-----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, DJlyfazUM1/GLhO0EB5W/ULbJro6n8yTWMEF9EMV2FWhrcWux6jqi+WOKwDF0SJA MYRhI3ZArS8+zcG6To0rFA== 0000062709-02-000032.txt : 20021114 0000062709-02-000032.hdr.sgml : 20021114 20021114155232 ACCESSION NUMBER: 0000062709-02-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02825079 BUSINESS ADDRESS: STREET 1: 1166 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2123455000 MAIL ADDRESS: STREET 1: 1166 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MARLENNAN CORP DATE OF NAME CHANGE: 19760505 10-Q 1 f10q3rdqtr2002.txt FORM 10-Q (QUARTER ENDED SEPT. 30, 2002) ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 2002 Marsh & McLennan Companies, Inc. 1166 Avenue of the Americas New York, New York 10036 (212) 345-5000 Commission file number 1-5998 State of Incorporation: Delaware I.R.S. Employer Identification No. 36-2668272 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . NO ___. As of October 31, 2002, there were outstanding 537,061,702 shares of common stock, par value $1.00 per share, of the registrant. ================================================================================ INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their representatives may from time to time make verbal or written statements (including certain statements contained in this report and other MMC filings with the Securities and Exchange Commission and in our reports to stockholders) relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, discussions concerning revenues, expenses, earnings, cash flow, capital structure, financial losses and expected insurance recoveries resulting from the September 11, 2001 attack on the World Trade Center in New York City, as well as market and industry conditions, premium rates, financial markets, interest rates, foreign exchange rates, contingencies and matters relating to MMC's operations and income taxes. Such forward-looking statements are based on available current market and industry materials, experts' reports and opinions and long-term trends, as well as management's expectations concerning future events impacting MMC. Forward-looking statements by their very nature involve risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by any forward-looking statements contained or incorporated or referred to herein include, in the case of MMC's risk and insurance services and consulting businesses, the amount of actual insurance recoveries and financial 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 challenging marketplace conditions for the transfer of commercial risk and other changes in the global property and casualty insurance markets, the impact of terrorist attacks, natural catastrophes and mergers between client organizations, including insurance and reinsurance companies. Factors to be considered in the case of MMC's investment management business include changes in worldwide and national equity and fixed income markets, actual and relative investment performance, the level of sales and redemptions and the ability to maintain investment management and administrative fees at appropriate levels; and with respect to all of MMC's activities, changes in general worldwide and national economic conditions, changes in the value of investments made in individual companies and investment funds, fluctuations in foreign currencies, actions of competitors or regulators, changes in interest rates or in the ability to access financial markets, developments relating to claims, lawsuits and contingencies, prospective and retrospective changes in the tax or accounting treatment of MMC's operations, and the impact of tax and other legislation and regulation in the jurisdictions in which MMC operates. Forward-looking statements speak only as of the date on which they are made, and MMC undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events. MMC is committed to providing timely and materially accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, MMC and its operating companies use their websites to convey meaningful information about their businesses, including the posting of updates of assets under management at Putnam. Monthly updates of assets under management at Putnam will be posted on the first business day following the end of each month, except at the end of March, June, September and December, when such information will be released with MMC's quarterly earnings announcement. Investors can link to MMC and its operating company websites through www.mmc.com. PART 1. FINANCIAL INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share figures) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Revenue $2,553 $2,407 $7,800 $7,579 Expense 2,041 2,095(a) 6,036 6,096(a) ------ ------- ------- ------- Operating Income 512 312 1,764 1,483 Interest Income 5 6 14 18 Interest Expense (43) (46) (118) (154) ------ ------ ------- ------- Income Before Income Taxes And Minority Interest 474 272 1,660 1,347 Income Taxes 168 100 589 503 Minority Interest, Net of Tax 7 4 18 14 ------ ------ ------- ------ Net Income $ 299 $ 168 $1,053 $ 830 ====== ====== ====== ====== Basic Net Income Per Share $0.56 $0.31 $1.94 $1.51 ===== ===== ===== ===== Diluted Net Income Per Share $0.55 $0.29 $1.88 $1.44 ===== ===== ===== ===== Average Number of Shares Outstanding - Basic 535 549 542 551 === === === === Average Number of Shares Outstanding - Diluted 548 569 559 572 === === === === Dividends Declared $0.28 $0.27 $0.83 $0.78 ===== ===== ===== ===== (a) 2001 expenses include charges of $173 related to September 11, 2001, see note 8. The accompanying notes are an integral part of these consolidated statements. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars) (Unaudited) September 30, December 31, 2002 2001 -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 675 $ 537 ------- ------- Receivables- Commissions and fees 2,123 2,288 Advanced premiums and claims 138 188 Other receivables 340 355 ------- ------- 2,601 2,831 Less-allowance for doubtful accounts and cancellations (138) (139) ------- ------- Net receivables 2,463 2,692 ------- ------- Prepaid dealer commissions - current portion 239 308 Other current assets 285 255 ------- ------- Total current assets 3,662 3,792 Goodwill and intangible assets 5,354 5,327 Fixed assets, net 1,249 1,235 (net of accumulated depreciation and amortization of $1,211 at September 30, 2002 and $1,022 at December 31, 2001) Long-term investments 568 826 Prepaid dealer commissions 355 528 Other assets 1,830 1,585 ------- ------- $13,018 $13,293 ======= ======= The accompanying notes are an integral part of these consolidated statements MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions, except per share figures) (Unaudited) September 30, December 31, 2002 2001 ------------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 490 $ 757 Accounts payable and accrued liabilities 1,360 1,347 Accrued compensation and employee benefits 836 1,088 Accrued income taxes 587 600 Dividends payable 151 146 ------- ------- Total current liabilities 3,424 3,938 ------- ------- Fiduciary liabilities 3,854 3,630 Less - cash and investments held in a fiduciary capacity (3,854) (3,630) ------- ------- Long-term debt 2,888 2,334 ------- ------- Other liabilities 1,700 1,848 ------- ------- Commitments and contingencies - - Stockholders' equity: Preferred stock, $1 par value, authorized 6,000,000 shares, none issued Common stock, $1 par value, authorized 800,000,000 shares, issued 560,641,640 shares at September 30, 2002 and at December 31, 2001 561 561 Additional paid-in capital 1,466 1,620 Retained earnings 4,329 3,723 Accumulated other comprehensive loss (263) (227) ------- ------- 6,093 5,677 Less - treasury shares, at cost, 24,067,604 shares at September 30, 2002 and 11,988,096 shares at December 31, 2001 (1,087) (504) ------- ------- Total stockholders' equity 5,006 5,173 ------- ------- $13,018 $13,293 ======= ======= The accompanying notes are an integral part of these consolidated statements. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions of dollars) (Unaudited) Nine Months Ended September 30, ------------------- 2002 2001 ------ ------- Operating cash flows: Net income $1,053 $ 830 Adjustments to reconcile net income to cash generated from operations: Depreciation of fixed assets and capitalized software 240 248 Amortization of intangible assets 25 147 Provision for deferred income taxes (119) (5) Other, net 36 (25) Changes in assets and liabilities: Net receivables 230 82 Prepaid dealer commissions 242 204 Other current assets (9) 12 Other assets (120) (115) Accounts payable and accrued liabilities 70 (15) Accrued compensation and employee benefits (251) (552) Accrued income taxes 22 189 Other liabilities (130) (128) ----- ------- Net cash generated from operations 1,289 872 ----- ------- Financing cash flows: Net (decrease) increase in commercial paper (515) 675 Other borrowings 750 24 Other repayments of debt (8) (27) Purchase of treasury shares (1,167) (590) Issuance of common stock 436 312 Dividends paid (442) (421) ----- ------- Net cash used for financing activities (946) (27) ----- ------- Investing cash flows: Additions to fixed assets and capitalized software (288) (324) Proceeds from sale of fixed assets 21 161 Acquisitions (49) (53) Other, net 115 (278) ----- ------- Net cash used for investing activities (201) (494) ----- ------- Effect of exchange rate changes on cash and cash equivalents (4) 9 ----- ------ Increase in cash & cash equivalents 138 360 Cash & cash equivalents at beginning of period 537 240 ------ ------ Cash & cash equivalents at end of period $ 675 $ 600 ====== ====== The accompanying notes are an integral part of these consolidated statements. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Operations -------------------- MMC, a professional services firm, is organized based on the different services that it offers. Under this organization structure, MMC operates in three principal business segments: risk and insurance services, investment management and consulting. The risk and insurance services segment provides insurance broking, reinsurance broking and insurance and program management services for businesses, public entities, insurance companies, associations, professional services organizations and private clients. It also provides services principally in connection with originating, structuring and managing insurance, financial services and other industry focused investments. The investment management segment primarily provides securities investment advisory and management services and administrative services for a group of publicly held investment companies and institutional accounts. The consulting segment provides advice and services to the managements of organizations primarily in the areas of human resources and employee benefit programs, investment consulting, general management consulting, organizational design and economic consulting and expert testimony. 2. Principles of Consolidation --------------------------- The consolidated financial statements included herein have been prepared by MMC pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such rules and regulations, although MMC believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in MMC's latest Annual Report on Form 10-K. The financial information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three-month and nine-month periods ended September 30, 2002 and 2001. