-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KuaXmTKrXKAsh76CUTBoYItJKleoqMvA8zisJs2IOvJt0i7MORZkoXclg605GiOl foJuPANm9efWKcvr71oELw== 0000062709-02-000020.txt : 20020813 0000062709-02-000020.hdr.sgml : 20020813 20020812183837 ACCESSION NUMBER: 0000062709-02-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARSH & MCLENNAN COMPANIES INC CENTRAL INDEX KEY: 0000062709 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 362668272 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05998 FILM NUMBER: 02727813 BUSINESS ADDRESS: STREET 1: 1166 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 8002251581 MAIL ADDRESS: STREET 1: 1166 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MARLENNAN CORP DATE OF NAME CHANGE: 19760505 10-Q 1 tenq2qtr02.txt FORM 10-Q (JUNE 30, 2002) =============================================================================== - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 2002 Marsh & McLennan Companies, Inc. 1166 Avenue of the Americas New York, New York 10036 (212) 345-5000 Commission file number 1-5998 State of Incorporation: Delaware I.R.S. Employer Identification No. 36-2668272 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . NO ___. As of July 31, 2002, there were outstanding 535,729,083 shares of common stock, par value $1.00 per share, of the registrant. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their representatives may from time to time make verbal or written statements (including certain statements contained in this report and other MMC filings with the Securities and Exchange Commission and in our reports to stockholders) relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, discussions concerning revenues, expenses, earnings, cash flow, capital structure, financial losses and expected insurance recoveries resulting from the September 11, 2001 attack on the World Trade Center in New York City, as well as market and industry conditions, premium rates, financial markets, interest rates, foreign exchange rates, contingencies and matters relating to MMC's operations and income taxes. Such forward-looking statements are based on available current market and industry materials, experts' reports and opinions and long-term trends, as well as management's expectations concerning future events impacting MMC. Forward-looking statements by their very nature involve risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by any forward-looking statements contained or incorporated or referred to herein include, in the case of MMC's risk and insurance services and consulting businesses, the amount of actual insurance recoveries and financial loss from the September 11 attack on the World Trade Center or other adverse consequences from that incident. Other factors that should be considered in the case of MMC's risk and insurance services business are changes in competitive conditions, movements in premium rate levels, the continuation of challenging marketplace conditions for the transfer of commercial risk and other changes in the global property and casualty insurance markets, the impact of terrorist attacks, natural catastrophes and mergers between client organizations, including insurance and reinsurance companies. Factors to be considered in the case of MMC's investment management business include changes in worldwide and national equity and fixed income markets, actual and relative investment performance, the level of sales and redemptions and the ability to maintain investment management and administrative fees at appropriate levels; and with respect to all of MMC's activities, changes in general worldwide and national economic conditions, changes in the value of investments made in individual companies and investment funds, fluctuations in foreign currencies, actions of competitors or regulators, changes in interest rates or in the ability to access financial markets, developments relating to claims, lawsuits and contingencies, prospective and retrospective changes in the tax or accounting treatment of MMC's operations and the impact of tax and other legislation and regulation in the jurisdictions in which MMC operates. Forward-looking statements speak only as of the date on which they are made, and MMC undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events. MMC is committed to providing timely and materially accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, MMC and its operating companies use their websites to convey meaningful information about their businesses, including the posting of updates of assets under management at Putnam. Monthly updates of assets under management at Putnam will be posted on the first business day following the end of each month, except at the end of March, June, September and December, when such information will be released with MMC's quarterly earnings announcement. Investors can link to MMC and its operating company websites through www.mmc.com. PART 1. FINANCIAL INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share figures) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ------ ------- ------- ------- Revenue $ 2,612 $ 2,541 $ 5,247 $ 5,172 Expense 2,047 2,015 3,995 4,001 ------- ------- ------- ------- Operating Income 565 526 1,252 1,171 Interest Income 4 7 9 12 Interest Expense (38) (56) (75) (108) ------- ------- ------- ------- Income Before Income Taxes And Minority Interest 531 477 1,186 1,075 Income Taxes 189 179 421 403 Minority Interest, Net of Tax 6 5 11 10 ------- ------- ------- ------- Net Income $ 336 $ 293 $ 754 $ 662 ======= ======= ======= ======= Basic Net Income Per Share $ 0.62 $ 0.53 $ 1.38 $ 1.20 ======= ======= ======= ======= Diluted Net Income Per Share $ 0.60 $ 0.51 $ 1.33 $ 1.14 ======= ======= ======= ======= Average Number of Shares Outstanding - Basic 545 551 546 552 ======= ======= ======= ======= Average Number of Shares Outstanding - Diluted 562 573 565 574 ======= ======= ======= ======= Dividends Declared $ 0.28 $ 0.27 $ 0.55 $ 0.52 ======= ======= ======= ======= The accompanying notes are an integral part of these consolidated statements. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars) (Unaudited) June 30, December 31, 2002 2001 ---------- ------------ ASSETS Current assets: Cash and cash equivalents $ 471 $ 537 -------- -------- Receivables- Commissions and fees 2,326 2,288 Advanced premiums and claims 154 188 Other receivables 379 355 -------- -------- 2,859 2,831 Less-allowance for doubtful accounts and cancellations (142) (139) -------- -------- Net receivables 2,717 2,692 -------- -------- Prepaid dealer commissions - current portion 258 308 Other current assets 270 255 -------- -------- Total current assets 3,716 3,792 Goodwill and intangible assets 5,349 5,327 Fixed assets, net 1,242 1,235 (net of accumulated depreciation and amortization of $1,171 at June 30, 2002 and $1,022 at December 31, 2001) Long-term investments 691 826 Prepaid dealer commissions 419 528 Other assets 1,707 1,585 -------- -------- $ 13,124 $ 13,293 ======== ======== The accompanying notes are an integral part of these consolidated statements. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions, except per share figure) (Unaudited) June 30, December 31, 2002 2001 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 647 $ 757 Accounts payable and accrued liabilities 1,392 1,347 Accrued compensation and employee benefits 758 1,088 Accrued income taxes 453 600 Dividends payable 152 146 -------- -------- Total current liabilities 3,402 3,938 -------- -------- Fiduciary liabilities 4,162 3,630 Less - cash and investments held in a fiduciary capacity (4,162) (3,630) -------- -------- Long-term debt 2,857 2,334 -------- -------- Other liabilities 1,828 1,848 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $1 par value, authorized 6,000,000 shares, none issued - - Common stock, $1 par value, authorized 800,000,000 shares, issued 560,641,640 shares at June 30, 2002 and at December 31, 2001 561 561 Additional paid-in capital 1,550 1,620 Retained earnings 4,181 3,723 Accumulated other comprehensive loss (214) (227) -------- -------- 6,078 5,677 Less - treasury shares, at cost, 22,498,655 shares at June 30, 2002 and 11,988,096 shares at December 31, 2001 (1,041) (504) -------- -------- Total stockholders' equity 5,037 5,173 -------- -------- $ 13,124 $ 13,293 ======== ======== The accompanying notes are an integral part of these consolidated statements. