================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 2001 Marsh & McLennan Companies, Inc. 1166 Avenue of the Americas New York, New York 10036 (212) 345-5000 Commission file number 1-5998 State of Incorporation: Delaware I.R.S. Employer Identification No. 36-2668272 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . NO ___. As of July 31, 2001 there were outstanding 274,907,908 shares of common stock, par value $1.00 per share, of the registrant. ================================================================================ INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS ------------------------------------------------- Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and its representatives may from time to time make verbal or written statements (including certain statements contained in this report and other MMC filings with the Securities and Exchange Commission and in our reports to stockholders) relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, discussions concerning matters affecting revenue and expense, cash flow, capital structure, cost savings and efficiencies expected from the integration of Sedgwick Group plc, market and industry conditions, interest rates, foreign exchange rates, contingencies and matters relating to MMC's operations and income taxes. Such forward-looking statements are based on available current market and industry materials, experts' reports and opinions, as well as management's expectations concerning future events impacting MMC. Forward-looking statements by their very nature involve risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by any forward-looking statements contained herein include, in the case of MMC's risk and insurance services and consulting businesses, the integration of the business Sedgwick Group plc (including the achievement of synergies and cost reductions) or other adverse consequences from that transaction. Other factors that should be considered in the case of MMC's risk and insurance service business are changes in competitive conditions, movements in premium rate levels and other changes in the global property and casualty insurance markets, the impact of natural catastrophes and mergers between client organizations, including insurance and reinsurance companies. Factors to be considered in the case of MMC's investment management business include changes in worldwide and national equity and fixed income markets; and with respect to all of MMC's activities, changes in general worldwide and national economic conditions, fluctuations in foreign currencies, actions of competitors or regulators, changes in interest rates, developments relating to claims, lawsuits and contingencies, prospective and retrospective changes in the tax or accounting treatment of MMC's operations and the impact of tax and other legislation and regulation in the jurisdictions in which MMC operates. MMC is committed to providing timely and materially accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, MMC and its operating companies use their websites to convey meaningful information about their businesses, including the posting of updates of assets under management at Putnam, and from time to time, Marsh Inc.'s view of insurance market conditions. Monthly updates of assets under management at Putnam will be posted on the first business day following the end of each month, except at the end of March, June, September and December, when such information will be released with MMC's quarterly earnings announcement. Investors can link to MMC and its operating company websites through www.mmc.com. PART I, FINANCIAL INFORMATION ----------------------------- MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share figures) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------- -------------------- 2001 2000 2001 2000 ----- ------ ------ ------ Revenue $ 2,505 $ 2,481 $ 5,099 $ 5,146 Expense 1,979 1,967 3,928 4,013 ------- ------- ------- ------- Operating Income 526 514 1,171 1,133 Interest Income 7 6 12 11 Interest Expense (56) (68) (108) (128) ------- ------- ------- ------- Income Before Income Taxes And Minority Interest 477 452 1,075 1,016 Income Taxes 179 171 403 394 Minority Interest 5 5 10 9 ------- ------- ------- ------- Net Income $ 293 $ 276 $ 662 $ 613 ======= ======= ======= ======= Basic Net Income Per Share $ 1.07 $ 1.02 $ 2.40 $ 2.28 ======= ======= ======= ======= Diluted Net Income Per Share $ 1.02 $ .96 $ 2.29 $ 2.15 ======= ======= ======= ======= Average Number of Shares Outstanding - Basic 276 270 276 269 ======= ======= ======= ======= Average Number of Shares Outstanding - Diluted 287 283 287 281 ======= ======= ======= ======= Dividends Declared $ .53 $ .50 $ 1.03 $ .95 ======= ======= ======= ======= MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars) (Unaudited) June 30, December 31, 2001 2000 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 402 $ 240 -------- -------- Receivables- Commissions and fees 2,305 2,370 Advanced premiums and claims 235 270 Other receivables 295 307 -------- -------- 2,835 2,947 Less-allowance for doubtful accounts and cancellations (133) (135) -------- -------- Net receivables 2,702 2,812 -------- -------- Prepaid dealer commissions - current portion 335 362 Other current assets 266 225 -------- -------- Total current assets 3,705 3,639 Intangible assets 5,405 5,476 Fixed assets, net 1,271 1,360 (net of accumulated depreciation and amortization of $1,070 at June 30, 2001 and $961 at December 31, 2000) Long-term investments 764 976 Prepaid dealer commissions 671 762 Other assets 1,584 1,556 -------- -------- $ 13,400 $ 13,769 ======== ======== MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars) (Unaudited June 30, December 31, 2001 2000 ---------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 1,145 $ 337 Accounts payable and accrued liabilities 1,428 1,964 Accrued compensation and employee benefits 761 1,388 Accrued income taxes 407 291 Dividends payable 148 139 -------- -------- Total current liabilities 3,889 4,119 -------- -------- Fiduciary liabilities 3,517 3,627 Less - cash and investments held in a fiduciary capacity (3,517) (3,627) -------- -------- - - -------- -------- Long-term debt 2,346 2,347 -------- -------- Other liabilities 1,939 2,075 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $1 par value, authorized 6,000,000 shares, none issued - - Common stock, $1 par value, authorized 800,000,000 shares, issued 280,324,148 shares at June 30, 2001 and 278,379,359 at December 31, 2000 280 278 Additional paid-in capital 2,025 1,918 Retained earnings 3,702 3,323 Accumulated other comprehensive loss (365) (149) -------- -------- 5,642 5,370 Less - treasury shares, at cost, 5,173,458 shares at June 30, 2001 and 2,352,046 shares at December 31, 2000 (416) (142) -------- -------- Total stockholders' equity 5,226 5,228 -------- -------- $ 13,400 $ 13,769 ======== ======== MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions of dollars) (Unaudited) Six Months Ended June 30, ---------------- 2001 2000 ----- ----- Operating cash flows: Net income $ 662 $ 613 Adjustments to reconcile net income to cash used for operations: Depreciation of fixed assets and capitalized software 168 149 Amortization of intangible assets 97 88 Provision for deferred income taxes 68 120 Integration related payments (55) (103) Prepaid dealer commissions 118 (96) Net receivables 110 (320) Other current assets 8 (2) Accounts payable and accrued liabilities (145) 146 Accrued compensation and employee benefits (627) (259) Accrued income taxes 112 58 Other liabilities (111) (66) Effect of exchange rate changes (29) (3) Other, net (72) (9) ----- ----- Net cash generated from operations 304 316 ----- ----- Financing cash flows: Net increase in commercial paper 796 241 Other borrowings 20 60 Other repayments of debt (10) (139) Purchase of treasury shares (308) - Issuance of common stock 144 113 Dividends paid (274) (241) ----- ----- Net cash provided by financing activities 368 34 ----- ----- Investing cash flows: Additions to fixed assets and capitalized software (224) (236) Proceeds from sale of business - 33 Acquisitions (47) (34) Other, net (230) (92) ----- ----- Net cash used for investing activities (501) (329) ----- ----- Effect of exchange rate changes on cash and cash equivalents (9) (10) ----- ----- Increase in cash & cash equivalents 162 11 Cash & cash equivalents at beginning of period 240 428 ----- ----- Cash & cash equivalents at end of period $ 402 $ 439 ===== ===== MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Operations -------------------- MMC, a global professional services firm, is organized based on the different services that it offers. MMC operates in three principal business segments: risk and insurance services, investment management and consulting. The risk and insurance services segment provides insurance broking, reinsurance broking and insurance and program management services for business, public entity, insurance company, professional, association and private clients. It also provides services principally in connection with originating, structuring and managing insurance, financial services and other industry-focused investments. The investment management segment primarily provides securities investment advisory and management services and administrative services for a group of publicly held investment companies and institutional accounts. The consulting segment provides advice and services to the managements of organizations primarily in the areas of human resources and employee benefit programs, general management consulting, organizational change and economic consulting and analysis. 2. Principles of Consolidation --------------------------- The consolidated financial statements included herein have been prepared by MMC pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although MMC believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in MMC's latest annual report on Form 10-K. The financial information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three- and six-month periods ended June 30, 2001 and 2000. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. 