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. In the normal course of business MMC makes investments through its subsidiary Marsh & McLennan Risk Capital Holdings, Ltd. ("MMRCH"), primarily in insurance and reinsurance entities, and periodically sells these investments. In the second quarter of 2002, MMRCH sold an investment that it had acquired in 1997 to Trident II, L.P. MMC Capital, Inc., a wholly owned subsidiary of MMRCH, serves as advisor to Trident II, L.P. Revenue of $9 million from this transaction was recorded by MMRCH. 3. Fiduciary Assets and Liabilities -------------------------------- In its capacity as an insurance broker or agent, MMC collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters. MMC also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims are held in a fiduciary capacity. Interest income on these fiduciary funds, included in revenue, amounted to $90 million and $135 million for the nine months ended September 30, 2002 and 2001, respectively. Net uncollected premiums and claims and the related payables amounting to $10.7 billion at September 30, 2002 and $10.8 billion at December 31, 2001 are not included in the accompanying Consolidated Balance Sheets. 4. Per Share Data -------------- Basic net income per share is calculated by dividing net income by the weighted average number of shares of MMC's common stock outstanding. Diluted net income per share is calculated by reducing net income for the potential minority interest associated with unvested Putnam Class B Common Shares and adding back dividend equivalent expense related to common stock equivalents. This result is then divided by the weighted average common shares outstanding, which have been adjusted for the dilutive effect of potentially issuable common shares. The following reconciles net income to net income for diluted earnings per share and basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and nine-month periods ended September 30, 2002 and 2001. Three Months Ended Nine Months Ended (In millions) September 30, September 30, ----------- ------------------ ------------------ 2002 2001 2002 2001 ------ ---- ----- ---- Net income $299 $168 $1,053 $830 Less: Potential minority interest associated with Putnam Class B Common Shares net of dividend equivalent expense related to common stock equivalents - (2) (1) (8) ---- ---- ------ ----- Net income for diluted earnings per share $299 $166 $1,052 $822 ==== ==== ====== ==== Basic weighted average common shares outstanding 535 549 542 551 Dilutive effect of potentially issuable common stock 13 20 17 21 ---- --- ------ ---- Diluted weighted average common shares outstanding 548 569 559 572 ==== ==== ====== === 5. Supplemental Disclosure to the Consolidated Statements of Cash Flows The following schedule provides additional information concerning interest and income taxes paid for the nine-month periods ended September 30, 2002 and 2001. (In millions of dollars) 2002 2001 ------------------------ ---- ---- Interest paid $ 91 $150 Income taxes paid $612 $169 6. Comprehensive Income The components of comprehensive income for the nine-month periods ended September 30, 2002 and 2001 are as follows: (In millions of dollars) 2002 2001 ------------------------ ------ ----- Foreign currency translation adjustments $ 71 $(34) Unrealized investment holding losses, net of income taxes (79) (165) Less: Reclassification adjustment for gains included in net income, net of income taxes (36) (57) Deferred gain on cash flow hedges, net of income taxes 8 - ------ ---- Other comprehensive loss (36) (256) Net income 1,053 830 ------ ---- Comprehensive income $1,017 $574 ====== ==== 7. Pension Remeasurement Effective July 1, 2002, MMC amended the substantive plans as defined by Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," related to its U.S. defined benefit pension plans. Discretionary cost of living increases had been included in the substantive plans for accounting purposes due to MMC's prior history of such grants. MMC no longer has the intention of granting such increases on a regular basis. The changes to the substantive plans have been accounted for as plan amendments. The assets and liabilities of the plans were remeasured at July 1, 2002 to reflect the amendments and included a reduction of the expected rate of return on plan assets to 9.25% from 10%. The change in the substantive plans reduced the Projected Benefit Obligation by approximately $240 million. 8. Integration and Restructuring Costs and Charges Related to September 11 ----------------------------------------------------------------------- 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. As a result of the events of September 11, pretax charges of $173 million were recorded in the third quarter of 2001. The charges included 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 were recorded in the financial statements as of September 30, 2001. Charges related to September 11 decreased diluted net income per share by $0.19 for the quarter and $0.18 for the nine months ended September 30, 2001. Additional charges of $14 million were recorded in the fourth quarter of 2001. Excluding restructuring charges, the remaining liability for charges related to September 11 was $5 million at September 30, 2002, primarily related to providing continued access to MMC's health and benefit plans as well as counseling for victims' families. 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 restructuring charges of $61 million related to this Plan is comprised of $44 million for severance and related benefits affecting 750 people and $17 million for future rent under noncancelable leases. The utilization of these charges is summarized as follows: - -------------------------------------------------------------------------------- Utilized Utilized 1999 Sedgewick Plan: and changes in (In millions of dollars) Initial in estimates Nine Balance Balance through Months Sept. 30, 2001 2002 2002 - -------------------------------------------------------------------------------- Termination payments to employees $183 $(180) $(2) $ 1 Other employee-related costs 5 (5) - - Future rent under noncancelable leases 48 (28) (2) 18 Leasehold termination and related costs 49 (30) (1) 18 - -------------------------------------------------------------------------------- $285 $(243) $(5) $37 - -------------------------------------------------------------------------------- Number of employee terminations 2,400 (2,400) - - Number of office consolidations 125 (125) - - - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Utilized Utilized 1999 MMC Plan: and changes in (In millions of dollars) Initial in estimates Nine Balance Balance through Months Sept. 30, 2001 2002 2002 - ------------------------------------------------------------------------------- Termination payments to employees $194 $(187) $(2) $ 5 Future rent under noncancelable leases 31 (19) (2) 10 Leasehold termination and related costs 16 (13) - 3 Other integration related costs 25 (25) - - - -------------------------------------------------------------------------------- $266 $(244) $(4) $18 - -------------------------------------------------------------------------------- Number of employee terminations 2,100 (2,100) - - Number of office consolidations 50 (50) - - - -------------------------------------------------------------------------------- The actions contemplated by the 1999 Sedgwick Plan and the 1999 MMC Plan were substantially complete by year-end 2000. Some accruals, primarily for future rent under noncancelable leases and salary continuance arrangements, are expected to be paid over several years. Accruals for lease termination costs are primarily related to expenses payable at the expiration of the lease terms. - -------------------------------------------------------------------------------- 2001 Plan (In millions of dollars) Utilized in Initial Utilized Nine Balance Balance 2001 Months Sept. 30, 2002 2002 - -------------------------------------------------------------------------------- Termination payments to employees $ 44 $(14) $(22) $ 8 Future rent under noncancelable leases 17 - (3) 14 - -------------------------------------------------------------------------------- $ 61 $(14) $(25) $22 - -------------------------------------------------------------------------------- Number of employee terminations 750 (506) (244) - Number of office consolidations 9 (2) (7) - - -------------------------------------------------------------------------------- Actions under the 2001 Plan were substantially complete by September 30, 2002. Some accruals, primarily for future rent under noncancelable leases and salary continuance arrangements are expected to be paid over several years. 9. Goodwill and Other Intangibles In accordance with SFAS No. 142, MMC discontinued the amortization of goodwill effective January 1, 2002. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization net of the pro-forma effect of directly related expenses and income taxes for the three and nine-month periods ended September 30, 2002 and 2001 is as follows: (In millions, except per share figures) Three Months Ended Nine Months Ended September 30, September 30, --------------- ----------------- 2002 2001 2002 2001 ---- ---- ----- ---- Reported Net Income $ 299 $168 $1,053 $830 Net amortization adjustment - 32 - 99 ----- ----- ------ ----- Adjusted Net Income $ 299 $200 $1,053 $929 ===== ==== ====== ===== Reported earnings per share - Basic $0.56 $0.31 $1.94 $1.51 ===== ===== ===== ===== Adjusted earnings per share - Basic $0.56 $0.37 $1.94 $1.69 ===== ===== ===== ====== Reported earnings per share - Diluted $0.55 $0.29 $1.88 $1.44 ===== ===== ===== ====== Adjusted earnings per share - Diluted $0.55 $0.35 $1.88 $1.62 ===== ===== ===== ====== Changes in the carrying amount of goodwill for the nine-month period ended September 30, 2002, are as follows: Balance as of January 1, 2002 $5,069 Goodwill acquired 26 Other adjustments (primarily foreign exchange) 15 ------ Balance as of September 30, 2002 $5,110 ====== The goodwill balance at September 30, 2002 includes approximately $121 million of equity method goodwill. MMC has completed the transitional goodwill impairment test and determined that there is no impairment of goodwill. Amortized intangible assets consist of the cost of client lists and client relationships acquired and the rights to future revenue streams from certain existing private equity funds. MMC has no intangible assets that are not amortized. The gross carrying amount and accumulated amortization by major intangible asset class is as follows: (In millions of dollars) Balance at September 30, 2002 ----------------------- ------------------------------------- Gross Accumulated Net Carrying Cost Amortization Value ------- ------------- ---------- Client lists and client relationships acquired $140 $ 48 $ 92 Future revenue streams related to existing private equity funds 216 64 152 ---- ---- ---- Total Amortized Intangibles $356 $112 $244 ==== ==== ==== Aggregate amortization expense for the nine-months ended September 30, 2002 was $25 million and the estimated aggregate amortization