-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RY6oz3BudHPboHeeFd8d8RrLBa49Y1Yo91ucVdH03NUPW4Z/5wqiAi6K7OgLnOPe C5315Z3LN3o9XL4yz9BmLw== 0000062709-01-500019.txt : 20020410 0000062709-01-500019.hdr.sgml : 20020410 ACCESSION NUMBER: 0000062709-01-500019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARSH & MCLENNAN COMPANIES INC CENTRAL INDEX KEY: 0000062709 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 362668272 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05998 FILM NUMBER: 1788713 BUSINESS ADDRESS: STREET 1: 1166 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 02109 BUSINESS PHONE: 8002251581 MAIL ADDRESS: STREET 1: 1166 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 02109 FORMER COMPANY: FORMER CONFORMED NAME: MARLENNAN CORP DATE OF NAME CHANGE: 19760505 10-Q 1 f10q3qtr.txt FORM 10-Q (09/30/2001) ================================================================================ - -------------------------------------------------------------------------------- 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 September 30, 2001 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 October 31, 2001 there were outstanding 274,644,046 shares of common stock, par value $1.00 per share, of the registrant. ================================================================================ - -------------------------------------------------------------------------------- INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and its 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 revenue and expenses, cash flow, capital structure, financial losses and expected insurance recoveries resulting from the September 11, 2001 attack on the World Trade Center in New York City, as well as market and industry conditions, premium rates, 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, 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 herein include, in the case of MMC's risk and insurance services and consulting businesses, the amount of actual insurance recoveries and financial loss from the September 11th 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 and other changes in the global property and casualty insurance markets, the impact of terrorist attacks, natural catastrophes and mergers between client organizations, including insurance and reinsurance companies. Factors to be considered in the case of MMC's investment management business include changes in worldwide and national equity and fixed income markets and the level of sales and redemptions; and with respect to all of MMC's activities, changes in general worldwide and national economic conditions, fluctuations in foreign currencies, actions of competitors or regulators, changes in interest rates, 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. MMC is committed to providing timely and materially accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, MMC and its operating companies use their websites to convey meaningful information about their businesses, including the posting of updates of assets under management at Putnam, and from time to time, Marsh Inc.'s view of insurance market conditions. Monthly updates of assets under management at Putnam will be posted on the first business day following the end of each month, except at the end of March, June, September and December, when such information will be released with MMC's quarterly earnings announcement. Investors can link to MMC and its operating company websites through www.mmc.com. 1 PART I, FINANCIAL INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share figures) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2001 2000 2001 2000 ----- ------ ------ ------ Revenue $ 2,371 $ 2,535 $ 7,470 $ 7,681 Expense 2,059(a) 2,009 5,987(a) 6,022 ------- ------- ------- ------- Operating Income 312 526 1,483 1,659 Interest Income 6 7 18 18 Interest Expense (46) (63) (154) (191) ------- ------- ------- ------- Income Before Income Taxes And Minority Interest 272 470 1,347 1,486 Income Taxes 100 182 503 576 Minority Interest 4 6 14 15 ------- ------- ------- ------- Net Income $ 168 $ 282 $ 830 $ 895 ======= ======= ======= ======= Basic Net Income Per Share $ 0.62 $ 1.04 $ 3.02 $ 3.32 ======= ======= ======= ======= Diluted Net Income Per Share $ 0.58 $ .97 $ 2.87 $ 3.12 ======= ======= ======= ======= Average Number of Shares Outstanding - Basic 274 272 275 270 ======= ======= ======= ======= Average Number of Shares Outstanding - Diluted 284 286 286 283 ======= ======= ======= ======= Dividends Declared $ 0.53 $ .50 $ 1.56 $ 1.45 ======= ======= ======= =======
(a) 2001 expenses include charges of $173 related to September 11, see note 8. See notes to consolidated financial statements. 2 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars)
(Unaudited) September 30, December 31, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 600 $ 240 -------- -------- Receivables- Commissions and fees 2,248 2,370 Advanced premiums and claims 237 270 Other receivables 379 307 -------- -------- 2,864 2,947 Less-allowance for doubtful accounts and cancellations (134) (135) -------- -------- Net receivables 2,730 2,812 -------- -------- Prepaid dealer commissions - current portion 320 362 Other current assets 266 225 -------- -------- Total current assets 3,916 3,639 Intangible assets 5,363 5,476 Fixed assets, net 1,222 1,360 (net of accumulated depreciation and amortization of $1,007 at September 30, 2001 and $961 at December 31, 2000) Long-term investments 651 976 Prepaid dealer commissions 600 762 Other assets 1,691 1,556 -------- -------- $ 13,443 $ 13,769 ======== ========