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions of dollars) (Unaudited) Six Months Ended June 30, 2002 2001 ----- ----- Operating cash flows: Net income $ 754 $ 662 Adjustments to reconcile net income to cash generated from operations: Depreciation of fixed assets and capitalized software 159 168 Amortization of intangible assets 16 97 Provision for deferred income taxes 14 68 Other, net 21 (28) Changes in assets and liabilities: Net receivables (25) 110 Prepaid dealer commissions 159 118 Other current assets (24) 8 Other assets (71) (73) Accounts payable and accrued liabilities 54 (200) Accrued compensation and employee benefits (329) (627) Accrued income taxes (151) 112 Other liabilities (17) (111) ----- ----- Net cash generated from operations 560 304 ----- ----- Financing cash flows: Net (decrease) increase in commercial paper (357) 796 Other borrowings 748 20 Other repayments of debt (6) (10) Purchase of treasury shares (802) (308) Issuance of common stock 235 144 Dividends paid (291) (274) ----- ----- Net cash (used for) provided by financing activities (473) 368 ----- ----- Investing cash flows: Additions to fixed assets and capitalized software (187) (224) Proceeds from sale of fixed assets 12 103 Acquisitions (21) (47) Other, net 38 (333) ----- ----- Net cash used for investing activities (158) (501) ----- ----- Effect of exchange rate changes on cash and cash equivalents 5 (9) ----- ----- (Decrease)/Increase in cash & cash equivalents (66) 162 Cash & cash equivalents at beginning of period 537 240 ----- ----- Cash & cash equivalents at end of period $ 471 $ 402 ===== ===== The accompanying notes are an integral part of these consolidated statements MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Operations -------------------- MMC, a professional services firm, is organized based on the different services that it offers. Under this organization structure, MMC operates in three principal business segments: risk and insurance services, investment management and consulting. The risk and insurance services segment provides insurance broking, reinsurance broking and insurance and program management services for businesses, public entities, insurance companies, associations, professional services organizations and private clients. It also provides services principally in connection with originating, structuring and managing insurance, financial services and other industry focused investments. The investment management segment primarily provides securities investment advisory and management services and administrative services for a group of publicly held investment companies and institutional accounts. The consulting segment provides advice and services to the managements of organizations primarily in the areas of human resources and employee benefit programs, investment consulting, general management consulting, organizational design and economic consulting and expert testimony. 2. Principles of Consolidation --------------------------- The consolidated financial statements included herein have been prepared by MMC pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such rules and regulations, although MMC believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in MMC's latest Annual Report on Form 10-K. The financial information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three-month and six-month periods ended June 30, 2002 and 2001. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. In the normal course of business MMC makes investments through its subsidiary Marsh & McLennan Risk Capital Holdings, Ltd. ("MMRCH"), primarily in insurance and reinsurance entities, and periodically sells these investments. In the second quarter of 2002, MMRCH sold an investment that it had acquired in 1997 to Trident II, L.P. MMC Capital, Inc. a wholly-owned subsidiary of MMRCH, serves as advisor to Trident II, L.P. Revenue of $9 million from this transaction was recorded by MMRCH. 3. Fiduciary Assets and Liabilities -------------------------------- In its capacity as an insurance broker or agent, MMC collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. MMC also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims are held in a fiduciary capacity. Interest income on these fiduciary funds, included in revenue, amounted to $56 million and $95 million for the six months ended June 30, 2002 and 2001, respectively. Net uncollected premiums and claims and the related payables amounting to $11.4 billion at June 30, 2002 and $10.8 billion at December 31, 2001 are not included in the accompanying Consolidated Balance Sheets. 4. Per Share Data -------------- Basic net income per share is calculated by dividing net income by the weighted average number of shares of MMC's common stock outstanding. Diluted net income per share is calculated by reducing net income for the potential minority interest associated with unvested Putnam Class B Common Shares and adding back dividend equivalent expense related to common stock equivalents. This result is then divided by the weighted average common shares outstanding, which have been adjusted for the dilutive effect of potentially issuable common shares. The following reconciles net income to net income for diluted earnings per share and basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and six-month periods ended June 30, 2002 and 2001. Three Months Six Months Ended (In millions) Ended June 30, June 30, ------------- -------------- ---------------- 2002 2001 2002 2001 ----- ----- ----- ----- Net income $ 336 $ 293 $ 754 $ 662 Less: Potential minority interest associated with Putnam Class B Common Shares net of dividend equivalent expense related to common stock equivalents - (2) (1) (6) ----- ----- ----- ----- Net income for diluted earnings per share $ 336 $ 291 $ 753 $ 656 ===== ===== ===== ===== Basic weighted average common shares outstanding 545 551 546 552 Dilutive effect of potentially issuable common stock 17 22 19 22 --- --- --- --- Diluted weighted average common shares outstanding 562 573 565 574 === === === === 5. Supplemental Disclosure to the Consolidated Statements of Cash Flows -------------------------------------------------------------------- The following schedule provides additional information concerning interest and income taxes paid for the six-month periods ended June 30, 2002 and 2001. (In millions of dollars) 2002 2001 ------------------------ ---- ---- Interest paid $ 62 $117 Income taxes paid $468 $133 6. Comprehensive Income -------------------- The components of comprehensive income for the six-month periods ended June 30, 2002 and 2001 are as follows: (In millions of dollars) 2002 2001 ------------------------ ----- ----- Foreign currency translation adjustments $ 60 $ (82) Unrealized investment holding losses, net of income taxes (33) (93) Less: Reclassification adjustment for gains included in net income, net of income taxes (18) (41) Deferred gain on cash flow hedges, net of income taxes 4 - ------ ------ Other comprehensive income/(loss) 13 (216) Net income 754 662 ------ ------ Comprehensive income $ 767 $ 446 ====== ====== 7. Integration and Restructuring Costs ----------------------------------- In 1999, as part of the 1998 combination with Sedgwick Group, plc ("Sedgwick") and the integration of Sedgwick, MMC adopted a plan to reduce staff and consolidate duplicative offices. The estimated cost of this plan relating to employees and offices of Sedgwick ("1999 Sedgwick Plan") amounted to $285 million and was included in the cost of the acquisition. Merger-related costs for employees and offices of MMC ("1999 MMC Plan") amounted to $266 million and were recorded as part of a 1999 special charge. In the third quarter of 2001, as a result of weakening business conditions, which were exacerbated by the events of September 11, MMC adopted a plan to provide for staff reductions and office consolidations, primarily in the consulting segment ("2001 Plan"). The charge of $61 million related to this Plan is comprised of $44 million for severance and related benefits affecting 750 people and $17 million for future rent under noncancelable leases. The utilization of these charges is summarized as follows:
1999 Sedgwick Plan: Utilized and (In millions of dollars) Initial changes in Utilized in Balance Balance estimates Six Months 2002 June 30, 2002 through 2001 ------- ------------ --------------- ------------- Termination payments to employees $183 $(180) $(1) $ 2 Other employee-related costs 5 (5) - - Future rent under noncancelable leases 48 (28) (2) 18 Leasehold termination and related costs 49 (30) (1) 18 ---- ----- ---- ---- $285 $(243) $(4) $38 ---- ----- ---- ---- Number of employee terminations 2,400 (2,400) - - Number of office consolidations 125 (125) - -
- -------------------------------------------------------------------------------
1999 MMC Plan: Utilized and (In millions of dollars) Initial changes in Utilized in Balance Balance estimates Six Months 2002 June 30, 2002 through 2001 ------- ------------ --------------- ------------- Termination payments to employees $194 $ (187) $(2) $ 5 Future rent under noncancelable leases 31 (19) (1) 11 Leasehold termination and related costs 16 (13) - 3 Other integration related costs 25 (25) - - ---- ------- ----- ---- $266 $ (244) $(3) $19 ---- ------- ----- ---- Number of employee terminations 2,100 (2,100) - - Number of office consolidations 50 (50) - -
- ------------------------------------------------------------------------------- The actions contemplated by the 1999 Sedgwick Plan and the 1999 MMC Plan were substantially complete by year-end 2000. Some accruals, primarily for future rent under noncancelable leases and salary continuance arrangements, are expected to be paid over several years. Accruals for lease termination costs are primarily related to expenses payable at the expiration of the lease terms.