expense is as follows: Year Ending December 31, Estimated Expense ------------------------------ ----------------------- 2002 $34 2003 $33 2004 $33 2005 $30 2006 $24 10. Long-term Debt -------------- In March 2002, MMC issued $500 million of 5.375% Senior Notes due 2007 and $250 million of 6.25% Senior Notes due 2012 (the "Notes"). Interest is payable semi-annually on March 15 and September 15 of each year. The proceeds of these Notes were used to repay a portion of commercial paper borrowings. Concurrent with the issuance of the Notes, MMC entered into interest rate swap transactions to hedge its exposure to changes in the fair value of the Notes. The swap transactions, effectively, converted the fixed rate obligations into floating rate obligations. Under the terms of the swaps, the swap counterparties pay MMC a fixed rate equal to the coupon rate on the Notes. MMC pays the swap counterparties a floating rate of 6-month Libor plus 9.25 bps for the five-year swap and 6-month Libor plus 25.45 bps for the ten-year swap. In July 2002, MMC dedesignated 50% of the fair value hedge on each of the Notes and settled 50% of each of the related swaps. The portion of the Notes no longer hedged ceased being marked to market, and the cumulative amount of fair value adjustments previously recognized is being amortized over the remaining life of the related Notes. MMC redesignated the remaining portion of the swaps as a fair value hedge of 50% of the Notes. The redesignated swaps carry the identical terms and conditions as the original swaps and under SFAS No. 133 qualify for hedge accounting and meet all criteria necessary to conclude the hedge will be perfectly effective. Commercial paper borrowings of $750 million at September 30, 2002 and $1.0 billion at December 31, 2001 have been classified as long-term debt based on MMC's intent and ability to maintain or refinance these obligations on a long-term basis. 11. Share Repurchases ----------------- During the first nine months of 2002, MMC repurchased approximately 24 million shares of its common stock at a cost of approximately $1.2 billion. 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. MMC uses written put options to supplement its share repurchase program. The contracts are European style options, which generally expire three months from the date of sale. Settlement terms of the contracts are controlled by MMC and include physical, net-cash or net-share settlement. The contracts are recorded as equity transactions in accordance with EITF Issue No. 00-19, "Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." At September 30, 2002, MMC had open contracts on 925,000 shares, with strike prices ranging from $37.52 to $43.76 with a maximum potential purchase commitment of $38 million. The open contracts expire between October 24, 2002 and January 6, 2003, and have a fair value of $2 million at September 30, 2002. Approximately 59,000 shares could be issuable if the company were to elect a net-share settlement of the contracts based on the fair value at September 30, 2002. 12. Common Stock ------------ On May 16, 2002, the Board of Directors authorized a two-for-one stock distribution of MMC's common stock, which was issued as a stock dividend on June 28, 2002. 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 investment and consulting services. Some of these matters seek damages, including punitive damages, in amounts which could, if assessed, be significant. Insurance coverage applicable to such matters includes elements of both risk retention and risk transfer. Sedgwick Group plc, since prior to its acquisition, has been engaged in a review of previously undertaken personal pension plan business as required by United Kingdom regulators to determine whether redress should be made to customers. Other present and former subsidiaries of MMC are engaged in a comparable review of their personal pension plan businesses, although the extent of their activity in this area, and consequently their financial exposure, was proportionally much less than Sedgwick.As of September 30, 2002, settlements and related costs previously paid amount to approximately $508 million, of which approximately $184 million is due from or has been paid by insurers. The remaining estimated payments for pension redress and related costs accrued in the financial statements is $120 million, essentially all of which is expected to be recovered from insurers. MMC's ultimate exposure from the review by the Personal Investment Authority (now part of the U.K. Financial Services Authority), as presently calculated and including Sedgwick, is subject to a number of variable factors including, among others, the interest rate established quarterly by the U.K. regulators for calculating compensation, equity markets, and the precise scope, duration, and methodology of the review as required by that Authority. As part of the combination with Sedgwick, MMC acquired several insurance underwriting businesses that were already in run-off, including River Thames Insurance Company Limited. MMC has subsequently disposed of substantially all of these insurance entities, however, guarantees issued by Sedgwick with respect to certain liabilities of River Thames remain open. Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on MMC and its subsidiaries, on the basis of present information, it is the opinion of MMC's management that the disposition or ultimate determination of these claims, lawsuits, proceedings or guarantees will not have a material adverse effect on MMC's consolidated results of operations or its consolidated financial position. 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 nine-month periods ended September 30, 2002 and 2001 follow: (In millions of dollars) ------------------------ Revenue Segment from External Operating Customers Income ------------ ---------- 2002 Risk and Insurance Services $4,343 (a) $1,125 Investment Management 1,697 460 Consulting 1,760 (b) 250 ------- ------- $7,800 $1,835 ====== ====== 2001 Risk and Insurance Services $3,824 (a) $ 874 Investment Management 2,002 613 Consulting 1,753 (b) 242 ------- ------- $7,579 $1,729 ====== ====== (a) Includes interest income on fiduciary funds ($90 million in 2002 and $135 million in 2001). (b) Revenue and expense for 2001 reflect the reclassification of reimbursed (out-of-pocket) expenses. Effective January 1, 2002, expense reimbursements received from clients within the Consulting segment are recorded as revenue rather than an offset to expense, in compliance with guidance provided by the Financial Accounting Standards Board (EITF Issue No. 01-14). A reconciliation of the total segment operating income to income before income taxes and minority interest in the consolidated financial statements is as follows: 2002 2001 ---- ---- Total segment operating income $ 1,835 $ 1,729 Charges relates to September 11 -- (173) Corporate expense (89) (87) Reclassification of minority interest 18 14 ------- ------- Operating income 1,764 1,483 Interest income 14 18 Interest expense (118) (154) ------- ------- Total income before income taxes and minority interest $ 1,660 $ 1,347 ======= ======= 15. New Accounting Pronouncements ----------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS 146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and supercedes EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 states that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period when the liability is incurred. It applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 146 will be applied for exit or disposal activities initiated after December 31, 2002. The adoption of this standard is not anticipated to have a material impact on MMC's consolidated financial position, results of operations or cash flows. 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, 2002 General Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional services firm. MMC subsidiaries include Marsh, the world's leading risk and insurance services firm; Putnam Investments, one of the largest investment management companies in the United States; and Mercer, a major global provider of consulting services. Approximately 59,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries. MMC operates in three principal business segments based on the services provided. Segment performance is evaluated based on operating income, which is after deductions for directly related expenses and minority interest. For a description of critical accounting policies, including those which involve significant management judgment, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the consolidated financial statements in MMC's Annual Report on Form 10-K for the year ended December 31, 2001. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" on page one of this filing. This Form 10-Q should be read in conjunction with MMC's latest Annual Report on Form 10-K. The consolidated results of operations follow: - -------------------------------------------------------------------------------- Third Quarter Nine Months ------------- ------------------ (In millions of dollars) 2002 2001 2002 2001 - -------------------------------------------------------------------------------- Revenue: Risk and Insurance Services $1,431 $1,219 $4,343 $3,824 Investment Management 522 616 1,697 2,002 Consulting (a) 600 572 1,760 1,753 ------ ------ ------ ------- 2,553 2,407 7,800 7,579 ------ ------ ------ ------- Expense: Compensation and Benefits 1,299 1,184 3,829 3,622 Other Operating Expenses 742 738 2,207 2,301 Charges related to September 11 - 173 - 173 ----- ----- ----- ----- 2,041 2,095 6,036 6,096 ----- ----- ----- ------ Operating Income $512 $312 $1,764 $1,483 ==== ==== ====== ====== Operating Income Margin 20.1% 13.0% 22.6% 19.6% ==== ==== ====== ====== (a) Revenue and expense for 2001 reflect the reclassification of reimbursed (out-of-pocket) expenses to conform with current year presentation. Revenue, derived mainly from commissions and fees, rose 6% from the third quarter of 2001 and rose 3% for the nine months. Expenses decreased 3% for the third quarter and 1% for the nine months. Revenue increased in the risk and insurance services segment, principally driven by a higher volume of business, partially offset by a revenue decline in the investment management segment. The 2002 expenses reflect the change in accounting for goodwill discussed under "New Accounting Pronouncements" in this Management's Discussion and Analysis and the write down related to Putnam's investment in T.H. Lee Equity Fund IV, L.P., discussed under "Investment Management." Expenses in 2001 include charges of $173 million related to September 11, which are discussed in detail in the September 30, 2001 Form 10-Q and the December 31, 2001 Form 10-K. On a consolidated basis, underlying revenue which excludes the effect of such items as foreign exchange, acquisitions, dispositions and gains and losses on investments increased 4% as compared with the third quarter of 2001. The risk and insurance services segment experienced underlying revenue growth of approximately 16% primarily due to net new business and the effect of higher commercial insurance premium rates partially offset by lower fiduciary interest income. Revenue decreased 17% in the investment management segment as