SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
Commission file number 1-7933
DELAWARE 36-3051915
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
123 N. WACKER DR, CHICAGO, ILLINOIS 60606
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(Address of Principal Executive Offices) (Zip Code)
(312) 701-3000
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(Registrant's Telephone Number)
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Number of shares of common stock outstanding:
No. Outstanding
Class as of 6-30-00
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$1.00 par value Common 255,010,419
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PART 1
FINANCIAL INFORMATION
Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(millions) AS OF AS OF
JUNE 30, 2000 DEC. 31, 1999
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ASSETS (UNAUDITED)
INVESTMENTS
Fixed maturities at fair value $ 2,419 $ 2,497
Equity securities at fair value 527 574
Short-term investments 2,322 2,362
Other investments 867 751
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TOTAL INVESTMENTS 6,135 6,184
CASH 930 837
RECEIVABLES
Insurance brokerage and consulting
services 7,065 6,230
Premiums and other 1,234 1,116
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TOTAL RECEIVABLES 8,299 7,346
EXCESS OF COST OVER NET ASSETS PURCHASED 3,296 3,359
OTHER INTANGIBLE ASSETS 493 503
OTHER ASSETS 2,942 2,903
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TOTAL ASSETS $ 22,095 $ 21,132
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AS OF AS OF
JUNE 30, 2000 DEC. 31, 1999
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LIABILITIES AND STOCKHOLDERS' EQUITY (UNAUDITED)
INSURANCE PREMIUMS PAYABLE $ 8,493 $ 7,643
POLICY LIABILITIES
Future policy benefits 1,010 1,005
Policy and contract claims 780 764
Unearned and advance premiums 2,056 2,012
Other policyholder funds 1,046 1,207
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TOTAL POLICY LIABILITIES 4,892 4,988
GENERAL LIABILITIES
General expenses 1,553 1,731
Short-term borrowings 390 303
Notes payable 1,818 1,611
Other liabilities 1,012 955
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TOTAL LIABILITIES 18,158 17,231
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE PREFERRED STOCK 50 50
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED CAPITAL SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES 800 800
STOCKHOLDERS' EQUITY
Common stock - $1 par value 260 259
Paid-in additional capital 548 525
Accumulated other comprehensive loss (394) (309)
Retained earnings 3,036 2,905
Less - Treasury stock at cost (141) (90)
Deferred compensation (222) (239)
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TOTAL STOCKHOLDERS' EQUITY 3,087 3,051
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,095 $ 21,132
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See the accompanying notes to the condensed consolidated financial statements.
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AON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
SECOND QUARTER ENDED SIX MONTHS ENDED
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(millions except per share data) JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
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REVENUE
Brokerage commissions and fees ................................ $ 1,203 $ 1,143 $ 2,408 $ 2,255
Premiums and other ............................................ 491 441 959 878
Investment income ............................................. 125 139 262 289
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TOTAL REVENUE .............................................. 1,819 1,723 3,629 3,422
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EXPENSES
General expenses .............................................. 1,262 1,167 2,533 2,476
Benefits to policyholders ..................................... 257 237 509 476
Interest expense .............................................. 33 24 64 45
Amortization of intangible assets ............................. 39 35 77 69
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TOTAL EXPENSES ............................................. 1,591 1,463 3,183 3,066
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INCOME BEFORE INCOME TAX AND MINORITY INTEREST ................... 228 260 446 356
Provision for income tax ...................................... 89 99 174 135
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INCOME BEFORE MINORITY INTEREST .................................. 139 161 272 221
Minority interest - 8.205% trust preferred capital securities . (10) (10) (20) (20)
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NET INCOME ....................................................... $ 129 $ 151 $ 252 $ 201
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Preferred stock dividends ..................................... - (1) (1) (1)
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NET INCOME AVAILABLE FOR COMMON STOCKHOLDERS ..................... $ 129 $ 150 $ 251 $ 200
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NET INCOME PER SHARE:
Basic net income per share .................................... $ 0.50 $ 0.58 $ 0.97 $ 0.77
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Dilutive net income per share ................................. $ 0.49 $ 0.57 $ 0.96 $ 0.76
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CASH DIVIDENDS PAID ON COMMON STOCK .............................. $ 0.22 $ 0.21 $ 0.43 $ 0.40
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Dilutive average common and common equivalent shares outstanding . 261.7 263.7 261.1 262.9
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See the accompanying notes to the condensed consolidated financial statements.
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AON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
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June 30, June 30,
(millions) 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 252 $ 201
Adjustments to reconcile net income to cash provided by operating activities
Insurance assets / liabilities net of reinsurance .............................. 18 122
Amortization of intangible assets .............................................. 77 69
Depreciation of property and equipment ......................................... 88 89
Income taxes ................................................................... 62 (23)
Special charge and purchase accounting liabilities (notes 8 and 11) ........... (73) 73
Brokerage insurance premiums payable - net ..................................... 277 355
Other .......................................................................... (439) (529)
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CASH PROVIDED BY OPERATING ACTIVITIES ............................................... 262 357
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of investments
Fixed maturities
Maturities .................................................................. 42 30
Calls and prepayments ....................................................... 80 104
Sales ....................................................................... 170 788
Equity securities. ............................................................. 83 356
Other investments .............................................................. 183 38
Purchase of investments
Fixed maturities ............................................................... (245) (848)
Equity securities .............................................................. (41) (384)
Other investments .............................................................. (260) (87)
Purchase of short-term investments - net ....................................... (2) (49)
Acquisition of subsidiaries ....................................................... (41) (177)
Property and equipment and other .................................................. (73) (134)
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CASH USED BY INVESTING ACTIVITIES ........................................... (104) (363)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock transactions - net ................................................ (63) (13)
Issuance of short-term borrowings - net .......................................... 101 126
Issuance of long-term debt ....................................................... 250 250
Issuance (repayment) of other long-term debt ..................................... (31) 2
Interest sensitive, annuity and investment-type contracts
Deposits ....................................................................... 35 153
Withdrawals .................................................................... (239) (91)
Cash dividends to stockholders ................................................... (111) (101)
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CASH PROVIDED (USED) BY FINANCING ACTIVITIES ................................ (58) 326
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EFFECT OF EXCHANGE RATE CHANGES ON CASH ............................................. (7) (5)
INCREASE IN CASH .................................................................... 93 315
CASH AT BEGINNING OF PERIOD ......................................................... 837 723
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CASH AT END OF PERIOD ............................................................... $ 930 $ 1,038
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See the accompanying notes to condensed consolidated financial statements.
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Aon CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The financial results included in this report are stated in conformity with accounting principles generally accepted in the United States and are unaudited but include all normal recurring adjustments which the Registrant ("Aon") considers necessary for a fair presentation of the results for such periods. These interim figures are not necessarily indicative of results for a full year as further discussed below.
Refer to the consolidated financial statements and notes in the Annual Report to Stockholders for the year ended December 31, 1999 for additional details of Aon's financial position, as well as a description of the accounting policies which have been continued without material change. The details included in the notes have not changed except as a result of normal transactions in the interim and the events mentioned in the footnotes below.
Certain prior period amounts have been reclassified to conform to the current period presentation.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and will require Aon to recognize all derivatives on the statement of financial position at fair value. Aon has not yet determined the effect, if any, this statement will have on the consolidated financial statements.
In June 1999, the FASB issued Statement No. 137 that amended the
required adoption date of Statement No. 133 to all fiscal years
beginning after June 15, 2000. Early adoption is permitted as of the
beginning of any quarter subsequent to the issuance of Statement No.