See notes to consolidated financial statements. 3 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars)
(Unaudited) September 30, December 31, 2001 2000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 1,011 $ 337 Accounts payable and accrued liabilities 1,559 1,964 Accrued compensation and employee benefits 836 1,388 Accrued income taxes 500 291 Dividends payable 147 139 -------- -------- Total current liabilities 4,053 4,119 -------- -------- Fiduciary liabilities 3,520 3,627 Less - cash and investments held in a fiduciary capacity (3,520) (3,627) -------- -------- -- -- Long-term debt 2,346 2,347 -------- -------- Other liabilities 1,949 2,075 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $1 par value, authorized 6,000,000 shares, none issued -- -- Common stock, $1 par value, authorized 800,000,000 shares, issued 280,320,820 shares at September 30, 2001 and 278,379,359 at December 31, 2000 280 278 Additional paid-in capital 1,987 1,918 Retained earnings 3,724 3,323 Accumulated other comprehensive loss (405) (149) -------- -------- 5,586 5,370 Less - treasury shares, at cost, 6,062,145 shares at September 30, 2001 and 2,352,046 shares at December 31, 2000 (491) (142) -------- -------- Total stockholders' equity 5,095 5,228 -------- -------- $ 13,443 $ 13,769 ======== ========
See notes to consolidated financial statements. 4 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions of dollars) (Unaudited)
Nine Months Ended September 30, 2001 2000 ----- ----- Operating cash flows: Net income $ 830 $ 895 Adjustments to reconcile net income to cash used for operations: Depreciation of fixed assets and capitalized software 248 225 Amortization of intangible assets 145 134 Provision for deferred income taxes (5) 217 Integration related payments (69) (136) Prepaid dealer commissions 204 (89) Net receivables 82 (508) Other current assets 12 1 Accounts payable and accrued liabilities 55 179 Accrued compensation and employee benefits (552) (36) Accrued income taxes 189 92 Other liabilities (128) (62) Effect of exchange rate changes (25) (10) Other, net (114) (92) ----- ----- Net cash generated from operations 872 810 ----- ----- Financing cash flows: Net increase (decrease) in commercial paper 675 (254) Other borrowings 24 67 Other repayments of debt (27) (168) Purchase of treasury shares (590) -- Issuance of common stock 312 304 Dividends paid (421) (376) ----- ----- Net cash provided by financing activities (27) (427) ----- ----- Investing cash flows: Additions to fixed assets and capitalized software (324) (352) Proceeds from sale of businesses -- 33 Acquisitions (53) (83) Other, net (117) (47) ----- ----- Net cash used for investing activities (494) (449) ----- ----- Effect of exchange rate changes on cash and cash equivalents 9 (21) ----- ----- Increase in cash & cash equivalents 360 (87) Cash & cash equivalents at beginning of period 240 428 ----- ----- Cash & cash equivalents at end of period $ 600 $ 341 ===== =====
See notes to consolidated financial statements. 5 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1 Nature of Operations MMC, a global professional services firm, is organized based on the different services that it offers. MMC operates in three principal business segments: risk and insurance services, investment management and consulting. The risk and insurance services segment provides insurance broking, reinsurance broking and insurance and program management services for business, public entity, insurance company, professional, association and private clients. It also provides services principally in connection with originating, structuring and managing insurance, financial services and other industry-focused investments. The investment management segment primarily provides securities investment advisory and management services and administrative services for a group of publicly held investment companies and institutional accounts. The consulting segment provides advice and services to the managements of organizations primarily in the areas of human resources and employee benefit programs, general management consulting, organizational change and economic consulting and analysis. 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 generally accepted accounting principles have been omitted pursuant to such rules and regulations, although MMC believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in MMC's latest annual report on Form 10-K. The financial information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three and nine-month periods ended September 30, 2001 and 2000. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. 3. Fiduciary Assets and Liabilities In its capacity as an insurance broker or agent, MMC collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters; MMC also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims are held in a fiduciary capacity. Interest income on these fiduciary funds, included in revenue, amounted to $135 million and $142 million for the nine months ended September 30, 2001 and 2000, respectively. Net uncollected premiums and claims and the related payables amounting to $9.9 billion at September 30, 2001 and $10.8 billion at December 31, 2000, are not included in the accompanying Consolidated Balance Sheets. 6 4. Per Share Data Basic net income per share is calculated by dividing net income by the 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. This result is then divided by the 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 nine-month periods ended September 30, 2001 and 2000.
