UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission file number 0-7201

BROWN & BROWN, INC.

(Exact Name of Registrant as Specified in its Charter)

Florida	59-0864469
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

220 S. Ridgewood Ave., Daytona Beach, FL	32114
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (386) 252-9601

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x        No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x        No  ¨

The number of shares of the Registrant’s common stock, $.10 par value, outstanding as of November 12, 2003, was 68,645,915.

BROWN & BROWN, INC.

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002	3
	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 6.	Exhibits and Reports on Form 8-K	20
SIGNATURE		22

2

PART 1—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS (UNAUDITED)

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)

	For the three months ended September 30,					For the nine months ended September 30,
	2003		2002			2003		2002
REVENUES
Commissions and fees	$	132,146	$	109,799		$	413,656	$	334,887
Investment income		309		924			1,084		2,222
Other income (loss), net		1,090		(66	)		1,399		(514	)
Total revenues		133,545		110,657			416,139		336,595
EXPENSES
Employee compensation and benefits		66,882		53,527			201,215		164,531
Non-cash stock grant compensation		375		1,463			1,824		3,025
Other operating expenses		17,479		15,815			56,114		47,173
Amortization		4,209		3,435			12,963		10,194
Depreciation		2,116		1,859			6,062		5,319
Interest		858		1,162			2,811		3,556
Total expenses		91,919		77,261			280,989		233,798
Income before income taxes and minority interest		41,626		33,396			135,150		102,797
Income taxes		15,575		12,830			50,629		39,550
Minority interest, net of income tax		—		388			—		1,506
NET INCOME	$	26,051	$	20,178		$	84,521	$	61,741
Net income per share:
Basic	$	0.38	$	0.30		$	1.24	$	0.92
Diluted	$	0.38	$	0.29		$	1.23	$	0.91
Weighted average number of shares outstanding:
Basic		68,532		68,266			68,327		66,979
Diluted		68,995		68,994			68,944		67,745
Dividends declared per share	$	0.0575	$	0.0475		$	0.1725	$	0.1425

See accompanying notes to condensed consolidated financial statements.

3

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except per share data)

	September 30, 2003		December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	68,743	$	68,050
Restricted cash		126,354		102,993
Short-term investments		471		446
Premiums, commissions and fees receivable		145,540		144,244
Other current assets		14,619		16,527
Total current assets		355,727		332,260
Fixed assets, net		25,209		24,730
Goodwill, net		225,663		176,269
Other intangible assets, net		231,383		203,984
Investments		9,264		8,585
Deferred income taxes, net		—		1,788
Other assets		6,780		6,733
Total assets	$	854,026	$	754,349
LIABILITIES
Current liabilities:
Premiums payable to insurance companies	$	214,802	$	191,682
Premium deposits and credits due customers		17,292		16,723
Accounts payable		8,055		12,054
Accrued expenses		56,010		46,586
Current portion of long-term debt		25,663		27,334
Total current liabilities		321,822		294,379
Long-term debt		45,298		57,585
Deferred income taxes, net		2,262		—
Other liabilities		9,634		8,943
Minority interest		—		1,852
SHAREHOLDERS’ EQUITY
Common stock, par value $.10 per share; authorized 280,000 shares; issued and outstanding, 68,646 shares at 2003 and 68,178 at 2002		6,865		6,818
Additional paid-in capital		169,473		159,564
Retained earnings		295,825		223,102
Accumulated other comprehensive income		2,847		2,106
Total shareholders’ equity		475,010		391,590
Total liabilities and shareholders’ equity	$	854,026	$	754,349

See accompanying notes to condensed consolidated financial statements.

4

BROWN & BROWN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	For the nine months ended September 30,
	2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	84,521		$	61,741
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		12,963			10,194
Depreciation		6,062			5,319
Non-cash stock grant compensation		1,824			3,025
Deferred income tax provision (benefit)		3,595			(761	)
Income tax benefit from exercise of stock options		3,530			—
Net (gains) losses on sales of investments, fixed assets and customer accounts		(1,125	)		670
Minority interest in earnings		—			2,448
Changes in operating assets and liabilities, net of effect from insurance agency acquisitions and disposals:
Restricted cash, (increase)		(23,361	)		(61,047	)
Premiums, commissions and fees receivable, (increase)		(1,421	)		(7,868	)
Other assets, decrease (increase)		2,080			(3,067	)
Premiums payable to insurance companies, increase		23,120			17,057
Premium deposits and credits due customers, increase		569			6,010
Accounts payable, (decrease) increase		(4,221	)		510
Accrued expenses, increase		10,347			9,612
Other liabilities, increase		482			2,454
NET CASH PROVIDED BY OPERATING ACTIVITIES		118,965			46,297
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets		(6,570	)		(6,128	)
Payments for businesses acquired, net of cash acquired		(89,172	)		(50,532	)
Proceeds from sales of fixed assets and customer accounts		4,057			3,506
Purchases of investments		(7	)		(107	)
Proceeds from sales of investments		—			110
NET CASH USED IN INVESTING ACTIVITIES		(91,692	)		(53,151	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt		(16,493	)		(19,150	)
Proceeds from issuance of common stock, net of expenses		—			149,437
Issuance of common stock for employee stock benefit plans		6,935			5,775
Purchase of common stock for employee stock benefit plans		(2,334	)		(10,142	)
Cash dividends paid		(11,798	)		(9,491	)
Cash distribution to minority interest shareholders		(2,890	)		(2,486	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(26,580	)		113,943
Net increase in cash and cash equivalents		693			107,089
Cash and cash equivalent at beginning of period		68,050			16,048
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	68,743		$	123,137