137. In June 2000, the FASB issued Statement No. 138, a significant
amendment to Statement No. 133, which is effective simultaneously with
Statement No. 133. Aon has not yet decided when it will adopt Statement
No. 133.
In June 2000, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101B that amended the required adoption date of SAB 101 to fourth quarter 2000. SAB 101 provides guidance for applying generally accepted accounting principles relating to the timing of revenue recognition in financial statements filed with the SEC. Any change required by the SAB must be made by the end of fourth quarter 2000 with a cumulative effect accounting change effective January 1, 2000. Aon has not yet determined the effect, if any, this SAB will have on the consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 (Interpretation), "Accounting for Certain Transactions Involving Stock Compensation." This Interpretation clarifies the application of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." This Interpretation is effective July 1, 2000, but adoption is not expected to have a material impact on Aon's consolidated financial statements.
The components of comprehensive income, net of related tax, for the second quarter and six months ended June 30, 2000 and 1999 are as follows:
(millions) Second Quarter Ended Six Months Ended
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June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
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Net income $ 129 $ 151 $ 252 $ 201
Net unrealized investment losses (8) (37) (5) (100)
Net foreign exchange gains (losses) (48) 21 (80) (45)
Net additional minimum pension
liability reduction - 65 - 65
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Comprehensive income $ 73 $ 200 $ 167 $ 121
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The components of accumulated other comprehensive loss, net of related tax, at June 30, 2000 and December 31, 1999 are as follows:
(millions) 2000 1999
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Net unrealized investment losses $ (126) $ (121)
Net foreign exchange losses (232) (152)
Net additional minimum pension liability adjustment (36) (36)
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Accumulated other comprehensive loss $ (394) $ (309)
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Aon classifies its business into three major segments based on the type of service or product, and a fourth nonoperating segment. The Insurance Brokerage and Other Services segment is comprised of retail and reinsurance brokerage operations, which include specialty and wholesale activity. The Consulting segment is Aon's employee benefit and human resource consulting organization. The Insurance Underwriting segment is comprised of life, accident and health, and extended warranty and casualty insurance products. The Corporate and Other segment revenues consist primarily of investment income on policyholder surplus of insurance underwriting companies which is not otherwise allocated to the operating segments. Corporate and Other expenses consist primarily of amortization of goodwill (excess of costs over net assets purchased), interest, certain information technology expenses and other general and administrative expenses.
Amounts reported in the tables for these four segments, when aggregated, total to the amounts in the accompanying condensed consolidated financial statements. Revenues are attributed to geographic areas based on the location of the resources producing the revenues. There are no material inter-segment amounts to be eliminated.
Selected information about Aon's operating and geographic areas of operation follows.
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INSURANCE BROKERAGE AND OTHER SERVICES
(millions) Second quarter ended June 30, Six months ended June 30,
2000 1999 2000 1999
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Revenue:
United States $ 545 $ 537 $ 1,069 $ 1,020
United Kingdom 238 218 442 407
Continental Europe 143 143 369 368
Rest of World 139 122 259 222
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Total revenue $ 1,065 $ 1,020 $ 2,139 $ 2,017
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Income before income tax
excluding special charges $ 182 $ 188 $ 362 $ 372
Special charges - - - 119
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Income before income tax $ 182 $ 188 $ 362 $ 253
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======================================================================================== CONSULTING Second quarter ended June 30, Six months ended June 30, (millions) 2000 1999 2000 1999 ======================================================================================== Revenue: United States $ 109 $ 98 $ 208 $ 189 United Kingdom 40 38 79 72 Continental Europe 14 9 36 25 Rest of World 17 16 33 31 ---------------------------------------------------------------------------------------- Total revenue $ 180 $ 161 $ 356 $ 317 ---------------------------------------------------------------------------------------- Income before income tax excluding special charges $ 23 $ 19 $ 42 $ 36 Special charges - - - 44 ---------------------------------------------------------------------------------------- Income (loss) before income tax $ 23 $ 19 $ 42 $ (8) ---------------------------------------------------------------------------------------- |
======================================================================================== INSURANCE UNDERWRITING Second quarter ended June 30, Six months ended June 30, (millions) 2000 1999 2000 1999 ======================================================================================== Revenue: United States $ 394 $ 349 $ 770 $ 691 United Kingdom 81 79 159 161 Continental Europe 28 28 54 58 Rest of World 49 46 99 89 ---------------------------------------------------------------------------------------- Total revenue $ 552 $ 502 $ 1,082 $ 999 ---------------------------------------------------------------------------------------- Income before income tax $ 79 $ 75 $ 146 $ 139 ---------------------------------------------------------------------------------------- |
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CORPORATE AND OTHER
(millions) Second quarter ended June 30, Six months ended June 30,
2000 1999 2000 1999
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Total revenue $ 22 $ 40 $ 52 $ 89
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Loss before income tax $ (56) $ (22) $ (104) $ (28)
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In May 2000, Aon filed a prospectus supplement to use the remaining $250 million of its universal shelf registration filed in May 1999, and issued $250 million of 8.65% debt securities due May 2005. The net proceeds from the sale of the 8.65% notes are being used for general corporate purposes, including securities repurchase programs, capital expenditures, working capital, repayment or reduction of long-term and short-term debt and the financing of acquisitions.
For the first six months of 2000, Aon reissued 588,700 shares of common stock from treasury for employee benefit plans and 323,300 shares in connection with the employee stock purchase plan. Aon purchased 2.8 million shares of its common stock at a total cost of $80 million during six months 2000. There were 4.6 million shares of common stock held in treasury at June 30, 2000.
In April 2000, Aon's stockholders approved an amendment to Aon's Second Amended and Restated Certificate of Incorporation to increase the number of shares of common stock Aon is authorized to issue from 300 million to 750 million.
In 1997, Aon Capital A, a subsidiary trust of Aon, issued $800 million of 8.205% mandatorily redeemable preferred capital securities (capital securities). The sole asset of Aon Capital A is $824 million aggregate principal amount of Aon's 8.205% Junior Subordinated Deferrable Interest Debentures due January 1, 2027.
In first quarter 1999, Aon consummated a plan of restructuring its operations as a result of recent business combination activity. A pretax special charge was recorded in the amount of $120 million.
In the first and second quarters of 2000, Aon made total payments of $8 million and $13 million, respectively, on restructuring charges and purchase accounting liabilities relating to business combinations.
The movements of these special charges and purchase accounting liabilities are presented below.