2001 Plan (In millions of dollars) Initial Utilized Utilized in Balance Balance 2001 Six Months 2002 June 30, 2002 ------- -------- --------------- ------------- Termination payments to employees $44 $(14) $ (19) $11 Future rent under noncancelable leases 17 - (2) 15 ---- ----- ------ ---- $61 $(14) $ (21) $26 ---- ----- ------ ---- Number of employee terminations 750 (506) (221) 23 Number of office consolidations 9 (2) (7) -
- -------------------------------------------------------------------------------- Actions under the 2001 Plan are expected to be substantially complete by September 30, 2002. Some accruals, primarily for future rent under noncancelable leases and salary continuance arrangements are expected to be paid over several years. 8. Goodwill and Other Intangibles ------------------------------ In accordance with SFAS No. 142, MMC discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization net of the pro-forma effect of directly related expenses and income taxes for the three and six-month periods ended June 30, 2002 and 2001 is as follows: (In millions, except per share figures) Three Months Six Months Ended June 30, Ended June 30, ----------------- ----------------- 2002 2001 2002 2001 ------- ------- ------- ------- Reported Net Income $ 336 $ 293 $ 754 $ 662 Net amortization adjustment - 34 - 67 ------- ------- ------- ------- Adjusted Net Income $ 336 $ 327 $ 754 $ 729 ======= ======= ======= ======= Reported earnings per share - Basic $ 0.62 $ 0.53 $ 1.38 $ 1.20 ======= ======= ======= ======= Adjusted earnings per share - Basic $ 0.62 $ 0.59 $ 1.38 $ 1.32 ======= ======= ======= ======= Reported earnings per share - Diluted $ 0.60 $ 0.51 $ 1.33 $ 1.14 ======= ======= ======= ======= Adjusted earnings per share - Diluted $ 0.60 $ 0.57 $ 1.33 $ 1.26 ======= ======= ======= ======= Changes in the carrying amount of goodwill for the six-month period ended June 30, 2002, are as follows: Balance as of January 1, 2002 $5,069 Goodwill acquired 7 Other adjustments (primarily foreign exchange) 22 ------ Balance as of June 30, 2002 $5,098 ====== The goodwill balance at June 30, 2002 includes approximately $115 million of equity method goodwill. MMC has completed the transitional goodwill impairment test and determined that there is no impairment of goodwill. Amortized intangible assets consist of the cost of client lists and client relationships acquired and the rights to future revenue streams from certain existing private equity funds. MMC has no intangible assets that are not amortized. The gross carrying amount and accumulated amortization by major intangible asset class is as follows: (In millions of dollars) Balance at June 30, 2002 ------------------------ ------------------------------------- Gross Accumulated Net Carrying Cost Amortization Value ----- ------------ ---------------- Client lists and client relationships acquired $135 $ 45 $ 90 Future revenue streams related to existing private equity funds 219 58 161 ---- ---- ---- Total Amortized Intangibles $354 $103 $251 ==== ==== ==== Aggregate amortization expense for the six-months ended June 30, 2002 was $16 million and the estimated aggregate amortization expense is as follows: Year Ending December 31, Estimated Expense ------------------------ ----------------- 2002 $32 2003 $32 2004 $32 2005 $32 2006 $23 9. Long-term Debt -------------- In March 2002, MMC issued $500 million of 5.375% Senior Notes due 2007 and $250 million of 6.25% Senior Notes due 2012 (the "Notes"). Interest is payable semi-annually on March 15 and September 15 of each year commencing September 15, 2002. The proceeds of these Notes were used to repay a portion of commercial paper borrowings. MMC entered into interest rate swap transactions to hedge its exposure to changes in the fair value of the Notes. The swap transactions effectively converted the fixed rate obligations into floating rate obligations. Under the terms of the swaps, the swap counterparties will pay MMC a fixed rate equal to the coupon rate on the Notes. MMC will pay the swap counterparties a floating rate of 6-month Libor plus 9.25 bps for the five-year swap and 6-month Libor plus 25.45 bps for the ten-year swap. The swaps qualify for hedge accounting and meet all the criteria necessary to conclude that the hedge will be perfectly effective under SFAS No. 133. Commercial paper borrowings of $750 million at June 30, 2002 and $1.0 billion at December 31, 2001 have been classified as long-term debt based on MMC's intent and ability to maintain or refinance these obligations on a long-term basis. 10. Share Repurchases ----------------- During the first six months of 2002, MMC repurchased approximately 16.5 million shares of its common stock at a cost of approximately $841 million. MMC currently plans to continue to repurchase shares throughout 2002, subject to market conditions, including from time to time pursuant to the terms of a 10b5-1 plan. MMC uses written put options to supplement its share repurchase program. The contracts are European style options, which generally expire three months from the date of sale. Settlement terms of the contracts are controlled by MMC and include physical, net-cash or net-share settlement. The contracts are recorded as equity transactions in accordance with EITF Issue No. 00-19, "Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." At June 30, 2002, MMC had open contracts on 2.3 million shares, with strike prices ranging from $41.85 to $48.15 with a maximum potential purchase commitment of $104 million. The open contracts expire between July 22, 2002 and September 24, 2002 and have a fair value of $2 million at June 30, 2002. Approximately 43 thousand shares could be issuable if the company were to elect a net-share settlement of the contracts based on the fair value at June 30, 2002. 11. Common Stock ------------ On May 16, 2002, the Board of Directors authorized a two-for-one stock distribution of MMC's common stock, which was issued as a stock dividend on June 28, 2002. 12. Claims, Lawsuits and Other Contingencies ---------------------------------------- MMC and its subsidiaries are subject to various claims, lawsuits and proceedings consisting principally of alleged errors and omissions in connection with the placement of insurance or reinsurance and in rendering investment and consulting services. Some of these matters seek damages, including punitive damages, in amounts which could, if assessed, be significant. Insurance coverage applicable to such matters includes elements of both risk retention and risk transfer. Sedgwick Group plc, since prior to its acquisition, has been engaged in a review of previously undertaken personal pension plan business as required by United Kingdom regulators to determine whether redress should be made to customers. Other present and former subsidiaries of MMC are engaged in a comparable review of their personal pension plan businesses, although the extent of their activity in this area, and consequently their financial exposure, was proportionally much less than Sedgwick. As of June 30, 2002, settlements and related costs previously paid amount to approximately $500 million, of which approximately $175 million is due from or has been paid by insurers. The remaining estimated payments for pension redress and related costs accrued in the financial statements is $130 million, essentially all of which is expected to be recovered from insurers. MMC's ultimate exposure from the review by the Personal Investment Authority (now part of the U.K. Financial Services Authority), as presently calculated and including Sedgwick, is subject to a number of variable factors including, among others, the interest rate established quarterly by the U.K. regulators for calculating compensation, equity markets, and the precise scope, duration, and methodology of the review as required by that Authority. As part of the combination with Sedgwick, MMC acquired several insurance underwriting businesses that were already in run-off, including River Thames Insurance Company Limited. MMC has subsequently disposed of substantially all of these insurance entities, however, guarantees issued by Sedgwick with respect to certain liabilities of River Thames remain open. Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on MMC and its subsidiaries, on the basis of present information, it is the opinion of MMC's management that the disposition or ultimate determination of these claims, lawsuits, proceedings or guarantees will not have a material adverse effect on MMC's consolidated results of operations or its consolidated financial position. 