See accompanying notes to condensed consolidated financial statements.

5

BROWN & BROWN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Basis of Financial Reporting

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited, condensed, and consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Results of operations for the three and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

Certain amounts for the prior periods have been reclassified to conform to the current period presentations.

Note 2 – Basic and Diluted Net Income Per Share

The following table sets forth the computation of basic net income per common share and diluted net income per common and common equivalent share (in thousands, except per-share data):

	For the three months ended September 30,				For the nine months ended September 30,
	2003		2002		2003		2002
Net income	$	26,051	$	20,178	$	84,521	$	61,741
Weighted average number of common shares outstanding		68,532		68,266		68,327		66,979
Dilutive effect of stock options using the treasury stock method		463		728		617		766
Weighted average number of common and common equivalent shares outstanding		68,995		68,994		68,944		67,745
Basic net income per share	$	0.38	$	0.30	$	1.24	$	0.92
Diluted net income per common and common equivalent share	$	0.38	$	0.29	$	1.23	$	0.91

6

Note 3 – Acquisitions

During the third quarter of 2003, the Company acquired certain assets of three general insurance agencies and two books of business (customer accounts). The aggregate purchase price was approximately $19,718,000, all of which was paid in cash. Additionally, $2,885,000 was paid during the quarter on the “earn-out” purchase price agreements of prior acquisitions. The operating results of each of these acquired businesses have been included in the condensed consolidated financial statements since the date of such transactions. These acquisitions are not material to the consolidated financial statements individually or in aggregate.

During the second quarter of 2003, the Company acquired certain assets and liabilities of four general insurance agencies and two books of business (customer accounts). The aggregate purchase price was approximately $7,602,000, including $7,176,000 of net cash payments and the issuance of notes payable in the amount of $426,000. Additionally, $1,084,000 was paid, $335,000 of other liabilities were assumed and $12,000 of notes payable were issued during the quarter on the “earn-out” purchase price agreements of prior acquisitions. The operating results of each of these acquired businesses have been included in the condensed consolidated financial statements since the date of such transactions. These acquisitions are not material to the consolidated financial statements individually or in aggregate.

During the first quarter of 2003, the Company acquired certain assets and liabilities of nine general insurance agencies, several books of business (customer accounts) and the remaining 25% minority interest in Florida Intracoastal Underwriters, Limited Company. The aggregate purchase price was approximately $47,965,000, including $47,324,000 of net cash payments and the issuance of notes payable in the amount of $641,000. Additionally, $10,985,000 was paid and $1,540,000 of notes payable were issued during the quarter on the “earn-out” purchase price agreements of prior acquisitions. The operating results of each of these acquired businesses have been included in the condensed consolidated financial statements since the date of such transactions. These acquisitions are not material to the consolidated financial statements individually or in aggregate.

The preliminary allocation of the aggregate purchase price to the fair values of the assets acquired, including earn-out adjustments, through the first nine months of 2003 was as follows: purchased customer accounts—$41,532,000; goodwill—$50,002,000; noncompete agreements—$491,000; and fixed assets and other miscellaneous net assets—$101,000.

Note 4 – Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 provides for the non-amortization of goodwill. Goodwill is now subject to at least an annual assessment for impairment by applying a fair value-based test. Other intangible assets will be amortized over their useful lives (other than indefinite life assets) and will be subject to a lower of cost or market impairment testing.

SFAS No. 142 requires the Company to compare the fair value of each reporting unit with its carrying amount to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Fair value is estimated based on multiples of revenues, earnings before interest, income taxes, depreciation and amortization (EBITDA) and discounted cash flows.