3. Fiduciary Assets and Liabilities -------------------------------- In its capacity as an insurance broker or agent, MMC collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters; MMC also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims are held in a fiduciary capacity. Interest income on these fiduciary funds, included in revenue, amounted to $95 million and $89 million for the six months ended June 30, 2001 and 2000, respectively. Net uncollected premiums and claims and the related payables amounting to $9.9 billion at June 30, 2001 and $10.8 billion at December 31, 2000, 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 average number of shares of MMC's common stock outstanding. Diluted net income per share is calculated by reducing net income for the potential minority interest associated with unvested shares granted under the Putnam Equity Partnership Plan. This result is then divided by the average common shares outstanding, which have been adjusted for the dilutive effect of potentially issuable common shares. The following reconciles net income to net income for diluted earnings per share and basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three- and six-month periods ended June 30, 2001 and 2000. (In millions) ------------ Three Months Six Months Ended Ended June 30, June 30, -------------- ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ Net income $ 293 $ 276 $ 662 $ 613 Less: Potential minority interest associated with Putnam Equity Partnership Plan (2) (4) (6) (9) ----- ----- ----- ----- Net income for diluted earnings per share $ 291 $ 272 $ 656 $ 604 ===== ===== ===== ===== Basic weighted average common shares outstanding 276 270 276 269 Dilutive effect of potentially issuable common shares 11 13 11 12 ----- ----- ----- ----- Diluted weighted average common shares outstanding 287 283 287 281 ===== ===== ===== ===== 5. Comprehensive Income -------------------- The components of comprehensive income for the six-month periods ended June 30, 2001 and 2000 are as follows: (In millions of dollars) ---------------------- 2001 2000 ----- ---- Foreign currency translation adjustments $ (82) $ (73) Unrealized investment holding (losses) gains, net of income taxes (93) 20 Less: Reclassification adjustment for gains included in net income, net of income taxes (41) (29) ----- ----- Other comprehensive loss (216) (82) Net income 662 613 ----- ----- Comprehensive income $ 446 $ 531 ===== ===== 6. Supplemental Disclosure to the Consolidated Statements of Cash Flows The following schedule provides additional information concerning interest and income taxes paid: Six Months Ended June 30, --------------------- (In millions of dollars) 2001 2000 ------------------------ ---- ----- Interest paid $117 $127 Income taxes paid $133 $175 In the first quarter of 2001, MMC settled its $286 million commitment to purchase a minority investment in Gruppo Bipop-Carire S.p.A., which had been recorded as a liability in accounts payable and accrued liabilities and is reflected in "other, net" in investing cash flows. In the second quarter of 2001, MMC sold certain of its London properties and simultaneously entered into a leaseback arrangement for a significant portion of the properties. Total proceeds of approximately $135 million, which exceeded the net book value of the properties by approximately $29 million, were received by the Company and were included in "other, net" in investing cash flows. A substantial portion of this excess was deferred and will be amoritzed over the lease period. 7. Dispositions and Integration Costs --------------------------------- Dispositions: As part of the 1998 combination with Sedgwick Group, plc ("Sedgwick"), MMC acquired several businesses that it intended to sell, including insurance underwriting operations already in run-off and consulting businesses not compatible with its existing operations. During the first quarter of 2000, MMC sold one of these businesses for $33 million which approximated its carrying value. The net liabilities of businesses to be disposed are reflected at their estimated realizable value of $130 million and $119 million at June 30, 2001 and December 31, 2000, respectively, and are included in accounts payable and accrued liabilities in the Consolidated Balance Sheet. Agreements have been reached to dispose of these operations pending regulatory approval. Integration Costs: In 1999, as part of the integration of Sedgwick, MMC adopted a plan to reduce staff and consolidate duplicative offices. The estimated cost of this plan relating to employees and offices of Sedgwick ("Sedgwick Plan") amounted to $285 million and was included in the cost of the acquisition. Merger-related costs for employees and offices of MMC ("MMC Plan") amounted to $266 million and were recorded as part of a 1999 special charge. The utilization of these charges is summarized as follows: - -------------------------------------------------------------------------------- Utilized Utilized Balance and charges in Six June 30, in Mos.2001 2001 estimates Initial through (In millions of dollars) Balance 2000 - -------------------------------------------------------------------------------- 1999 Sedgwick Plan: Termination payments to employees $183 $(160) $(17) $ 6 Other employee-related costs 5 (5) - - Future rent under noncancelable leases 48 (20) (4) 24 Leasehold termination and related costs 49 (22) (2) 25 - -------------------------------------------------------------------------------- $285 $(207) $(23) $55 - -------------------------------------------------------------------------------- Number of employee terminations 2,400 (2,400) - - Number of office consolidations 125 (116) - 9 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Utilized Utilized Balance and charges in Six June 30, in Mos.2001 2001 estimates Initial through (In millions of dollars) Balance 2000 - -------------------------------------------------------------------------------- 1999 MMC Plan: Termination payments to employees $194 $(140) $(28) $26 Future rent under noncancelable leases 31 (12) (3) 16 Leasehold termination and related costs 16 (10) (1) 5 Other integration related costs 25 (25) - - - -------------------------------------------------------------------------------- $266 $(187) $(32) $47 - -------------------------------------------------------------------------------- Number of employee terminations 2,100 (2100) - - Number of office consolidations 50 (44) 1 5 - ------------------------------------------------------------------------------- The actions contemplated by these plans are substantially complete. The majority of the remaining balances for termination payments to employees are expected to be paid in 2001. Some accruals, primarily for future rent under noncancelable leases and salary continuance arrangements, are expected to be paid over several years. 8. Claims, Lawsuits and Other Contingencies ---------------------------------------- MMC and its subsidiaries are subject to various claims, lawsuits and proceedings consisting principally of alleged errors and omissions in connection with the placement of insurance or reinsurance and in rendering investment and consulting services. Some of these matters seek damages, including punitive damages, in amounts which could, if assessed, be significant. Sedgwick Group plc, since prior to its acquisition, has been engaged in a review of previously undertaken personal pension plan business as required by United Kingdom regulators to determine whether redress should be made to customers. As of June 30, 2001, settlements and related costs previously paid amount to approximately $285 million of which approximately $30 million is due from or has been paid by insurers. The contingent exposure of Sedgwick for pension redress and related costs is estimated to be $160 million. Sedgwick has recorded $20 million of reserves and recognized approximately $140 million of insurance recoveries related to this exposure. Other present and former subsidiaries of MMC are engaged in a comparable review of their personal pension plan businesses, although the extent of their activity in this area, and consequently their financial exposure, was proportionally much less than Sedgwick. The contingent exposure of the present and former non-Sedgwick subsidiaries of MMC for pension redress and related costs is estimated to be approximately $85 million, essentially all of which is expected to be recovered from insurers. As of June 30, 2001, net settlements and related costs previously paid total approximately $55 million. MMC's ultimate exposure from the United Kingdom's Personal Investment Authority review, as presently calculated and including Sedgwick, is subject to a number of variable factors including, among others, the interest rate established quarterly by the U.K. Personal Investment Authority for calculating compensation, equity markets, and the precise scope, duration, and methodology of the review as required by that authority. As part of the combination with Sedgwick, MMC acquired several insurance underwriting businesses that were already in run-off. Sedgwick had issued guarantees with respect to certain liabilities of these operations. On the basis of present information, anticipated insurance coverage and advice received from counsel, it is the opinion of MMC's management that the disposition or ultimate determination of these claims, lawsuits, proceedings or guarantees will not have a material adverse effect on MMC's consolidated results of operations or its consolidated financial position. 9. Financial Instruments --------------------- Effective January 1, 2001 MMC adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The adoption of this standard did not have a material impact on MMC's consolidated financial position, results of operations or cash flows. 10. Segment Information ------------------- MMC operates in three principal business segments based on the services provided. Segment performance is evaluated based on operating income, which is after deductions for directly related expenses and minority interest but before special charges. The accounting policies of the segments are the same as those used for the consolidated financial statements. Selected information about MMC's operating segments for the six-month periods ended June 30, 2001 and 2000 follow: (In millions of dollars) Revenue Segment from External Operating Customers Income ------------ ---------- 2001- Risk and Insurance Services $2,605 (a) $ 634 Investment Management 1,386 424 Consulting 1,108 161 ------ ------ $5,099 $1,219 ====== ====== 2000- Risk and Insurance Services $2,449 (a) $ 528 Investment Management 1,639 511 Consulting 1,058 149 ------ ------ $5,146 $1,188 ====== ====== (a) Includes interest income on fiduciary