================================================================================
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, 2003
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, 2003 there were outstanding 532,637,345 shares of common
stock, par value $1.00 per share, of the registrant.
1
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, pension funding, 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
losses 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 difficult
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 insolvencies. 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 anticipated release of
quarterly financial results, and the posting of updates of assets under
management at Putnam. Monthly updates of total assets under management at Putnam
will be posted to the MMC website 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. Putnam
posts mutual fund and performance data to its website regularly. Assets for most
Putnam retail mutual funds are posted approximately two weeks after each
month-end. Mutual fund net asset value (NAV) is posted daily. Historical
performance and Lipper rankings are also provided. Investors can link to MMC and
its operating company websites through www.mmc.com.
2
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------
(In millions, except per share figures) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenue:
Service revenue $2,840 $2,607 $5,681 $5,210
Investment income (loss) 25 5 36 37
- --------------------------------------------------------------------------------
Operating revenue 2,865 2,612 5,717 5,247
- --------------------------------------------------------------------------------
Expense:
Compensation and benefits 1,475 1,281 2,853 2,530
Other operating expenses 791 766 1,548 1,465
- --------------------------------------------------------------------------------
Operating expenses 2,266 2,047 4,401 3,995
- --------------------------------------------------------------------------------
Operating income 599 565 1,316 1,252
Interest income 7 4 13 9
Interest expense (46) (38) (89) (75)
- --------------------------------------------------------------------------------
Income before income taxes and minority interest 560 531 1,240 1,186
Income taxes 189 189 421 421
Minority interest, net of tax 6 6 11 11
- --------------------------------------------------------------------------------
Net income $ 365 $ 336 $ 808 $ 754
- --------------------------------------------------------------------------------
Basic net income per share $ .68 $ .62 $ 1.51 $ 1.38
- --------------------------------------------------------------------------------
Diluted net income per share $ .66 $ .60 $ 1.47 $ 1.33
- --------------------------------------------------------------------------------
Average number of shares outstanding-Basic 534 545 535 546
- --------------------------------------------------------------------------------
Average number of shares outstanding-Diluted 552 562 550 565
- --------------------------------------------------------------------------------
Dividends Declared $ 0.31 $ 0.28 $ 0.59 0.55
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
3
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
(In millions of dollars) 2003 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 618 $ 546
- --------------------------------------------------------------------------------
Receivables
Commissions and fees 2,403 2,178
Advanced premiums and claims 115 119
Other 308 305
- --------------------------------------------------------------------------------
2,826 2,602
Less-allowance for doubtful accounts and cancellations (132) (124)
- --------------------------------------------------------------------------------
Net receivables 2,694 2,478
- --------------------------------------------------------------------------------
Prepaid dealer commissions - current portion 181 226
Other current assets 270 414
- --------------------------------------------------------------------------------
Total current assets 3,763 3,664
Goodwill and intangible assets 5,741 5,404
Fixed assets, net 1,386 1,308
(net of accumulated depreciation and
amortization of $1,354 at June 30, 2003
and $1,275 at December 31, 2002)
Long-term investments 567 578
Prepaid dealer commissions 210 292
Prepaid pension 1,135 1,071
Other assets 1,655 1,538
- --------------------------------------------------------------------------------
$14,457 $13,855
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
4
MARSH & MCLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
(In millions of dollars) 2003 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 369 $ 543
Accounts payable and accrued liabilities 1,561 1,406
Accrued compensation and employee benefits 1,271 1,568
Accrued income taxes 491 194
Dividends payable 167 152
- --------------------------------------------------------------------------------
Total current liabilities 3,859 3,863
- --------------------------------------------------------------------------------
Fiduciary liabilities 4,554 4,010
Less - cash and investments held in
a fiduciary capacity (4,554) (4,010)
- --------------------------------------------------------------------------------
- -
Long-term debt 2,877 2,891
- --------------------------------------------------------------------------------
Other liabilities 2,274 2,083
- --------------------------------------------------------------------------------
Commitments and contingencies - -
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
1,600,000,000 shares, issued 560,641,640
shares at June 30, 2003 and December 31, 2002 561 561
Additional paid-in capital 1,321 1,426
Retained earnings 4,982 4,490
Accumulated other comprehensive loss (264) (452)
- --------------------------------------------------------------------------------
6,600 6,025
Less - treasury shares, at cost,
26,464,681 shares at June 30, 2003 and
22,441,817 shares at December 31, 2002 (1,153) (1,007)
- --------------------------------------------------------------------------------
Total stockholders' equity 5,447 5,018
- --------------------------------------------------------------------------------
$14,457 $13,855
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
5
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
For Six Months Ended June 30, 2003 2002
(In millions of dollars)
- --------------------------------------------------------------------------------
Operating cash flows:
Net income $ 808 $ 754
Adjustments to reconcile net income to cash generated from
(used for) operations:
Depreciation of fixed assets and amortization,
capitalized software and other intangible assets 194 175
Provision for deferred income taxes 73 14
(Gains) losses on investments (36) (37)
Changes in assets and liabilities:
Net receivables (189) (25)
Prepaid dealer commissions 127 159
Other current assets 36 (24)
Other assets (105) (111)
Accounts payable and accrued liabilities 80 54
Accrued compensation and employee benefits (297) (296)
Accrued income taxes 298 (151)
Other liabilities 17 (17)
Effect of exchange rate changes 50 24
- --------------------------------------------------------------------------------
Net cash generated from operations 1,056 519
- --------------------------------------------------------------------------------
Financing cash flows:
Net decrease in commercial paper (640) (357)
Proceeds from issuance of debt 502 748
Other repayments of debt (44) (6)
Purchase of treasury shares (492) (802)
Issuance of common stock 253 235
Dividends paid (301) (291)
- --------------------------------------------------------------------------------
Net cash used for financing activities (722) (473)
- --------------------------------------------------------------------------------
Investing cash flows:
Capital expenditures (240) (187)
Proceeds from sales related to fixed assets
and capitalized software 9 12
Acquisitions (101) (21)
Other, net 42 79
- --------------------------------------------------------------------------------
Net cash used for investing activities (290) (117)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 28 5
- --------------------------------------------------------------------------------
Increase/(Decrease) in cash & cash equivalents 72 (66)
Cash & cash equivalents at beginning of period 546 537
- --------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 618 $ 471
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
6
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
risk management and insurance broking, reinsurance broking and insurance
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 retirement services, human capital, health care and group benefit
programs, management consulting, organizational change and organizational
design, economic consulting and corporate identity.
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 six-month periods ended June 30, 2003 and
2002. Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
The caption "Investment income (loss)" in the consolidated statements of
income comprises realized and unrealized gains and losses from investments
recognized in income. It includes other than temporary declines in the
value of available for sale securities, the change in value of trading
securities and the change in value of MMC's holdings in certain private
equity funds. MMC's investments may include seed shares for mutual funds,
direct investments in insurance, consulting or investment management
companies and investments in private equity funds.
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
7
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 service revenue, amounted to $61 million and $56 million
for the six-month periods ended June 30, 2003 and 2002, respectively. Since
fiduciary assets are not available for corporate use, they are shown in the
balance sheet as an offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to
$12.0 billion at June 30, 2003 and $11.7 billion at December 31, 2002,
respectively. MMC is not a principal to the contracts under which the right
to receive premiums or the right to receive reimbursement of insured losses
arises. Net uncollected premiums and claims and the related payables are,
therefore, not assets and liabilities of MMC and 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 shares granted under
the Putnam Equity Partnership Plan 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, 2003 and 2002.
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(In millions of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income $365 $336 $808 $754
Less: Potential minority interest
associated with the Putnam Class B Common
Shares net of dividend equivalent expense
related to common stock equivalents - - - (1)
- --------------------------------------------------------------------------------
Net income for diluted earnings per share $365 $336 $808 $753
- --------------------------------------------------------------------------------
Basic weighted average common shares outstanding 534 545 535 546
Dilutive effect of potentially issuable
common shares 18 17 15 19
- --------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 552 562 550 565
- --------------------------------------------------------------------------------
8
5 Supplemental Disclosures to the Consolidated Statements of Cash Flow
--------------------------------------------------------------------
The following schedule provides additional information concerning interest
and income taxes paid for the six-month periods ended June 30, 2003 and
2002.