7

The changes in goodwill, net of accumulated amortization, for the nine months ended September 30, 2003, are as follows (in thousands):

	Retail			National Programs		Services		Brokerage		Total
Balance as of December 31, 2002	$	131,423		$	38,905	$	56	$	5,885	$	176,269
Goodwill acquired		27,991			18,227		—		3,784		50,002
Goodwill disposed of relating to sale of businesses (customer accounts)		(608	)		—		—		—		(608	)
Balance as of September 30, 2003	$	158,806		$	57,132	$	56	$	9,669	$	225,663

Other intangible assets as of September 30, 2003 and December 31, 2002 consisted of the following (in thousands):

	September 30, 2003								December 31, 2002
	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Weighted Average Life	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Weighted Average Life
								(Yrs)								(Yrs)
Purchased Customer Accounts		294,292	$	(73,714	)	$	220,578	18.3	$	254,413	$	(63,188	)	$	191,225	18.1
Noncompete Agreements		32,169		(21,364	)		10,805	7.7		31,686		(18,927	)		12,759	7.7
Total	$	326,461	$	(95,078	)	$	231,383		$	286,099	$	(82,115	)	$	203,984

Amortization expense for amortizable assets for the years ended December 31, 2003, 2004, 2005, 2006 and 2007 are estimated to be $17.4 million, $17.6 million, $17.3 million, $15.9 million and $15.4 million, respectively.

Note 5 – Long-Term Debt

In January 2001, the Company entered into a $90 million unsecured seven-year term loan agreement with a national banking institution, bearing an interest rate based upon the 30-, 60- or 90-day London Interbank Offering Rate (LIBOR) plus 0.50% to 1.00%, depending upon the Company’s quarterly ratio of funded debt to earnings before interest, taxes, depreciation and amortization. The 90-day LIBOR was 1.14% as of September 30, 2003. The loan was fully funded on January 3, 2001 and as of September 30, 2003 had an outstanding balance of $54.6 million. This loan is to be repaid in equal quarterly installments of $3.2 million through December 2007.

To hedge the risk of increasing interest rates from January 2, 2002 through the remaining six years of its seven-year $90 million term loan, the Company entered into an interest rate swap agreement that effectively converted the floating LIBOR-based interest payments to fixed interest rate payments at 4.53%. This agreement did not affect the required 0.50% to 1.00% credit risk spread portion of the term loan. In accordance with SFAS No. 133, as amended, the Company recorded a liability as of September 30, 2003 for the fair value of the interest rate swap of approximately $1,730,000, net of taxes of approximately $1,060,000, with the related change in fair value reflected as other comprehensive income.

8

As of December 31, 2002, the Company recorded a liability for the fair value of the interest rate swap of approximately $2,070,000, net of taxes of approximately $1,269,000. The Company has designated and assessed the derivative as a highly effective cash flow hedge.

In September 2003, the Company established a revolving credit facility with a national banking institution that provided for available borrowings of up to $75 million, with a maturity date of October 2008, bearing an interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.75% to 1.75%, depending upon the Company’s quarterly ratio of funded debt to earnings before interest, taxes, depreciation and amortization. A commitment fee of 0.175% to 0.25% per annum is assessed on the unused balance. There were no borrowings against this facility at September 30, 2003.

Acquisition notes payable as of September 30, 2003 were $16.4 million, which represents debt incurred to former owners of certain agencies or customer accounts acquired by the Company. These notes, including future contingent payments, are payable in monthly, quarterly or annual installments through February 2014, including interest ranging from 1.34% to 15.25%.

Note 6 – Contingencies

The Company is involved in numerous pending or threatened proceedings by or against the Company or one or more of the Company’s subsidiaries that arise in the ordinary course of business. The damages that may be claimed in these various proceedings are substantial, including in many instances claims for punitive or extraordinary damages. Some of these claims and lawsuits have been resolved, others are in the process of being resolved, and others are still in the investigation or discovery phase. The Company will continue to respond appropriately to these claims and lawsuits, and to vigorously protect its interests.

Among the above-referenced claims, and as previously described in the Company’s Report on Form 10-Q for the quarterly period ended March 31, 2003, there are several threatened and pending legal claims against the Company and Brown & Brown Insurance Services of Texas, Inc. (“BBTX”), a subsidiary of the Company, arising out of the procurement and placement of workers’ compensation insurance coverage for entities including several professional employer organizations. On October 27, 2003, the Company and BBTX reached a final settlement in Vega Roofing Co. v. Brown & Brown, Inc., et al., one such case previously described in such Report on Form 10-Q, including settlement of all claims asserted by Aerostaff Services, Inc. against the Company and BBTX. Such settlement is within applicable insurance policy limits, and therefore the settlement does not have a material effect on the Company’s results of operations or cash flows.

Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on the Company or its subsidiaries, on the basis of present information, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the Company’s consolidated financial position.