funds ($95 million in 2001 and $89 million in 2000). A reconciliation of the total segment operating income to income before income taxes in the consolidated financial statements is as follows: (In millions of dollars) ---------------------- 2001 2000 ------ ------- Total segment operating income $ 1,219 $ 1,188 Corporate expense (58) (64) Reclassification of Minority interest 10 9 ------- ------- Operating income 1,171 1,133 Interest income 12 11 Interest expense (108) (128) ------- ------- Total income before income taxes and minority interest $ 1,075 $ 1,016 ======= ======= 11. New Accounting Pronouncement ---------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") No. 16 "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." It changes the accounting for goodwill from an amortization method to an impairment only approach. Starting January 1, 2002, MMC will cease the amortization of goodwill that was recorded in past business combinations as required by SFAS No. 142. The full impact of applying this standard is yet to be determined. Marsh & McLennan Companies, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Second Quarter and Six Months Ended June 30, 2001 General Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional services firm. MMC subsidiaries include Marsh, the world's leading risk and insurance services firm; Putnam Investments, one of the largest investment management companies in the United States; and Mercer Consulting Group, a major global provider of consulting services. Approximately 57,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries. MMC operates in three principal business segments based on the services provided. Segment performance is evaluated based on operating income, which is after deductions for directly related expenses and minority interest. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" on page one of this filing. This Form 10-Q should be read in conjunction with MMC's latest Annual Report on Form 10-K. The consolidated results of operations follow: - ------------------------------------------------------------------------------- Second Quarter Six Months ----------------- ----------------- (In millions of dollars) 2001 2000 2001 2000 - ------------------------------------------------------------------------------- Revenue: Risk and Insurance Services $1,251 $1,155 $2,605 $2,449 Investment Management 696 788 1,386 1,639 Consulting 558 538 1,108 1,058 ------ ------ ------ ------ 2,505 2,481 5,099 5,146 ------ ------ ------ ------ Expense: Compensation and Benefits 1,222 1,211 2,438 2,515 Amortization of Intangibles 48 44 97 88 Other Operating Expenses 709 712 1,393 1,410 ------ ------ ------ ------ 1,979 1,967 3,928 4,013 ------ ------ ------ ------ Operating Income $ 526 $ 514 $1,171 $1,133 ====== ====== ====== ====== Operating Income Margin 21.0% 20.7% 23.0% 22.0% ====== ====== ====== ====== Minority interest recorded in other operating expenses in 2000 has been reclassified to be consistent with the 2001 presentation. Revenue, derived mainly from commissions and fees, rose 1% from the second quarter of 2000 and was essentially unchanged for the six months. This performance was principally driven by a higher volume of business in risk and insurance services and consulting segments offset by a decline in the investment management segment. On a consolidated basis, underlying revenue, which excludes the effect of items such as foreign exchange, acquisitions and dispositions, grew approximately 2% over the second quarter of 2000. The risk and insurance services segment experienced underlying revenue growth of approximately 10% primarily due to net new business development and the effect of higher commercial insurance premium rates. Consulting revenue grew 6% for the quarter due to a higher volume of business in the retirement practice. Revenue decreased 12% in the investment management segment as average assets under management decreased 14% from the prior year. For the six months, consolidated underlying revenue rose approximately 1%. Operating expenses, excluding the effect of items such as foreign exchange, acquisitions and dispositions, increased approximately 3% in the second quarter of 2001 primarily reflecting a higher volume of business in the risk and insurance services and consulting segments, partially offset by significantly lower incentive compensation in the investment management segment and a reduction in discretionary expenses in all segments. Expenses were also reduced by the realization of incremental net integration savings related to the Sedgwick Group plc ("Sedgwick") transaction. Underlying expenses were essentially unchanged for the first six months of 2001 compared with the same period of 2000. Management believes the net annual savings associated with the Sedgwick integration should approach $160 million when it is completed. Of this amount, $30 million was realized in 1999, $90 million in 2000 and $30 million in the first six months of 2001. The remaining $10 million is expected to be realized over the last two quarters of 2001. Risk and Insurance Services - ------------------------------------------------------------------------------- Second Quarter Six Months ----------------- ------------------- (In