(In millions of dollars) - ---------------------- Three Months Ended Nine Months Ended September 30, September 30, --------------- ----------------- 2001 2000 2001 2000 ----- ----- ------ ----- Net income $ 168 $ 282 $ 830 $ 895 Less: Potential minority interest associated with Putnam Equity Partnership Plan (2) (5) (8) (14) ----- ----- ----- ----- Net income for diluted earnings per share $ 166 $ 277 $ 822 $ 881 ===== ===== ===== ===== Basic weighted average common shares outstanding 274 272 275 270 Dilutive effect of potentially issuable common shares 10 14 11 13 ----- ----- ----- ----- Diluted weighted average common shares outstanding 284 286 286 283 ===== ===== ===== =====
7 5. Comprehensive Income The components of comprehensive income for the nine-month periods ended September 30, 2001 and 2000 are as follows: (In millions of dollars) ---------------------- 2001 2000 ---- ---- Foreign currency translation adjustments $ (34) $ (142) Unrealized investment holding (losses) gains, net of income taxes (165) 109 Less: Reclassification adjustment for gains included in net income, net of income taxes (57) (54) ------ ------- Other comprehensive loss (256) (87) Net income 830 895 ----- ------- Comprehensive income $574 $ 808 ==== ===== 6. Supplemental Disclosure to the Consolidated Statements of Cash Flows The following schedule provides additional information concerning interest and income taxes paid: Nine Months Ended September 30, (In millions of dollars) 2001 2000 ------------------------ ---- ---- Interest paid $150 $172 Income taxes paid $169 $206 In the first quarter of 2001, MMC settled its $286 million commitment to purchase a minority investment in Gruppo Bipop-Carire S.p.A., which had been recorded as a liability in accounts payable and accrued liabilities, and is reflected in "other, net" in investing cash flows. In the second quarter of 2001, MMC sold certain of its London properties and simultaneously entered into a leaseback arrangement for a significant portion of the properties. Total proceeds of approximately $135 million, which exceeded the net book value of the properties by approximately $29 million, were received by the Company and are included in "other, net" in investing cash flows. A substantial portion of this excess was deferred and will be amortized over the lease period. 7 Dispositions and Integration Costs Dispositions: As part of the 1998 combination with Sedgwick Group, plc ("Sedgwick"), MMC acquired several businesses that it intended to sell, including insurance underwriting operations already in run-off and consulting businesses not compatible with its existing operations. During the first quarter of 2000, MMC sold one of these businesses for $33 million which approximated its carrying value. In third quarter 2001, MMC disposed of one of these businesses for $0.5 million. No gain or loss was realized on the disposal. The net liabilities of businesses to be disposed are reflected at their estimated realizable value of $103 million and $119 million at September 30, 2001 and December 31, 2000, respectively, and are included in accounts payable and accrued liabilities in the Consolidated Balance Sheet. Agreements have been reached to dispose of the remainder of these operations pending regulatory approval. 8 Integration Costs: In 1999, as part of 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 ("Sedgwick Plan") amounted to $285 million and was included in the cost of the acquisition. Merger-related costs for employees and offices of MMC ("MMC Plan") amounted to $266 million and were recorded as part of a 1999 special charge.
The utilization of these charges is summarized as follows: Utilized Utilized Balance Initial and in nine Sept. 30, (In millions of dollars) Balance changes mos. 2001 in 2001 estimates through 2000 1999 Sedgwick Plan: Termination payments to employees $ 183 $(160) $ (23) $- Other employee-related costs 5 (5) -- -- Future rent under noncancelable leases 48 (20) (7) 21 Leasehold termination and related costs 49 (22) (2) 25 - ---------------------------------------- ------ ------ ----- ------- $ 285 $(207) $ (32) $ 46 - ---------------------------------------- ----- ----- ----- ------- Number of employee terminations 2,400 (2,400) -- -- Number of office consolidations 125 (116) (2) 7
Utilized Utilized Balance Initial and in nine Sept. 30, (In millions of dollars) Balance changes mos. 2001 in 2001 estimates through 2000 1999 MMC Plan: Termination payments to employees $ 194 $ (140) $ (30) $ 24 Future rent under noncancelable leases 31 (12) (4) 15 Leasehold termination and related costs 16 (10) (3) 3 Other integration related costs 25 (25) -- -- - --------------------------------------- ------- ------- ------ ------- $ 266 $ (187) $ (37) $ 42 - --------------------------------------- ------- ------- ------ ------- Number of employee terminations 2,100 (2,100) -- -- Number of office consolidations 50 (44) (5) 1 - --------------------------------------- ------- ------- ------ -------
The actions contemplated by these plans are substantially complete. Some accruals, primarily for future rent under noncancelable leases and salary continuance arrangements, are expected to be paid over several years. 9 8.Charges related to September 11 MMC was directly impacted by the September 11, 2001 terrorist attacks. As a result of the destruction of the World Trade Center ("WTC"), 295 MMC colleagues were lost. MMC occupied fifteen floors in the two towers of the WTC, with approximately 1,900 employees and outside consultants of its total worldwide workforce of 57,000 at that location. The Risk and Insurance Services segment was the most directly impacted. Information technology and finance support for the insurance broking unit, and the headquarters for the reinsurance broking unit were located in the WTC. A small number of Consulting colleagues were also at that location. A long-standing disaster recovery plan was successfully implemented, and all critical business functions and systems were recovered and are operational. Employees have been relocated to various sites in midtown Manhattan and the New York metropolitan area. Pretax charges related to September 11 of $173 million were recorded in the third quarter of 2001. The charges include services and benefits provided to victims' families and to employees of $55 million, asset write-offs and impairments of $32 million, compensation costs associated with business disruption of $25 million and restructuring charges of $61 million which are discussed below. The charges are net of insurance recoveries of $126 million, which have been recorded in the