average assets under management declined 19% from the prior year. Consulting revenue increased 2% for the third quarter primarily reflecting an increase in retirement consulting and administration as well as economic consulting practices partially offset by a decline in general management consulting. For the nine months, consolidated underlying revenue rose approximately 3%. Operating expenses, excluding the effect of foreign exchange, acquisitions, dispositions, the change in accounting for goodwill and charges related to September 11, increased approximately 7% in the third quarter of 2002 primarily due to increased compensation and benefit costs in the risk and insurance services segment partially offset by reduced incentive compensation and lower volume related expenses in the investment management segment. Underlying expenses increased 4% for the first nine months of 2002 compared with the same period of 2001. Risk and Insurance Services - -------------------------------------------------------------------------------- Third Quarter Nine Months ---------------- ---------------- (In millions of dollars) 2002 2001 2002 2001 - -------------------------------------------------------------------------------- Revenue $1,431 $1,219 $4,343 $3,824 Expense 1,097 979(a) 3,218 2,950(a) ------ ------ ------ ------ Operating Income $ 334 $ 240 $1,125 $ 874 ====== ====== ====== ======= Operating Income Margin 23.3% 19.7% 25.9% 22.9% ====== ====== ====== ======= - -------------------------------------------------------------------------------- (a) Excludes charges related to September 11, 2001 Revenue Revenue for the risk and insurance services segment grew 17% over the third quarter of 2001. On a comparable basis, underlying revenue for the risk and insurance services segment rose approximately 16% primarily reflecting net new business and higher premium rates. Underlying revenue for insurance broking and risk management, which accounted for approximately 75% of the entire risk and insurance services segment, grew approximately 17%. This increase includes the impact of an 8% decrease in fiduciary interest income, resulting from a decline in interest rates, partially offset by higher average funds invested. Underlying revenue for the reinsurance broking unit grew 18%, which includes the impact of a 33% decline in fiduciary interest income. For the first nine months of 2002, underlying revenue grew 15% over the same period of 2001. Over the past two years, the transfer of commercial risk has become more difficult and costly with proportionate increases in premiums. Since the terrorist attacks in 2001, insurance and reinsurance markets worldwide have tightened, capacity is reduced and rates increased. The size of the increases varies according to product line and clients' loss experience, which reflects a dynamic and changing marketplace. These trends are continuing into the fourth quarter of 2002. Expense Risk and insurance services expenses increased 12% in the third quarter and 9% for the nine months over 2001. On a comparable basis, excluding the effect of such items as acquisitions, foreign exchange, and the change in accounting for goodwill, expenses increased approximately 14% from the third quarter of 2001 and 12% for the nine months primarily reflecting increased incentive compensation commensurate with strong operating performance, higher benefit costs and increased costs due to a higher volume of business. Expenses in 2001 exclude 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 resulting from the September 11, 2001 attacks. These costs were recorded as part of the charges related to September 11, 2001 and are not included in the segment's operating expenses. These charges are discussed more fully in MMC's September 30, 2001 Form 10-Q. Investment Management - -------------------------------------------------------------------------------- Third Quarter Nine Months --------------- ------------------- (In millions of dollars) 2002 2001 2002 2001 - -------------------------------------------------------------------------------- Revenue $522 $616 $1,697 $2,002 Expense 406 427(a) 1,237 1,389(a) ---- ---- ------ ----- Operating Income $116 $189 $ 460 $ 613 ==== ==== ====== ===== Operating Income Margin 22.2% 30.7% 27.1% 30.6% ===== ===== ====== ===== - -------------------------------------------------------------------------------- (a) Excludes charges related to September 11, 2001 Revenue Putnam's revenue decreased 15% compared with the third quarter of 2001. Underlying revenue, which excludes a contractual payment from Putnam's Italian joint venture partner, declined 17% in the third quarter primarily reflecting a decline in the level of average assets under management on which fees are earned. Assets under management averaged $257 billion in the third quarter of 2002, a 19% decline from the $316 billion managed in the third quarter of 2001. Assets under management aggregated $238 billion at September 30, 2002 compared with $286 billion at September 30, 2001 and $315 billion at December 31, 2001. The change from December 31, 2001 results from a $66 billion decrease due to a decline in equity market levels and $11 billion of net fund redemptions. Assets under management at October 31, 2002 aggregated $249 billion. Underlying revenue for Putnam decreased 16% for the first nine months of 2002 compared with the same period of 2001. Expense Putnam's expenses decreased 5% in the third quarter of 2002 from the same period of 2001 and 11% in the first nine months of 2002 compared to 2001, primarily due to a reduction in volume related expenses, as well as lower incentive compensation reflecting the current operating environment. These expense reductions are partially offset by a charge related to Putnam's minority interest investment in Thomas H. Lee Partners, L.P. ("TH Lee"), a private equity business. TH Lee is the general partner of T. H. Lee Equity Fund IV, L.P. ("Fund IV"). In the third quarter of 2002, Putnam determined its investments related to Fund IV may not be fully recoverable based on expected cash flows from Fund IV. The net impact of the write down related to Fund IV on Putnam's operating income was $32 million. At September 30, 2002, the remaining intangible asset related to Fund IV was $24 million which is being amortized over three years. Expenses in 2001 exclude compensation and benefit costs of $6 million related to recovery efforts that were recorded as part of the charges related to September 11, 2001 and are not included in the segment's operating expenses. These charges are discussed more fully in MMC's September 30, 2001 Form 10-Q. Quarter-end and average assets under management are presented below: - -------------------------------------------------------------------------------- (In billions of dollars) 2002 2001 - -------------------------------------------------------------------------------- Mutual Funds: Core Equity $43 $ 51 Value Equity 38 49 Growth Equity 29 55 Fixed Income 51 48 - -------------------------------------------------------------------------------- 161 203 - -------------------------------------------------------------------------------- Institutional Accounts: Core Equity 41 41 Value Equity 6 6 Growth Equity 12 20 Fixed Income 18 16 - -------------------------------------------------------------------------------- 77 83 - -------------------------------------------------------------------------------- Quarter-end Assets $238 $286 - -------------------------------------------------------------------------------- Assets from Non-US Investors $27 $26 - -------------------------------------------------------------------------------- Average Assets $257 $316 - -------------------------------------------------------------------------------- Assets under management and revenue levels are particularly affected by fluctuations in domestic and international stock and bond market prices, the composition of assets under management and by the level of investments and withdrawals for current and new fund shareholders and clients. U.S. equity markets have recorded declines in each of the past two years and over the first nine months of 2002 after several years of substantial growth prior to 2000. These market declines are the primary causes of the decrease in assets under management and, accordingly, to the decrease in revenue. Items affecting revenue also include, but are not limited to, actual and relative investment performance, service to clients, the development and marketing of new investment products, the relative attractiveness of the investment style under prevailing market conditions and changes in the investment patterns of clients and the ability to maintain investment management and administrative fees at appropriate levels. Revenue levels are sensitive to all of the factors above, but in particular, to changes in stock and bond market valuations. Putnam provides individual and institutional investors with a broad range of equity and fixed income investment products and services, invested domestically and globally, designed to meet varying investment objectives and which afford its clients the opportunity to allocate their investment resources among various investment products as changing worldwide economic and market conditions warrant. At the end of the third quarter, assets held in equity securities represented 71% of assets under management, compared with 78% at September 30, 2001, while investments in fixed income products represented 29%, compared with 22% at September 30, 2001. Consulting - -------------------------------------------------------------------------------- Third Quarter Nine Months ------------- ----------- (In millions of dollars) 2002 2001(a) 2002 2001(a) - -------------------------------------------------------------------------------- Revenue $600 $572 $1,760 $1,753 Expense 514 491(b) 1,510 1,511(b) ---- ---- ------ ------ Operating Income $ 86 $ 81 $ 250 $ 242 ==== ==== ====== ===== Operating Income Margin 14.3% 14.2% 14.2% 13.8% ==== ==== ====== ====== - ------------------------------------------------------------------------------- (a) Revenue and expense for 2001 reflect the reclassification of reimbursed (out-of-pocket) expenses to conform with current year presentation. (b) Excludes charges related to September 11, 2001 Revenue Consulting revenue increased 5% in the third quarter of 2002 compared with the same period of 2001. Excluding items such as foreign exchange, acquisitions and dispositions, underlying consulting revenue increased 2%. Retirement consulting and administration revenue, which represented 45% of the consulting segment, grew 7% in the third quarter and economic consulting revenue rose 12%. General management consulting revenue declined 19% due to the continued slow down in corporate spending. For the nine months of 2002, underlying revenue decreased 1% compared with the same period of 2001. Expense Consulting expenses rose 5% in the third quarter of 2002 compared with the same period of 2001 and were essentially unchanged for the nine months. On a comparable basis, excluding the effect of such items as foreign exchange, acquisitions and dispositions, and the change in accounting for goodwill, expenses rose 2% for the third quarter and were essentially unchanged for the nine