millions of dollars) 2001 2000 2001 2000 - ------------------------------------------------------------------------------- Revenue $1,251 $1,155 $2,605 $2,449 Expense 998 951 1,971 1,921 ------ ------ ------ ------ Operating Income $ 253 $ 204 $ 634 $ 528 ====== ====== ====== ====== Operating Income Margin 20.2% 17.7% 24.3% 21.6% ====== ====== ====== ====== - ------------------------------------------------------------------------------- Revenue Revenue for the risk and insurance services segment grew 8% over the second quarter of 2000. On a comparable basis, underlying revenue for risk and insurance services operations rose approximately 10% primarily reflecting the effect of net new business and higher commercial insurance premium rates. Insurance broking and risk management revenue, which represented approximately 75% of risk and insurance services, grew approximately 8% over the second quarter of 2000. In addition, revenue grew 11% in the reinsurance operation and 12% in the consumer & program practices unit. The current level of commercial insurance premium rates is expected to continue for the remainder of 2001. For the first six months of 2001, underlying revenue grew 9% over the same period of 2000. Expense Expenses for risk and insurance services increased 5% for the second quarter and 3% for the first six months of 2001 compared to the same periods of 2000. Excluding the effect of items such as acquisitions and foreign exchange, expenses increased approximately 8% from the second quarter of 2000 primarily reflecting costs associated with a higher volume of business, partially offset by the realization of net integration savings related to the Sedgwick transaction. For the six months, expenses for risk and insurance services, excluding items such as acquisitions and the effect of foreign exchange, rose approximately 6%. Investment Management - ------------------------------------------------------------------------------- Second Quarter Six Months ------------------ ------------------- (In millions of dollars) 2001 2000 2001 2000 - ------------------------------------------------------------------------------- Revenue $ 696 $ 788 $1,386 $1,639 Expense 489 536 962 1,128 ------ ------ ------ ------ Operating Income $ 207 $ 252 $ 424 $ 511 ====== ====== ====== ====== Operating Income Margin 29.7% 32.0% 30.6% 31.2% ====== ====== ====== ====== - ------------------------------------------------------------------------------- Revenue Putnam's revenue decreased 12% compared with the second quarter of 2000, reflecting a decline in the level of average assets under management on which management fees are earned partially offset by the recognition of equity earnings associated with the Thomas H. Lee investment. Assets under management averaged $340 billion in the second quarter of 2001, a 14% decline from the $394 billion managed in the second quarter of 2000. Assets under management aggregated $339 billion at June 30, 2001 compared with $407 billion at June 30, 2000 and $321 billion at March 31, 2001. The increase from the end of the first quarter reflects $5 billion of net new fund sales including reinvested dividends and additional institutional investments plus a $13 billion increase resulting from an increase in equity market levels during the quarter. Revenue for Putnam decreased 15% for the first six months of 2001 compared with the same period of 2000, largely as a result of lower average assets under management. Expense Putnam's expenses decreased 9% in the second quarter of 2001 from the same period of 2000 and 15% in the first six months of 2001 compared to 2000, primarily due to lower incentive compensation reflecting the current operating environment, partially offset by severance costs. Quarter-end and average assets under management are presented below: - -------------------------------------------------------------------------------- (In billions of dollars) 2001 2000 - -------------------------------------------------------------------------------- Mutual Funds: Growth Equity $ 76 $149 Core Equity 64 52 Value Equity 55 55 Fixed Income 47 46 - -------------------------------------------------------------------------------- 242 302 - -------------------------------------------------------------------------------- Institutional Accounts: Growth Equity 28 37 Core Equity 46 42 Value Equity 7 6 Fixed Income 16 20 - -------------------------------------------------------------------------------- 97 105 - -------------------------------------------------------------------------------- Quarter-end Assets $339 $407 - -------------------------------------------------------------------------------- Assets from Non-US Investors $ 29 $ 30 - -------------------------------------------------------------------------------- Average Assets $340 $394 - -------------------------------------------------------------------------------- Assets under management and revenue levels are particularly affected by fluctuations in domestic and international stock and bond market prices and by the level of investments and withdrawals for current and new fund shareholders and clients. U.S. equity markets were volatile throughout 2000 and during the first half of 2001, recording declines after several