13. Segment Information ------------------- MMC operates in three principal business segments based on the services provided. Segment performance is evaluated based on operating income, which is after deductions for directly related expenses and minority interest but before special charges. The accounting policies of the segments are the same as those used for the consolidated financial statements. Selected information about MMC's operating segments for the six-month periods ended June 30, 2002 and 2001 follow: (In millions of dollars) Revenue Segment ------------------------ from External Operating Customers Income ------------- -------------- 2002 ---- Risk and Insurance Services $2,912 (a) $ 791 Investment Management 1,175 344 Consulting 1,160 (b) 164 ------ ------ $5,247 $1,299 ====== ====== 2001 ---- Risk and Insurance Services $2,605 (a) $ 634 Investment Management 1,386 424 Consulting 1,181 (b) 161 ------ ------ $5,172 $1,219 ====== ====== (a) Includes interest income on fiduciary funds ($56 million in 2002 and $95 million in 2001). (b) Revenue and expense for 2001 reflect the reclassification of reimbursed (out-of-pocket) expenses. Effective January 1, 2002, expense reimbursements received from clients within the Consulting segment are recorded as revenue rather than an offset to expense, in compliance with guidance provided by the Financial Accounting Standards Board (EITF Issue No. 01-14). A reconciliation of the total segment operating income to income before income taxes and minority interest in the consolidated financial statements is as follows: 2002 2001 -------- ------- Total segment operating income $ 1,299 $ 1,219 Corporate expense (58) (58) Reclassification of minority interest 11 10 ------- ------- Operating income 1,252 1,171 Interest income 9 12 Interest expense (75) (108) ------- ------- Total income before income taxes and minority interest $ 1,186 $ 1,075 ======= ======= 14. Subsequent Event ---------------- On August 9, 2002, Conseco, Inc. announced its intent to exercise a 30-day grace period on bond interest payments and engage financial and legal advisors for the purpose of beginning discussions with bondholders with a goal of restructuring the capital of the parent company. Thomas H. Lee Equity Fund IV, L.P. ("Fund IV") holds a significant preferred investment position in Conseco. In 1999, Putnam acquired an equity interest in Thomas H. Lee Partners, L. P., and the general partner of Fund IV. The significant capital restructuring that may result from the actions announced by Conseco may adversely impact the value of Fund IV's investment in Conseco, and consequently the value of Putnam's investments related to Fund IV. Putnam is assessing the impact of this event on its investments in Fund IV, which could result in a reduction of pre-tax operating income (non-cash) in the range of $10-15 million in the third quarter. Marsh & McLennan Companies, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Second Quarter and Six Months Ended June 30, 2002 General Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional services firm. MMC subsidiaries include Marsh, the world's leading risk and insurance services firm; Putnam Investments, one of the largest investment management companies in the United States; and Mercer, a major global provider of consulting services. Approximately 58,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries. MMC operates in three principal business segments based on the services provided. Segment performance is evaluated based on operating income, which is after deductions for directly related expenses and minority interest. For a description of critical accounting policies, including those which involve significant management judgment, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the consolidated financial statements in MMC's Annual Report on Form 10-K for the year ended December 31, 2001. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" on page one of this filing. This Form 10-Q should be read in conjunction with MMC's latest Annual Report on Form 10-K. The consolidated results of operations follow: - -------------------------------------- ------------------- -------------------- Second Quarter Six Months (In millions of dollars) 2002 2001 2002 2001 - -------------------------------------- ------------------- -------------------- Revenue: Risk and Insurance Services $1,436 $1,251 $2,912 $2,605 Investment Management 581 696 1,175 1,386 Consulting (a) 595 594 1,160 1,181 ------ ------ ------ ------ 2,612 2,541 5,247 5,172 ------ ------ ------ ------ Expense: Compensation and Benefits 1,281 1,222 2,530 2,438 Other Operating Expenses 766 793 1,465 1,563 ------ ------ ------ ------ 2,047 2,015 3,995 4,001 ------ ------ ------ ------ Operating Income $ 565 $ 526 $1,252 $1,171 ====== ====== ====== ====== Operating Income Margin 21.6% 20.7% 23.9% 22.6% ====== ====== ====== ====== - -------------------------------------------------------------------------------- (a) Revenue and expense for 2001 reflect the reclassification of reimbursed (out-of-pocket) expenses to conform with current year presentation. Revenue, derived mainly from commissions and fees, rose 3% from the second quarter of 2001 and rose 1% for the six months. Expenses increased 2% for the second quarter and were essentially unchanged for the six months. Revenue increased in the risk and insurance services segment, principally driven by a higher volume of business, partially offset by a revenue decline in the investment management segment. The 2002 expenses reflect the change in accounting for goodwill discussed under "New Accounting Pronouncements" in this Management's Discussion and Analysis. On a consolidated basis, underlying revenue which excludes the effect of such items as foreign exchange, acquisitions and dispositions, increased 3% as compared with the second quarter of 2001. The risk and insurance services segment experienced underlying revenue growth of approximately 16% primarily due to net new business and the effect of higher commercial insurance premium rates partially offset by lower fiduciary interest income. Revenue decreased 17% in the investment management segment as average assets under management declined from the prior year. Consulting revenue decreased 2% for the second quarter primarily reflecting a decline in the general management consulting, the rewards/talent management, and the communication practices partially offset by increased levels of service provided by its retirement consulting, administration and economic consulting practices. For the six months, consolidated underlying revenue declined approximately 2%. Operating expenses, excluding the effect of foreign exchange, acquisitions and dispositions, and the change in accounting for goodwill, increased approximately 3% in the second quarter of 2002 primarily due to increased compensation and benefit costs in the risk and insurance services segment offset by lower incentive compensation and lower volume related expenses in the investment management segment. Underlying expenses increased 2% for the first six months of 2002 compared with the same period of 2001. Risk and Insurance Services - ------------------------------------------------------------------------------- Second Quarter Six Months (In millions of dollars) 2002 2001 2002 2001 - ------------------------------------------------------------------------------- Revenue $1,436 $1,251 $2,912 $2,605 Expense 1,107 998 2,121 1,971 ------ ------ ------ ------ Operating Income $ 329 $ 253 $ 791 $ 634 ====== ====== ====== ====== Operating Income Margin 22.9% 20.2% 27.2% 24.3% ====== ====== ====== ====== - ------------------------------------------------------------------------------- Revenue Revenue for the risk and insurance services segment grew 15% over the second quarter of 2001. On a comparable basis, underlying revenue for the risk and insurance services segment rose approximately 16% primarily reflecting net new business and higher premium rates. Underlying revenue for insurance broking and risk management, which accounted for approximately 75% of the entire risk and insurance services segment, grew approximately 19%. This increase includes the impact of a 35% decrease in fiduciary interest income, resulting from a decline in interest rates, partially offset by higher average funds invested. Underlying revenue for the reinsurance broking unit grew 20%, which includes the impact of a 33% decline in fiduciary interest income. For the first six months of 2002, underlying revenue grew 14% over the same period of 2001. Over the past two years, the transfer of commercial risk has become more difficult and costly with proportionate increases in premiums. Since the terrorist attacks in 2001, insurance and reinsurance markets worldwide have tightened, capacity is reduced and rates increased. The size of the increases varies according to product line and clients' loss experience, which reflects a dynamic and changing marketplace. These trends are continuing into the third quarter of 2002. Expense Risk and insurance services expenses increased 11% in the second quarter and 8% for the six months over 2001. On a comparable basis, excluding the effect of such items as acquisitions, foreign exchange, and the change in accounting for goodwill, expenses increased approximately 13% from the second quarter of 2001 and 11% for the six months primarily reflecting increased incentive compensation commensurate with strong operating performance and increased benefit costs and increased costs due to a higher volume of business. Investment Management - -------------------------------------------------------------------------------- Second Quarter