months. Expenses in 2001 exclude compensation and benefit costs of $3 million related to the recovery efforts that were recorded as part of the charges related to September 11, 2001 and are not included in the segment's operating expenses. These charges are discussed more fully in MMC's September 30, 2001 Form 10-Q. New Accounting Pronouncements In accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", MMC discontinued amortization of goodwill on a prospective basis, effective January 1, 2002. Although results of prior periods are not to be restated, SFAS No. 142 requires disclosure of the effect of the accounting change on all prior periods presented. The impact of this change on 2001 results, after the effect of taxes and directly related expenses, is an increase in diluted earnings per share as follows for the quarter ended: March 31 - $0.06; June 30 - $0.06; September 30 - $0.06; and December 31 - $0.05. Approximately 70% of the impact of this change is related to the Risk and Insurance Services segment. Effective January 1, 2002, expense reimbursements received from clients within the consulting segment are recorded as revenue, rather than an offset to expense, in accordance with guidance provided in EITF Issue 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." Revenue and expense for prior periods reflect the reclassification of reimbursed expenses as follows: Reclassification of Consulting Reimbursed Expenses 2001 ----------------------------------------------- 1Q 2Q 3Q 4Q YR ----------------------------------------------- Revenue: As Previously Reported $ 550 $ 558 $ 536 $ 516 $2,160 Reimbursements 37 36 36 39 148 ------ ------ ------ ------ ------ After Reclassification $ 587 $ 594 $ 572 $ 555 $2,308 ------ ------ ------ ------ ------ Expense: As Previously Reported $ 480 $ 467 $ 455 $ 445 $1,847 Reimbursements 37 36 36 39 148 ------ ------ ------ ------ ------ After Reclassification $ 517 $ 503 $ 491 $ 484 $1,995 ------ ------ ------ ------ ------ Operating Income $ 70 $ 91 $ 81 $ 71 $ 313 ====== ====== ====== ====== ====== Operating Margin: As Previously Reported 12.7% 16.3% 15.1% 13.8% 14.5% After Reclassification 11.9% 15.3% 14.2% 12.8% 13.6% In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and supercedes EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No.146 states that a liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period when the liability is incurred. It applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 146 will be applied for exit or disposal activities initiated after December 31, 2002. The adoption of this standard is not anticipated to have a material impact on MMC's consolidated financial position, results of operations or cash flows. Interest Interest income earned on corporate funds amounted to $5 million in the third quarter of 2002, compared with $6 million in the third quarter of 2001. Interest expense of $43 million decreased from $46 million in the third quarter of 2001. The decrease in both interest income and interest expense is primarily due to lower average interest rates in 2002. Income Taxes MMC's consolidated effective tax rate was 35.5% of income before income taxes and minority interest in the third quarter of 2002 compared with 36.8% in the third quarter of 2001. Excluding charges related to September 11, the effective tax rate was 37.5% for the third quarter 2001. The reduction in the effective tax rate results primarily from the implementation of SFAS No. 142, as a significant portion of the goodwill amortization expense recorded in prior years was not deductible for tax purposes. Liquidity and Capital Resources MMC anticipates that funds generated from operations will be sufficient to meet its foreseeable recurring operating cash requirements as well as to fund dividends, capital expenditures and scheduled repayments of long-term debt. MMC's ability to generate cash flow from operations is subject to the business risks inherent in each operating segment. MMC generated $1.3 billion of cash from operations for the nine months ended September 30, 2002 compared with $872 million for the same period in 2001. These amounts reflect the net income earned by MMC during those periods adjusted for non-cash charges and working capital changes. MMC's cash and cash equivalents aggregated $675 million on September 30, 2002, an increase of $138 million from the end of 2001. MMC determines the most advantageous use of near-term cash flow when considering alternatives including dividends, investments, acquisitions, potential funding alternatives for its pension programs, and share repurchases. In the third quarter, MMC increased its quarterly dividend by 6% to $.28 per share. Financing Activity In March 2002, MMC issued $500 million of 5.375% Senior Notes due in 2007 and $250 million of 6.25% Senior Notes due in 2012 (the "Notes"). The net proceeds from the Notes were used to pay down commercial paper borrowings. Concurrent with the issuance of the Notes, MMC entered into interest rate swap transactions to hedge 100% of its exposure to changes in the fair value of the Notes. The swap transactions effectively converted the fixed rate obligations into floating rate obligations. Under the terms of the swaps, the swap counterparties pay MMC a fixed rate equal to the coupon rate on the bonds. MMC pays the swap counterparties a floating rate of 6-month Libor plus 9.25 bps for the five-year swap and 6 month Libor plus 25.45 bps for the ten-year swap. In July 2002, MMC dedesignated 50% of the fair value hedge on each of the Notes and settled 50% of each of the related swaps. The portion of the Notes no longer hedged ceased being marked to market, and the cumulative amount of fair value adjustments previously recognized is being amortized over the remaining life of the related Notes. MMC redesignated the remaining portion of the swaps as a fair value hedge of the 50% of the Notes. The redesignated swaps carry the identical terms and conditions as the original swaps and under SFAS No. 133 qualify for hedge accounting and meet all criteria necessary to conclude the hedge will be perfectly effective. As a result of these transactions, the effective interest rate over the remaining life of the Notes, including the amortization of the fair value adjustments, is 4.5% for $250 million of the Notes due in 2007 and 5.5% for $125 million of the Notes Due in 2012 which are no longer being hedged. Interest on the hedged portion of the Notes, $250 million of the Notes due in 2007 and $125 million of the Notes due in 2012 remain subject to the swap terms described above. During the first nine months of 2002, MMC repurchased approximately 24 million shares of its common stock at a cost of approximately $1.2 billion. 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. MMC uses written put options to supplement its share repurchase program. The contracts are European style options, which generally expire three months from the date of sale. Settlement terms of the contracts are controlled by MMC and include physical, net-cash or net-share settlement. The contracts are recorded as equity transactions in accordance with EITF Issue No. 00-19, "Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock." At September 30, 2002, MMC had open contracts on 925,000 shares, with strike prices ranging from $37.52 to $43.76. The open contracts expire between October 24, 2002 and January 6, 2003. Investment Activity MMC's additions to fixed assets and capitalized software, which amounted to $288 million in the first nine months of 2002 and $324 million in the nine 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 $500 million in connection with various MMC Capital funds and other MMC investments. Approximately $50 million is expected to be invested during the remainder of 2002. MMC expects to fund future commitments, in part, with sales proceeds from existing investments. In the normal course of business MMC makes investments through its subsidiary Marsh & McLennan Risk Capital Holdings, Ltd., primarily in insurance and reinsurance entities, and periodically sells these investments. In the second quarter of 2002, MMC sold an investment that it had acquired in 1997 to Trident II, L.P. MMC Capital, Inc. a wholly owned subsidiary of MMRCH, serves as advisor to Trident II, L.P. Revenue of $9 million from this transaction was recorded by MMRCH. The underlying revenue growth rate for the Risk and Insurance Services segment excludes the revenue from investment transactions. Market Risk Certain of MMC's revenues, expenses, assets and liabilities are exposed to the impact of interest rate changes and fluctuations in foreign currency exchange rates and equity markets. Interest Rate Risk MMC manages its net exposure to interest rate changes by utilizing a mixture of variable and fixed rate borrowings to finance MMC's asset base. Interest rate swaps are used on a limited basis to manage MMC's exposure to interest rate movements on its cash and investments, as well as to hedge the fair value of fixed rate debt, and are only executed with counterparties of high creditworthiness. Foreign Currency Risk The translated values of revenue and expense from MMC's international risk and insurance services and consulting operations are subject to fluctuations due to changes in currency exchange rates. However, the net impact of these fluctuations on MMC's results of operations or cash flows has not been material. Forward contracts and options are periodically utilized by MMC to limit foreign currency exchange rate exposure on net income and cash flows for specific, clearly defined transactions arising in the ordinary course of its business. Equity Price Risk MMC has both "available for sale" investments which are carried at market value under SFAS No. 115 and investments which are accounted for using the equity method under APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." The investments are subject to risk of changes in market value, which if determined to be other than temporary, could result in impairment losses. MMC reviews the carrying value of such investments to determine if any valuation adjustments are appropriate under the applicable accounting pronouncements. MMC utilizes option contracts to hedge the variability of cash flows from forecasted sales of certain available for sale investments. The hedge is achieved through the use of European style put and call options, which mature on the dates of the forecasted sales. The hedges are only executed with counterparties of high creditworthiness. Other As further explained in Note 13 to the consolidated financial statements, the disclosure and advice given to clients regarding certain personal pension transactions by certain present and former subsidiaries in the United Kingdom are under review by the Financial Services Authority. At current rates of exchange, the estimated payments for pension redress and related costs accrued in the financial statements is $120 million, essentially all of which is expected to be recovered from insurers. Approximately two-thirds of the contingent exposure is associated with the Sedgwick acquisition while the balance is associated with other current and former subsidiaries of MMC. Such amounts in excess of anticipated insurance recoveries have been provided for in the accompanying financial statements. Part I - Item 4. Controls & Procedures - --------------------------------------- a. Evaluation of Disclosure Controls and Procedures Based on their evaluation, as of a date within 90 days of the filing of this Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 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. b. Changes in Internal Controls There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II, OTHER INFORMATION -------------------------- MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT September 30, 2002 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3. Bylaws (restated as last amended September 19, 2002). 