The following table demonstrates the activity related to the liability for termination benefits and abandoned leases recorded as expenses in 1999:
Termination Lease
(millions) Benefits Abandonments Total
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Expense charged in 1999 $ 67 $ 11 $ 78
Cash payments in 1999 (51) (6) (57)
Credit to expense in 2000 - (4) (4)
Cash payments in 2000 (5) - (5)
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Balance at June 30, 2000 $ 11 $ 1 $ 12
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The following table demonstrates the activity related to the liabilities established as a result of 1998 acquisitions:
Termination Lease
(millions) Benefits Abandonments Total
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Initial liability $ 40 $ 30 $ 70
Cash payments in 1998 (16) (4) (20)
Cash payments in 1999 (24) (6) (30)
Cash payments in 2000 - (2) (2)
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Balance at June 30, 2000 $ - $ 18 $ 18
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The following table demonstrates the activity related to the "Aon Plan" liabilities recorded as expenses in 1996 and 1997:
Lease
Abandonments
Termination and Other
(millions) Benefits Exit Costs Total
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Balance at December 31, 1996 $ 12 $ 48 $ 60
Expense charged in 1997 40 68 108
Cash payments in 1997 (48) (10) (58)
Cash payments in 1998 (4) (26) (30)
Cash payments in 1999 - (24) (24)
Credit to expense in 1999 - (11) (11)
Credit to expense in 2000 - (2) (2)
Cash payments in 2000 - (6) (6)
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Balance at June 30, 2000 $ - $ 37 $ 37
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The following table demonstrates the activity related to the A&A and Bain Hogg plan liabilities established as a result of 1996 and 1997 acquisitions:
Lease
Abandonments
Termination and Other
(millions) Benefits Exit Costs Total
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Initial liability $ 100 $ 164 $ 264
Cash payments in 1997 (65) (44) (109)
Cash payments in 1998 (35) (45) (80)
Cash payments in 1999 - (28) (28)
Charge to expense in 1999 - 13 13
Charge to expense in 2000 - 3 3
Cash payments in 2000 - (8) (8)
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Balance at June 30, 2000 $ - $ 55 $ 55
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All of Aon's liabilities relating to restructuring charges and purchase accounting are reflected in the general expense liabilities in the condensed consolidated statements of financial position.
Net income per share is calculated as follows:
(millions except per Second Quarter Ended Six Months Ended
share data) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
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Net income $ 129 $ 151 $ 252 $ 201
Redeemable preferred stock
dividends - 1 1 1
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Net income for dilutive and
basic $ 129 $ 150 $ 251 $ 200
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Basic shares outstanding 259 260 259 259
Common stock equivalents 3 4 2 4
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Dilutive potential common
shares 262 264 261 263
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Basic net income per share $0.50 $0.58 $0.97 $0.77
Dilutive net income per share $0.49 $0.57 $0.96 $0.76
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A&A discontinued its property and casualty insurance underwriting operations in 1985, some of which were then placed into run-off, with the remainder sold in 1987. In connection with those sales, A&A provided indemnities to the purchasers for various estimated and potential liabilities, including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement, and actions or omissions by various underwriting agencies previously managed by an A&A subsidiary. As of June 30, 2000, the liabilities associated with the foregoing indemnities and liabilities of insurance underwriting subsidiaries that are currently in run-off were included in other liabilities in the accompanying condensed consolidated statement of financial position. Such liabilities amounted to $143 million and would be substantially reduced if a February, 2000 ruling from the Court of Appeal in England favorable to the Company, in respect of which right to appeal has been granted, were upheld in a decision expected in or around 2002. The stated liabilities are net of $174 million of reinsurance recoverables and other assets.
Aon and its subsidiaries are subject to numerous claims, tax assessments and lawsuits that arise in the ordinary course of business. The damages that may be claimed are substantial, including in many instances claims for punitive or extraordinary damages. Accruals for these items have been provided to the extent that losses are deemed probable and are estimable.
In 1998, the Internal Revenue Service (IRS) proposed adjustments to the tax of certain Aon subsidiaries for the period of 1990 through 1993. Most of these adjustments should be resolved through factual substantiation of certain accounting matters. However, the IRS has contended that retro-rated extended warranty contracts do not constitute insurance for tax purposes. Accordingly, the IRS has proposed a deferral of deductions for obligations under those contracts. The effect of such deferral would be to increase the current tax obligations of certain Aon subsidiaries by approximately $74 million, $3 million, $5 million and $12 million (plus interest) in years 1990, 1991, 1992, and 1993, respectively. Aon believes that the IRS's position is without merit and inconsistent with numerous previous IRS private letter rulings. Aon has commenced an administrative appeal and intends to contest vigorously such treatment. Aon believes that if the contracts are deemed not to be insurance for tax purposes, they would be recharacterized in such a way that the increased taxes for the years in question would be far less than the proposed assessments.
In the second quarter of 1999, Allianz Life Insurance Company of North America, Inc. ("Allianz") filed an amended complaint in Minnesota adding a brokerage subsidiary of Aon as a defendant in an action which Allianz brought against three insurance carriers reinsured by Allianz. These three carriers provided certain types of workers' compensation reinsurance to a pool of insurers and to certain facilities managed by Unicover Managers, Inc. ("Unicover"), a New Jersey corporation not affiliated with Aon. Allianz alleges that the Aon subsidiary acted as an agent of the three carriers when placing reinsurance coverage on their behalf. Allianz claims that the reinsurance it issued should be rescinded or that it should be awarded damages, based on alleged fraudulent, negligent and innocent misrepresentations by the carriers, through their agents, including the Aon subsidiary defendant. Aon believes that the Aon subsidiary has meritorious defenses and the Aon subsidiary intends to vigorously defend this claim.
Except for an action filed in Illinois seeking to compel Aon to produce documents and for an action filed in England disputing entitlement to commissions and fees to both of which Aon is responding, the Allianz lawsuit is the only lawsuit or arbitration relating to Unicover in which any Aon related entity is a party. However, in fourth quarter 1999 Aon recognized a pretax charge for $72 million in general expenses in its insurance brokerage and other services segment relating to various litigation matters including Unicover. As of June 30, 2000, Aon has $49 million remaining in general expense liabilities for these various litigation matters, which are complex and, therefore, the timing of resolution cannot yet be determined.
Certain U.K. subsidiaries of Aon have been required by their regulatory body, the Personal Investment Authority (PIA), to review advice given by those subsidiaries to individuals who bought pension plans during the period from April 1988 to June 1994. These reviews have resulted in a requirement to pay compensation to clients based on guidelines issued by the PIA. In 1999, Aon charged general expenses for $121 million in the consulting segment, of which $43 million was in first quarter 1999, to provide for these payments. As of June 30, 2000, Aon has $77 million remaining in general expense liabilities for these payments which are expected to be disbursed over the next several years. Aon's ultimate exposure from the private pension plan review, as presently calculated, is subject to a number of variable factors including, among others, general level of pricing in the equity markets, the rate of response to the pension review mailings, the interest rate established quarterly by the PIA for calculating compensation, and the precise scope, duration and methodology of the review, including whether recent regulatory guidance will have to be applied to previously settled claims.
Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the consolidated financial position of Aon beyond amounts provided. However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters.
Aon CORPORATION
MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
AND FINANCIAL CONDITION
REVENUE AND INCOME BEFORE INCOME TAX
FOR SECOND QUARTER and SIX MONTHS 2000
This quarterly report 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. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors such as general economic conditions in different countries around the world, fluctuations in global equity and fixed income markets, changes in commercial property and casualty premium rates, the competitive environment and the actual cost of resolution of contingent liabilities.
Total revenue increased $96 million or 6% in the second quarter and $207 million or 6% in six months 2000. The impact of foreign exchange rate reductions and the absence of revenue from the Unicover workers compensation pool slowed revenue growth in second quarter and six months 2000. On a comparable currency basis, total revenues improved 8% in the quarter compared to 1999.
Brokerage commissions and fees increased $60 million or 5% in second quarter 2000 and $153 million or 7% in six months 2000, primarily reflecting growth from business combination activity, internal growth from increased new business and the impact of an improving premium rate environment on revenue. Partially offsetting the growth in brokerage commission and fees was the impact of foreign exchange rates in the quarter and six months.
Premiums and other, primarily related to insurance underwriting operations, increased $50 million or 11% in second quarter 2000 and $81 million or 9% in six months 2000 compared with the same period last year. Total premiums earned in the insurance underwriting segment were $488 million, an increase of $52 million or 12% over second quarter 1999. The increase primarily reflects new business development in the domestic mechanical warranty and casualty lines and the appliance and electronic lines and continued internal growth.