---------------------------------------------------------------------------
(In millions of dollars) 2003 2002
---------------------------------------------------------------------------
Interest paid $ 81 $ 62
Income taxes paid $ 41 $ 468
6. Comprehensive Income
The components of comprehensive income for the six-month periods ended June
30, 2003 and 2002 are as follows:
---------------------------------------------------------------------------
(In millions of dollars) 2003 2002
---------------------------------------------------------------------------
Foreign currency translation adjustments $ 172 $ 60
Unrealized investment holding gains (losses),
net of income taxes 26 (33)
Less: Reclassification adjustment for realized
gains included in net income, net of income taxes (7) (18)
Deferred (loss) gain on cash flow hedges,
net of income taxes (3) 4
---------------------------------------------------------------------------
Other comprehensive income 188 13
Net income 808 754
---------------------------------------------------------------------------
Comprehensive income $996 $767
---------------------------------------------------------------------------
7. Acquisitions
------------
In April 2003, MMC acquired Oliver, Wyman & Company ("OWC") for $265
million, $159 million in cash, which will be paid over 4 years, and $106
million in MMC stock. Substantially all former employees of OWC are now
employees of MMC. Approximately $35 million of the purchase consideration
is subject to continued employment of the selling shareholders and is being
recorded as compensation expense over four years.
9
8. Goodwill and Other Intangibles
------------------------------
Changes in the carrying amount of goodwill for the six-month period ended
June 30, 2003, are as follows:
--------------------------------------------------------------------------
(In millions of dollars) 2003
---------------------------------------------------------------------------
Balance as of January 1, $5,151
Goodwill acquired 221
Other adjustments (primarily foreign exchange) 61
---------------------------------------------------------------------------
Balance as of June 30, $5,433
---------------------------------------------------------------------------
The goodwill balance at June 30, 2003 and December 31, 2002 includes
approximately $121 million of equity method goodwill.
Amortized intangible assets consist primarily 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
with indefinite lives. The gross carrying amount and accumulated
amortization by major intangible asset class is as follows:
- ------------------------------------------------------------------------------------------------------------------------
June 30, 2003 December 31, 2002
------------------------------------------------------------------------------
Net Net
Gross Accumulated Carrying Gross Accumulated Carrying
(In millions of dollars) Cost Amortization Amount Cost Amortization Amount
- ------------------------------------------------------------------------------------------------------------------------
Client lists and client relationships $226 $ 59 $167 $148 $ 50 $ 98
acquired
Future revenue streams related to 216 83 133 216 70 146
existing private equity funds
- ------------------------------------------------------------------------------------------------------------------------
Total amortized intangibles $442 $142 $300 $364 $120 $244
- ------------------------------------------------------------------------------------------------------------------------
Aggregate amortization expense for the six-month periods ended June 30,
2003 and 2002 was $20 million and $16 million, respectively and the
estimated aggregate amortization expense is as follows:
---------------------------------------------------------------------------
For the Years
Ending December 31, Estimated
(In millions of dollars) Expense
---------------------------------------------------------------------------
2003 $42
2004 $44
2005 $40
2006 $33
2007 $31
---------------------------------------------------------------------------
9. Stock Benefit Plans
-------------------
MMC has stock-based benefit plans under which employees are awarded grants
of restricted stock, stock options and other forms of awards. As provided
under SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
10
MMC has elected to continue to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and has provided the required
additional pro forma disclosures.
Pro Forma Information: In accordance with the intrinsic value method
allowed by APB 25, no compensation cost has been recognized in the
Consolidated Statements of Income for MMC's stock option and stock purchase
plans and the stock options awarded under the Putnam Investments Equity
Partnership Plan. If compensation cost for MMC's stock-based compensation
plans had been determined consistent with the fair value method prescribed
by SFAS No. 123, MMC's net income and net income per share for the three-
and six-month periods ended June 30, 2003 and 2002 would have been reduced
to the pro forma amounts indicated in the table below.
- ----------------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share figures) Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Net Income:
As reported $365 $336 $808 $754
Adjustment for fair value method, net of tax (41) (39) (88) (74)
- ----------------------------------------------------------------------------------------------------------------------
Pro forma net income $324 $297 $720 $680
- ----------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
Basic:
As reported $0.68 $0.62 $1.51 $1.38
Pro forma $0.61 $0.55 $1.35 $1.24
Diluted:
As reported $0.66 $0.60 $1.47 $1.33
Pro forma $0.59 $0.53 $1.32 $1.21
- ----------------------------------------------------------------------------------------------------------------------
The pro forma information above includes the cost of stock options issued
under MMC incentive and stock award plans and the Putnam Investments Equity
Partnership Plan and stock issued under MMC stock purchase plans. MMC stock
purchase plans allow eligible employees to purchase MMC shares at prices
not less than 85% of the less of the fair market value of the stock at the
beginning or end of the offering period. The stock purchase plans represent
approximately 20% of the increment from applying the fair value method in
2003 and 2002.
The estimated fair value of options granted was calculated using the
Black-Scholes option pricing valuation model. The weighted average
assumptions used in the valuation models are evaluated and revised, as
necessary, to reflect market conditions and experience.
10. Long-term Debt
--------------
In February 2003, MMC issued $250 million of 3.625% Senior Notes due 2008
and $250 million of 4.85% Senior Notes due 2013. The net proceeds from the
notes were used to pay down commercial paper borrowings.
In January 2003, MMC terminated and settled interest rate swaps that had
hedged the fair value of senior notes issued in 2002. The cumulative amount
of previously recognized adjustments of the fair value of the hedged notes
is being amortized over the remaining life of those notes in accordance
11
with SFAS No. 133. As a result, the effective interest rate over the
remaining life of the notes, including the amortization of the fair value
adjustments, is 4.0% for the $500 million Senior Notes due in 2007 (5.375%
coupon rate) and 5.1% for the $250 million Senior Notes due in 2012 (6.25%
coupon rate).
Commercial paper borrowings of $250 million and $750 million respectively,
at June 30, 2003 and December 31, 2002, 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.
In July 2003, MMC issued $300 million of 5.875% Senior Notes due 2033.
11. 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 non-cancelable
leases.
The utilization of these charges is summarized as follows:
------------------------------------------------------------------------------------------------------------
Utilized and
1999 Sedgwick Plan: changes in
(In millions of dollars) Initial estimates Utilized in Balance
Balance through 2002 Six Months 2003 June30, 2003
------------------------------------------------------------------------------------------------------------
Termination payments to employees $ 183 $ (181) $ - $ 2
Other employee-related costs 5 (5) - -
Future rent under noncancelable leases 48 (33) (2) 13
Leasehold termination and related costs 49 (32) - 17
------------------------------------------------------------------------------------------------------------
$ 285 $ (251) $(2) $ 32
------------------------------------------------------------------------------------------------------------
Number of employee terminations 2,400 (2,400) - -
Number of office consolidations 125 (125) - -
------------------------------------------------------------------------- ----------------------------------
12
------------------------------------------------------------------------------------------------------------
Utilized and
1999 MMC Plan: changes in
(In millions of dollars) Initial estimates Utilized in Balance
Balance through 2002 Six Months 2003 June 30, 2003
------------------------------------------------------------------------------------------------------------
Termination payments to employees $ 194 $ (190) $ - $ 4
Future rent under noncancelable leases 31 (21) (1) 9
Leasehold termination and related costs 16 (13) - 3
Other integration related costs 25 (25) - -
------------------------------------------------------------------------------------------------------------
$ 266 $ (249) $ (1) $ 16
------------------------------------------------------------------------------------------------------------
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, costs to restore leased properties
to contractually agreed upon condition and salary continuance arrangements,
are expected to be paid over several years.