9

Note 7 – Supplemental Disclosures of Cash Flow Information

	For the nine months ended September 30,
	2003		2002
Cash paid during the period for (in thousands):
Interest	$	2,737	$	3,805
Income taxes	$	51,575	$	35,153

The Company’s significant non-cash investing and financing activities are as follows (in thousands):

	For the nine months ended September 30,
	2003		2002
Unrealized holding gain on available-for-sale securities, net of tax expense of $246 in 2003 and $223 in 2002	$	401	$	358
Gain (loss) on cash flow-hedging derivative, net of tax expense of $209 for 2003 and net of tax benefit of $1,240 for 2002		340		(1,980	)
Notes payable and other liabilities issued or assumed for purchased customer accounts		2,954		1,323
Notes receivable on sale of fixed assets and customer accounts		1,297		591

Note 8 – Comprehensive Income

The components of comprehensive income, net of related tax, are as follows (in thousands):

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003		2002
Net income	$	26,051		$	20,178		$	84,521	$	61,741
Net change in unrealized holding gain (loss) on available-for-sale securities		(815	)		(1,035	)		401		358
Gain (loss) on cash-flow hedging derivative		435			(1,338	)		340		(1,980	)
Comprehensive income	$	25,671		$	17,805		$	85,262	$	60,119

10

Note 9 – Stock-Based Compensation and Incentive Plans

The Company applies the intrinsic value-based method of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for its stock plans. Accordingly, the Company adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-based Compensation—Transition and Disclosure”, effective for the fiscal year ended December 31, 2002, which requires presentation of pro forma net income and earnings per share information under SFAS No. 123 (same title).

Pursuant to the above disclosure requirement, the following table provides an expanded reconciliation for all periods presented that: adds back to reported net income the recorded expense under APB No. 25, net of related income tax effects; deducts the total fair value expense under SFAS No. 123, net of related income tax effects; and shows the reported and pro forma earnings per share amounts.

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
Net income as reported	$	26,051		$	20,178		$	84,521		$	61,741
Total stock-based employee compensation cost included in the determination of net income, net of related tax effects		233			900			1,133			1,863
Total stock-based employee compensation cost determined under fair value method for all awards, net of related tax effects		(1,729	)		(1,193	)		(3,019	)		(2,556	)
Pro forma net income	$	24,555		$	19,885		$	82,635		$	61,048
Earnings per share:
Basic, as reported	$	0.38		$	0.30		$	1.24		$	0.92
Basic, pro forma	$	0.36		$	0.29		$	1.21		$	0.91
Diluted, as reported	$	0.38		$	0.29		$	1.23		$	0.91
Diluted, pro forma	$	0.36		$	0.29		$	1.20		$	0.90
Shares – Basic		68,532			68,266			68,327			66,979
Shares – Diluted		68,995			68,994			68,944			67,745

11

Note 10 – Segment Information

The Company’s business is divided into four segments: the Retail Division, which provides a broad range of insurance products and services to commercial, professional and individual clients; the National Programs Division, which is comprised of two units—Professional Programs, which provides professional liability and related packages for certain professionals, delivered through nationwide networks of independent agents, and Special Programs, which markets targeted products and services designated for specific industries, trade groups and market niches; the Services Division, which provides insurance-related services including third-party administration, consulting for the workers’ compensation and employee benefit self-insurance markets and managed healthcare services; and the Brokerage Division, which markets and sells excess surplus commercial insurance and reinsurance, primarily through independent agents and brokers. The Company conducts all of its operations within the United States of America.

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The “Other” column includes corporate-related items and any income and expenses not allocated to reportable segments.

(in thousands)
Nine Months Ended September 30, 2003:	Retail		National Programs		Services		Brokerage		Other			Total
Total revenues	$	308,117	$	59,115	$	22,817	$	25,194	$	896		$	416,139
Investment income		37		119		—		—		928			1,084
Amortization		9,362		3,142		28		313		118			12,963
Depreciation		4,329		814		349		240		330			6,062
Interest expense		13,392		4,686		170		804		(16,241	)		2,811
Income before income taxes and minority interest		80,136		20,368		4,368		8,793		21,485			135,150
Total assets		614,237		272,402		13,553		67,389		(113,555	)		854,026
Capital expenditures		4,008		1,764		142		479		177			6,570
(in thousands)
Nine Months Ended September 30, 2002:		Retail		National Programs		Services		Brokerage		Other			Total
Total revenues	$	264,097	$	36,577	$	21,224	$	17,740	$	(3,043	)	$	336,595
Investment income		3,672		821		314		152		(2,737	)		2,222
Amortization		8,144		1,735		28		170		117			10,194
Depreciation		3,793		680		368		193		285			5,319
Interest expense		12,254		1,205		203		420		(10,526	)		3,556
Income before income taxes and minority interest		64,983		15,910		3,201		5,469		13,234			102,797
Total assets		503,031		122,069		11,430		59,535		16,632			712,697
Capital expenditures		4,944		303		216		301		364			6,128

12

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

THE FOLLOWING DISCUSSION UPDATES THE MD&A CONTAINED IN THE COMPANY’S 2002 ANNUAL REPORT ON FORM 10-K, AND THE TWO DISCUSSIONS SHOULD BE READ TOGETHER.

Critical Accounting Policies

The more critical accounting and reporting policies include our accounting for revenue recognition, business acquisitions and purchase price allocations, intangible assets impairments, reserves for litigation and derivative interests. In particular, the accounting for these areas requires significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Refer to Note 1 in the “Notes to Consolidated Financial Statements” in our 2002 Annual Report on Form 10-K on file with the Securities and Exchange Commission for details regarding all of our critical and significant accounting policies.