Investment income, which includes related expenses and income on disposals, decreased 10% and 9% in the second quarter and six months 2000, respectively, when compared to prior year. For six months 1999, investment income included $30 million of income on the disposal of tax-exempt bonds with no comparable amount in 2000. Excluding the income on disposal of the bonds, six months 2000 investment income increased a modest 1% or $3 million, primarily reflecting higher short-term interest rates offset by lower revenue from equity investments. Revenues from private equity investments fluctuate due to the inherent volatility of these investments. Investment income from insurance brokerage and other services, and consulting operations, primarily relating to fiduciary funds, increased $5 million in second quarter 2000 compared to second quarter 1999. Higher short-term interest rates coupled with improved cashflows contributed to the overall investment income increase in the brokerage segments.
In first quarter 1999, Aon recorded special charges of $163 million ($102 million after-tax or $0.39 per share) including provisions for U.K. pension selling, an early retirement plan in the U.S. and Canada and the consolidation of Aon's European insurance brokerage and other services operations. General expenses, excluding 1999 special charges, increased $220 million or 10% in six months 2000, primarily reflecting investments in new business initiatives and technology. For example, incremental costs related to the rollout of the retail insurance brokerage and other services brokerage system and related conversions, running of parallel systems and training expenses, were incurred in second quarter and six months 2000.
Benefits to policyholders increased $20 million or 8% in the quarter and $33 million or 7% in six months 2000 when compared to prior year. The increases were fairly consistent with growth in related premiums earned and reflected no unusual claims activity. Total expenses increased $128 million or 9% in second quarter 2000 and $117 million or 4% when compared to prior year. Total expenses, excluding the 1999 special charges, increased 10% for the six months when compared to 1999. Interest expense increased 38% in the quarter compared to prior year and 42% in six months 2000, attributed primarily to acquisition financing in 1999 and the issuances of $250 million of 6.9% notes at the end of second quarter 1999 and $250 million of 8.65% notes in second quarter 2000 (see note 5). Restructuring liabilities for recent acquisitions and 1999 special charges have been reduced by payments as planned.
Income before income tax and minority interest decreased $32 million or 12% in second quarter 2000 when compared to prior year, primarily due to lower revenue from equity investments, higher interest and technology expenses, new business initiatives and the absence of Unicover revenue.
Although foreign exchange rates negatively affected revenues in the second quarter, pretax income is generally hedged against foreign currency fluctuations. In the second quarter, the net foreign exchange impact to pretax income, after the benefit of hedge activity, was minimal. For the six months 2000, the foreign exchange impact to pretax income was $9 million.
Six months 2000 income before income tax increased $90 million or 25% over 1999 reflecting the inclusion of 1999 special charges. Excluding special charges, six months 2000 income before income tax decreased $73 million or 14% when compared to prior year, primarily reflecting lower revenue from equity investments, costs to integrate Aon's global network, increased technology expenses related to brokerage computer systems, additional interest expense, absence of Unicover revenues, and the inclusion of the $30 million income on disposal of tax-exempt securities in 1999.
For purposes of the following business segments discussions, comparisons against 1999 results exclude special charges. In addition, references to income before income tax exclude minority interest related to the capital securities.
Aon classifies its businesses into three major operating segments: Insurance Brokerage and Other Services, Consulting and Insurance Underwriting; and into one nonoperating segment, Corporate and Other. A description of operations and a review of financial performance for each of the four business segments follows.
The Insurance Brokerage and Other Services segment consists principally of Aon's retail and reinsurance brokerage operations, which include specialty and wholesale activity.
Second quarter 2000 revenue was $1.1 billion, up 4%, and six months 2000 revenue was $2.1 billion, up 6%. Post-second quarter 1999 acquisitions as well as internal growth accounted for the majority of this revenue growth. Excluding the impact of acquisitions and foreign exchange, revenue related to brokerage core businesses grew approximately 6% in the quarter in a very competitive environment. Excluding the impact of foreign exchange adjustments, revenue growth in the quarter was 7% on a comparable currency basis. Revenue related to reinsurance obtained by Unicover was $8 million and $14 million for second quarter and six months 1999, respectively.
In the quarter, U.S. revenue of $545 million in 2000 was up 1% from 1999 due to increased new business, acquisitions and growth in U.S. specialty operations. In second quarter 2000, the premium rate environment continued to improve with a lower level of decline internationally and an indicated slight increase in the U.S. U. K. and Continental Europe revenue of $381 million increased 6% from 1999, primarily due to strong internal growth, particularly in Spain, Finland, Germany and Ireland. The impact of foreign exchange rates partially offset this revenue growth. Rest of world revenue increased 14% in 2000 primarily due to new initiatives and internal growth.
In the six months, U.S. revenue of $1.1 billion in 2000 was up 5% from 1999 reflecting increased new business, acquisitions, and the impact of minimal premium rate declines and growth in U.S. specialty operations. U.K. and Continental Europe revenue of $811 million increased 5% from 1999, primarily due to internal growth as mentioned above and to a lesser extent, acquisitions. The impact of foreign exchange rates partially offset this revenue growth. Rest of world revenue increased $37 million or 17% in 2000 primarily reflecting new initiatives and internal growth.
Excluding 1999 special charges, pretax income declined 3% both in the quarter and six months 2000 over prior year, reflecting lower revenue sharing income with insurers that was principally due to higher industry-wide underwriting losses. While this negatively affected short-term results, poor underwriting performance contributed to continued price firming.
Second quarter pretax margins in this segment were 17% in 2000 compared to 18% in the prior year. Second quarter 1999 results benefited from high margin Unicover revenue which was absent in 2000. In addition, higher technology costs related to the rollout of Aon's U.S. retail brokerage computer system platform, the impact of certain recent acquisitions that have seasonally higher expenses relative to revenues and investments in new initiatives, with little or no immediate revenue growth, contributed to the pretax income and related margin declines in the second quarter.
The Consulting segment provides a range of consulting services including employee benefits, human resources, compensation and change management.
In the Consulting segment, both second quarter and six months 2000 revenue increased 12% to $180 million and $356 million, respectively. On a comparable currency basis, Consulting revenue grew 14% in the quarter compared to 1999. Internal growth, acquisition activity, and to a lesser extent, transfers of business units to consulting from the Insurance Brokerage and Other Services segment subsequent to second quarter 1999, influenced revenue growth. Absent these factors, revenue grew approximately 7% in second quarter 2000.
U.S. revenue of $109 million in second quarter 2000 was up 11% from 1999 reflecting growth primarily in employee benefit consulting. U.K. and Continental Europe revenue of $54 million increased 15% from 1999. U.K. revenue grew 5% from the prior period reflecting strong growth in employee benefit services. Continental Europe revenue increased 56% or $5 million reflecting revenue growth of existing businesses and transfers of certain operating activities to the consulting segment, partially offset by unfavorable foreign exchange rates.
U.S. revenue of $208 million in six months 2000 was up 10% from 1999 reflecting growth primarily in employee benefit consulting. U.K. and Continental Europe revenue of $115 million increased 19% from 1999. U.K. revenue grew 10% from the prior period reflecting strong growth in employee benefit services. Continental Europe revenue increased 44% or $11 million reflecting revenue growth of existing businesses and transfers of certain operating activities to the consulting segment, partially offset by unfavorable foreign exchange rates.
Second quarter and six months pretax income, excluding 1999 special charges, increased 21% to $23 million and 17% to $42 million, respectively, compared to 1999 primarily reflecting U.K. operations and domestic employee benefits, human resources and change management consulting. Pretax margins in this segment improved slightly in the quarter and six months compared to 1999.