------------------------------------------------------------------------------------------------------------
Utilized
2001 Plan Initial through Utilized in Balance
(In millions of dollars) Balance 2002 Six Months 2003 June 30, 2003
------------------------------------------------------------------------------------------------------------
Termination payments to employees $ 44 $ (39) $ (1) $ 4
Future rent under noncancelable leases 17 (4) (1) 12
------------------------------------------------------------------------------------------------------------
$ 61 $ (43) $ (2) $ 16
------------------------------------------------------------------------------------------------------------
Number of employee terminations 750 (750) - -
Number of office consolidations 9 (9) - -
------------------------------------------------------------------------------------------------------------
Actions under the 2001 Plan were completed 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.
12. Common Stock
------------
In 2003, MMC repurchased shares of its common stock for treasury as well as
to meet requirements for issuance of shares for its various stock
compensation and benefit programs. During the six-month period ended June
30, 2003, MMC repurchased 11.5 million shares for total consideration of
$503 million.
MMC repurchases shares 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, pursuant to a written plan that may not be changed.
Approximately 1.8 million shares of the repurchases discussed above were
made under the 10b5-1 plan.
13. 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
13
investment and consulting services. Some of these matters seek damages,
including punitive damages, in amounts that could, if assessed, be
significant. Insurance coverage applicable to such matters includes
elements of both risk retention and risk transfer.
As part of the combination with Sedgwick, MMC acquired River Thames
Insurance Company Limited ("River Thames"), an insurance underwriting
business that was already in run-off, which was sold in 2001. Sedgwick
guaranteed payment of claims on certain policies underwritten through the
Institute of London Underwriters by River Thames ("ILU Guarantee"). The
policies covered by the ILU Guarantee are reinsured up to (pound)40 million
by a related party of River Thames. Payment of claims under the reinsurance
agreement is collateralized by segregated assets held in a trust. As of
June 30, 2003, the reinsurance coverage exceeded the best estimate of the
projected liability of the policies covered by the ILU Guarantee. To the
extent River Thames or the reinsurer are unable to meet their obligations
under those policies, a claimant may seek to recover from MMC under the
guarantee. MMC does not expect any material net impact on its consolidated
financial position or results of operations related to this guarantee.
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.
14. 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, 2003 and 2002 follows:
- --------------------------------------------------------------------------------
Segment Operating
(In millions of dollars) Revenue Income
- --------------------------------------------------------------------------------
2003
Risk and Insurance Services $ 3,453 (a) $ 963
Investment Management 940 228
Consulting 1,324 182
- --------------------------------------------------------------------------------
$5,717 $1,373
- --------------------------------------------------------------------------------
2002
Risk and Insurance Services $ 2,912 (a) $ 791
Investment Management 1,175 344
Consulting 1,160 164
- --------------------------------------------------------------------------------
$5,247 $1,299
- --------------------------------------------------------------------------------
(a)Includes interest income on fiduciary funds ($61 million in 2003 and $56
million in 2002).
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:
---------------------------------------------------------------------------
(In millions of dollars) 2003 2002
---------------------------------------------------------------------------
Total segment operating income $ 1,373 $1,299
Corporate expense (68) (58)
Reclassification of minority interest 11 11
---------------------------------------------------------------------------
Operating income 1,316 1,252
Interest income 13 9
Interest expense (89) (75)
---------------------------------------------------------------------------
Total income before income taxes and
minority interest $ 1,240 $1,186
---------------------------------------------------------------------------
Operating segment revenue by product for the six-month periods ended June
30, 2003 and 2002 is as follows:
---------------------------------------------------------------------------
(In millions of dollars) 2003 2002
---------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $2,593 $2,158
Reinsurance Broking and Services 423 334
Related Insurance Services 437 420
---------------------------------------------------------------------------
Total Risk and Insurance Services 3,453 2,912
---------------------------------------------------------------------------
Investment Management 940 1,175
---------------------------------------------------------------------------
Consulting
Retirement Services 612 549
Health Care & Group Benefits 201 176
Human Capital 175 163
Management and Organizational Change 198 139
Economic 71 65
---------------------------------------------------------------------------
1,257 1,092
Reimbursed Expenses 67 68
---------------------------------------------------------------------------
Total Consulting 1,324 1,160
---------------------------------------------------------------------------
Total $5,717 $5,247
---------------------------------------------------------------------------
15. New Accounting Pronouncements
-----------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 interprets Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" and addresses
consolidation by business enterprises qualifying as variable interest
entities ("VIE"). FIN 46 defines a VIE as a corporation, partnership, trust
or other legal structure used for business purposes that either (a) does
not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to
support its activities. FIN 46 applies immediately to VIEs created after
January 31, 2003 in which the company obtains an interest after that date.
FIN 46 applies to the first fiscal year or interim period beginning after
June 15, 2003 for VIEs in which MMC holds a variable interest that it
acquired before February 1, 2003.
15
MMC through Putnam, manages $3.3 billion in the form of Collateralized Debt
Obligations ("CDO") and Collateralized Bond Obligations ("CBO"). The CDOs
and CBOs were created prior to January 31, 2003. Separate limited liability
companies were established to issue the notes and to hold the underlying
collateral, which consists of high-yield bonds and other securities. Putnam
serves as the collateral manager for the CDOs and CBOs. The maximum loss
exposure related to the CDOs and CBOs is limited to Putnam's investment
totaling $4.0 million, reflected in Long-term investments in the
Consolidated Balance Sheets at June 30, 2003. The implementation of FIN 46
will not have a significant impact on MMC's consolidated results of
operations, financial position or cash flows. The FASB may issue future
interpretive guidance to FIN 46.
16
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, 2003
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh, the world's largest 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 60,000 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, 2002.
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) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenue:
Service Revenue $2,840 $2,607 $5,681 $5,210
Investment Income (Loss) 25 5 36 37
- --------------------------------------------------------------------------------
Operating Revenue 2,865 2,612 5,717 5,247
- --------------------------------------------------------------------------------
Expense:
Compensation and Benefits 1,475 1,281 2,853 2,530
Other Operating Expenses 791 766 1,548 1,465
- --------------------------------------------------------------------------------
Operating Expenses 2,266 2,047 4,401 3,995
- --------------------------------------------------------------------------------
Operating Income $ 599 $ 565 $1,316 $1,252
- --------------------------------------------------------------------------------
Operating Income Margin 20.9% 21.6% 23.0% 23.9%
- --------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, increased 10% from the second
quarter of 2002. Revenue increased 5% on a constant currency basis which
measures the change in revenue using consistent current exchange rates, before
the impact of acquisitions and dispositions. Revenue increases in the risk and
insurance services and consulting segments were partially offset by a revenue
decline in the investment management segment.
17
The impact of foreign currency translation and acquisitions on MMC's reported
revenue is as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended % Change Currency/
June 30, GAAP Constant Acquisitions
2003 2002 Revenue Currency (b) Impact
- ---------------------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $1,270 $1,082 17% 13% 4%
Reinsurance Broking and Services 189 149 27% 24% 3%
Related Insurance Services (a) 221 205 8% 7% 1
- ---------------------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services 1,680 1,436 17% 14% 3%
- ---------------------------------------------------------------------------------------------------------------------------
Investment Management 495 581 (15)% (15)% -
- ---------------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services 312 279 12% 3% 9%
Health Care & Group Benefits 103 92 12% 6% 6%
Human Capital 89 85 5% 2% 3%
Management and Organizational Change 117 71 65% (1)% 66%
Economic 34 32 6% (1)% 7%
- ----------------------------------------------------------------------------------------------------------------------------
655 559 17% 2% 15%
Reimbursed Expenses 35 36 (3)% (3)% -
- ----------------------------------------------------------------------------------------------------------------------------
Total Consulting 690 595 16% 2% 14%
- ----------------------------------------------------------------------------------------------------------------------------
Total $2,865 $2,612 10% 5% 5%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Six Months Ended % Change Currency/
June 30, GAAP Constant Acquisitions
2003 2002 Revenue Currency (b) Impact
- ----------------------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $2,593 $2,158 20% 15% 5%
Reinsurance Broking and Services 423 334 27% 23% 4%
Related Insurance Services (a) 437 420 4% 4% -
- ----------------------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services 3,453 2,912 19% 15% 4%
- ----------------------------------------------------------------------------------------------------------------------------
Investment Management 940 1,175 (20)% (20)% -
- ----------------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services 612 549 11% 3% 8%
Health Care & Group Benefits 201 176 14% 9% 5%
Human Capital 175 163 7% 3% 4%
Management and Organizational Change 198 139 42% (3)% 45%
Economic 71 65 9% 5% 4%
- ----------------------------------------------------------------------------------------------------------------------------
1,257 1,092 15% 3% 12%
Reimbursed Expenses 67 68 (1)% (1)% -
- ----------------------------------------------------------------------------------------------------------------------------
Total Consulting 1,324 1,160 14% 3% 11%
- ----------------------------------------------------------------------------------------------------------------------------
Total $5,717 $5,247 9% 4% 5%
- ----------------------------------------------------------------------------------------------------------------------------
(a) Includes U.S. affinity, claims management, underwriting management and MMC
Capital businesses.