Results of Operations

Net Income.    Net income for the third quarter of 2003 was $26.1 million, or $0.38 per diluted share, compared with net income in the third quarter of 2002 of $20.2 million, or $0.29 per diluted share, a 31.0% increase on a per-share basis. Net income for the nine months ended September 30, 2003 was $84.5 million, or $1.23 per diluted share, compared with net income for the comparable period in 2002 of $61.7 million, or $0.91 per diluted share, a 35.2% increase on a per-share basis.

Commissions & Fees.    Commissions and fees for the third quarter of 2003 increased $22.3 million, or 20.4%, over the same period in 2002. Approximately $20.5 million of this increase represents revenues from agencies acquired since the third quarter of 2002, with the remainder due mainly to new business production and higher renewal commissions. Commissions and fees for the nine months ended September 30, 2003 increased $78.8 million, or 23.5%, over the same period in 2002. Approximately $57.7 million of this increase represents revenues from agencies acquired since the comparable period in 2002, $9.8 million relates to higher contingent commissions (revenue-sharing commissions from insurance companies that are based upon the volume, growth and/or profitability of the business placed with such companies during the prior year), with the remainder due mainly to new business production and higher renewal commissions.

Investment Income.    Investment income for the three and nine months ended September 30, 2003 decreased $0.6 million, or 66.6%, and $1.1 million, or 51.2%, respectively, from the same periods in 2002. The reduction in investment income during the three and nine months ended September 30, 2003 was primarily due to lower available investment cash balances along with lower investment yields.

Other Income (Loss).    Other income (loss) primarily includes gains and losses from the sales of customer accounts and other assets. Other income for the three and nine months ended September 30, 2003 increased $1.2 million and $1.9 million, respectively, from the same periods in 2002, primarily due to gains on several sales of books of business (customer accounts) in 2003.

Employee Compensation and Benefits.    Employee compensation and benefits for the third quarter of 2003 increased $13.4 million, or 25.0%, over the same period in 2002. For the nine months ended September 30, 2003 employee compensation increased $36.7 million, or 22.3%, over the same period in 2002. These increases are primarily related to the addition of new employees from acquisitions completed since October 1, 2002 and increased producer compensation that resulted from higher commissions and fees revenue. Employee compensation and benefits as a percentage of total revenue increased to 50.1% for the third quarter of 2003 from 48.4% for the third quarter of 2002, primarily due

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to higher profit center bonuses. For the nine months ended September 30, 2003, employee compensation and benefits as a percentage of total revenue decreased to 48.4% from 48.9% from the same period in 2002. The improved ratio for the nine-month period was the result of the continued assimilation of the acquisitions completed in 2002 into our standard compensation program, as well as the positive impact of higher contingent commissions received in 2003.

Non-Cash Stock Grant Compensation.    Non-cash stock grant compensation expense represents the expense required to be recorded under Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” relating to our stock performance plan.

The annual cost of this stock performance plan increases only when our average stock price over a 20 trading-day period increases by increments of 20% or more over the price at the time of the original grant, or when more shares are granted and the aforementioned average stock price increases.

Non-cash stock grant compensation expense for the third quarter of 2003 decreased $1.1 million, or 74.4%, from the same period in 2002. For the nine months ended September 30, 2003, non-cash stock grant compensation expense decreased $1.2 million, or 39.7%, from the comparable period in 2002. These decreases are due to forfeited stock grants that resulted in less granted shares being outstanding during the three and nine months ended September 30, 2003 than were outstanding during the three and nine months ended September 30, 2002.

Other Operating Expenses.    Other operating expenses for the third quarter of 2003 increased $1.7 million, or 10.5%, over the same period in 2002. For the nine months ended September 30, 2003, other operating expenses increased $8.9 million, or 19.0%, over the same period in 2002. This was the primarily the result of acquisitions completed since the third quarter of 2002. Other operating expenses as a percentage of revenue for the third quarter of 2003 decreased to 13.1% from 14.3% in the third quarter of 2002. For the nine months ended September 30, 2003, other operating expenses as a percentage of revenue decreased to 13.5%, compared with 14.0% for the same period in 2002. The improved ratios are the result of operating efficiencies as well as the positive impact of higher contingent commissions received in the first and second quarter of 2003.

Amortization.    Amortization expense for the third quarter of 2003 increased $0.8 million, or 22.5%, from the third quarter of 2002. For the nine months ended September 30, 2003, amortization expense increased $2.8 million, or 27.2%, from the same period in 2002. These increases are primarily due to acquisitions completed since October 1, 2002.

Depreciation.    Depreciation expense for the third quarter of 2003 increased $0.3 million, or 13.8%, over the third quarter of 2002. For the nine months ended September 30, 2003, depreciation expense increased $0.7 million, or 14.0%, over the same period in 2002. These increases are due to capital expenditures and fixed assets acquired from acquisitions completed since October 1, 2002.