The Insurance Underwriting segment is comprised of accident, health and life insurance and extended warranty and casualty insurance products.
Revenue was $552 million in second quarter 2000, up 10% from 1999, primarily due to growth in the U.S. appliance and electronics and mechanical extended warranty and casualty products. Accident and health continued to expand product distribution through worksite marketing programs, and the development of new product initiatives introduced in 1999 on a global basis. However, the above revenue growth is predominantly from core operations and acquisitions as these new initiatives continue to build momentum. Excluding the impact of acquisitions and foreign exchange, written premiums related to insurance underwriting core businesses grew approximately 9% in the quarter.
U.S. revenue of $394 million was up 13% in second quarter 2000 due to growth in revenues for accident and health and appliance and electronics extended warranty products. U.K. and Continental Europe revenue of $109 million improved 2% principally reflecting continued growth, particularly due to direct sales accident and health products in the U.K. and Ireland. Rest of world revenue was $49 million, up 7% from prior year reflecting continued geographic expansion.
U.S. revenue of $770 million was up 11% in six months 2000 due to growth in revenues for life, accident and health and extended warranty products. U.K. and Continental Europe revenue of $213 million declined 3% reflecting the transfer of certain business to the Insurance Brokerage and Other Services segment in first quarter 2000. Rest of world revenue was $99 million, up 11% from prior year reflecting continued geographic expansion.
Pretax income was $79 million in second quarter 2000, up 5% from last year. Six months 2000 pretax income was $146 million, an increase of 5% over prior year. Revenue growth and expense management was partially offset by start-up costs related to new accident and health product initiatives and investments in new product development in the extended warranty lines. Pretax margins in this segment declined to 14% in second quarter 2000 compared to 15% in 1999, principally reflecting the effect of start-up costs mentioned above.
Revenue in this category consists primarily of investment income (including income on disposals) which is not otherwise allocated to the operating segments. Corporate operating expenses include goodwill amortization, interest expense and general expenses such as administrative and certain information technology costs.
Corporate and Other revenue for the second quarter 2000 was $22 million, down $18 million or 45% from second quarter 1999 primarily due to an increase in the allocation of investment income to the operating segments and lower yields on Corporate equity investments. For six months 2000, Corporate and Other revenue declined $37 million or 42%. Six months 1999 corporate revenue included $30 million of income on the disposal of $500 million in tax-exempt bonds. Excluding the gain, Corporate and Other revenue in the six months decreased $7 million or 12% from prior year primarily due to lower revenue from equity investments. These investments generate a more variable income stream due to the inherent fluctuations of equity security valuations.
Corporate and Other expenses for the quarter and six months were up $16 million and $39 million, respectively, from the same periods last year. Interest expense and goodwill amortization were up a total of $14 million over the second quarter 1999, reflecting the financing of acquisitions made during the last twelve months and the issuance of approximately $500 million of debt securities since June 1999.
Lower revenues from equity investments and increased interest and amortization expenses were the primary factors that contributed to the overall corporate and other pretax loss of $56 million in the quarter and $104 million for six months, a decline of $34 million and $76 million, respectively.
NET INCOME FOR SECOND QUARTER AND SIX MONTHS 2000
Second quarter 2000 net income was $129 million ($0.49 dilutive per share) compared to $151 million ($0.57 dilutive per share) in 1999. Six months 2000 net income was $252 million ($0.96 dilutive per share) compared to $201 million ($0.76 per share) in 1999. Six months 1999 net income was primarily influenced by after-tax 1999 special charges of $102 million ($0.39 per share) with no comparable amount in six months 2000. In the second quarter and first six months of 2000, there was no net income reflected in Aon's consolidated financial statements from the impact of Unicover revenues. The impact of Unicover revenues in 1999 was approximately $0.02 per share in the second quarter and $0.03 per share for the first six months.
Basic net income per share, including 1999 special charges, was $0.50 and $0.58 in second quarter 2000 and 1999, respectively, and $0.97 and $0.77 in six months 2000 and 1999, respectively. Dividends on the redeemable preferred stock have been deducted from net income to compute income per share. The effective tax rate was 39% and 38.25% for second quarter 2000 and 1999, respectively. The increase in the effective rate was primarily attributable to a shift in business mix and to lower tax-exempt investment income.
CASH FLOW AND FINANCIAL POSITION
AT THE END OF SIX MONTHS 2000
Cash flows from operating activities reflect the net income earned by Aon in the reported periods adjusted for non-cash charges and working capital changes. Cash flows provided by operating actvities in six months 2000 were $262 million, a decrease of $95 million from the $357 million reported at six months 1999. The decrease is primarily due to payments on special charges related to restructuring and purchase accounting liabilities from business combinations and changes in insurance assets and liabilities net of reinsurance and net brokerage insurance premiums payable. In addition, six months 2000 net income of $252 million was $51 million below prior year after adjusting for after-tax special charges of $102 million at six months 1999. A refund due on prior year taxes partially offset the decrease in operating cash flows for the six months 2000.
Investing activities used cash of $104 million, which was made available from financing and operating activities. Cash used for acquisition activity during six months 2000 was $41 million, primarily reflecting brokerage acquisitions. Property and equipment and other expenditures for the first six months of 2000 were $73 million, net of proceeds of $33 million from the sale of certain assets.
Cash totaling $58 million was used during six months 2000 from financing activities. The decrease of $384 million from six months 1999 is primarily due to net withdrawals of capital accumulation products and a reduction of new short-term borrowings. Cash was used to pay dividends of $110 million on common stock and $1 million on redeemable preferred stock during six months 2000.
Aon's operating subsidiaries anticipate that there will be adequate liquidity to meet their needs in the foreseeable future. Aon's liquidity needs are primarily for servicing its debt and for the payment of dividends on stock issues and capital securities. The businesses of Aon's operating subsidiaries continue to provide substantial positive cash flow. Brokerage cash flow has been used primarily for business reinvestment (i.e. rollout of the new U.S. retail brokerage system, acquisition financing and payments of special charge and
purchase accounting liabilities). Aon anticipates continuation of the company's positive cash flow, the ability of the parent company to access adequate short-term lines of credit, and sufficient cash flow in the long term.
Aon's fixed maturity investments are invested primarily in investment grade holdings (97%) and have a fair value of $2.4 billion at June 30, 2000, which is approximately 96% of amortized cost.
Total assets increased $963 million to $22.1 billion since year-end 1999. Invested assets at June 30, 2000 decreased $49 million from year-end levels primarily from the use of short-term investments to fund special charge payments and to settle policyholder fund liabilities. The amortized cost and fair value of less than investment grade fixed maturity investments were $109 million and $100 million, respectively, at June 30, 2000. The carrying value of non-income producing investments in Aon's portfolio at June 30, 2000 was $100 million, or 1.6% of total invested assets.
In general, Aon uses derivative financial instruments (primarily financial futures, swaps, options and foreign exchange forwards) to: (a) hedge income statement foreign currency translation and transaction risks and other business risks (i.e. interest rate and credit risk); (b) hedge asset price risk associated with financial instruments whose change in value is reported under SFAS 115; and (c) manage its overall asset/liability duration match. As of June 30, 2000, Aon had open contracts, related to certain of the above, which had net unrealized gains of approximately $1 million.