Six Months (In millions of dollars) 2002 2001 2002 2001 - -------------------------------------------------------------------------------- Revenue $581 $696 $1,175 $1,386 Expense 412 489 831 962 ----- ----- ----- ----- Operating Income $169 $207 $344 $ 424 ===== ===== ===== ===== Operating Income Margin 29.1% 29.7% 29.3% 30.6% ===== ===== ===== ===== - -------------------------------------------------------------------------------- Revenue Putnam's revenue decreased 17% compared with the second quarter of 2001 primarily reflecting a decline in the level of average assets under management on which fees are earned, as well as a decline in equity earnings for the Thomas H. Lee investment. Assets under management averaged $301 billion in the second quarter of 2002, an 11% decline from the $340 billion managed in the second quarter of 2001. Assets under management aggregated $284 billion at June 30, 2002 compared with $339 billion at June 30, 2001 and $315 billion at December 31, 2001. The change from December 31, 2001 results from a $27 billion decrease due to a decline in equity market levels and $3.6 billion of net fund redemptions. Assets under management at July 31, 2002 aggregated $261 billion. Revenue for Putnam decreased 15% for the first six months of 2002 compared with the same period of 2001. Expense Putnam's expenses decreased 16% in the second quarter of 2002 from the same period of 2001 and 14% in the first six months of 2002 compared to 2001, primarily due to a reduction in volume related expenses, as well as lower incentive compensation reflecting the current operating environment. Quarter-end and average assets under management are presented below: - --------------------------------------------------------------------- (In billions of dollars) 2002 2001 - ----------------------------------- ---------------- ---------------- Mutual Funds: Core Equity $53 $ 64 Value Equity 49 55 Growth Equity 39 76 Fixed Income 50 47 - ----------------------------------- ---------------- ---------------- 191 242 - ----------------------------------- ---------------- ---------------- Institutional Accounts: Core Equity 47 46 Value Equity 7 7 Growth Equity 20 28 Fixed Income 19 16 - ----------------------------------- ---------------- ---------------- 93 97 - ----------------------------------- ---------------- ---------------- Quarter-end Assets $284 $339 - ----------------------------------- ---------------- ---------------- Assets from Non-US Investors $30 $29 - ----------------------------------- ---------------- ---------------- Average Assets $301 $340 - ----------------------------------- ---------------- ---------------- Assets under management and revenue levels are particularly affected by fluctuations in domestic and international stock and bond market prices, the composition of assets under management and by the level of investments and withdrawals for current and new fund shareholders and clients. U.S. equity markets have recorded declines in each of the past two years and over the first six months of 2002 after several years of substantial growth prior to 2000. These market declines are a primary cause to the decrease in assets under management and, accordingly, to the decrease in revenue. Items affecting revenue also include, but are not limited to, actual and relative investment performance, service to clients, the development and marketing of new investment products, the relative attractiveness of the investment style under prevailing market conditions and changes in the investment patterns of clients and the ability to maintain investment management and administrative fees at appropriate levels. Revenue levels are sensitive to all of the factors above, but in particular, to changes in stock and bond market valuations. Putnam provides individual and institutional investors with a broad range of equity and fixed income investment products and services, invested domestically and globally, designed to meet varying investment objectives and which afford its clients the opportunity to allocate their investment resources among various investment products as changing worldwide economic and market conditions warrant. At the end of the second quarter, assets held in equity securities represented 76% of assets under management, compared with 81% at June 30, 2001, while investments in fixed income products represented 24%, compared with 19% at June 30, 2001. Consulting - -------------------------------------------------------------------------------- Second Quarter Six Months (In millions of dollars) 2002 2001 (a) 2002 2001(a) - ------------------------------------------------------------------------------- Revenue $595 $594 $1,160 $1,181 Expense 505 503 996 1,020 ---- ---- ------ ------ Operating Income $90 $91 $ 164 $ 161 ===== ===== ====== ====== Operating Income Margin 15.1% 15.3% 14.1% 13.6% ===== ===== ====== ====== - ------------------------------------------ ------------- ------------ ---------- (a) Revenue and expense for 2001 reflect the reclassification of reimbursed (out-of-pocket) expenses to conform with current year presentation. Revenue Consulting revenue was essentially unchanged in the second quarter of 2002 compared with the same period of 2001. Excluding items such as foreign exchange, acquisitions and dispositions, underlying consulting revenue decreased 2%. General management consulting revenue declined 24% and rewards/talent management and communications consulting revenue declined 13% due to reduced demand for these services. Retirement consulting and administration revenue, which represented 46% of the consulting segment, grew 6% in the second quarter and economic consulting revenue rose 16%. For the six months of 2002, underlying revenue decreased 2% compared with the same period of 2001. Expense Consulting expenses were essentially unchanged in the second quarter of 2002 compared with the same period of 2001 and declined 2% for the six months. On a comparable basis, excluding the effect of such items as foreign exchange, acquisitions and dispositions, and the change in accounting for goodwill, expenses were flat for the second quarter and declined 1% for the six months. New Accounting Pronouncements In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", MMC discontinued amortization of goodwill on a prospective basis, effective January 1, 2002. Although results of prior periods are not to be restated, SFAS No. 142 requires disclosure of the effect of the accounting change on all prior periods presented. The impact of this change on 2001 results, after the effect of taxes and directly related expenses, is an increase in diluted earnings per share as follows for the quarter ended: March 31 - $0.06; June 30 - $0.06; September 30 - $0.06; and December 31 - $0.05. Approximately 70% of the impact of this change is related to the Risk and Insurance Services segment. Effective January 1, 2002, expense reimbursements received from clients within the consulting segment are recorded as revenue, rather than an offset to expense, in accordance with guidance provided in EITF Issue 01-14, "Income Statement Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." Revenue and expense for prior periods reflect the reclassification of reimbursed expenses as follows: Reclassification of Consulting Reimbursed Expenses 2001 --------------------------------------------------------- 1Q 2Q 3Q 4Q YR ----------- ------------ ---------- --------- ----------- Revenue: As Previously Reported $550 $558 $536 $516 $2,160 Reimbursements 37 36 36 39 148 ----------- ------------ ---------- --------- ----------- After Reclassification $587 $594 $572 $555 $2,308 ----------- ------------ ---------- --------- ----------- Expense: As Previously Reported $480 $467 $455 $445 $1,847 Reimbursements 37 36 36 39 148 ----------- ------------ ---------- --------- ----------- After Reclassification $517 $503 $491 $484 $1,995 ----------- ------------ ---------- --------- ----------- Operating Income $70 $91 $81 $71 $313 =========== ============ ========== ========= =========== Operating Margin: As Previously Reported 12.7% 16.3% 15.1% 13.8% 14.5% After Reclassification 11.9% 15.3% 14.2% 12.8% 13.6% Interest Interest income earned on corporate funds amounted to $4 million in the second quarter of 2002, compared with $7 million in the second quarter of 2001. Interest expense of $38 million decreased from $56 million in the second quarter of 2001. The decrease in both interest income and interest expense is primarily due to lower average interest rates in 2002. Income Taxes MMC's consolidated effective tax rate was 35.5% of income before income taxes and minority interest in the second quarter of 2002 compared with 37.5% in the second quarter of 2001. The reduction in the effective tax rate results primarily from the implementation of SFAS No. 142, as a significant portion of the goodwill amortization expense recorded in prior years was not deductible for tax purposes. Subsequent Event On August 9, 2002, Conseco, Inc. announced its intent to exercise a 30-day grace period on bond interest payments and engage financial and legal advisors for the purpose of beginning