853
Provision for income taxes 13,502 3,895 (800) 16,597
-------------- -------------- -------------- --------------
Net earnings (loss) $ 103,988 $ 27,432 $ (6,164) $ 125,256
============== ============== ============== ==============
Income (loss) from equity investments $ (470) $ -- $ 138 $ (332)
Depreciation expense 9,107 7,217 3,317 19,641
Amortization expense 3,265 240 -- 3,505
Interest expense 199 150 10,128 10,477
Net foreign exchange gain (loss) (464) (32) -- (496)
- ------------------------------------------------------------------------------------------------------------------
Revenues:
United States $ 526,083 $ 242,403 $ 43,916 $ 812,402
Foreign, principally United Kingdom,
Australia and Bermuda 51,303 22,293 2,031 75,627
-------------- -------------- -------------- --------------
Total revenues $ 577,386 $ 264,696 $ 45,947 $ 888,029
============== ============== ============== ==============
AT DECEMBER 31, 2001
Identifiable assets:
United States $ 1,164,136 $ 47,203 $ 538,642 $ 1,749,981
Foreign, principally United Kingdom,
Australia and Bermuda 375,531 16,481 3,349 395,361
-------------- -------------- -------------- --------------
Total Identifiable assets $ 1,539,667 $ 63,684 $ 541,991 $ 2,145,342
============== ============== ============== ==============
Goodwill -- net $ 53,143 $ 1,882 $ 450 $ 55,475
Amortizable Intagible assets - net 9,866 -- -- 9,866
Identifiable assets related to equity
investments 1,175 -- 49,315 50,490
YEAR ENDED DECEMBER 31, 2000
Revenues:
Commissions $ 472,878 $ -- $ -- $ 472,878
Fees 51,678 230,761 -- 282,439
Investment income and other 17,333 1,534 26,396 45,263
-------------- -------------- -------------- --------------
Gross revenues 541,889 232,295 26,396 800,580
Less brokerage (26,048) -- -- (26,048)
-------------- -------------- -------------- --------------
Total revenues $ 515,841 $ 232,295 $ 26,396 $ 774,532
============== ============== ============== ==============
Earnings (loss) before income taxes $ 97,442 $ 31,809 $ 4,488 $ 133,739
Provision for income taxes 28,822 9,964 1,998 40,784
-------------- -------------- -------------- --------------
Net earnings (loss) $ 68,620 $ 21,845 $ 2,490 $ 92,955
============== ============== ============== ==============
Income from equity investments $ (384) $ -- $ (325) $ (709)
Depreciation expense 8,971 5,875 934 15,780
Amortization expense 3,547 99 -- 3,646
Interest expense 517 174 2,387 3,078
Net foreign exchange gain (loss) (313) 20 -- (293)
- ------------------------------------------------------------------------------------------------------------------
Revenues:
United States $ 472,528 $ 210,384 $ 25,771 $ 708,683
Foreign, principally United Kingdom,
Australia and Bermuda 43,313 21,911 625 65,849
-------------- -------------- -------------- --------------
Total revenues $ 515,841 $ 232,295 $ 26,396 $ 774,532
============== ============== ============== ==============
AT DECEMBER 31,2000
Identifiable assets:
United States $ 875,876 $ 47,919 $ 426,163 $ 1,349,958
Foreign, principally United Kingdom,
Australia and Bermuda 256,630 13,744 6,439 276,813
-------------- -------------- -------------- --------------
Total identifiable assets $ 1,132,506 $ 61,663 $ 432,602 $ 1,626,771
============== ============== ============== ==============
Goodwill -- net $ 10,975 $ 2,122 $ -- $ 13,097
Amortizable intangible assets -- net 2,992 -- -- 2,992
Identifiable assets related to equity
investments 945 -- 34,596 35,541
27