(b) Constant currency measures the change in revenue using consistent currency
exchange rates, before the impact of acquisitions and dispositions.
Revenue growth on a constant currency basis in the risk and insurance services
segment was 14% in the second quarter of 2003, reflecting strong growth across
all geographies in both insurance and reinsurance broking. Consulting revenue on
a constant currency basis grew 2% primarily resulting from a higher volume of
business in retirement services and health care & group benefits. Revenue
18
decreased 15% in the investment management segment as average assets under
management declined 14% from the second quarter of 2002. For the six months,
revenue growth was 9%, 4% on a constant currency basis.
Operating expenses increased 11% in the second quarter of 2003 (5% on a constant
currency basis) primarily due to increased compensation and benefit costs in the
risk and insurance services segment partially offset by lower expenses in the
investment management segment. Operating expenses also reflect an increase in
costs for office space and insurance. For the six months, operating expenses
increased 10%, 5% on a constant currency basis.
Risk and Insurance Services
- --------------------------------------------------------------------------------
Second Quarter Six Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenue $1,680 $1,436 $3,453 $2,912
Expense 1,277 1,107 2,490 2,121
- --------------------------------------------------------------------------------
Operating Income $ 403 $ 329 $ 963 $ 791
- -------------------------------------------------------------------------------
Operating Income Margin 24.0% 22.9% 27.9% 27.2%
- -------------------------------------------------------------------------------
Revenue
Revenue for the risk and insurance services segment grew 17% over the second
quarter of 2002 and on a constant currency basis grew 14%. The revenue growth
reflects continued strong demand for Marsh's services as clients face new,
expanding and more complex risks. The effect of higher premium rates and an
increase in placement service activities also contributed to the increase in
revenue. In the second quarter, constant currency revenues in risk management
and insurance broking, which accounts for approximately three quarters of the
risk and insurance services segment grew 13% with strong growth across all
geographies. Constant currency revenue in reinsurance broking and services grew
24%. Related insurance services revenues increased 7% on a constant currency
basis, with revenue increases in claims management and underwriting management
partially offset by declines in the U.S. affinity business and MMC Capital. For
the six months, revenue grew 19% over 2002 and 15% on a constant currency basis.
Pricing for commercial property risks has stabilized, however clients continue
to face rate increases in most casualty lines, and restricted terms and
conditions and coverage exclusions in all lines.
Expense
Risk and insurance services expenses increased 15% over the second quarter of
2002, 11% on a constant currency basis. Expense growth primarily reflects
increased headcount due to higher volumes of business along with increased
incentive compensation commensurate with the current operating environment.
Operating expenses also reflect an increase in costs for office space and
insurance. For the six months, operating expenses increased 17% over 2002, 13%
on a constant currency basis.
19
Investment Management
- --------------------------------------------------------------------------------
Second Quarter Six Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenue $ 495 $ 581 $ 940 $1,175
Expense 370 412 712 831
- --------------------------------------------------------------------------------
Operating Income $ 125 $ 169 $ 228 $ 344
- -------------------------------------------------------------------------------
Operating Income Margin 25.3% 29.1% 24.3% 29.3%
- -------------------------------------------------------------------------------
Revenue
Putnam's revenue decreased 15% compared with the second quarter of 2002
reflecting a decline in the level of average assets under management on which
fees are earned. Assets under management averaged $260 billion in the second
quarter of 2003, a 14% decline from the $301 billion managed in the second
quarter of 2002. Assets under management aggregated $267 billion at June 30,
2003 compared with $284 billion at June 30, 2002 and $251 billion at December
31, 2002. The change from December 31, 2002 results primarily from an increase
in equity market levels partially offset by net redemptions of $4.3 billion,
including reinvested dividends. Positive flows from institutional business were
more than offset by net outflows in retail mutual funds. Assets under management
at July 31, 2003 aggregated $267 billion.
Expense
Putnam's expenses decreased 10% in the second quarter of 2003 from the same
period of 2002 primarily due to reductions in volume related expenses, including
amortization of prepaid dealer commissions and incentive compensation.
Quarter-end and average assets under management are presented below:
- --------------------------------------------------------------------------------
(In billions of dollars) 2003 2002
- --------------------------------------------------------------------------------
Mutual Funds:
Growth Equity $48 $58
Value Equity 42 49
Blend Equity 35 40
Fixed Income 46 44
- --------------------------------------------------------------------------------
171 191
- --------------------------------------------------------------------------------
Institutional:
Equity 72 74
Fixed Income 24 19
- --------------------------------------------------------------------------------
96 93
- --------------------------------------------------------------------------------
Quarter-end Assets $267 $284
- --------------------------------------------------------------------------------
Assets from Non-US Investors $ 37 $30
- --------------------------------------------------------------------------------
Average Assets $260 $301
- --------------------------------------------------------------------------------
The categories of mutual fund assets reflect style designations aligned with
each fund's prospectus. All prior year amounts have been reclassified to conform
with the current investment mandate for each product.
20
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, which declined in 2002 for the third consecutive year after several
years of substantial growth prior to 2000, increased in the second quarter of
2003. 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, 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 significant changes in stock and
bond market valuations.
Putnam provides individual and institutional investors with a broad range of
both 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
74% of assets under management, compared with 78% at June 30, 2002, while
investments in fixed income products represented 26%, compared with 22% at June
30, 2002.
Consulting
- --------------------------------------------------------------------------------
Second Quarter Six Months
- -------------------------------------------------------------------------------
(In millions of dollars) 2003 2002 2003 2002
- -----------------------------------------------------------------------=-------
Revenue $ 690 $ 595 $1,324 $1,160
Expense 591 505 1,142 996
- -------------------------------------------------------------------------------
Operating Income $ 99 $ 90 $ 182 $ 164
- -------------------------------------------------------------------------------
Operating Income Margin 14.3% 15.1% 13.7% 14.1%
- --------------------------------------------------------------------------------
Revenue
Consulting revenue increased 16% over 2002 primarily due to the effect
of foreign currency exchange rates, as well as acquisitions including Oliver,
Wyman & Company ("OWC"), which is included in the management consulting
practice. On a constant currency basis revenue increased 2%. Retirement services
revenue, which represented approximately 50% of the consulting segment revenue,
increased 3% on a constant currency basis and health care & group benefits
consulting grew 6%. For the six months, revenue grew 14% over 2002, 3% on a
constant currency basis.
Expense
Consulting expenses increased 17% over 2002 reflecting the impact of foreign
exchange as well as the acquisition of OWC. As described in Note 7 to the
financial statements, a portion of the OWC purchase consideration is contingent
upon future employment. This amount has been accounted for as deferred
compensation and is being recognized as compensation expense over four years.
Expenses increased 2% on a constant currency basis over 2002. For the six
months, expenses increased 15% over 2002, 3% on a constant currency basis.
Interest
Interest income earned on corporate funds amounted to $7 million in the second
quarter of 2003, an increase of $3 million from the second quarter of 2002.