financial statements as of September 30, 2001. Charges related to September 11 decreased diluted net income per share by $0.38 for the quarter and nine months ended September 30, 2001. As a result of weakening business conditions, which accelerated after the September 11 attacks, MMC implemented a plan to reduce staff and consolidate office locations, primarily in its consulting business. The cost of this plan amounted to $61 million. The utilization of these charges is summarized as follows: Initial Balance (In millions of dollars) Balance Utilized Sept.30, 2001 -------- --------- -------- Termination payments to employees $44 (4) $ 40 Future rent under noncancelable leases 17 -- 17 ------- --------- ------- $61 (4) $ 57 Number of employee terminations 747 (201) 546 Number of office consolidations 9 -- 9 As of September 30, 2001, the actions contemplated by this plan were in progress, and the remaining actions are expected to be substantially completed by December 31, 2001. Some accruals, primarily future rent under noncancelable leases (net of anticipated sublease income), are expected to be paid over several years. 10 9. Claims, Lawsuits and Other Contingencies MMC and its subsidiaries are subject to various claims, lawsuits and proceedings consisting principally of alleged errors and omissions in connection with the placement of insurance or reinsurance and in rendering investment and consulting services. Some of these matters seek damages, including punitive damages, in amounts which could, if assessed, be significant. Sedgwick Group plc, since prior to its acquisition, has been engaged in a review of previously undertaken personal pension plan business as required by United Kingdom regulators to determine whether redress should be made to customers. As of September 30, 2001, settlements and related costs previously paid amount to approximately $315 million, of which approximately $44 million is due from or has been paid by insurers. The remaining contingent exposure of Sedgwick for pension redress and related costs is estimated to be $130 million, essentially all of which is expected to be recovered from insurers. Other present and former subsidiaries of MMC are engaged in a comparable review of their personal pension plan businesses, although the extent of their activity in this area, and consequently their financial exposure, was proportionally much less than Sedgwick. The contingent exposure of the present and former non-Sedgwick subsidiaries of MMC for pension redress and related costs is estimated to be approximately $75 million, essentially all of which is expected to be recovered from insurers. As of September 30, 2001, net settlements and related costs previously paid total approximately $55 million. MMC's ultimate exposure from the United Kingdom's Personal Investment Authority review, as presently calculated and including Sedgwick, is subject to a number of variable factors including, among others, the interest rate established quarterly by the U.K. Personal Investment Authority for calculating compensation, equity markets, and the precise scope, duration, and methodology of the review as required by that authority. As part of the combination with Sedgwick, MMC acquired several insurance underwriting businesses that were already in run-off. Sedgwick had issued guarantees with respect to certain liabilities of these operations. On the basis of present information, anticipated insurance coverage and advice received from counsel, 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. 11 10. Financial Instruments Effective January 1, 2001 MMC adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The adoption of this standard did not have a material impact on MMC's consolidated financial position, results of operations or cash flows. 11. 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 nine-month periods ended September 30, 2001 and 2000 follow: (In millions of dollars) Revenue Segment from External Operating Customers Income ------------- ----------- 2001- Risk and Insurance Services $3,824 (a) $ 874 Investment Management 2,002 613 Consulting 1,644 242 ----- ------- $7,470 $1,729 (b) ====== ======= 2000- Risk and Insurance Services $3,581 (a) $ 727 Investment Management 2,502 782 Consulting 1,598 233 ------- ------- $7,681 $1,742 (b) ====== ====== (a) Includes interest income on fiduciary funds ($135 million in 2001 and $142 million in 2000). (b) A reconciliation of the total segment operating income to income before income taxes in the consolidated financial statements is as follows: 12 (In millions of dollars) ---------------------- 2001 2000 ------ ------- Total segment operating income $1,729 $1,742 Charges related to September 11 (173) -- Corporate expense (87) (98) Reclassification of minority interest 14 15 ------- ------- Operating income 1,483 1,659 Interest income 18 18 Interest expense (154) (191) -------- ------- Total income before income taxes and minority interest $1,347 $1,486 ====== ====== 12. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") No. 16 "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." It changes the accounting for goodwill from an amortization method to an impairment only approach. Starting January 1, 2002, MMC will cease the amortization of goodwill that was recorded in past business combinations as required by SFAS No. 142. The full impact of applying this standard is yet to be determined. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 establishes accounting for standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The impact of applying these standards is yet to be determined. 13 Marsh & McLennan Companies, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Third Quarter and Nine Months Ended September 30, 2001 General Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional services firm. MMC subsidiaries include Marsh, the world's leading risk and insurance services firm; Putnam Investments, one of the largest investment management companies in the United States; and Mercer Consulting Group, a major global provider of consulting services. Approximately 57,000 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, but before charges related to September 11. 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:
Third Quarter Nine Months ------------------ ----------------- (In millions of dollars) 2001 2000 2001 2000 Revenue: Risk and Insurance Services $1,219 $1,132 $3,824 $3,581 Investment Management 616 863 2,002 2,502 Consulting 536 540 1,644 1,598 ------ ------ ------ ------ 2,371 2,535 7,470 7,681 ------ ------ ------ ------ Expense: Compensation and Benefits 1,184 1,267 3,622 3,782 Amortization of Intangibles 48 46 145 134 Other Operating Expenses 654 696 2,047 2,106 Charges related to September 11 173 -- 173 -- ------ -- ---- ------ ------ 2,059 2,009 5,987 6,022 ------ ------ ------ ------ Operating Income $ 312 $ 526 $1,483 $1,659 ====== ====== ====== ====== Operating Income Margin 13.2% 20.7% 19.9% 21.6% ====== ====== ====== ======
Minority interest recorded in other operating expenses in 2000 has been reclassified to be consistent with the 2001 presentation. 14 Consolidated Results Revenue, derived mainly from commissions and fees, declined 6% from the third quarter of 2000 and decreased 3% for the nine months. This resulted largely from a decline in revenue in the investment management segment due to lower assets under management on which fees are earned, offset by a higher volume of business in the risk and insurance services segment. On a consolidated basis, underlying revenue, which excludes the effect of items such as foreign exchange, acquisitions and dispositions, declined approximately 5% from the third quarter of 2000. The risk and insurance services segment experienced underlying revenue growth of approximately 10% primarily due to the effect of higher commercial insurance premium rates and net new business development. Consulting revenue grew 1% for the quarter due to a higher volume of business in the retirement practice offset by a decline in the compensation and communications consulting and general management consulting practices. Revenue decreased 29% in the investment management segment as average assets under management decreased 23% from the prior year. For the nine months, consolidated underlying revenue declined approximately 1%. Operating expenses, excluding the effect of items such as foreign exchange, acquisitions and dispositions, and charges related to September 11, decreased approximately 4% in the third quarter of 2001 primarily due to significantly lower incentive compensation in the investment management segment and a reduction in discretionary expenses in all segments, partially offset by expenses associated with a higher volume of business in the risk and insurance services segment. Expenses were also reduced by the realization of incremental net integration savings related to the Sedgwick Group plc ("Sedgwick") transaction. Underlying expenses declined 1% for the first nine months of 2001 compared with the same period of 2000. MMC was directly and profoundly impacted by the September 11, 2001 terrorist attacks. As a result of the destruction of the World Trade Center ("WTC"), 295 MMC colleagues were lost. MMC occupied a combined total of fifteen floors in the two towers of the WTC, that housed approximately 1,900 employees and outside consultants. The risk and insurance services segment was the most directly impacted by this event. The WTC housed the center for information technology and finance support of Marsh, where most of the lost colleagues were employed. The WTC also served as the headquarters for Guy Carpenter, MMC's reinsurance intermediary. Employees have been relocated to various sites in midtown Manhattan and the New York metropolitan area. In addition, certain support functions previously performed in the WTC have been distributed among regional processing centers throughout the United States. A small number of colleagues from the consulting business were located at the WTC, all of whom have been relocated to other sites. Boston-based Putnam Investments, MMC's investment management subsidiary, suffered disruptions due to building evacuations and the closing of the equity markets. MMC successfully implemented long-standing disaster recovery plans. All critical business functions and systems have been recovered and are operational. 15 In the third quarter of 2001, MMC recorded pretax charges of $173 million, net of insurance recoveries, related to the events of September 11 and the subsequent impact on business conditions. The impact of these costs, net of taxes, was a reduction in EPS of $.38 for the quarter and nine months ended September 30, 2001. Services and benefits provided to victims' families and employees, such as salary and benefit continuance, counseling and a commitment to the MMC Victims Relief Fund, make up $55 million of the charges. Write-off or impairments of intangibles and other non-cash assets were $32 million and charges related to disruption of business operations amounted to $25 million. As a result of weakening business conditions, which were exacerbated by the events of September 11, a charge of $61 million was recorded to provide for planned staff reductions and office consolidations, primarily in the consulting segment. The charge is comprised of $44 million for severance and related benefits affecting approximately 750 people and $17 million for future rent under non-cancelable leases. Actions under the plan are expected to be substantially completed by December 31, 2001. Utilization of these charges is summarized in Note 8 to the consolidated financial statements. Risk and Insurance Services Third Quarter Nine Months -------------------- ---------------------- (In millions of dollars) 2001 2000 2001 2000 Revenue $1,219 $1,132 $3,824 $3,581 Expense 979 (a) 933 2,950 (a) 2,854 -------- -------- ------- ------- Operating Income $ 240 $ 199 $ 874 $ 727 ======= ======= ====== ====== Operating Income Margin 19.7% 17.6% 22.9% 20.3% ====== ====== ====== ====== (a) Excludes charges related to September 11. Revenue for the risk and insurance services segment grew 8% over the third quarter of 2000. On a comparable basis, underlying revenue for risk and insurance services operations rose approximately 10% primarily reflecting the effect of net new business and higher commercial insurance premium rates. Insurance broking and risk management revenue, which represented approximately 71% of risk and insurance services, grew approximately 8% over the third quarter of 2000. In addition, revenue grew 24% in the reinsurance operation and 6% in the consumer and program practices unit. Over the last 18 months, the transfer of commercial risk has become more difficult and more expensive for clients. The terrorist attacks have accelerated these trends. Insurance industry losses will be felt across multiple product lines, most acutely in commercial property. Clients now face a more difficult marketplace as insurance and reinsurance markets worldwide tighten, capacity is reduced and rates increase. The size of the increases varies according to product line and clients' loss experience and reflects a marketplace that is changing daily as the January 2002 renewals begin. For the first nine months of 2001, underlying revenue grew 10% over the same period of 2000. Expenses for risk and insurance services increased 5% for the third quarter and 3% for the first nine months of 2001 compared to the same periods of 2000. Excluding the effect of items such as acquisitions and foreign exchange, expenses increased approximately 8% from the third quarter of 2000 primarily reflecting costs associated with a higher volume of business, partially offset by the realization of net integration savings related to the Sedgwick transaction. For the nine months, expenses for risk and insurance services, excluding items such as acquisitions and the effect of foreign exchange and charges related to September 11, rose approximately 7%. 