discussions with bondholders with a goal of restructuring the capital of the parent company. Thomas H. Lee Equity Fund IV, L.P. ("Fund IV") holds a significant preferred investment position in Conseco. In 1999, Putnam acquired an equity interest in Thomas H. Lee Partners, L. P., and the general partner of Fund IV. The significant capital restructuring that may result from the actions announced by Conseco may adversely impact the value of Fund IV's investment in Conseco, and consequently the value of Putnam's investments related to Fund IV. Putnam is assessing the impact of this event on its investments in Fund IV, which could result in a reduction of pre-tax operating income (non-cash) in the range of $10-15 million in the third quarter. Liquidity and Capital Resources MMC anticipates that funds generated from operations will be sufficient to meet its foreseeable recurring operating cash requirements as well as to fund dividends, capital expenditures and scheduled repayments of long-term debt. MMC's ability to generate cash flow from operations is subject to the business risks inherent in each operating segment. MMC generated $560 million of cash from operations for the period ended June 30, 2002 compared with $304 million for the same period in 2001. These amounts reflect the net income earned by MMC during those periods adjusted for non-cash charges and working capital changes. MMC's cash and cash equivalents aggregated $471 million on June 30, 2002, a decrease of $66 million from the end of 2001. Financing Activity In March 2002, MMC issued $500 million of 5.375% Senior Notes due in 2007 and $250 million of 6.25% Senior Notes due in 2012 (the "Notes"). The net proceeds from the Notes were used to pay down commercial paper borrowings. MMC entered into interest rate swap transactions to hedge its exposure to changes in the fair value of the Notes. The swap transactions effectively convert the fixed rate obligations into floating rate obligations. Under the terms of the swaps, the swap counterparties will pay MMC a fixed rate equal to the coupon rate on the bonds. MMC will pay the swap counterparties a floating rate of 6-month Libor plus 9.25 bps for the five-year swap and 6 month Libor plus 25.45 bps for the ten year swap. The swaps qualify for hedge accounting and meet all criteria necessary to conclude that the hedge will be perfectly effective under SFAS No. 133. During the first six months of 2002, MMC repurchased approximately 16.5 million shares of its common stock at a cost of approximately $841 million. MMC currently plans to continue to repurchase shares throughout 2002, subject to market conditions, including from time to time pursuant to the terms of a 10b5-1 plan. A 10b5-1 plan allows a company to purchase shares during a blackout period, provided the company communicates its share purchase instructions to the broker prior to the blackout period. MMC uses written put options to supplement its share repurchase program. The contracts are European style options, which generally expire three months from the date of sale. Settlement terms of the contracts are controlled by MMC and include physical, net-cash or net-share settlement. The contracts are recorded as equity transactions in accordance with EITF Issue No. 00-19, "Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock." At June 30, 2002, MMC had open contracts on 2,300,000 shares, with strike prices ranging from $41.85 to $48.15. The open contracts expire between July 22, 2002 and September 24, 2002. Investment Activity MMC's additions to fixed assets and capitalized software, which amounted to $187 million in the first six months of 2002 and $224 million in the six months last year, primarily relate to computer equipment purchases and the refurbishing and modernizing of office facilities and software development costs. MMC has committed to potential future investments of approximately $535 million in connection with various MMC Capital funds and other MMC investments. Approximately $200 million is expected to be invested during the remainder of 2002. MMC expects to fund future commitments, in part, with sales proceeds from existing investments. In the normal course of business MMC makes investments through its subsidiary Marsh & McLennan Risk Capital Holdings, Ltd., primarily in insurance and reinsurance entities, and periodically sells these investments. In the second quarter of 2002, MMC sold an investment that it had acquired in 1997 to Trident II, L.P. MMC Capital, Inc. a wholly-owned subsidiary of MMRCH, serves as advisor to Trident II, L.P. Revenue of $9 million from this transaction was recorded by MMRCH. The underlying revenue growth rate for the Risk and Insurance Services segment excludes the revenue from investment transactions. Market Risk Certain of MMC's revenues, expenses, assets and liabilities are exposed to the impact of interest rate changes and fluctuations in foreign currency exchange rates and equity markets. Interest Rate Risk MMC manages its net exposure to interest rate changes by utilizing a mixture of variable and fixed rate borrowings to finance MMC's asset base. Interest rate swaps are used on a limited basis to manage MMC's exposure to interest rate movements on its cash and investments, as well as to hedge the fair value of fixed rate debt, and are only executed with counterparties of high creditworthiness. Foreign Currency Risk The translated values of revenue and expense from MMC's international risk and insurance services and consulting operations are subject to fluctuations due to changes in currency exchange rates. However, the net impact of these fluctuations on MMC's results of operations or cash flows has not been material. Forward contracts and options are periodically utilized by MMC to limit foreign currency exchange rate exposure on net income and cash flows for specific, clearly defined transactions arising in the ordinary course of its business. Equity Price Risk MMC has both "available for sale" investments which are carried at market value under SFAS No. 115 and investments which are accounted for using the equity method under APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." The investments are subject to risk of changes in market value, which if determined to be other than temporary, could result in impairment losses. MMC reviews the carrying value of such investments to determine if any valuation adjustments are appropriate under the applicable accounting pronouncements. MMC utilizes option contracts to hedge the variability of cash flows from forecasted sales of certain available for sale investments. The hedge is achieved through the use of European style put and call options, which mature on the dates of the forecasted sales. The hedges are only executed with counterparties of high creditworthiness. Other As further explained in Note 12 to the consolidated financial statements, the disclosure and advice given to clients regarding certain personal pension transactions by certain present and former subsidiaries in the United Kingdom are under review by the Financial Services Authority. At current rates of exchange, the estimated payments for pension redress and related costs accrued in the financial statements is $130 million, essentially all of which is expected to be recovered from insurers. Approximately two-thirds of the contingent exposure is associated with the Sedgwick acquisition while the balance is associated with other current and former subsidiaries of MMC. Such amounts in excess of anticipated insurance recoveries have been provided for in the accompanying financial statements. PART II. OTHER INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT JUNE 30, 2002 Item 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Stockholders of MMC was held on May 16, 2002. Represented at the Meeting, at which stockholders took the following actions, were 229,537,807 shares or 85 percent of MMC's 271,579,404 shares of common stock outstanding and entitled to vote: 1. MMC's stockholders elected the six director nominees named below with each receiving the following votes: Number of Number of Shares Shares Voted For Voted to be Withheld ---------------- -------------------- Jeffrey W. Greenberg 196,216,063 33,321,744 Stephen R. Hardis 224,335,999 5,201,808 Rt. Hon. Lord Lang 225,455,231 4,082,576 Morton O. Schapiro 224,747,356 4,790,451 Adele Simmons 224,215,303 5,322,504 A.J.C. Smith 224,585,370 4,952,437 2. Deloitte & Touche LLP was ratified as MMC's independent public accountants for the year ending December 31, 2002 with a favorable vote of 219,132,973 of the shares represented (9,142,489 against and 1,261,985 abstaining). Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 10.1 Renewal of Consulting Agreement between A.J.C. Smith and MMC dated as of May 16, 2002. 10.2 Form of Waiver dated June 24, 2002 of certain provisions of the MMC Capital Long-Term Incentive Plan executed by Messrs. Greenberg and Davis. 10.3 Representative Fund Advisory Contract with each of the Putnam Funds. 