Interest Expense.    Interest expense for the third quarter of 2003 decreased $0.3 million, or 26.2%, from the same period in 2002. For the nine months ended September 30, 2003 interest expense decreased $0.7 million, or 21.0%, from the same period in 2002. These decreases are a result of lower outstanding debt balances.

Segment Information

As discussed in Note 10 of the notes to our condensed consolidated financial statements, we operate in four business segments: the Retail, National Programs, Services and Brokerage Divisions.

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The Retail Division is our insurance agency business, which provides a broad range of insurance products and services directly to commercial, governmental, professional and individual clients. The Retail Division’s total revenues during the three and nine months ended September 30, 2003 increased 13.5%, or $11.7 million, to $97.7 million, and 16.7%, or $44.0 million, to $308.1 million over the same period in 2002, respectively. Of this increase, approximately $10.8 million and $34.4 million for the three and nine months ended September 30, 2003, respectively, related to the core commissions and fees from acquisitions that had no comparable revenues in the same periods of 2002. The remaining increases are primarily due to net new business growth, which benefited from continued rising premium rates from the corresponding periods in 2002. Income before income taxes and minority interest for the three and nine months ended September 30, 2003 increased 16.3%, or $3.1 million, to $22.4 million, and 23.3%, or $15.2 million, to $80.1 million over the same periods in 2002. These increases are due to higher revenues, increases in premium rates and improved cost structure.

The National Programs Division is comprised of two units: Professional Programs, which provides professional liability and related package products for certain professionals delivered through nationwide networks of independent agents; and Special Programs, which markets targeted products and services designated for specific industries, trade groups and market niches. Total revenues for National Programs for the three and nine months ended September 30, 2003 increased 74.8%, or $8.8 million, to $20.6 million, and 61.6%, or $22.5 million, to $59.1 million over the same periods in 2002, respectively. Of these increases, approximately $9.7 million and $21.6 million for the three and nine-month periods, respectively, related to core commissions and fees from acquisitions that had no comparable revenues in the same periods of 2002. The remaining increase is primarily due to net new business growth, which benefited from continued rising premium rates from the corresponding periods in 2002. Income before income taxes and minority interest for the three and nine months ended September 30, 2003 increased 36.6%, or $1.9 million, to $7.0 million, and 28.0%, or $4.5 million, to $20.4 million, respectively, over the same periods in 2002, due primarily to net increases in revenues.

The Services Division provides insurance-related services, including third-party administration, consulting for the workers’ compensation and employee benefit self-insurance markets and managed healthcare services. Unlike our other segments, the majority of the Services Division’s revenues are fees, which are not significantly affected by fluctuations in general insurance premiums. The Service Division’s total revenues in the three and nine months ended September 30, 2003 increased 11.8%, or $0.9 million, to $8.3 million, and 7.5%, or $1.6 million, to $22.8 million over the same periods of 2002, respectively, the majority of which related to net new business growth. Income before income taxes and minority interest for the three and nine months ended September 30, 2003 increased 70.5%, or $0.8 million, to $2.0 million, and 36.5%, or $1.2 million, to $4.4 million from the same periods in 2002, respectively. This increase was driven primarily by net new business revenues.

The Brokerage Division markets and sells excess and surplus commercial insurance and reinsurance, primarily through independent agents and brokers. The Brokerage Division’s total revenues in the three and nine months ended September 30, 2003 increased 7.0%, or $0.4 million, to $6.7 million, and 42.0%, or $7.5 million, to $25.2 million over the same periods of 2002. Of these increases, approximately $0.1 million and $1.8 million for the three and nine-month periods, respectively, related to core commissions and fees from acquisitions that had no comparable revenues in the same periods of 2002. The remaining increase is primarily due to net new business growth which also benefited from continued rising premium rates from the corresponding periods in 2002. Income before income taxes and minority interest for the three months ended September 30, 2003 decreased 20.0%, or $0.3 million, to $1.2 million due primarily to higher costs and payrolls associated with the opening of several new brokerage offices. Income before income taxes and minority interest for the nine months ended September 30, 2003 increased 60.8%, or $3.3 million, to $8.8 million from the same period in 2002, due primarily to net new business revenues offset by slightly higher costs.

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Liquidity and Capital Resources

Our cash and cash equivalents of $68.7 million at September 30, 2003 increased by $0.7 million from the $68.0 million balance at December 31, 2002. For the nine-month period ended September 30, 2003, $119.0 million of cash was provided from operating activities. Also during this period, $89.2 million was used to acquire other agencies and books of business (customer accounts), $6.6 million was used for additions to fixed assets, $16.5 million was used for payments on long-term debt, and $11.8 million was used for payment of dividends.