16 The events of September 11 resulted in significant disruption of business in Marsh, which was directly impacted. The effect on revenue cannot be quantified. Significant resources were dedicated to recovery of business operations, and providing assistance to victims' families. Compensation and benefit costs of $15 million related to employees who were unable to report to work or were involved directly in the recovery efforts have been recorded as part of the charges related to September 11 and are not included in the segment's operating expenses. Investment Management Third Quarter Nine Months ------------------- ------------------- (In millions of dollars) 2001 2000 2001 2000 Revenue $ 616 $ 863 $2,002 $2,502 Expense 427 (a) 592 1,389 (a) 1,720 ------- ------- ------- ------- Operating Income $ 189 $ 271 $ 613 $ 782 ====== ====== ======= ======= Operating Income Margin 30.7% 31.4% 30.6% 31.3% ===== ===== ====== ===== (a) Excludes charges related to September 11. Putnam's revenue decreased 29% compared with the third quarter of 2000, reflecting a decline in the level of average assets under management on which management fees are earned and lower equity earnings on its Thomas H. Lee investment. Assets under management averaged $316 billion in the third quarter of 2001, a 23% decline from the $412 billion managed in the third quarter of 2000. Assets under management were $286 billion at September 30, 2001 compared with $406 billion at September 30, 2000 and $339 billion at June 30, 2001. The decrease from the end of the second quarter reflects net redemptions of $3 billion plus a $50 billion decrease resulting from a decline in equity market levels during the quarter. Revenue for Putnam decreased 20% for the first nine months of 2001 compared with the same period of 2000, largely as a result of lower average assets under management. Putnam's expenses decreased 28% in the third quarter of 2001 from the same period of 2000 and 19% in the first nine months of 2001 compared to 2000, primarily due to lower incentive compensation reflecting the current operating environment. The events of September 11 resulted in disruption of business operations throughout MMC. Significant resources were dedicated to the recovery efforts of the risk and insurance services segment, particularly related to information technology. Compensation and benefit costs of $6 million related to the recovery efforts have been recorded as part of the charges related to September 11 and are not included in the segment's operating expenses. 17
Quarter-end and average assets under management are presented below: (In billions of dollars) 2001 2000 ------ ------ Mutual Funds: Growth Equity $ 55 $142 Core Equity 51 59 Value Equity 49 57 Fixed Income 48 45 ---- ---- 203 303 Institutional Accounts: Growth Equity 20 39 Core Equity 41 42 Value Equity 6 5 Fixed Income 16 17 ---- ---- 83 103 ---- ---- Quarter-end Assets $286 $406 ---- ---- Assets from Non-US Investors $ 26 $ 30 ---- ---- Average Assets $316 $412 ---- ----
Putnam provides individual and institutional investors with a broad range of equity and fixed income investment products and services 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 third quarter, assets held in equity securities represented 78% of assets under management, compared with 85% at September 30, 2000, while investments in fixed income products represented 22%, compared with 15% at September 30, 2000. Assets under management and revenue levels are particularly affected by fluctuations in domestic and international stock and bond market prices and by the level of investments and withdrawals for current and new fund shareholders and clients. U.S. equity markets were volatile throughout 2000 and during the first nine months of 2001, recording declines after several years of substantial growth. This volatility contributed to the fluctuations in assets under management and, accordingly, to the decline in revenue. A continued decline in general market levels could lead to further declines in revenue. Items affecting revenue also include, but are not limited to, investment performance, service to clients, the development and marketing of new investment products, the relative attractiveness of the investment style under prevailing market conditions and changes in the investment patterns of clients. Revenue levels are sensitive to all of the factors above, but in particular, to significant changes in stock and bond market valuations. 18 Consulting Third Quarter Nine Months ------------------ ------------------ (In millions of dollars) 2001 2000 2001 2000 Revenue $ 536 $ 540 $1,644 $1,598 Expense 455 (a) 456 1,402 (a) 1,365 ------- ------- ------- ------- Operating Income $ 81 $ 84 $ 242 $ 233 ======= ======= ====== ====== Operating Income Margin 15.1% 15.6% 14.7% 14.6% ===== ===== ====== ====== (a) Excludes charges related to September 11. Consulting services revenue declined 1% in the third quarter of 2001 compared with the same period of 2000. On a comparable basis, underlying consulting revenue increased 1% in the third quarter and 5% for the first nine months of 2001. Retirement consulting revenue, which represented 43% of the consulting segment, grew 10% in the third quarter primarily due to increased services provided. In addition, underlying revenue rose 5% in health and group benefits consulting, 15% in organizational change practices and 13% in economic consulting primarily due to a higher volume of business in these practice lines during the third quarter of 2001, offset by a 10% decline in compensation and communications consulting. Revenue in general management consulting declined by 25% from the third quarter of 2000 due to lack of demand for these services. Consulting services expenses were relatively unchanged in the third quarter of 2001 compared