12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K A Current Report on Form 8-K dated June 25, 2002 was filed by the registrant announcing it had extended its offer to exchange up to $500,000,000 aggregate principal amount of its registered 5.375% Senior Notes due 2007 and $250,000,000 aggregate principal amount of its registered 6.25% Senior Notes due 2012 for any and all outstanding unregistered 5.375% Senior Notes due 2007 and unregistered 6.25% Senior Notes due 2012 until 5:00 p.m., New York City time, on July 1, 2002. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES SIGNATURE ----------- Pursuant to the requirements of the Securities Exchange Act of 1934, MMC has duly caused this report to be signed this 12th day of August, 2002 on its behalf by the undersigned, thereunto duly authorized and in the capacity indicated. MARSH & McLENNAN COMPANIES, INC. /s/ Sandra S. Wijnberg ------------------------- Senior Vice President and Chief Financial Officer EX-10 2 ex10_2waiver.txt EXHIBIT 10.2 (WAIVER) Exhibit 10.2 Waiver/Modification of LTIP Interest in connection with the Proposed Sale of The Arc Group, LLC WHEREAS, the undersigned plan participant is an employee of or consultant to MMC Capital, Inc. ("MMC Capital") and MMC Capital is a wholly owned subsidiary of Marsh & McLennan Risk Capital Holdings, Ltd. ("MMRCH"). WHEREAS, under the MMC Capital Long-Term Incentive Plan (the "LTIP"), certain employees of and consultants to MMC Capital are entitled to participate in profit generated from certain investments made by MMRCH. WHEREAS, the investment made by MMRCH in The ARC Group, LLC ("ARC") is subject to profit sharing pursuant to the LTIP and the undersigned plan participant has received a grant entitling him to participate in such profit. WHEREAS, after consulting with the Board of Advisors of Trident II, L.P. ("Trident"), Trident recently indicated that it would be willing to acquire all of MMRCH's interest in ARC but only if both of the undersigned were to enter into an agreement substantially in the form hereof. Trident would expect to use a holding company to consummate this acquisition. WHEREAS, both of the undersigned have determined that it is in their respective best interests to support the above-referenced sale and to execute this agreement. NOW, THEREFORE, the undersigned hereby agree as follows: o Section 1. The undersigned plan participant hereby irrevocably waives his right to receive any payment under the LTIP in connection with the sale by MMRCH of its interest in ARC to Trident. Amounts not distributed pursuant to the LTIP become an asset of MMC Capital, a wholly owned subsidiary of MMRCH. o Section 2. In the event that Trident recovers the entire amount paid to MMRCH for the above-referenced interest in ARC (i.e., to the extent that Trident generates a gain on the purchase of MMRCH's interest in ARC), MMC Capital hereby agrees to make promptly thereafter a payment to the undersigned plan participant in an amount equal to the product of (i) the amount that would have been payable to the undersigned plan participant pursuant to the LTIP upon the sale by MMRCH of its interest in ARC to Trident assuming this agreement had not been executed and (ii) 1.[___]n where "n" is a fraction, the numerator of which is the actual number of days elapsed between the date hereof and the date on which the payment is made to the undersigned plan participant pursuant to this Section 2, and the denominator of which is 365. o Section 3. It is hereby acknowledged that, to the extent that Trident does not recover the amount paid to MMRCH for the above-referenced interest in ARC (i.e., to the extent that Trident loses money on the purchase of MMRCH's interest in ARC), MMRCH has agreed to pay to Trident as a purchase price adjustment an amount in cash equal to the loss experienced by Trident, but in no event will the amount of such payment exceed the profit pool that would have been available for distribution under the LTIP in connection with the sale of MMRCH's interest in ARC to Trident. The treatment of any portion of the LTIP profit pool relating to ARC that is not paid to Trident shall be subject to the then applicable terms of the LTIP. Agreed as of June [__], 2002: MMC Capital, Inc. Plan Participant: By:_____________________________ _____________________________ Name: Title: EX-10 3 ex10_1letter.txt EXHIBIT 10.1 (LETTER) Exhibit 10.1 May 16, 2002 Mr. A.J.C. Smith 630 Park Avenue New York, NY 10021 Dear Ian, The purpose of this letter is to confirm that the terms of your consultant agreement (described in the letter of June 1, 2000 attached) will continue through May 31, 2003. Please indicate your acceptance below. Thank you. Sincerely, /s/ Francis N. Bonsignore /s/ A.J.C. Smith ------------------------- Accepted A.J.C. Smith cc: Jeffrey W. Greenberg William L. Rosoff Gregory Van Gundy JS-3289 EX-12 5 ex12_1ratio.txt EXHIBIT 12.1 (RATIO OF EARNINGS) Exhibit 12.1 Marsh & McLennan Companies, Inc. and Subsidiaries Ratio of Earnings to Fixed Charges (In millions, except ratios)
Six Months Ended June 30, Years Ended December 31, 2002 (Unaudited) 2001 2000 1999(1) 1998 1997(2) - ----------------------------------------------------------------------------------------- Earnings Income before income taxes and minority interest $1,186 $1,590 $1,955 $1,255 $1,305 $ 715 Interest expense 75 196 247 233 140 107 Portion of rents representative of the interest factor 59 121 120 121 104 88 Amortization of capitalized interest -- -- -- 1 1 1 ------ ------ ------ ------ ------ ------ $1,320 $1,907 $2,322 $1,610 $1,550 $ 911 ====== ====== ====== ====== ====== ====== Fixed Charges Interest expense $ 75 $ 196 $ 247 $ 233 $ 140 $ 107 Portion of rents representative of the interest factor 59 121 120 121 104 88 ------ ------ ------ ------ ------ ------ $ 134 $ 317 $ 367 $ 354 $ 244 $ 195 ====== ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges 9.9 6.0 6.3 4.5 6.4 4.7
(1) For the year ended December 31, 1999, income before income taxes included a $337 million special charge related to the acquisition and integration of Sedgwick. Excluding that charge, the ratio of earnings to fixed charges would have been 5.5. (2) For the year ended December 31, 1997, income before income taxes included a $244 million special charge related to the Johnson & Higgins integration, London real estate and the disposal of certain assets. Excluding that charge, the ratio of earnings to fixed charges would have been 5.9. EX-10 7 ex10_3contract.txt EXHIBIT 10.3 (CONTRACT) Exhibit 10.3 [FUND NAME] MANAGEMENT CONTRACT Management Contract dated as of [date] between [FUND NAME], a Massachusetts business trust (the "Fund"), and PUTNAM INVESTMENT MANAGEMENT, LLC, a Delaware limited liability company (the "Manager"). WITNESSETH: That in consideration of the mutual covenants herein contained, it is agreed as follows: 1. SERVICES TO BE RENDERED BY MANAGER TO FUND. (a) The Manager, at its expense, will furnish continuously an investment program for the Fund, will determine what investments shall be purchased, held, sold or exchanged by the Fund and what portion, if any, of the assets of the Fund shall be held uninvested and shall, on behalf of the Fund, make changes in the Fund's investments. Subject always to the control of the Trustees of the Fund and except for the functions carried out by the officers and personnel referred to in Section 1(d), the Manager will also manage, supervise and conduct the other affairs and business of the Fund and matters incidental thereto. In the performance of its duties, the Manager will comply with the provisions of the Agreement and Declaration of Trust and By-Laws of the Fund and its stated investment objectives, policies and restrictions, and will use its best efforts to safeguard and promote the welfare of the Fund and to comply with other policies which the Trustees may from time to time determine and shall exercise the same care and diligence expected of the Trustees. (b) The Manager, at its expense, except as such expense is paid by the Fund as provided in Section 1(d), will furnish (1) all necessary investment and management facilities, including salaries of personnel, required for it to execute its duties faithfully; (2) suitable office space for the Fund; and (3) administrative facilities, including bookkeeping, clerical personnel and equipment necessary for the efficient conduct of the affairs of the Fund, including determination of the Fund's net asset value, but excluding shareholder accounting services. Except as otherwise provided in Section 1(d), the Manager will pay the compensation, if any, of the officers of the Fund. (c) The Manager, at its expense, shall place all orders for the purchase and sale of portfolio investments for the Fund's account with brokers or dealers selected by the Manager. In the selection of such brokers or dealers and the placing of such orders, the Manager shall use its best efforts to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain for the Fund the most favorable price and execution available, the Manager, bearing in mind the Fund's best interests at all times, shall consider all factors it deems relevant, including by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker or dealer involved and the quality of service rendered