21
Interest expense of $46 million in 2003 increased from $38 million in the second
quarter of 2002 primarily due to an increase in the average interest rates on
outstanding debt in the second quarter of 2003. Since March 2002, MMC has
improved liquidity and extended the average maturity of its debt through the
issuance of $1.3 billion of long-term senior notes through June 30, 2003. The
net proceeds from the notes were used to pay down outstanding commercial paper
balances. The increase in the average interest rate results from the conversion
of a significant portion of the company's debt from floating to fixed rates.
Income Taxes
MMC's consolidated effective tax rate was 34% of income before income taxes and
minority interest in the second quarter of 2003 compared with 35.5% in the
second quarter of 2002. As a result of the geographic mix of MMC's businesses,
the effective tax rate for 2003 should remain at 34%.
Liquidity and Capital Resources
Operating Cash Flows
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 $1.1 billion of cash from operations for the six-month period
ended June 30, 2003 compared with $519 million for the same period in 2002.
These amounts reflect the net income earned by MMC during those periods adjusted
for non-cash charges and working capital changes. In 2003, MMC's tax payments
decreased as compared to 2002. MMC's estimated tax payments related to the third
quarter of 2001 were paid in the first quarter of 2002 due to the events of
September 11, 2001 and the government's subsequent directives. In addition,
current year tax payments reflect a refund of overpayment of prior year taxes.
Other current assets at June 30, 2003 declined from the prior year end balance
primarily due to lower deferred tax assets in the current period as well as a
decrease in insurance recoveries receivable related to personal pension plan
settlements in the United Kingdom.
MMC's cash and cash equivalents aggregated $618 million on June 30, 2003, an
increase of $72 million from the end of 2002.
MMC increased its quarterly dividend by 11% to $.31 per share effective with the
dividend to be paid on August 15, 2003.
Financing Cash Flows
In February 2003, MMC issued $250 million of 3.625% Senior Notes due in 2008 and
$250 million of 4.85% Senior Notes due in 2013 (the "2003 Notes"). The net
proceeds from the 2003 Notes were used to pay down commercial paper borrowings.
Commercial paper outstanding decreased $640 million during the first six months
of 2003 as a result of these repayments.
In January 2003, MMC terminated and settled interest rate swaps that had hedged
the fair value of senior notes issued in 2002. The cumulative amount of
previously recognized adjustments of the fair value of the hedged notes is being
amortized over the remaining life of those notes in accordance with SFAS No.
133. As a result, the effective interest rate over the remaining life of the
notes, including the amortization of the fair value adjustments, is 4.0% for the
$500 million Senior Notes due in 2007 (5.375% coupon rate) and 5.1% for the $250
million Senior Notes due in 2012 (6.25% coupon rate).
22
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033.
During the first six months of 2003, MMC repurchased 11.5 million shares of its
common stock at a cost of $503 million. MMC repurchases shares 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, pursuant to a written plan that may not be
changed.
Investing Cash Flows
MMC's additions to fixed assets and capitalized software, which amounted to $240
million in the first six months of 2003 and $187 million in the first 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 $440 million
in connection with various MMC Capital funds and other MMC investments.
Approximately $35 million is expected to be invested during the remainder of
2003. MMC expects to fund future commitments, in part, with sales proceeds from
existing investments.
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 interest expense on
borrowings, 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. 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 holds investments in both public and private companies as well as certain
private equity funds managed by MMC Capital including Trident II. Publicly
traded investments of $346 million are classified as available for sale under
SFAS No. 115. Non-publicly traded investments of $155 million and $311 million
are accounted for under APB Opinion No. 18 using the cost method and the equity
method, respectively. The investments are subject to risk of changes in market
value, which if determined to be other than temporary, could result in realized
impairment losses. MMC periodically reviews the carrying value of such
investments to determine if any valuation adjustments are appropriate under the
applicable accounting pronouncements.
23
MMC Capital helped develop an additional source of insurance and reinsurance
capacity after September 11 through the formation of AXIS Specialty Holdings
("AXIS"), a Bermuda domiciled insurance company. AXIS had an initial
capitalization of $1.6 billion, which included a $250 million investment by
Trident II and a $100 million direct investment by MMC. AXIS completed an
initial public offering on July 1, 2003. MMC's direct investment is currently
carried at cost and will be classified as an available for sale security, as
restrictions on the sale of AXIS shares expire, with changes in fair value
recorded in other comprehensive income until realized. Trident II's investments
are carried at fair value, in accordance with investment company accounting.
MMC's proportionate share of the change in value of its investment in Trident II
is recorded as part of investment income (loss) in the Consolidated Income
Statement.
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
The insurance coverage for potential liability resulting from alleged errors and
omissions in the professional services provided by MMC includes elements of both
risk retention and risk transfer. MMC believes it has adequately reserved for
the self-insurance portion of the contingencies. Payments related to the
respective self-insured layers are made as legal fees are incurred and claims
are resolved and generally extend over a considerable number of years. The
amounts paid in that regard vary in relation to the severity of the claims and
the number of claims active in any particular year. The long-term portion of
this liability is included in Other liabilities in the Consolidated Balance
Sheets.
New Accounting Pronouncements
New accounting pronouncements are discussed in Note 15 to the Consolidated
Financial Statements.
24
Part I - Item 4. Controls & Procedures
- ---------------------------------------
Controls and Procedures
Based on their evaluation, as of the end of the period for the filing of this
Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) are
effective in timely alerting them to material information relating to the
Company required to be included in our reports filed under the Exchange Act.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company's internal controls over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
25
PART II. OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
June 30, 2003
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of MMC was held on May 15,
2003. Represented at the meeting, at which stockholders took the
following actions, were 460,647,321 shares, or 87 percent, of
MMC's 528,696,095 shares of common stock outstanding and entitled
to vote:
1. MMC's stockholders elected the five director nominees named
below with each receiving the following votes:
Number of Number of Shares
Shares Voted Voted to be
For Withheld
Peter Coster 443,927,171 16,720,150
----------- ----------
Charles A. Davis 444,000,428 16,646,893
----------- ----------
Gwendolyn S. King 446,564,657 14,082,664
----------- ----------
Lawrence J. Lasser 435,329,928 25,317,393
----------- ----------
David A. Olsen 345,367,039 115,280,282
----------- -----------
2. MMC's stockholders adopted an amendment to MMC's Restated
Certificate of Incorporation increasing the number of
authorized shares of common stock from 800,000,000 to
1,600,000,000, with a favorable vote of 426,263,910 of the
shares represented (30,764,982 against and 3,618,228
abstaining).
3. Deloitte & Touche LLP was ratified as MMC's independent
auditors for the year ending December 31, 2003, with a
favorable vote of 430,132,915 of the shares represented
(27,212,518 against and 3,300,488 abstaining).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Third Supplemental Indenture dated as of July 30, 2003
between MMC and U.S. National Bank Association (as
successor to State Street Bank and Trust Company), as
trustee (includes the form of senior note due 2033).
10.1 Renewal of Consulting Agreement between A.J.C. Smith
and MMC dated as of May 16, 2003.
26
12. Statement Re: Computation of Ratio of Earnings to Fixed
Charges.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32. Section 1350 Certifications.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated April 23, 2003 was filed
by the registrant to report its issuance of a press release
announcing its unaudited first quarter financial results for
the quarter ended March 31, 2003.