12. Statement Re: Computation of Ratio of Earnings to Fixed Charges. (b) Reports on Form 8-K A current report on Form 8-K dated August 7, 2002 was filed by the registrant submitting the sworn statements of its Principal Executive officer, Jeffrey W. Greenberg, and its Principal Financial Officer, Sandra S. Wijnberg, pursuant to the Securities and Exchange Commission Order No. 4-460. 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, 2002 on its behalf by the undersigned, thereunto duly authorized and in the capacity indicated. MARSH & McLENNAN COMPANIES, INC. /s/ Sandra S. Wijnberg ---------------------- Senior Vice President and Chief Financial Officer 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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ 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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Sandra W. Wijnberg ---------------------- Senior Vice President & Chief Financial Officer EX-3.(II) 2 by-lawssept02.txt EXHIBIT 3 (BY-LAWS FOR SEPTEMBER 19, 2002) Exhibit 3 BY-LAWS OF MARSH & McLENNAN COMPANIES, INC. RESTATED AS LAST AMENDED September 19, 2002 I N D E X Page Number ARTICLE I Offices............................................. 1 ARTICLE II Meetings of the Stockholders........................ 1 ARTICLE III Directors........................................... 9 ARTICLE IV Officers............................................ 12 ARTICLE V Committees.......................................... 15 ARTICLE VI Indemnification..................................... 19 ARTICLE VII Checks, Contracts, Other Instruments................ 24 ARTICLE VIII Capital Stock....................................... 24 ARTICLE IX Miscellaneous....................................... 27 ARTICLE X Amendments.......................................... 28 BY-LAWS OF MARSH & McLENNAN COMPANIES, INC. ARTICLE I Offices The principal office of the Corporation in Delaware shall be at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, in the State of Delaware, and The Corporation Trust Company shall be the resident agent of the Corporation in charge thereof. The Corporation may also have such other offices at such other places as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE II Meetings of the Stockholders SECTION 1. Place of Meetings. Meetings of the stockholders may be held at such place as the Board of Directors may determine. SECTION 2. Annual Meetings. The annual meeting of the stockholders shall be held on the third Thursday of May in each year, or such other day in May as may be determined from time to time by the Board of Directors, at such time and place as the Board of Directors may designate. At said meeting the stockholders shall elect a Board of Directors and transact any other business authorized or required to be transacted by the stockholders. SECTION 3. Special Meetings. Special meetings of the stockholders, except as otherwise provided by law, shall be called by the Chairman of the Board, or whenever the Board of Directors shall so direct, the Secretary. SECTION 4. Notice of Meetings. Except as otherwise provided by law, written or printed notice stating the place, day and hour of the meeting, and in the case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered personally or mailed, postage prepaid, at least ten (10) days but not more than sixty (60) days before such meeting to each stockholder at such address as appears on the stock books of the Corporation. SECTION 5. Fixing of Record Date. In order to determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, and no more than sixty (60) days prior to any other action. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice of the meeting is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and such date for any other purpose shall be the date on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 6. Quorum. The holders of a majority of the stock issued and outstanding present in person or represented by proxy shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by law, by the Restated Certificate of Incorporation or by these by-laws. If, however, such majority shall not be present or represented at any meeting of the stockholders, the stockholders present in person or by proxy shall have power to adjourn the meeting from time to time without notice other than announcement at the meeting until the requisite amount of stock shall be represented. At such adjourned meeting at which the requisite amount of stock shall be represented, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 7. Voting. Each stockholder entitled to vote in accordance with the terms of the Restated Certificate of Incorporation and in accordance with the provisions of these by-laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. The vote for directors and, upon demand of any stockholder, the vote upon any question before the meeting shall be by ballot. All elections of directors shall be decided by plurality vote; all other questions shall be decided by a majority of the shares present in person or represented by proxy at the meeting of stockholders and entitled to vote on the subject matter, except as otherwise provided in the Restated Certificate of Incorporation or by law or regulation. SECTION 8. Inspectors of Election. All elections of directors and all votes where a ballot is required shall be conducted by two inspectors of election who shall be appointed by the Board of Directors; but in the absence of such appointment by the Board of Directors, the Chairman of the meeting shall appoint such inspectors who shall not be directors or candidates for the office of director. SECTION 9. Voting List. The Secretary shall prepare and make, at least ten days before every election of directors, a complete list of the stockholders entitled to vote, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 10. Stockholder Nominations of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors at a meeting of stockholders. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any person appointed by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 10. Such nominations, other than those made by or at the direction of the Board of Directors or by any person appointed by the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary, Marsh & McLennan Companies, Inc. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation, in the case of an Annual Meeting of Stockholders, not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the Stockholder in order to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the 15th day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934, as amended; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 11. Advance Notice of Stockholder Proposed Business at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary, Marsh & McLennan Companies, Inc. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these by-laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 11, provided, however, that nothing in this Section 11 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with said procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. ARTICLE III Directors SECTION 1. Powers, Number, Tenure, Qualifications and Compensation. The business and affairs of the Corporation shall be managed by its Board of Directors which shall consist of the number of members set forth in Article FIFTH of the Restated Certificate of Incorporation, none of whom need be stockholders, and directors must retire at the annual meeting following attaining age 72, unless the person has been a non-executive director for less than 10 years, in which case they would retire at the annual meeting following the earlier of 10 years of service or attaining age 75. In addition to the powers and duties by these by-laws expressly conferred upon them, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Restated Certificate of Incorporation or by these by-laws directed or required to be exercised or done by the stockholders. The Board of Directors may provide for compensation of directors who are not otherwise compensated by the Corporation or any subsidiary thereof. SECTION 2. Meetings and Notice. The Board shall, for the purposes of organization, the election and appointment of officers and the transaction of other business, hold a meeting as soon as convenient after the annual meeting of stockholders. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Special meetings of the Board may be called by the Chairman of the Board or, if the Chairman of the Board is unable to act, by the Corporation's General Counsel or any member of the Executive Committee of the Board of Directors on at least twenty-four (24) hours notice to each director, personally or by mail, by telecopy, by e-mail or by telephone. Special meetings of the Board shall also be called in like manner on the written request of any three (3) directors delivered to the Corporation's Secretary. In the case of a meeting of the Board of Directors not attended by the Chairman of the Board, a Vice Chairman, determined in the order of their election if two or more Vice Chairmen are present, shall call the meeting to order and the first item of business shall be to appoint a director to preside at the meeting. Notice of a special meeting of the Board may be waived by any director, either before or after the meeting, by written assent, by telecopy or by e-mail; provided that attendance at the meeting by a director shall constitute waiver of such notice by such director. The attendance of a director at any meeting shall dispense with notice to him of the meeting. Members of the Board of Directors may participate in a meeting of the Board by means of conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this section shall constitute presence in person at such meeting. SECTION 3. Offices, Books, Place of Meeting. The Board of Directors may have one or more offices and keep the books of the Corporation outside of Delaware, and may hold its meetings at such places as it may from time to time determine. SECTION 4. Quorum. At all meetings of the Board of Directors one-third (1/3) of the total number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Restated Certificate of Incorporation or by these by-laws. SECTION 5. Informal Action. The Board of Directors shall, except as otherwise provided by law, have power to act in the following manner: A resolution in writing, signed by all of the members of the Board of Directors shall be deemed to be action by such Board to the effect therein expressed with the same force and effect as if the same had been duly passed at a duly convened meeting, and it shall be the duty of the Secretary of the Corporation to record any such resolution in the minute book of the Corporation, under its proper date. ARTICLE IV Officers SECTION 1. Election. The Board of Directors shall elect officers of the Corporation, including a Chairman of the Board, one or more Vice Chairmen, one or more Vice Presidents, a Secretary, a Treasurer and a Controller. SECTION 2. Term and Removal. Each officer of the Corporation designated in SECTION 1 of this Article IV shall hold office until such officer's successor is elected and qualified or until such officer's earlier resignation or removal. Any officer may be removed at any time, with or without cause, by the Board of Directors. Any officer who may be elected or appointed by the Executive Committee may also be removed at any time, with or without cause by said Committee. SECTION 3. Chairman of the Board. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation and, subject to the control of the Board of Directors and of the committees exercising functions of the Board of Directors, shall have general supervision over the business and property of the Corporation. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors. At any meeting of the stockholders not attended by the Chairman of the Board, the Board shall appoint a director to preside at the meeting. The Chairman of the Board shall review and recommend to the Board of Directors both short-term objectives and long-term planning for the business. The Chairman of the Board shall also preside at meetings of any committee of which the Chairman of the Board is a member which is not attended by the chairman of such committee. The Chairman of the Board or an appointed delegate may take any action on behalf of the Corporation with respect to the shares owned by the Corporation in other corporations in such manner as they deem advisable unless otherwise directed by the Board of Directors. The Chairman of the Board shall have full authority to take other action on behalf of the Corporation in respect of shares of stock in other corporations owned by the Corporation, directly or indirectly, including the obtaining of information and reports. SECTION 4. Vice Chairman. A Vice Chairman shall, subject to the control of the Board of Directors and of the committees exercising functions of the Board of Directors, perform such duties as may from time to time be assigned to the Vice Chairman by the Chairman. SECTION 5. Vice Presidents. A Vice President shall have such powers, duties, supplementary titles and other designations as the Board of Directors may from time to time determine. SECTION 6. Secretary. The Secretary shall attend all meetings of the stockholders and the Board of Directors. The Secretary shall, at the invitation of the chairman thereof, attend meetings of the committees elected by the Board or established by these by-laws. The Secretary shall record all votes and minutes of all proceedings which the Secretary attends and receive and maintain custody of all votes and minutes of all such proceedings. Votes and minutes of meetings of the Compensation and Audit Committees shall be recorded and maintained as each such committee shall determine. The Secretary shall give or cause to be given notice of meetings of the stockholders, Board of Directors and, when instructed to do so by the Chairman thereof, committees of the Board of Directors, and shall have such other powers and duties as may be prescribed by appropriate authority. The Secretary shall keep in safe custody the seal of the Corporation and shall affix the seal to any instrument requiring the same. The Assistant Secretaries shall have such powers and perform such duties as may be prescribed by appropriate authority. SECTION 7. Treasurer. The Treasurer shall have such powers and perform such duties as are usually incident to the office of Treasurer or which may be assigned to the Treasurer by the Board of Directors or other appropriate authority. The Assistant Treasurers shall have such powers and perform such duties as may be prescribed by the chief financial officer or the Treasurer. SECTION 8. Controller. The Controller shall be the chief accounting officer of the Corporation. The Controller shall keep or cause to be kept all books of account and accounting records of the Corporation and shall render to the Chairman, the chief financial officer and the Board of Directors whenever they may require it, a report of the financial condition of the Corporation. The Controller shall have such other powers and duties as shall be assigned to him by appropriate authority. The Assistant Controllers shall have such powers and perform such duties as may be prescribed by the chief financial officer or the Controller. SECTION 9. Bond. The Board of Directors may, or the Chairman may, require any officers, agents or employees of the Corporation to furnish bonds conditioned on the faithful performance of their respective duties with a surety company satisfactory to the Board of Directors or the Chairman as surety. The expenses of such bond shall be paid by the Corporation. ARTICLE V Committees SECTION 1. Executive Committee. An Executive Committee, composed of the Chairman of the Board and such other directors as the Board of Directors may determine from time to time shall be elected by the Board of Directors. Except as provided hereinafter or in resolutions of the Board of Directors, the Executive Committee shall have, and may exercise when the Board of Directors is not in session, all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. The Executive Committee shall not, however, have power or authority in reference to (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the provisions of the General Corporation Law of Delaware to be submitted to stockholders for approval, (b) adopting, amending or repealing any by-laws of the Corporation, (c) electing or appointing the Chairman of the Board of the Corporation, or (d) declaring a dividend. SECTION 2. Compensation Committee. A Compensation Committee, including a chairman, having such number of directors as the Board of Directors shall determine from time to time, shall be elected by the Board of Directors. Each member of the Compensation Committee should be a "non-employee director" within the meaning of Rule 16b-(3) of the Securities Exchange Act of 1934 and an outside director for purposes of Section 162(m) of the Internal Revenue Code. The Compensation Committee shall fix the compensation of the chief executive officer of the Corporation and approve the compensation of senior executives of the Corporation or any of its subsidiaries designated under procedures established by the Committee from time to time. The Compensation Committee will approve, disapprove or modify the retention by the Corporation of advisors or consultants on matters relating to the compensation of the chief executive officer and senior executives of the Corporation. The Compensation Committee shall also satisfy itself, if in its opinion circumstances make it desirable to do so, that the general compensation policies and practices followed by the Corporation and its subsidiaries are in the Corporation's best interests. The Compensation Committee shall have such other duties as may be set forth in the Corporation's compensation and benefit plans as they may exist from time to time, or otherwise as provided by the Board of Directors. The Compensation Committee shall report to the Board at least annually and whenever the Board may require respecting the discharge of the committee's duties and responsibilities. The term "compensation" as used in this Section shall mean salaries, bonuses, agreements to pay deferred compensation, and discretionary benefits such as stock options, but shall not include payments to or under any employee pension, retirement, profit sharing, stock investment, or similar plan. SECTION 3. Audit Committee. An Audit Committee, including a chairman, having such number of directors as the Board of Directors may determine from time to time, shall be elected by the Board of Directors. The Audit Committee shall have such duties as may be set forth in the Corporation's Audit Committee Charter as it may exist from time to time, or as otherwise provided by the Board of Directors. The Audit Committee shall, as it may deem appropriate from time to time, report and make recommendations to the Board of Directors. SECTION 4. Directors and Governance Committee. A Directors and Governance Committee, including a chairman, having such number of directors as the Board of Directors may determine from time to time, shall be elected by the Board of Directors. The Directors and Governance Committee shall have such duties as may be set forth in the Corporation's Directors and Governance Committee charter as it may exist from time to time, or as otherwise provided by the Board of Directors. SECTION 5. Reports. The Executive Committee shall report to each regular meeting and, if directed, to each special meeting of the Board of Directors all action taken by such committee subsequent to the date of its last report, and other committees shall report to the Board of Directors at least annually. SECTION 6. Other Committees. The Board of Directors may appoint such other committee or committees as it deems desirable. SECTION 7. Election and Term. The Chairman and each member of every committee shall be a member of and, except as provided in Section 7 of this Article V, elected by the Board of Directors and shall serve until such person shall cease to be a member of the Board of Directors or such person's membership on the committee shall be terminated by the Board. SECTION 8. Meetings, Quorum and Notice. The Chairman of any committee shall be the presiding officer thereof. Any committee may meet at such time or times on notice to all the members thereof by the Chairman or by a majority of the members or by the Secretary of the Corporation and at such place or places as such notice may specify. At least twenty-four (24) hours' notice of the meeting shall be given but such notice may be waived. Such notice may be given by mail, electronic media, telephone or personally. Each committee shall cause minutes to be kept of its meetings which record all actions taken. Such minutes shall be placed in the custody of the Secretary of the Corporation except that the Compensation and Audit Committees shall each determine who shall maintain custody of its minutes or portions thereof. Any committee may, except as otherwise provided by law, act in its discretion by a resolution or resolutions in writing signed by all the members of such committee with the same force and effect as if duly passed by a duly convened meeting. Any such resolution or resolutions shall be recorded in the minute book of the committee under the proper date thereof. Members of any committee may also participate in a meeting of such committee by means of conference telephone or similar communications equipment, by means of which all persons participating in the meeting can hear each other and participation in the meeting pursuant to this provision shall constitute presence in person at such meeting. A majority of the members of each committee shall constitute a quorum. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. ARTICLE VI Indemnification SECTION 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a "proceeding"), by reason of the fact that, on or after May 21, 1987, he or she is serving or had served as a director, officer or employee of the Corporation or, while serving as such director, officer or employee, is serving or had served at the request of the Corporation as a director, officer, employee or agent of, or in any other capacity with respect to, another corporation or a partnership, joint venture, trust or other entity or enterprise, including service with respect to employee benefit plans (hereinafter, an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer or employee of the Corporation, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Delaware law, as the same exists or may hereafter be changed or amended (but, in the case of any such change or amendment, only to the extent that such change or amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by an indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer or employee of the Corporation and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that except as provided in Section 3 of this Article with respect to proceedings seeking to enforce rights to indemnification, the Corporation shall indemnify an indemnitee in connection with a proceeding (or part thereof) initiated by the indemnitee only if such proceeding (or part thereof) was authorized by the board of directors of the Corporation. The right to indemnification conferred in this Article shall be a contract right. SECTION 2. Advancement of Expenses. An indemnitee who is a director or officer of the Corporation, and any other indemnitee to the extent authorized from time to time by the board of directors of the Corporation, shall have the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter, an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter, an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter, a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Article or otherwise. SECTION 3. Right of Indemnitee to Bring Suit. If a claim under Section 1 or Section 2 of this Article is not paid in full by the Corporation within sixty days in the case of Section 1 and twenty days in the case of Section 2 after a written claim has been received by the Corporation, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (other than a suit brought by the indemnitee to enforce a right to an advancement of expenses), it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to the action. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Corporation. SECTION 4. Indemnification of Agents of the Corporation. The Corporation may, to the extent authorized from time to time by its board of directors, grant rights to indemnification, and to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification of directors, officers and employees of the Corporation and advancement of expenses of directors and officers of the Corporation. SECTION 5. Non-Exclusivity of Rights. The right to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Restated Certificate of Incorporation, these by-laws, any agreement, vote of stockholders or disinterested directors, or otherwise. SECTION 6. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 7. Survival of Prior Indemnification Provisions; Effect of Subsequent Change on Existing Rights. Nothing contained in this Article shall be construed as altering or eliminating the rights to indemnification existing, or based upon service by an indemnitee, prior to May 21, 1987. Any repeal or modification of this Article shall not adversely affect any right or protection of a director, officer or employee of the Corporation existing at the time of such repeal or modification. ARTICLE VII Checks, Contracts, Other Instruments SECTION 1. Documents, Instruments Not Requiring Seal. All checks, notes, drafts, acceptances, bills of exchange, orders for the payment of money, and all written contracts and instruments of every kind which do not require a seal shall be signed by such officer or officers, or person or persons as these by-laws, or the Board of Directors or Executive Committee by resolution, may from time to time prescribe. SECTION 2. Documents, Instruments Requiring Seal. All bonds, deeds, mortgages, leases, written contracts and instruments of every kind which require the corporate seal of the Corporation to be affixed thereto, shall be signed and attested by such officer or officers as these by-laws, or the Board of Directors or Executive Committee, by resolution, may from time to time prescribe. ARTICLE VIII Capital Stock SECTION 1. Stock Certificates. The certificates for shares of the capital stock of the Corporation shall be in such form, not inconsistent with the Restated Certificate of Incorporation, as shall be approved by the Board of Directors. Each certificate shall be signed by the Chairman of the Board of Directors or a Vice President and also by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, provided, however, that any such signature of an officer of the Corporation or of the Transfer Agent, Assistant Transfer Agent, Registrar or Assistant Registrar, or any of them, may be a facsimile. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued by the Corporation and be used and delivered as though the officer or officers who signed the said certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be said officer or officers of the Corporation. All certificates shall be consecutively numbered, shall bear the corporate seal and the names and addresses of all persons owning shares of capital stock of the Corporation with the number of shares owned by each; and, the date or dates of issue of the shares of stock held by each shall be entered in books kept for that purpose by the proper officers or agents of the Corporation. SECTION 2. Recognition of Holders of Record. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has actual or other notice thereof, save as expressly provided by the laws of the State of Delaware. SECTION 3. Lost Certificates. Except in cases of lost or destroyed certificates, and in that case only after conforming to the requirements hereinafter provided, no new certificates shall be issued until the former certificate for the shares represented thereby shall have been surrendered and cancelled. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates to be lost or destroyed; and the Board of Directors may, in its discretion and as a condition precedent to the issuance of any such new certificate or certificates, require (i) that the owner of such lost or destroyed certificate or certificates, or his legal representative give the Corporation and its transfer agent or agents, registrar or registrars a bond in such form and amount as the Board of Directors may direct as indemnity against any claim that may be made against the Corporation and its transfer agent or agents, registrar or registrars, or (ii) that the person requesting such new certificate or certificates obtain a final order or decree of a court of competent jurisdiction as to his right to receive such new certificate or certificates. SECTION 4. Transfer of Shares. Shares of stock shall be transferred on the books of the Corporation by the holder thereof or by his attorney thereunto duly authorized upon the surrender and cancellation of certificates for a like number of shares. SECTION 5. Regulations Governing Transfer of Shares. The Board of Directors may make such regulations as it may deem expedient concerning the issue, transfer and registration of stock. SECTION 6. Appointment of Transfer Agent, Registrar. The Board may appoint a Transfer Agent or Transfer Agents and Registrar or Registrars for transfers and may require all certificates to bear the signature of either or both. ARTICLE IX Miscellaneous SECTION 1. Inspection of Books. The Board of Directors or the Executive Committee shall determine from time to time whether and, if allowed, when and under what conditions and regulations the accounts and books of the Corporation (except such as may by statute be specifically open to inspection), or any of them shall be open to the inspection of the stockholders, and the stockholders' rights in this respect are and shall be restricted and limited accordingly. SECTION 2. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization, and the words "Corporate Seal, Delaware". SECTION 3. Fiscal Year. The fiscal year shall begin on the first day of January of each year. SECTION 4. Waiver of Notice. Whenever by statute, the provisions of the Restated Certificate of Incorporation, or these by-laws, the stockholders, the Board of Directors or any committee established by the Board of Directors in accordance with these by-laws are authorized to take any action after notice, such notice may be waived, in writing, before or after the holding of the meeting at which such action is to be taken, by the person or persons entitled to such notice or, in the case of a stockholder, by his attorney thereunto authorized. ARTICLE X Amendments SECTION 1. By Stockholders. These by-laws, or any of them, may be amended, altered, changed, added to or repealed at any regular or special meeting of the stockholders, by the affirmative vote of a majority of the shares of stock then issued and outstanding. SECTION 2. By the Board of Directors. The Board of Directors, by affirmative vote of a majority of its members, may, at any regular or special meeting, amend, alter, change, add to or repeal these by-laws, or any of them, but any by-laws made by the Directors may be amended, altered, changed, added to or repealed by the stockholders. EX-12 3 ex12_3qtr2002.txt EXHIBIT 12 (RATIO OF EARNINGS) Exhibit 12.1 Marsh & McLennan Companies, Inc. and Subsidiaries Ratio of Earnings to Fixed Charges (In millions, except ratios) Nine Months Ended September 30, Years Ended December 31, ------------------------------------------------------------ 2002 (Unaudited) 2001 2000 1999(1) 1998 1997(2)
Earnings Income before income taxes and minority interest $1,660 $1,590 $1,955 $1,255 $1,305 $715 Interest expense 118 196 247 233 140 107 Portion of rents representative of the interest factor 91 121 120 121 104 88 Amortization of capitalized interest - - - 1 1 1 ------ ------- ------ ------ ------ ----- $1,869 $1,907 $2,322 $1,610 $1,550 $911 ------ ------- ------ ------ ------ ----- Fixed Charges Interest expense $118 $196 $ 247 $ 233 $ 140 $107 Portion of rents representative of the interest factor 91 121 120 121 104 88 ------ ------- ------ ------ ------ ----- $209 $317 $367 $354 $244 $195 ------ ------- ------ ------ ------ ----- Ratio of Earnings to Fixed Charges 8.9 6.0 6.3 4.5 6.4 4.7
(1) For the year ended December 31, 1999, income before income taxes included a $337 million special charge related to the acquisition and integration of Sedgwick. Excluding that charge, the ratio of earnings to fixed charges would have been 5.5. (2) For the year ended December 31, 1997, income before income taxes included a $244 million special charge related to the Johnson & Higgins integration, London real estate and the disposal of certain assets. Excluding that charge, the ratio of earnings to fixed charges would have been 5.9. -----END PRIVACY-ENHANCED MESSAGE-----