by the broker or dealer in other transactions. Subject to such policies as the Trustees of the Fund may determine, the Manager shall not be deemed to have acted unlawfully or to have breached any duty created by this Contract or otherwise solely by reason of its having caused the Fund to pay a broker or dealer that provides brokerage and research services to the Manager an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Manager determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Manager's overall responsibilities with respect to the Fund and to other clients of the Manager as to which the Manager exercises investment discretion. The Manager agrees that in connection with purchases or sales of portfolio investments for the Fund's account, neither the Manager nor any officer, director, employee or agent of the Manager shall act as a principal or receive any commission other than as provided in Section 3. (d) The Fund will pay or reimburse the Manager for the compensation in whole or in part of such officers of the Fund and persons assisting them as may be determined from time to time by the Trustees of the Fund. The Fund will also pay or reimburse the Manager for all or part of the cost of suitable office space, utilities, support services and equipment attributable to such officers and persons, as may be determined in each case by the Trustees of the Fund. The Fund will pay the fees, if any, of the Trustees of the Fund. (e) The Manager shall pay all expenses incurred in connection with the organization of the Fund and the initial public offering and sale of its shares of beneficial interest, provided that upon the issuance and sale of such shares to the public pursuant to the offering, and only in such event, the Fund shall become liable for, and to the extent requested reimburse the Manager for, registration fees payable to the Securities and Exchange Commission and for an additional amount not exceeding [limit] as its agreed share of such expenses. (f) The Manager shall not be obligated to pay any expenses of or for the Fund not expressly assumed by the Manager pursuant to this Section 1 other than as provided in Section 3. 2. OTHER AGREEMENTS, ETC. It is understood that any of the shareholders, Trustees, officers and employees of the Fund may be a shareholder, director, officer or employee of, or be otherwise interested in, the Manager, and in any person controlled by or under common control with the Manager, and that the Manager and any person controlled by or under common control with the Manager may have an interest in the Fund. It is also understood that the Manager and any person controlled by or under common control with the Manager have and may have advisory, management, service or other contracts with other organizations and persons, and may have other interests and business. 3. COMPENSATION TO BE PAID BY THE FUND TO THE MANAGER. The Fund will pay to the Manager as compensation for the Manager's services rendered, for the facilities furnished and for the expenses borne by the Manager pursuant to paragraphs (a), (b), (c) and (e) of Section 1, a fee, computed and paid [payment cycle] at the annual rate of: [fee schedule] Such average net asset value shall be determined by taking an average of all of the determinations of such net asset value during such [period] at the close of business on each business day during such [period] while this Contract is in effect. Such fee shall be payable for each fiscal [period] within [days] after the close of such [period] and shall commence accruing as of the date of the initial issuance of shares of the Fund to the public. The fees payable by the Fund to the Manager pursuant to this Section 3 shall be reduced by any commissions, fees, brokerage or similar payments received by the Manager or any affiliated person of the Manager in connection with the purchase and sale of portfolio investments of the Fund, less any direct expenses approved by the Trustees incurred by the Manager or any affiliated person of the Manager in connection with obtaining such payments. In the event that expenses of the Fund for any fiscal year should exceed the expense limitation on investment company expenses imposed by any statute or regulatory authority of any jurisdiction in which shares of the Fund are qualified for offer or sale, the compensation due the Manager for such fiscal year shall be reduced by the amount of excess by a reduction or refund thereof. In the event that the expenses of the Fund exceed any expense limitation which the Manager may, by written notice to the Fund, voluntarily declare to be effective subject to such terms and conditions as the Manager may prescribe in such notice, the compensation due the Manager shall be reduced, and, if necessary, the Manager shall assume expenses of the Fund to the extent required by the terms and conditions of such expense limitation. If the Manager shall serve for less than the whole of a [period], the foregoing compensation shall be prorated. 4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT. This Contract shall automatically terminate, without the payment of any penalty, in the event of its assignment; and this Contract shall not be amended unless such amendment be approved at a meeting by the affirmative vote of a majority of the outstanding shares of the Fund, and by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Trustees of the Fund who are not interested persons of the Fund or of the Manager. 5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT. This Contract shall become effective upon its execution, and shall remain in full force and effect continuously thereafter (unless terminated automatically as set forth in Section 4) until terminated as follows: (a) Either party hereto may at any time terminate this Contract by not more than sixty days' nor less than thirty days' written notice delivered or mailed by registered mail, postage prepaid, to the other party, or (b) If (i) the Trustees of the Fund or the shareholders by the affirmative vote of a majority of the outstanding shares of the Fund, and (ii) a majority of the Trustees of the Fund who are not interested persons of the Fund or of the Manager, by vote cast in person at a meeting called for the purpose of voting on such approval, do not specifically approve at least annually the continuance of this Contract, then this Contract shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later. Action by the Fund under (a) above may be taken either (i) by vote of a majority of its Trustees, or (ii) by the affirmative vote of a majority of the outstanding shares of the Fund. Termination of this Contract pursuant to this Section 5 will be without the payment of any penalty. 6. CERTAIN DEFINITIONS. For the purposes of this Contract, the "affirmative vote of a majority of the outstanding shares of the Fund" means the affirmative vote, at a duly called and held meeting of shareholders of the Fund, (a) of the holders of 67% or more of the shares of the Fund present (in person or by proxy) and entitled to vote at such meeting, if the holders of more than 50% of the outstanding shares of the Fund entitled to vote at such meeting are present in person or by proxy, or (b) of the holders of more than 50% of the outstanding shares of the Fund entitled to vote at such meeting, whichever is less. For the purposes of this Contract, the terms "affiliated person," "control," "interested person" and "assignment" shall have their respective meanings defined in the Investment Company Act of 1940 and the Rules and Regulations thereunder (the "1940 Act"), subject, however, to such exemptions as may be granted by the Securities and Exchange Commission under said Act; the term "specifically approve at least annually" shall be construed in a manner consistent with the 1940 Act, and the Rules and Regulations thereunder; and the term "brokerage and research services" shall have the meaning given in the Securities Exchange Act of 1934 and the Rules and Regulations thereunder. 7. NON-LIABILITY OF MANAGER. In the absence of willful misfeasance, bad faith or gross negligence on the part of the Manager, or reckless disregard of its obligations and duties hereunder, the Manager shall not be subject to any liability to the Fund or to any shareholder of the Fund, for any act or omission in the course of, or connected with, rendering services hereunder. 8. LIMITATION OF LIABILITY OF THE TRUSTEES, OFFICERS, AND SHAREHOLDERS. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Fund as Trustees and not individually and that the obligations of or arising out of this instrument are not binding upon any of the Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund. IN WITNESS WHEREOF, [FUND NAME] and PUTNAM INVESTMENT MANAGEMENT, LLC have each caused this instrument to be signed in duplicate in its behalf by its President or a Vice President thereunto duly authorized, all as of the day and year first above written. [FUND NAME] By: ______________________________ Executive Vice President PUTNAM INVESTMENT MANAGEMENT, LLC By: ______________________________ Senior Managing Director -----END PRIVACY-ENHANCED MESSAGE-----