As of September 30, 2003, our contractual cash obligations were as follows (in thousands):

	Payments Due by Period
Contractual Cash Obligations	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-Term Debt	$	70,845	$	25,565	$	28,341	$	16,535	$	404
Capital Lease Obligations		116		99		17		—		—
Other Long Term Liabilities		9,634		4,268		2,347		1,752		1,267
Operating Leases		57,649		16,454		23,476		11,534		6,185
Maximum Future Acquisition Contingency Payments		55,420		36,526		18,856		38		—
Total Contractual Cash Obligations	$	193,664	$	82,912	$	73,037	$	29,859	$	7,856

In January 2001, we entered into a $90 million unsecured seven-year term loan agreement with a national banking institution, bearing an interest rate based upon the 30-, 60- or 90-day London Interbank Offering Rate (LIBOR) plus 0.50% to 1.00%, depending upon our quarterly ratio of funded debt to earnings before interest, taxes, depreciation and amortization. The 90-day LIBOR was 1.14% as of September 30, 2003. The loan was fully funded on January 3, 2001 and as of September 30, 2003 had an outstanding balance of $54.6 million. This loan is to be repaid in equal quarterly installments of $3.2 million through December 2007.

To hedge the risk of increasing interest rates from January 2, 2002 through the remaining six years of its seven-year $90 million term loan, we entered into an interest rate swap agreement that effectively converted the floating LIBOR-based interest payments to fixed interest payments at an annual rate of 4.53%. This agreement did not impact or change the required 0.50% to 1.00% credit risk spread portion of the term loan. In accordance with SFAS No. 133, as amended, we recorded a liability as of September 30, 2003 for the fair value of the interest rate swap at September 30, 2003 of approximately $1,730,000, net of taxes of approximately $1,060,000. We have designated and assessed the derivative as a highly effective cash flow hedge, and accordingly, the effect is reflected in other comprehensive income.

In September 2003, we established a revolving credit facility with a national banking institution that provided for available borrowings of up to $75 million, with a maturity date of October 2008, bearing an interest rate based upon the 30-, 60- or 90-day LIBOR plus 0.75% to 1.75%, depending upon our quarterly ratio of funded debt to earnings before interest, taxes, depreciation and amortization. A commitment fee of 0.175% to 0.25% per annum is assessed on the unused balance. There were no borrowings against this facility at September 30, 2003.

The Company (including its subsidiaries) has never incurred off-balance sheet obligations through the use of, or investment in, off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies, or trusts.

We believe that our existing cash, cash equivalents, short-term investments portfolio, funds generated from operations, and available credit facility borrowings are sufficient to satisfy our normal financial needs.

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New Accounting Pronouncements

In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, for certain decisions made by the FASB as part of the Derivatives Implementation Group process and to incorporate clarifications of the definitions of a derivative. SFAS No. 149 is effective for contracts modified or entered into after June 30, 2003 and hedging relationships designated after June 30, 2003. We adopted the standard on July 1, 2003. There has been no impact on our financial condition, results of operations or cash flows upon adoption.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This statement established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We have not entered into or modified any financial instruments with characteristics outlined in the statement and adopted the standard on July 1, 2003. There has been no material impact on our financial condition, results of operations or cash flows upon adoption.

Disclosure Regarding Forward-Looking Statements

We make “forward-looking statements” within the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995 throughout this report and in the documents we incorporate by reference into this report. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan” and “continue” or similar words. We have based these statements on our current expectations about future events. Although we believe that our expectations reflected in or suggested by our forward-looking statements are reasonable, our actual results may differ materially from what we currently expect. Important factors which could cause our actual results to differ materially from the forward-looking statements in this report include:

• material adverse changes in economic conditions in the markets we serve;

• future regulatory actions and conditions in the states in which we conduct our business;

• competition from others in the insurance agency and brokerage business;

• the integration of our operations with those of businesses or assets we have acquired or may acquire in the future and the failure to realize the expected benefits of such integration; and

• other risks and uncertainties as may be detailed from time to time in our public announcements and Securities and Exchange Commission filings.

You should carefully read this report completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

We do not undertake any obligation to publicly update or revise any forward-looking statements.

ITEM 3:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and equity prices. We are exposed to market risk through our investments, revolving credit line and term loan agreements.

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Our invested assets are held as cash and cash equivalents, restricted cash, available-for-sale marketable equity securities, non-marketable equity securities and certificates of deposit. These investments are subject to interest rate risk and equity price risk. The fair values of our cash and cash equivalents, restricted cash, and certificates of deposit at September, 2003 and December 31, 2002 approximated their respective carrying values due to their short-term duration and therefore such market risk is not considered to be material.