Short-term borrowings increased at the end of six months 2000 by $87 million when compared to year-end 1999. The increase is primarily due to the financing of acquisitions, in particular the completion of minority interest buyouts associated with previous acquisitions. Notes payable increased at the end of six months 2000 by $207 million when compared to year-end 1999. The principal factor influencing this increase is the issuance of $250 million of 8.65% debt securities due May 2005 (see note 5). Debt repayments partially offset the increase in notes payable. Included in notes payable at June 30, 2000 is approximately $22 million, which represents the principal amount of notes to be paid within one year.
Stockholders' equity increased $36 million in six months 2000 to $12.10 per share, an increase of $0.19 per share since year-end 1999. The principal factor influencing this increase was net income. Partially offsetting this increase were net foreign exchange losses of $80 million and dividends to stockholders of $111 million. Unrealized investment gains and losses and foreign exchange gains and losses fluctuations from period to period are largely based on market conditions. These short-term non-cash fluctuations are not economical to hedge completely.
The condensed consolidated financial statements at June 30, 2000 and for the second quarter and six months then ended have been reviewed, prior to filing, by Ernst & Young LLP, Aon's independent auditors, and their report is included herein.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholders
Aon Corporation
We have reviewed the accompanying condensed consolidated statement of financial position of Aon Corporation as of June 30, 2000, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated statement of financial position of Aon Corporation as of December 31, 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended, not presented herein, and in our report dated February 8, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Chicago, Illinois
August 10, 2000
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with this report are listed on the attached Exhibit Index.
(b) Reports on Form 8-K - The Registrant filed one Current Report
on Form 8-K dated May 9, 2000 for the quarter ended June 30,
2000. The following exhibits were included in the report: (1)
Exhibit 3 - Certificate of Amendment of Second Restated
Certificate of Incorporation; (2) Exhibit 12(a) - Statement
regarding Computation of Ratio of Earnings to Fixed Charges;
(3) Exhibit 12(b) - Statement regarding Computation of Ratio
of Earnings to Combined Fixed Charges and Preferred Stock
Dividends; and (4) Exhibit 99 - Press Release regarding First
Quarter 2000 Earnings.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 11, 2000 /s/ Harvey N. Medvin
--------------------------------
HARVEY N. MEDVIN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
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Exhibit Number
In Regulation S-K
(10) Material Contracts.
(a) Aon Stock Award Plan (as amended and restated through February, 2000).
(12) Statements regarding Computation of Ratios.
(a) Statement regarding Computation of Ratio of Earnings to Fixed Charges.
(b) Statement regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
(15) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedule
Exhibit 10(a)
Aon STOCK AWARD PLAN
(AS AMENDED AND RESTATED THROUGH FEBRUARY, 2000)
1. PURPOSE
Aon Corporation and its subsidiaries (the "Corporation"), has adopted the Aon Stock Award Plan (as amended and restated through February 2000) (the "Plan"). The purpose of the Plan is to foster and promote the long-term financial success of the Corporation and materially increase stockholder value by: (a) strengthening the Corporation's capability to develop, maintain, and direct an outstanding management team; (b) motivating superior performance by means of long-term performance related incentives; (c) encouraging and providing for obtaining an ownership interest in the Corporation; (d) attracting and retaining outstanding executive talent by providing incentive compensation opportunities competitive with other major companies; and (e) enabling executives to participate in the long-term growth and financial success of the Company.
2. ADMINISTRATION
The Plan shall be administered by the Organization and Compensation Committee (the "Committee") of Aon Corporation's Board of Directors (the "Board"). Subject to the limitations of the plan, the Committee shall have the sole and complete authority to: (a) select from the regular, full-time employees of the Corporation, those who shall participate in the Plan ("Participant"); (b) make awards in such forms and amounts as it shall determine; (c) impose such limitations, restrictions and conditions upon such awards as it shall deem appropriate; (d) interpret the Plan and adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan; (e) correct any defect or omission or reconcile any inconsistency in this Plan or in any award granted hereunder; and (f) make all other determinations and take all other actions deemed necessary or advisable for the implementation and administration of the Plan. The Committee's determinations on matters within its authority shall be conclusive and binding upon the Corporation and all other persons.
3. TYPES OF AWARDS
Awards of the common stock, $1.00 par value per share of the Corporation
(the "Common Stock") under this Plan may be in the form of any one or more of
the following: (a) incentive stock options (as defined by Internal Revenue Code
Section 422 and referred to herein as "ISO's"); (b) regular stock options (not
intended to be accorded favored tax treatment, and referred to herein as
"RSO's"); and (c) stock awards granted pursuant to Section 7.
4. SHARES SUBJECT TO THE PLAN
Since the adoption of the Plan in 1987, after giving effect to subsequent additions approved by shareholders and stock splits, the aggregate number of shares of Common Stock which may be issued pursuant to awards under the Plan shall be 19,350,000, subject to adjustment pursuant to Section 10 hereof.
5. STOCK OPTION TERMS AND CONDITIONS
The Committee may make option grants of Common Stock in the form of ISO's and/or RSO's (collectively referred to as "Option Grant").
The purchase price per share of Common Stock subject to an Option Grant shall not be less than 100% of the fair market value of the Common Stock on the date such Option Grant is made. "Fair Market Value" as used in the Plan with regard to a date means the arithmetic mean of the high and low prices of the Common Stock as quoted on the New York Stock Exchange, as published in The Wall Street Journal, or, if The Wall Street Journal is no longer published, such other periodical as is chosen by the Committee.
An Option Grant shall vest after a Participant's period of continuous employment by the Corporation from the date of the Option Grant ("Grant Date") in accordance with the schedule set forth below:
Participant's Full Years of Continuous
Employment From Grant Date Percent Vested
-------------------------- --------------
2 33%
3 34%
4 33%
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A Participant, following the vesting of any portion of an Option Grant as
set forth above, may elect to exercise an option by giving written notice to the
Corporation on such form as the Committee may prescribe. Payment for all shares
to be purchased pursuant to an exercise of an option shall be made in a form or
manner authorized by the Committee, including, but not limited to, cash or, if
the Committee so permits, (a) by delivery of certification of ownership to the
Corporation of the number of shares of Common Stock which have been owned by the
holder for at least six (6) months prior to the date of exercise having an
aggregate Fair Market Value of not less than the product of the purchase price
of the option multiplied by the number of shares the Participant intends to
purchase upon exercise of the option on the date of delivery; or (b) in a
cashless exercise through a broker. Delivery of such certificates is conditioned
on the Participant's prior compliance with this Section and with the terms of
Section 9. Upon receipt of such stock certificate, the Participant is free to
hold or subject to Section 15 dispose of it at will. The Participant does not
have the right to vote any shares of Common Stock subject to an Option Grant or
receive dividends on such shares prior to the time that the option to which they
are subject is exercised. The Committee at its discretion may alter the terms of
the vesting of Option Grants; provided however, no Option Grant may be exercised
after the tenth (10th) anniversary of the date of the making of such Option
Grant.
Notwithstanding any provision contained in the Plan to the contrary, the maximum number of shares for which Option Grants may be made under this Plan to any one Participant in any one calendar year is 675,000 shares of Common Stock, subject to adjustment pursuant to Section 10 hereof.
6. LIMITATION ON ISO'S
Notwithstanding anything in the Plan to the contrary, to the extent required from time to time by the Internal Revenue Code and promulgation's thereunder ("Code"), the following additional provisions shall apply to Option Grants which are intended to qualify as ISO's:
(a) The aggregate Fair Market Value (determined as of the Grant Date) of the shares of Common Stock with respect to which ISO's are exercisable for the first time by any Participant during any calendar year (under all plans of the Corporation) shall not exceed $100,000 or such other amount as may subsequently be specified by the Code; provided that, to the extent that such limitation is exceeded, any excess options (as determined under the Code) shall be deemed to be RSO's.