years of substantial growth. This volatility contributed to the fluctuations in assets under management and, accordingly, to the decline in revenue. A continued decline in general market levels could lead to further declines in revenue. Items affecting revenue also include, but are not limited to, investment performance, service to clients, the development and marketing of new investment products, the relative attractiveness of the investment style under prevailing market conditions, changes in the investment patterns of clients and equity earnings associated with THL investments. Revenue levels are sensitive to all of the factors above, but in particular, to significant changes in stock and bond market valuations. Putnam provides individual and institutional investors with a broad range of equity and fixed income investment products and services designed to meet varying investment objectives and which afford its clients the opportunity to allocate their investment resources among various investment products as changing worldwide economic and market conditions warrant. At the end of the second quarter, assets held in equity securities represented 81% of assets under management, compared with 84% at June 30, 2000, while investments in fixed income products represented 19%, compared with 16% at June 30, 2000. Consulting - -------------------------------------------------------------------------------- Second Quarter Six Months ------------------ ------------------- (In millions of dollars) 2001 2000 2001 2000 - -------------------------------------------------------------------------------- Revenue $ 558 $ 538 $1,108 $1,058 Expense 467 452 947 909 ------ ------ ------ ------ Operating Income $ 91 $ 86 $ 161 $ 149 ====== ====== ====== ====== Operating Income Margin 16.3% 16.0% 14.5% 14.1% ====== ====== ====== ====== - -------------------------------------------------------------------------------- Revenue Consulting services revenue increased 4% in the second quarter of 2001 compared with the same period of 2000 primarily reflecting increased levels of services provided by its retirement consulting practice. On a comparable basis, underlying consulting revenue increased 6% in the second quarter and six months of 2001. Retirement consulting revenue, which represented 42% of the consulting segment, grew 12% in the second quarter primarily due to increased services provided. In addition, underlying revenue rose 16% in health and group benefits consulting, 2% in compensation and communications consulting, and 24% in economic consulting primarily due to a higher volume of business in these practice lines during the second quarter of 2001. Revenue in general management consulting declined by 23% from the second quarter of 2000. Expense Consulting services expenses increased 3% in 2001 compared with the second quarter of 2000. On a comparable basis, excluding the effect of such items as foreign exchange, acquisitions and dispositions, expenses increased approximately 6% for both the three months and six months of 2001 reflecting the effect of staff growth offset, in part, by lower discretionary spending. Corporate Expenses Corporate expenses decreased to $30 million in the second quarter of 2001 from $33 million in 2000 primarily due to nonrecurring costs incurred in 2000 associated with certain corporate initiatives as well as non-recurring consulting fees related to the integration of Sedgwick. Interest Interest income earned on corporate funds amounted to $7 million in the second quarter of 2001, as compared to $6 million in the second quarter of 2000. Interest expense of $56 million decreased from $68 million in the second quarter of 2000 primarily due to a reduction of approximately $120 million in average outstanding debt in 2001 and a reduction in the average interest rate primarily related to commercial paper borrowings compared with the second quarter of 2000. Income Taxes MMC's consolidated tax rate was 37.5% of income before income taxes in the second quarter and first half of 2001 compared with 37.8% in the second quarter and 38.8% for the first six months of 2000. The reduction in the tax rate for the six months primarily reflects lower state and non-U.S. taxes from implementing tax efficient structures worldwide. Liquidity and Capital Resources MMC anticipates that internally generated funds will be sufficient to meet its foreseeable recurring operating cash requirements as well as dividends, capital expenditures and scheduled repayments of long-term debt. MMC generated $304 million of cash from operations for the six months ended June 30, 2001 compared with $316 million for the same period in 2000. These amounts reflect the net income earned by MMC during those periods adjusted for non-cash charges and working capital changes. Included in the cash flows from operations are the net cash requirements related to integration payments. Cash outlays of $55 million and $103 million were made in the first six months of 2001 and 2000, respectively. MMC's cash and cash equivalents aggregated $402 million on June 30, 2001, an increase of $162 million from the end of 2000. During the first half of 2001, commercial paper borrowings increased $796 million relating to certain investments