27
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 14th of August, 2003 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
28
Exhibit 4.1
================================================================================
MARSH & McLENNAN COMPANIES INC.,
Issuer,
and
U.S. Bank National Association (as successor
to State Street Bank and Trust Company),
Trustee
---------------------
THIRD SUPPLEMENTAL INDENTURE
Dated as of July 30, 2003
---------------------
$300,000,000 principal amount of 5.875% Senior Notes Due 2033
================================================================================
THIRD SUPPLEMENTAL INDENTURE, dated as of July 30, 2003, between MARSH
& McLENNAN COMPANIES, INC., a Delaware corporation (the "Company" and
hereinafter the "Issuer"), and U.S. BANK NATIONAL ASSOCIATION (as successor to
State Street Bank and Trust Company), a national banking association, as Trustee
(the "Trustee")
W I T N E S S E T H:
WHEREAS, the Issuer and the Trustee executed and delivered an
Indenture, dated as of June 14, 1999 (as supplemented hereby, the "Indenture"),
to provide for the issuance by the Issuer from time to time of senior debt
securities evidencing its unsecured indebtedness;
WHEREAS, U.S. Bank National Association purchased substantially all of
the corporate trust business of the State Street Bank and Trust Company,
succeeding as the Trustee pursuant to Section 7.12 of the Indenture;
WHEREAS, pursuant to a Board Resolution, the Issuer has authorized the
issuance of $300,000,000 principal amount of 5.875% Senior Notes due 2033 (the
"Notes");
WHEREAS, the entry into this Third Supplemental Indenture by the
parties hereto is in all respects authorized by the provisions of the Indenture;
and
WHEREAS, the Issuer desires to establish the terms of the Notes in
accordance with Section 2.01 of the Indenture and to establish the form of the
Notes in accordance with Section 2.02 of the Indenture; and
WHEREAS, all things necessary to make this Third Supplemental Indenture
a valid indenture and agreement according to its terms have been done.
NOW, THEREFORE, for and in consideration of the premises, the Issuer
and the Trustee mutually covenant and agree for the equal and proportionate
benefit of the respective holders from time to time of the Notes as follows:
Article 1
Section 1.01 . Terms of Notes. The following terms relating to the Notes
are hereby established:
(a) The Notes shall constitute a series of securities having the title
"5.875% Senior Notes due 2033."
(b) The aggregate principal amount of the Notes that may be
authenticated and delivered under the Indenture (except for Notes authenticated
and delivered upon registration of, transfer of, or in exchange for, or in lieu
of, other Notes pursuant to Sections 2.05, 2.06, 2.07 or 9.01) shall be up to
$300,000,000.
(c) The entire outstanding principal of the Notes shall be payable on
August 1, 2033 plus any unpaid interest accrued to such date.
(d) The rate at which the Notes shall bear interest shall be 5.875% per
annum; the date from which interest shall accrue on the Notes shall be July 30,
2003; the Interest Payment Dates for the Notes on which interest will be payable
shall be February 1 and August 1 in each year, beginning February 1, 2004; the
Regular Record Dates for the interest payable on the Notes on any Interest
Payment Date shall be the January 15 and July 15 preceding the applicable
Interest Payment Date; and the basis upon which interest shall be calculated
shall be that of a 360-day year consisting of twelve 30-day months.
(e) The Notes shall be issuable in denominations of $1,000 and any
integral multiple thereof.
(f) The Trustee shall also be the security registrar and paying agent
for the Notes.
(g) Payments of the principal of and interest on the Notes shall be made
in U.S. Dollars, and the Notes shall be denominated in U.S. Dollars.
(h) The holders of the Notes shall have no special rights in addition to
those provided in the Indenture upon the occurrence of any particular events.
(i) The Notes shall not be subordinated to any other debt of the Issuer,
and shall constitute senior unsecured obligations of the Issuer.
The Notes are issuable in book entry form and are not convertible into
shares of common stock or other securities of the Company.
Section 1.02 . Amendment to Article IV. Article IV of the Indenture is
hereby amended to include the following covenant with respect to the Notes only
(and not with respect to any other series of securities issuable pursuant to the
Indenture unless the supplemental indenture relating thereto expressly so
provides), which reads in its entirety as follows:
Section 4.06. Limitation on Liens on Stock of Significant
Subsidiaries. The Company will not, and it will not permit any
Subsidiary of the Company to, at any time directly or indirectly
create, assume, incur or permit to exist any Indebtedness secured
by a pledge, lien or other encumbrance (any pledge, lien or other
encumbrance being hereinafter in this Section referred to as a
2
"lien") on the voting stock or voting equity interest of Marsh Inc.,
Putnam, LLC or Mercer Inc. (each a "Significant Subsidiary") without
making effective provision whereby the Notes then Outstanding (and, if
the Company so elects, any other Indebtedness of the Company that is
not subordinate to the Notes and with respect to which the governing
instruments require, or pursuant to which the Company is otherwise
obligated or required, to provide such security) shall be equally and
ratably secured with such secured Indebtedness so long as such other
Indebtedness shall be so secured.
"Indebtedness" of any person means the principal of and
premium, if any, and interest due on indebtedness of such Person,
whether outstanding on the date of this Indenture or thereafter
created, incurred or assumed, which is (a) indebtedness for money
borrowed, and (b) any amendments, renewals, extensions, modifications
and refundings of any such indebtedness. For the purposes of this
definition, "indebtedness for money borrowed" means (i) any obligation
of, or any obligation guaranteed by, such Person for the repayment of
borrowed money, whether or not evidenced by bonds, debentures, notes or
other written instruments, (ii) any obligation of, or any such
obligation guaranteed by, such Person evidenced by bonds, debentures,
notes or similar written instruments, including obligations assumed or
incurred in connection with the acquisition of properly, assets or
businesses (provided, however, that the deferred purchase price of any
business or property or assets shall not be considered Indebtedness if
the purchase price thereof is payable in full within 90 days from the
date on which such indebtedness was created), and (iii) any obligations
of such Person as lessee under leases required to be capitalized on the
balance sheet of the lessee under generally accepted accounting
principles and leases of property or assets made as part of any sale
and lease-back transaction to which such Person is a party. For
purposes of this covenant only, Indebtedness also includes any
obligation of, or any obligation guaranteed by, any Person for the
payment of amounts due under a swap agreement or similar instrument or
agreement, or under a foreign currency hedge or similar instrument or
agreement.
If the Company shall hereafter be required to secure the
Notes equally and ratably with any other Indebtedness pursuant to
this Section, (i) the Company will promptly deliver to the Trustee
an Officers' Certificate stating that the foregoing covenant has
been complied with, and an Opinion of Counsel stating that in the
opinion of such counsel the foregoing covenant has been complied
3
with and (ii) the Trustee is hereby authorized to enter into an
indenture or agreement supplemental hereto and to take such
action, if any, as it may deem advisable to enable it to enforce the
rights of the holders of the Notes so secured.
Section 1.03 . Amendment of Article Ten. Article Ten of the Indenture
is hereby amended and restated in its entirety with respect to the Notes only
(and not with respect to any other series of securities issuable pursuant to
the Indenture unless the supplemental indenture relating thereto expressly so
provides) as follows:
Section 10.01. Company May Consolidate, Etc., Only on Certain
Terms. (a) Subject to Section 10.01(c) below, the Company shall not
consolidate with or merge into any other Person or convey, transfer or
lease all or substantially all of its properties and assets to any
Person, and the Company shall not permit any Person to consolidate with
or merge into the Company, unless:
(1) in case the Company shall consolidate with or
merge into another Person or convey, transfer or lease all or
substantially all of its properties and assets to any Person, the
Person formed by such consolidation or into which the Company is merged
or the Person which acquires by conveyance or transfer, or which
leases, all or substantially all of the properties and assets of the
Company shall be a corporation, partnership or trust, shall be
organized and validly existing under the laws of the United States of
America, any State thereof or the District of Columbia and shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, the due and punctual payment of the principal
of and any premium and interest on all the Securities and the
performance or observance of every covenant of this Indenture on the
part of the Company to be performed or observed;
(2) immediately after giving effect to such
transaction, no Event of Default, and no event which, after notice or
lapse of time or both, would become an Event of Default, shall have
happened and be continuing; and
(3) the Company has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article and that all
conditions precedent herein provided for relating to such transaction
have been complied with.
4
Section 10.02. Successor Substitute. Upon any consolidation of
the Company with, or merger of the Company into, any other Person or
any conveyance, transfer or lease of all or substantially all of the
properties and assets of the Company in accordance with Section 10.01
above, the successor Person formed by such consolidation or into which
the Company is merged or to which such conveyance, transfer or lease is
made shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture with the same
effect as if such successor Person had been named as the Company
herein, and thereafter, except in the case of a lease, the predecessor
Person shall be relieved of all obligations and covenants under the
Indenture and the Notes.