(b) Any ISO's authorized under the Plan shall contain such other provisions as the Committee shall deem advisable, but shall in all events be consistent with and contain or be deemed to contain all provisions required in order to qualify the Option Grants as ISO's.
(c) All ISO's must be granted within ten years from the effective date of this Plan.
7. STOCK AWARD TERMS AND CONDITIONS
The Committee may in its discretion make grants of Common Stock, subject to this Section 7 (herein referred to as "Stock Awards"). The Stock Awards shall vest after a Participant's period of continuous employment by the Corporation from the date of the Stock Award (the "Award Date") in accordance with the schedule set forth below:
Participant's Full Years of Continuous
Employment From Award Date Percent Vested
-------------------------- --------------
3 20
4 10
5 10
6 10
7 10
8 10
9 10
10 20
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Within 30 days of the vesting of any portion of a Stock Award by virtue of the Participant's completing the full years of continuous employment as set forth above, the Corporation shall deliver to the Participant a stock certificate covering the requisite number of shares of Common Stock. Delivery of such certificates is conditioned on the Participant's prior compliance with the terms of Section 9. Upon receipt of such stock certificate, the Participant is free to hold or, subject to Section 15, dispose of it at will. The Participant does not have the right to vote any shares of Common Stock subject to an Award or receive dividends on such shares prior to the time they are vested. The Committee in its discretion may alter the terms of the vesting of Stock Awards. The Committee shall have the discretion to discharge all or a portion of its obligation under this paragraph by paying to the Participant an amount of money equal to the fair market value of all or a portion of the undelivered shares of Common Stock on the date the Stock Award becomes vested, less applicable withholding taxes.
8. EMPLOYMENT TERMINATION
If a Participant's employment terminates for any reason, other than by death or disability, all unvested Option Grants and Stock Awards will be forfeited. If a Participant's employment terminates because of death or disability, all unvested Option Grants and Stock Awards will continue to vest in accordance with Sections 5 and 7, respectively. The Committee, however, shall have the discretion to accelerate the vesting of any unvested Option Grant or to deliver shares of Common Stock representing all or a portion of any unvested Stock Award, with respect to specific terminating Participants if, after reviewing all of the facts and circumstances of such termination, the Committee determines that such delivery is appropriate and equitable.
Any participant who terminates employment, other than by death or
disability, will be permitted to exercise any vested Option Grants, pursuant to
Section 5, for a period of 30 days immediately following the Participant's
termination of employment, after which any vested Option Grants will be
forfeited.
9. WITHHOLDING TAXES
A Participant shall have the duty to pay to the Corporation an amount equal to the taxes required by any government to be withheld or otherwise deducted and paid by the Corporation as a result of the exercise by the Participant of any Option Grant or the delivery to the Participant of any shares subject to an Option Grant and/or Stock Award. Shares of Common Stock subject to an exercised Option Grant and/or Stock Award shall not be delivered to the Participant until such time as such payment has been made.
The Committee may, in its discretion and subject to such rules as it may adopt, permit or, in the absence of the receipt of payment therefore within prescribed time periods, require the Participant to pay all or a portion of the withholding taxes (federal, state and local) by electing to have the Corporation withhold shares of Common Stock otherwise issuable having a Fair Market Value equal to all or any portion of the withholding tax to be satisfied in this manner.
However, in no event will the amount of shares of Common Stock withheld exceed the amount necessary to satisfy the required minimum statutory withholding.
10. ADJUSTMENT IN EVENT OF CHANGES IN CAPITALIZATION
In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or shares of the Corporation, the Committee may make such equitable adjustments, to prevent dilution or enlargement of rights, as it may deem appropriate, including but not limited to (a) the maximum number of shares available to be issued pursuant to Section 4; (b) the maximum number of shares of Common Stock which may be granted in a single year pursuant to Section 5; (c) the number of shares of Common Stock subject to outstanding Option Grants and/or Stock Awards and (d) the exercise price of outstanding Option Grants.
11. NO RIGHT TO CONTINUED EMPLOYMENT
Nothing in the Plan shall confer on a Participant any right to continue in the employ of the Corporation or in any way affect the Corporation's right to terminate the Participant's employment at any time without prior notice and for any or no reason.
12. IMPACT ON OTHER BENEFITS
The value of any shares of Common Stock delivered (or money in-lieu thereof) under this Plan shall not be includable as compensation or earnings for purposes of any other benefit plan offered by the Corporation.
13. BENEFICIARY
Any shares deliverable after a Participants death (or money in-lieu thereof) shall be delivered (or paid) to the beneficiary as designated in writing by the Participant. If no beneficiary is so designated, delivery (or payment) will be made to the Participant's estate. The Participant may change the designated beneficiary of this Plan by filing with the Committee written notices of such change.
14. TERMINATION OR AMENDMENT OF THE PLAN
The Board shall have the right to amend or terminate the Plan at any time. An outstanding Option Grant or Stock Award, however, may not in any way be adversely affected or limited by any Plan amendment or termination approved after the Grant Date or the Award Date, as the case may be, without the Participant's written consent (or, if the Participant is not then living, the affected beneficiary); provided, that adjustments pursuant to Section 10 herein shall not be subject to the foregoing limitations of this Section 14.
15. REGULATORY COMPLIANCE AND LISTING
The delivery of any shares of Common Stock under this Plan may be postponed by the Corporation for such period as may be required to comply with any applicable requirements under the Federal or State securities laws, any applicable listing or other requirements of any national securities exchange and requirements under any other law or regulation applicable to the delivery of such shares, and the Corporation shall not be obligated to deliver any shares of Common Stock under this Plan if such delivery shall constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange. In addition, the shares of Common Stock when delivered may be subject to conditions, including transfer restrictions, if required to comply with applicable securities law.
16. MISCELLANEOUS
The shares of Common Stock to be delivered under the Plan may be either authorized but unissued shares or shares which have been or may be reacquired by the Corporation, as determined from time to time by the Committee.
To the extent any shares of Common Stock are not delivered to a Participant or beneficiary because the Option Grant or Stock Award was forfeited or canceled, or the shares of Common Stock are not delivered because the Option Grant or Stock Award is settled in cash or used to satisfy the applicable tax withholding obligation, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of Common Stock available for delivery under the Plan.
If the exercise price of an Option Grant under this Plan is satisfied by tendering shares of Common Stock to the Corporation (by either actual delivery or by attestation), only the number of shares of Common Stock issued net of shares of Common Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of Common Stock available for delivery under the Plan.
17. TRANSFERABILITY
No Option Grant and/or Stock Award and no right under any such Option Grant and/or Stock Award shall be transferable by a Participant otherwise than by will or by the laws of descent and distribution; provided, however, that if so determined by the Committee, a Participant may, in the manner established by the Committee;
(a) designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Option Grants and/or Stock Awards upon the death of the Participant, or;
(b) transfer an Option Grant and/or Stock Award to any member of such Participant's "immediate family" (as such term is defined in Rule 16a-1(e) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or any successor rule or regulation) or to a trust or family partnership whose beneficiaries are members of such Participant's "immediate family."
Each Option Grant and Stock Award or right under any Option Grant and Stock Award shall be exercisable during the Participant's lifetime only by the Participant, or by a member of such Participant's immediate family or a trust or family partnership for members of such immediate family pursuant to a transfer as described above, or if permissible under applicable law, by the Participant's guardian or legal representative. No Option Grant and/or Stock Award or right under any such Option Grant and/or Stock Award may be pledged, alienated, attached or otherwise encumbered, any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Corporation.