and seasonal demands related to incentive compensation payments. In January 2001, $286 million was used to purchase a minority investment in Gruppo Bipop-Carire S.p.A. During the first half of 2001, MMC repurchased approximately 3.2 million shares of its common stock with a cash outlay of approximately $308 million. MMC's additions to fixed assets and capitalized software, which amounted to $224 million in the first six months of 2001 and $236 million during the same period last year, primarily relate to computer equipment purchases and the refurbishing and modernizing of office facilities and software development costs. In the second quarter of 2001, MMC sold certain of its London properties and simultaneously entered into a leaseback arrangement for a significant portion of the properties. Total proceeds of approximately $135 million were received by the Company MMC has committed to potential future investments of approximately $625 million in connection with various MMC Capital funds and other MMC investments. Approximately $150 million is expected to be invested during the remainder of 2001. MMC expects to fund future commitments, in part, with sales proceeds from existing investments. As further explained in Note 8 to the consolidated financial statements, the disclosure and advice given to clients regarding certain personal pension transactions by certain present and former subsidiaries in the United Kingdom are under review by the Personal Investment Authority. At current rates of exchange, the contingent exposure for pension redress and related cost is presently estimated to be approximately $245 million, of which $225 million 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. The timing of payments relating to the pension review process cannot be predicted with certainty; however, payments net of anticipated insurance recoveries were approximately $90 million in 2000, and $80 million during the first six months of 2001, with $20 million, anticipated to be paid over the next twelve months. These payments are reflected in other liabilities in the Consolidated Statements of Cash Flows. Market Risk Certain of MMC's revenues, expenses, assets and liabilities are exposed to the impact of interest rate changes and fluctuations in foreign currency exchange rates. MMC manages its net exposure to interest rate changes by utilizing a mixture of variable and fixed rate borrowings to finance MMC's asset base. Interest rate swaps are used on a limited basis and are with counterparties of high creditworthiness. MMC does not enter into foreign currency or interest rate transactions for trading or other speculative purposes. The translated values of revenue and expense from MMC's international risk and insurance services and consulting operations are subject to fluctuations due to changes in currency exchange rates. However, the net impact of these fluctuations on MMC's results of operations or cash flows has not been material. Other In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") No. 16 "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets". It changes the accounting for goodwill from an amortization method to an impairment only approach. Starting January 1, 2002, MMC will cease the amortization of goodwill that was recorded in past business combinations as required by SFAS No. 142. The full impact of applying this standard is yet to be determined, however, the elimination of amortization expense on goodwill is expected to increase reported annual earnings for MMC by at least $0.40 per share beginning in 2002. PART II, OTHER INFORMATION -------------------------- MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT JUNE 30, 2001 Item 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Stockholders of MMC was held on May 17, 2001. Represented at the Meeting, at which stockholders took the following actions, were 232,773,947 shares or 85 percent of MMC's 273,879,139 shares of common stock outstanding and entitled to vote: 1. MMC's stockholders elected the four director nominees named below with each receiving the following votes: Number of Number of Shares Shares Voted For Voted to be Withheld ---------------- -------------------- Lewis W. Bernard 228,732,848 4,041,099 ----------- ----------- Mathis Cabiallavetta 210,950,220 21,823,727 ----------- ----------- Robert F. Erburu 228,384,074 4,389,873 ----------- ----------- Ray J. Groves 228,774,863 3,999,084 ----------- ----------- 2. Deloitte & Touche LLP was ratified as MMC's independent public accountants for the year ending December 31, 2001 with a favorable vote of 230,573,316 of the shares represented (1,264,890 against and 935,741 abstaining). Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 10. Renewal of Consulting Agreement between A.J.C. Smith and MMC dated as of May 24, 2001. 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 April 6, 2001 was filed by the registrant in order to make a Regulation FD disclosure. 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 August, 2001 on its behalf by the undersigned, thereunto duly authorized and in the capacity indicated. MARSH & McLENNAN COMPANIES, INC. /s/ Sandra S. Wijnberg -------------------------------- Senior Vice President and Chief Financial Officer