Section 10.03. Evidence of Consolidation, Etc. to Trustee. The
Trustee, subject to the provisions of Section 7.01, may receive an
Opinion of Counsel as conclusive evidence that any such consolidation,
merger, sale, conveyance, transfer or other disposition, and any such
assumption, comply with the provisions of this Article.
Section 1.04 . Trustee's Obligations with Respect to the Covenants. The
Trustee shall not be obligated to monitor or confirm, on a continuing basis or
otherwise, the Issuer's compliance with the covenants contained in this Article
One or with respect to reports or other documents filed under the Indenture;
provided, however, that nothing herein shall relieve the Trustee of any
obligations to monitor the Issuer's timely delivery of all reports and
certificates required under Sections 5.01 and 5.03 of the Indenture and to
fulfill its obligations under Article Seven of the Indenture.
Section 1.05 . Form Of Note. The form of the Notes is attached
hereto as Exhibit A.
Article 2
MISCELLANEOUS
Section 2.01 . Definitions. Capitalized terms used but not defined in
this Third Supplemental Indenture shall have the meanings ascribed thereto in
the Indenture.
Section 2.02 . Confirmation of Indenture. The Indenture, as heretofore
supplemented and amended and as further supplemented and amended by this
Third Supplemental Indenture, is in all respects ratified and confirmed, and the
5
Indenture, this Third Supplemental Indenture and all indentures supplemental
thereto shall be read, taken and construed as one and the same instrument.
Section 2.03 . Concerning the Trustee. The Trustee assumes no duties,
responsibilities or liabilities by reason of this Third Supplemental Indenture
other than as set forth in the Indenture and, in carrying out its
responsibilities hereunder, shall have all of the rights, protections and
immunities which it possesses under the Indenture.
Section 2.04 . Governing Law. This Third Supplemental Indenture, the
Indenture and the Securities shall be governed by and construed in accordance
with the law of the State of New York.
Section 2.05 . Separability. In case any provision in this Third
Supplemental Indenture shall for any reason be held to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
Section 2.06 . Counterparts. This Third Supplemental Indenture may be
executed in any number of counterparts each of which shall be an original, but
such counterparts shall together constitute but one and the same instrument.
6
IN WITNESS WHEREOF, this Supplemental Indenture has been duly executed
by the Company and the Trustee as of the day and year first written above.
MARSH & McLENNAN COMPANIES, INC.
By:/s/ Matthew B. Bartley
-----------------------------------
Name: Matthew B. Bartley
Title: Vice President and Treasurer
7
U.S. BANK NATIONAL
ASSOCIATION (as successor to
State Street Bank and Trust
Company), as Trustee
By:/s/ Patrick E. Thebado
-----------------------------------
Name: Patrick E. Thebado
Title: Vice President
8
Exhibit A
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO, HAS AN INTEREST HEREIN.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM IN ACCORDANCE WITH THE PROVISIONS OF THE INDENTURE AND THE TERMS
OF THE SECURITIES, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY DTC TO
A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC OR BY
DTC OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY.
Certificate No. $300,000,000
CUSIP _________
MARSH & McLENNAN COMPANIES, INC.
5.875% Senior Notes
due August 1, 2033
MARSH & McLENNAN COMPANIES, INC., a Delaware corporation (the
"Company", which term includes any successor corporation under the Indenture
hereinafter referred to), for value received, hereby promises to pay to CEDE &
Co., or its registered assigns, the principal sum of 300,000,000 Dollars
($300,000,000) on August 1, 2033 and to pay interest on said principal sum from
July 30, 2003 or from the most recent interest payment date (each such date, an
"Interest Payment Date") to which interest has been paid or duly provided for,
semiannually on February 1 and August 1 of each year commencing February 1, 2004
at the rate of 5.875% per annum until the principal hereof shall have become
9
due and payable, and on any overdue principal and premium, if any, and (without
duplication and to the extent that payment of such interest is enforceable under
applicable law) on any overdue installment of interest at the same rate per
annum. The amount of interest payable on any Interest Payment Date shall be
computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on this Note is not a Business Day,
then payment of interest payable on such date will be made on the next
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. The interest installment so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture,
be paid to the person in whose name this Note (or one or more Predecessor
Securities, as defined in said Indenture) is registered at the close of business
on the Regular Record Date for such interest installment which shall be January
15 or July 15 preceding such Interest Payment Date. Any such interest
installment not punctually paid or duly provided for (as defined in the
Indenture, the "Defaulted Interest") shall forthwith cease to be payable to the
registered holders on such regular record date, and may be paid to the person in
whose name this Note (or one or more Predecessor Securities) is registered at
the close of business on a special record date to be fixed by the Trustee for
the payment of such Defaulted Interest, which shall not be more than 15 nor less
than 10 days prior to the date of the proposed payment, and not less than 10
days after the receipt by the Trustee of the notice of the proposed payment or
at any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Notes may be listed, and upon such notice
as may be required by such exchange, all as more fully provided in the
Indenture. The principal of (and premium, if any) and the interest on this Note
shall be payable at the office or agency of the Trustee maintained for that
purpose in any coin or currency of the United States of America which at the
time of payment is legal tender for payment of public and private debts;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the registered holder at such address as shall appear
in the Security Register. Notwithstanding the foregoing, so long as the Holder
of this Note is Cede & Co., the payment of the principal of (and premium, if
any) and interest on this Note will be made at such place and to such account as
may be designated by DTC.
The indebtedness evidenced by this Note is, to the extent provided in
the Indenture, senior and unsecured and will rank in right of payment on parity
with all other senior unsecured obligations of the Company.
This Note shall not be entitled to any benefit under the Indenture
hereinafter referred to, be valid or become obligatory for any purpose until the
10
Certificate of Authentication hereon shall have been signed by or on behalf of
the Trustee.
The provisions of this Note are continued on the reverse side hereof
and such continued provisions shall for all purposes have the same effect as
though fully set forth at this place.
11
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed.
Dated July 30, 2003
MARSH & McLENNAN COMPANIES, INC.
By:
--------------------------------
Name:
Title:
MARSH & McLENNAN COMPANIES, INC.
By:
--------------------------------
Name:
Title:
Attest:
By_______________________
Name:
Title:
12
CERTIFICATE OF AUTHENTICATION
This is one of the Notes of the series of Notes described in the
within-mentioned Indenture.
U.S. BANK NATIONAL
ASSOCIATION, as Trustee
By_____________________________
Authorized Signatory
13
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned hereby
sells, assigns and transfers to
- --------------------------------------------------------------------------------
(Insert Social Security number or other identifying number of assignee)
- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including zip code of assignee)
- --------------------------------------------------------------------------------
the within Note of Marsh & McLennan Companies, Inc. and hereby does
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer said Note on the books of the within-named Issuer with full
power of substitution in the premises.
Dated:___________________ ___________________________________
___________________________________
Signature(s) must be guaranteed by an eligible Guarantor Institution (banks,
stock brokers, savings and loan associations and credit unions) with membership
in an approved signature guarantee medallion program pursuant to Securities and
Exchange Commission Rule 17Ad-1 5.
NOTICE: The signature to this assignment must correspond with the name as it
appears on the first page of the within Note in every particular, without
alteration or enlargement or any change whatever.
14
MARSH & McLENNAN COMPANIES, INC.
5.875% Senior Notes due 2033
This Note is one of a duly authorized series of Securities of the
Company (herein sometimes referred to as the "Notes"), specified in the
Indenture, all issued or to be issued in one or more series under and pursuant
to an indenture (the "Base Indenture") dated as of June 14, 1999 between the
Company, and U.S. Bank National Association (as successor to State Street Bank
and Trust Company), as Trustee (the "Trustee"), as supplemented by the Third
Supplemental Indenture dated as of July 30, 2003 between the Company and the
Trustee (the Base Indenture as so supplemented, the "Indenture"), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Company and the holders of the Notes.