with the third quarter of 2000. On a comparable basis, excluding the effect of such items as foreign exchange, acquisitions and dispositions, expenses increased approximately 4% for the third quarter and 5% for the first nine months of 2001 reflecting the effect of staff increases in the growing practices, principally outside the United States, offset in part, by lower discretionary spending. As mentioned in the general section of this Management Discussion and Analysis, Mercer has taken action to adjust its staffing levels to the current business environment. The events of September 11 resulted in disruption of business operations throughout MMC. The effect on revenue for Mercer cannot be quantified. Resources were devoted to the recovery of operations. Compensation and benefit costs of $3 million related to the recovery efforts have been recorded as part of the charges related to September 11 and are not included in the segment's operating expenses. Corporate Expenses Corporate expenses decreased to $29 million in the third quarter of 2001 from $34 million in 2000 primarily due to nonrecurring costs incurred in 2000 associated with certain corporate initiatives as well as nonrecurring consulting fees related to the integration of Sedgwick. Compensation and benefit costs of $1 million related to the recovery efforts have been recorded as part of the charges related to September 11 and are not included in the corporate expenses. Expenses for the nine months ended September 30 decreased 3% compared to the same period in 2000. 19 Interest Interest income earned on corporate funds amounted to $6 million in the third quarter of 2001, as compared to $7 million in the third quarter of 2000. Interest expense of $46 million decreased from $63 million in the third quarter of 2000 due to a decrease in the average interest rate primarily related to commercial paper borrowings compared with the third quarter of 2000. Income Taxes MMC's consolidated tax rate was 36.8% of income before income taxes and minority interest in the third quarter and 37.4% for the nine months of 2001 compared with 38.75% in the third quarter and in the first nine months of 2000. The consolidated tax rate was 37.5% for the quarter and nine months of 2001 excluding the impact of charges related to September 11. The reduction in the tax rate for the nine months primarily reflects lower state and non-U.S. taxes from implementing tax efficient structures worldwide. Liquidity and Capital Resources MMC anticipates that internally generated funds will be sufficient to meet its foreseeable recurring operating cash requirements as well as dividends, capital expenditures and scheduled repayments of long-term debt. MMC generated $872 million of cash from operations for the nine months ended September 30, 2001 compared with $810 million for the same period in 2000. These amounts reflect the net income earned by MMC during those periods adjusted for non-cash charges and working capital changes. MMC's cash and cash equivalents aggregated $600 million on September 30, 2001, an increase of $360 million from the end of 2000. As a result of the events of September 11 and the subsequent business environment, MMC recorded a pretax charge of $173 million. The net charges include non-cash asset impairments of approximately $32 million and restructuring costs of $61 million. The impact of the events of September 11 on MMC's cash flow after the effect of insurance recoveries and taxes has not been significant. MMC will continue to incur expenses related to recovery from the disaster, but does not expect any material uninsured cash outflow related to this event in excess of the charges recognized in the financial statements at September 30, 2001. Recoveries under certain provisions of MMC's insurance policies are contingent upon the occurrence of future events. Such provisions include replacement value coverage of fixed assets and leasehold improvements, which is contingent on actual replacement of the lost assets and reimbursement of incremental rent cost for replacement office facilities, which is contingent upon acquiring the new leasehold interest. Such recoveries will not be recorded in the financial statements until all contingencies have been satisfied and the amount can be reasonably estimated. Insurance recoveries of $126 million have been recorded in the financial statements to date. Additional recoveries under these policy provisions are expected to be significant. 20 During the first nine months of 2001, commercial paper borrowings increased by $675 million to fund certain investments and MMC's share repurchase program. In January 2001, $286 million was used to purchase a minority investment in Gruppo Bipop-Carire S.p.A. During the first nine months of 2001, MMC repurchased approximately 6.2 million shares of its common stock with a cash outlay of approximately $590 million. MMC's additions to fixed assets and capitalized software, which amounted to $324 million in the first nine months of 2001 and $352 million during the same period last year, primarily relate to computer equipment purchases and the refurbishing and modernizing of office facilities and software development costs. MMC wrote off fixed assets and leasehold improvements with a net book value of $83 million as a result of the terrorist attacks, all of which is covered by insurance. In the second quarter of 2001, MMC sold certain of its London properties and simultaneously entered into a leaseback arrangement for a significant portion of the properties. Total proceeds of approximately $135 million were received. MMC has committed to potential future investments of approximately $725 million in connection with various MMC Capital funds and other MMC investments. Approximately $250 million is expected to be invested during the remainder of 2001. MMC expects to fund future commitments, in part, with sales proceeds from existing investments. As further explained in Note 9 to the consolidated financial statements, the disclosure and advice given to clients regarding certain personal pension transactions by certain present and former subsidiaries in the United Kingdom are under review by the Personal Investment Authority. At current rates of exchange, the contingent exposure for pension redress and related cost is presently estimated to be approximately $205 million, essentially all of which is expected to be recovered from insurers. Approximately two-thirds of the contingent exposure is associated with the Sedgwick acquisition while the balance is associated with other current and former subsidiaries of MMC. The timing of payments and insurance recoveries relating to the pension review process cannot be predicted with certainty; however, payments net of anticipated insurance recoveries were approximately $90 million in 2000, and $100 million during the first nine months of 2001. These payments are reflected in other liabilities in the Consolidated Statements of Cash Flows. 