We do not actively invest or trade in equity securities. In addition, we generally dispose of any significant equity securities received in conjunction with an acquisition shortly after the acquisition date. However, we have no current intentions to add to or dispose of any of the 559,970 common stock shares of Rock-Tenn Company, a publicly-held New York Stock Exchange-listed company, which we have owned for over ten years. The investment in Rock-Tenn Company accounted for 83.9% and 83.6% of the total value of available-for-sale marketable equity securities, non-marketable equity securities and certificates of deposit as of September 30, 2003 and December 31, 2002, respectively. Rock-Tenn Company’s closing stock price at September 30, 2003 and December 31, 2002 was $14.58 and $13.48, respectively. Our exposure to equity price risk is primarily related to the Rock-Tenn Company investment. As of September 30, 2003, the value of the Rock-Tenn Company investment was $8,164,000.

To hedge the risk of increasing interest rates from January 2, 2002 through the remaining six years of our seven-year $90 million term loan, on December 5, 2001 we entered into an interest rate swap agreement that effectively converted the floating rate LIBOR-based interest payments to fixed interest rate payments at 4.53%. We do not otherwise enter into derivatives, swaps or other similar financial instruments for trading or speculative purposes.

At September 30, 2003, the interest rate swap agreement was as follows:

(in thousands, except     percentages)	Contractual/ Notional Amount	Fair Value	Weighted Average Pay Rates	Weighted Average Received Rates
Interest rate swap agreement	$54,643	($2,790)	4.53%	1.10%

ITEM 4:    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Within 90 days prior to the date of this report, we completed an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”). Based on the Evaluation, our CEO and CFO concluded that, subject to the limitations noted below, our Disclosure Controls are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission reports.

Changes in Internal Controls

We have also evaluated our internal controls for financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and

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operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

CEO and CFO Certifications

Appearing immediately following the Signatures section of this report there are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”). This Item 4, which you are currently reading, is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

The Company is involved in numerous pending or threatened proceedings by or against the Company or one or more of the Company’s subsidiaries that arise in the ordinary course of business. The damages that may be claimed in these various proceedings are substantial, including in many instances claims for punitive or extraordinary damages. Some of these claims and lawsuits have been resolved, others are in the process of being resolved, and others are still in the investigation or discovery phase. The Company will continue to respond appropriately to these claims and lawsuits, and to vigorously protect its interests.

Among the above-referenced claims, and as previously described in the Company’s Report on Form 10-Q for the quarterly period ending March 31, 2003, there are several threatened and pending legal claims against the Company and Brown & Brown Insurance Services of Texas, Inc. (“BBTX”), a subsidiary of the Company, arising out of the procurement and placement of workers’ compensation insurance coverage for entities including several professional employer organizations. On October 27, 2003, the Company and BBTX reached a final settlement in Vega Roofing Co. v. Brown & Brown, Inc., et al., one such case previously described in such Report on Form 10-Q, including settlement of all claims asserted by Aerostaff Services, Inc. against the Company and BBTX. Such settlement is within applicable insurance policy limits, and therefore the settlement does not have a material effect on the Company’s results of operations or cash flows.

Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on the Company or its subsidiaries, on the basis of present information, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the Company’s consolidated financial position.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)    EXHIBITS

Exhibit 3a	Articles of Amendment to Articles of Incorporation (adopted April 24, 2003) (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 2003), and Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3a to Form 10-Q for the quarter ended March 31, 1999).
Exhibit 3b	Bylaws (incorporated by reference to Exhibit 3b to Form 10-K for the year ended December 31, 2002).
Exhibit 4	Rights Agreement, dated as of July 30, 1999, between the Company and First Union National Bank, as Rights Agent (incorporated by reference to Exhibit 4.1 to Form 8-K filed on August 2, 1999).
Exhibit 10a	Revolving Loan Agreement Dated as of September 29, 2003 By and Among Brown & Brown, Inc. and SunTrust Bank.
Exhibit 31.1	Certificate by the Chief Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Exhibit 31.2	Certificate by the Chief Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	Certification by the Chief Executive Officer of Registrant submitted to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification shall not be deemed to be “filed” with the Commission or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Registrant specifically requests that such Certification be incorporated by reference into a filing under the Securities Act or Exchange Act. This Certification is being furnished to the Commission and accompanies this report pursuant to SEC Release No. 33-8212.
Exhibit 32.2	Certification by the Chief Financial Officer of Registrant submitted to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification shall not be deemed to be “filed” with the Commission or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Registrant specifically requests that such Certification be incorporated by reference into a filing under the Securities Act or Exchange Act. This Certification is being furnished to the Commission and accompanies this report pursuant to SEC Release No. 33-8212.

(b)    REPORTS ON FORM 8-K

The Company filed a current report on Form 8-K on July 24, 2003. This current report reported (a) Item 9, which announced that the Company issued a press release on July 9, 2003, relating to the Company’s earnings for the second quarter of fiscal year 2003 (the “Press Release”), and (b) Item 7, which attached the Press Release as Exhibit 99.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BROWN & BROWN, INC.

/S/ CORY T. WALKER

Date: November 13, 2003

Cory T. Walker

Vice President, Chief Financial Officer

    and Treasurer

(duly authorized officer, principal financial

    officer and principal accounting officer)

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