This series of Notes is limited in aggregate principal amount as specified in
said Third Supplemental Indenture.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes of each series affected at the time
Outstanding, as defined in the Indenture, to execute supplemental indentures for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or of any supplemental indenture or of
modifying in any manner the rights of the Holders of the Notes; provided,
however, that no such supplemental indenture shall, without the consent of the
holders of each Note then Outstanding and affected thereby (i) extend the fixed
maturity of any Notes of any series, or reduce the principal amount thereof, or
reduce the rate or extend the time of payment of interest thereon, or reduce any
premium payable upon the redemption thereof, or (ii) reduce the aforesaid
percentage of Notes, the Holders of which are required to consent to any such
supplemental indenture. The Indenture also contains provisions permitting the
Holders of a majority in aggregate principal amount of the Notes of any series
at the time Outstanding affected thereby, on behalf of all of the Holders of the
Notes of such series, to waive any past default in the performance of any of the
covenants contained in the Indenture, or established pursuant to the Indenture
with respect to such series, and its consequences, except a default in the
payment of the principal of or premium, if any, or interest on any of the Notes
of such series and except as provided in Section 6.06 of the Base Indenture. Any
such consent or waiver by the registered Holder of this Note (unless revoked as
provided in the Indenture) shall be conclusive and binding upon such Holder and
upon all future Holders and owners of this Note and of any Note issued in
exchange herefor or in place hereof (whether by registration of transfer or
otherwise), irrespective of whether or not any notation of such consent or
waiver is made upon this Note.
15
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Note at the time and place and at the rate and in the money
herein prescribed.
The Issuer is subject to certain covenants contained in the Indenture
with respect to, and for the benefit of the Holders of, the Notes. The Trustee
shall not be obligated to monitor or confirm, on a continuing basis or
otherwise, the Issuer's compliance with the covenants contained in the Indenture
or with respect to reports or other certificates filed under the Indenture;
provided, however, that nothing herein shall relieve the Trustee of any
obligations to monitor the Issuer's timely delivery of all reports and
certificates required under Section 5.03 of the Indenture and to fulfill its
obligations under Article VII of the Indenture. If an Event of Default as
defined in the Indenture with respect to the Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.
As provided in and subject to the provisions of the Indenture, the
Holder of this Note shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Notes, the Holders of not less than 25% in principal amount of the Notes at the
time Outstanding shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default as Trustee and offered the
Trustee reasonable indemnity and the Trustee shall have failed to institute any
such proceeding for 60 days after receipt of such notice, request and offer of
indemnity and the Trustee shall not have received from the Holders of a majority
in principal amount of the Notes at the time Outstanding a direction
inconsistent with such request. The foregoing shall not apply to any suit
instituted by the Holder of this Note for the enforcement of any payment of
principal hereof or any interest on or after the respective due dates expressed
herein.
As provided in the Indenture and subject to certain limitations therein
set forth, this Note is transferable by the registered holder hereof on the
Security Register of the Company, upon surrender of this Note for registration
of transfer at the office or agency of the Company in the borough of Manhattan,
the City and State of New York accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company or the Trustee duly
executed by the registered holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Notes of authorized denominations and for
the same aggregate principal amount and series will be issued to the designated
transferee or transferees. No service charge will be made for any such transfer,
16
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in relation thereto.
Prior to due presentment for registration of transfer of this Note, the
Company, the Trustee, any paying agent and any Security Registrar may deem and
treat the registered holder hereof as the absolute owner hereof (whether or not
this Note shall be overdue and notwithstanding any notice of ownership or
writing hereon made by anyone other than the Security Registrar) for the purpose
of receiving payment of or on account of the principal hereof and premium, if
any, and interest due hereon and for all other purposes, and neither the Company
nor the Trustee nor any paying agent nor any Note Registrar shall be affected by
any notice to the contrary.
No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture, against any incorporator,
stockholder, officer or director, past, present or future, as such, of the
Company or of any predecessor or successor corporation, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issuance hereof, expressly waived and
released.
The Notes of this series are issuable only in registered form without
coupons in authorized denominations. As provided in the Indenture and subject to
certain limitations herein and therein set forth, Notes of this series so issued
are exchangeable for a like aggregate principal amount of Notes of this series
of a different authorized denomination, as requested by the Holder surrendering
the same.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
THE INDENTURE AND THE NOTES INCLUDING THIS NOTE SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Issuer has caused "CUSIP" numbers to be
printed on the Notes as a convenience to the Holders of the Notes. No
representation is made as to the correctness or accuracy of such CUSIP numbers
as printed on the Notes, and reliance may be placed only on the other
identification numbers printed hereon.
17
Unless the certificate of authentication hereon has been executed by or
on behalf of the Trustee by manual signature, this Note shall not be entitled to
any benefit under the Indenture or be valid or obligatory for any purposes.
18
Exhibit 12.1
Marsh & McLennan Companies, Inc. and Subsidiaries
Ratio of Earnings to Fixed Charges
(In millions, except ratios)
- --------------------------------------------------------------------------------------------------------------------
Six
Months
Ended Years Ended December 31,
June 30, --------------------------------------------------------
2003
(Unaudited) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Earnings
- --------
Income before income taxes and minority
interest* $1,240 $2,133 $1,590 $1,955 $1,255 $1,305
Interest expense 89 160 196 247 233 140
Portion of rents representative of
the interest factor 75 135 122 120 121 104
Amortization of capitalized interest - - - - 1 1
- --------------------------------------------------------------------------------------------------------------------
$1,404 $2,428 $1,908 $2,322 $1,610 $1,550
- --------------------------------------------------------------------------------------------------------------------
Fixed Charges
- -------------
Interest expense $89 $160 $196 $ 247 $ 233 $ 140
Portion of rents representative of
the interest factor 75 135 122 120 121 104
- --------------------------------------------------------------------------------------------------------------------
$164 $295 $318 $367 $354 $244
- --------------------------------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 8.6 8.2 6.0 6.3 4.5 6.4
* Minority interest has been reclassified in the prior years (1998-1999) to
conform to the current year presentation.
EXHIBIT 31
CERTIFICATIONS
I, Jeffrey W. Greenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marsh &
McLennan Companies, Inc. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) [Omitted pursuant to SEC Release Nos. 33-8238 and
34-47986];
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 14, 2003 /s/ Jeffrey W. Greenberg
----------------------------------------
Jeffrey W. Greenberg
Chief Executive Officer
CERTIFICATIONS
I, Sandra S. Wijnberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marsh &
McLennan Companies, Inc. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) [Omitted pursuant to SEC Release Nos. 33-8238 and
34-47986];
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 14, 2003 /s/ Sandra S. Wijnberg
-----------------------------------------
Sandra S. Wijnberg
Chief Financial Officer
EXHIBIT 32
Certification of Chief Executive and Chief Financial Officers
-------------------------------------------------------------
The certification set forth below is being submitted in connection with
the Quarterly Report on Form 10-Q for the fiscal quarter ending June 30, 2003
(the "Report") for the purpose of complying with Rule 13a-14(b) or Rule
15d-14(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code.
Jeffrey W. Greenberg, the Chief Executive Officer and Sandra S.
Wijnberg, the Chief Financial Officer of Marsh & McLennan Companies, Inc. each
certifies that, to the best of his or her knowledge:
1. such Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of Marsh & McLennan Companies, Inc.
/s/ Jeffrey W. Greenberg
----------------------------------
Name: Jeffrey W. Greenberg
Chief Executive Officer
/s/ Sandra S. Wijnberg
----------------------------------
Name: Sandra S. Wijnberg
Chief Financial Officer
EXHIBIT 10.1
May 16, 2003
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 attached letter of June 1, 2000) regarding Section 3, Payment for Services, are amended to
provide that for the period beginning June 1, 2003 through May 31, 2004 the Company will pay
you an annual fee of $2,000,000 in equal monthly installments in arrears. Please indicate your
acceptance below. Thank you.
Sincerely,
/s/ Francis N. Bonsignore
- --------------------------------------
Senior Vice President, Executive
Resources & Development
/s/ A.J.C. Smith
------------------------------------
Accepted
A. J. C. Smith