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. 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 and are with counterparties of high creditworthiness. MMC does not enter into foreign currency or interest rate transactions for trading or other speculative purposes. The translated values of revenue and expense from MMC's international risk and insurance services and consulting operations are subject to fluctuations due to changes in currency exchange rates. However, the net impact of these fluctuations on MMC's results of operations or cash flows has not been material. 21 Other In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") No. 16 "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets". It changes the accounting for goodwill from an amortization method to an impairment only approach. Starting January 1, 2002, MMC will cease the amortization of goodwill that was recorded in past business combinations as required by SFAS No. 142. The full impact of applying this standard is yet to be determined, however, the elimination of amortization expense on goodwill is expected to increase reported annual earnings for MMC by at least $0.40 per share beginning in 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The full impact of applying these standards is yet to be determined. 22 PART II, OTHER INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT SEPTEMBER 30, 2001 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10. Employment Letter between R. J. Groves and MMC dated August 1, 2001. 12. Statement Re: Computation of Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K None. 23 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 day of November, 2001 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 24 EX-10 2 ex10_3qtr.txt EXHIBIT 10 - RAY GROVES LETTER Exhibit 10.1 August 1, 2001 Mr. Ray J. Groves Ernst & Young 787 Seventh Avenue 26th Floor New York, New York 10019 Dear Ray: I am very pleased to extend our formal employment offer for you to join MMC in the role of senior advisor. The background and perspective you bring will be extremely valuable to me personally and to our other senior colleagues -- at Marsh, in particular. Your professional, management and directorship experiences combine to offer a rich source from which we can all draw, and we are excited about your joining. You will be based in our New York headquarters offices at 1166 Avenue of the Americas and report to me. Outlined below are the compensation arrangements that we have discussed: o Base Salary - Upon employment, which we expect to be August 1, 2001, your annual base salary will be $800,000 and subject to annual review. o Bonus - For 2001 you will be guaranteed a cash bonus of $250,000 which will be paid in late February 2002. Beyond 2001 you will be eligible for a bonus consistent with that provided for our senior executives at MMC and reflecting both company and individual performance. A portion of your annual bonus for 2002 and beyond may be paid in MMC stock. o Stock Options - You will be granted options on 100,000 shares of MMC stock. These are ten-year options, vesting 25% per annum beginning one year from the date of grant. This grant will be fully vested upon your retirement after August 1, 2004 and will be exercisable up to the expiration date of the grant. You will be eligible for awards in March 2002 and beyond consistent with the guidelines in place for stock option grants to senior executives. o Restricted Stock - You will be granted 10,000 shares of MMC restricted stock, one-third of which will vest annually from the date of grant, and you will receive dividend equivalent payments on these shares. You will be eligible for future grants in March 2002 and beyond based on the guidelines in place for grants of restricted stock. Mr. Ray J. Groves August 1, 2001 Page 2 Your term of employment will be 3 years. Were the company to terminate your employment for reasons other than for cause during the first 12 months of you joining MMC, all grants of options and restricted stock will vest. By accepting this offer, you affirm that there are no restrictive covenants that apply that would restrict in any way your ability to carry out the role proposed for you with MMC in all its respects. Further, MMC is an employment at will employer, meaning that either party can terminate your employment at any time for any reason or for no reason at all. Ray, I am delighted that we will have the benefit of your expertise and counsel. My enthusiasm is shared among all of my colleagues with whom you have spoken, and we look forward to welcoming you to MMC in this new capacity. Sincerely, - ----------------------------- Accepted (Date) 25 EX-12 3 ex12_3qtr.txt EXHIBIT 12.1 (RATIO OF EARNINGS TO FIXED CHARGES) Exhibit 12.1 Marsh & McLennan Companies, Inc. and Subsidiaries Ratio of Earnings to Fixed Charges (In millions, except ratios)
Nine Months Ended September 30, 2001 Years Ended December 31, ----------- --------------------------------------- (unaudited) 2000 1999 (1) 1998 1997(2) 1996 Earnings Income before income taxes and minority interest* $1,347 $1,955 $1,255 $1,305 $ 715 $668 Interest expense 154 247 233 140 107 61 Portion of rents representative of the interest factor 84 120 121 104 88 72 Amortization of capitalized interest -- -- 1 1 1 1 $1,585 $2,322 $1,610 $1,550 $ 911 $802 Fixed Charges Interest expense $ 154 $ 247 $ 233 $ 140 $ 107 $ 61 Portion of rents representative of the interest factor 84 120 121 104 88 72 $ 238 $ 367 $ 354 $ 244 $ 195 $133 Ratio of Earnings to Fixed Charges 6.7 6.3 4.5 6.4 4.7 6.0
* Minority interest has been reclassified in the prior years to conform to the current year presentation. (1) For the year ended December 31, 1999, income before income taxes included a $337 million special charge related to the acquisition and integration of Sedgwick. Excluding that charge, the ratio of earnings to fixed charges would have been 5.5. (2) For the year ended December 31, 1997, income before income taxes included a $244 million special charge related to the Johnson & Higgins integration, London real estate and the disposal of certain assets. Excluding that charge, the ratio of earnings to fixed charges would have been 5.9. 26 -----END PRIVACY-ENHANCED MESSAGE-----