18. DEFERRAL OF AWARDS
The Committee may, in its discretion and subject to such rules as it may adopt, permit a Participant to defer all or a portion of such shares of Common Stock otherwise deliverable pursuant to the Plan.
19. EFFECTIVE DATE OF THE PLAN
The Plan as amended and restated shall become effective as of the date of approval of this Plan by the Board and the stockholders of the Company.
Exhibit 12(a)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Six Months Ended
June 30, Years Ended December 31,
---------------- ------------------------------------------
(millions except ratios) 2000 1999 1999 1998 1997 1996 1995
------- -------- ------- -------- -------- ------- --------
Income from continuing operations
before provision for income taxes (1) $ 446 $ 356 $ 635 $ 931 $ 542 $ 446 $ 458
Add back fixed charges:
Interest on indebtedness 64 45 105 87 70 45 56
Interest on ESOP - 1 1 2 3 4 5
Portion of rents representative of
interest factor 25 25 49 51 44 29 21
------- -------- ------- -------- -------- ------- --------
Income as adjusted $ 535 $ 427 $ 790 $1,071 $ 659 $ 524 $ 540
======= ======== ======= ======== ======== ======= ========
Fixed charges:
Interest on indebtedness $ 64 $ 45 $ 105 $ 87 $ 70 $ 45 $ 56
Interest on ESOP - 1 1 2 3 4 5
Portion of rents representative of
interest factor 25 25 49 51 44 29 21
------- -------- ------- -------- -------- ------- --------
Total fixed charges $ 89 $ 71 $ 155 $ 140 $ 117 $ 78 $ 82
======= ======== ======= ======== ======== ======= ========
Ratio of earnings to fixed charges 6.0 6.0 5.1 7.6 5.6 6.7 6.6
======= ======== ======= ======== ======== ======= ========
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $163 million for the six
months ended June 30, 1999 and $313 million, $172 million and $90 million
for the years ended December 31, 1999, 1997 and 1996, respectively.
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Exhibit 12(b)
Aon CORPORATION AND CONSOLIDATED SUBSIDIARIES
COMBINED WITH UNCONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
Six Months Ended
June 30, Years Ended December 31,
---------------- ------------------------------------------
(millions except ratios) 2000 1999 1999 1998 1997 1996 1995
------- -------- ------- -------- -------- ------- --------
Income from continuing operations
before provision for income taxes (1) $ 446 $ 356 $ 635 $ 931 $ 542 $ 446 $ 458
Add back fixed charges:
Interest on indebtedness 64 45 105 87 70 45 56
Interest on ESOP - 1 1 2 3 4 5
Portion of rents representative of
interest factor 25 25 49 51 44 29 21
------- -------- ------- -------- -------- ------- --------
Income as adjusted $ 535 $ 427 $ 790 $1,071 $ 659 $ 524 $ 540
======= ======== ======= ======== ======== ======= ========
Fixed charges and preferred stock dividends:
Interest on indebtedness $ 64 $ 45 $ 105 $ 87 $ 70 $ 45 $ 56
Preferred stock dividends 35 35 70 70 82 29 38
------- -------- ------- -------- -------- ------- --------
Interest and dividends 99 80 175 157 152 74 94
Interest on ESOP - 1 1 2 3 4 5
Portion of rents representative of
interest factor 25 25 49 51 44 29 21
------- -------- ------- -------- -------- ------- --------
Total fixed charges and preferred
stock dividends $ 124 $ 106 $ 225 $ 210 $ 199 $ 107 $ 120
======= ======== ======= ======== ======== ======= ========
Ratio of earnings to combined fixed
charges and preferred stock dividends (2) 4.3 4.0 3.5 5.1 3.3 4.9 4.5
======= ======== ======= ======== ======== ======= ========
(1) Income from continuing operations before provision for income taxes and
minority interest includes special charges of $163 million for the six
months ended June 30, 1999 and $313 million, $172 million and $90 million
for the years ended December 31, 1999, 1997 and 1996, respectively.
(2) Included in total fixed charges and preferred stock dividends are $33
million for the six months ended June 30, 2000 and 1999, $66 million for
the years ended December 31, 1999 and 1998, and $64 million for the year
ended December 31, 1997, of pretax distributions on the 8.205% mandatorily
redeemable preferred capital securities which are classified as "minority
interest" on the condensed consolidated statements of income.
|
Exhibit 15
Board of Directors and Stockholders
Aon Corporation
We are aware of the incorporation by reference in the Registration Statements of Aon Corporation ("Aon") described in the following table of our report dated August 10, 2000 relating to the unaudited condensed consolidated interim financial statements of Aon Corporation that are included in its Form 10-Q for the quarter ended June 30, 2000:
Form Number Purpose
---- ------ -------
S-8 33-27984 Pertaining to Aon's savings plan
S-8 33-42575 Pertaining to Aon's stock award plan and stock
option plan
S-8 33-59037 Pertaining to Aon's stock award plan and stock
option plan
S-4 333-21237 Offer to exchange Capital Securities of Aon Capital A
S-3 333-50607 Pertaining to the registration of 369,000 shares of
common stock
S-8 333-55773 Pertaining to Aon's stock award plan, stock option
plan and employee stock purchase plan
S-3 333-78723 Pertaining to the registration of debt securities,
preferred stock and common stock
|
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part of the registration statements prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Chicago, Illinois
August 10, 2000
|
| ARTICLE 5 |
| This schedule contains summary financial information extracted from Condensed Consolidated Statements of Financial Position and Condensed Consolidated Statements of Income and is qualified in its entirety by reference to such financial statements. |
| MULTIPLIER: 1,000,000 |
| CURRENCY: USD |
| PERIOD TYPE | 6 MOS | |
| FISCAL YEAR END | DEC 31 2000 | |
| PERIOD START | JAN 01 2000 | |
| PERIOD END | JUN 30 2000 | |
| EXCHANGE RATE | 1.0 | |
| CASH | 3,252 | 1 |
| SECURITIES | 2,946 | 2 |
| RECEIVABLES | 8,389 | |
| ALLOWANCES | 90 | |
| INVENTORY | 0 | |
| CURRENT ASSETS | 0 | 3 |
| PP&E | 1,502 | |
| DEPRECIATION | 824 | |
| TOTAL ASSETS | 22,095 | |
| CURRENT LIABILITIES | 0 | 3 |
| BONDS | 1,818 | 4 |
| PREFERRED MANDATORY | 850 | 5 |
| PREFERRED | 0 | |
| COMMON | 260 | |
| OTHER SE | 2,827 | |
| TOTAL LIABILITY AND EQUITY | 22,095 | |
| SALES | 0 | |
| TOTAL REVENUES | 1,819 | |
| CGS | 0 | |
| TOTAL COSTS | 0 | |
| OTHER EXPENSES | 1,591 | 6 |
| LOSS PROVISION | 0 | |
| INTEREST EXPENSE | 33 | |
| INCOME PRETAX | 228 | |
| INCOME TAX | 89 | |
| INCOME CONTINUING | 139 | |
| DISCONTINUED | 0 | |
| EXTRAORDINARY | 0 | |
| CHANGES | 0 | |
| NET INCOME | 129 | |
| EPS BASIC | 0.50 | |
| EPS DILUTED | 0.49 |
| 1 | Includes short term investments. |
| 2 | Includes fixed maturities and equity securities at fair value. |
| 3 | Not applicable based on current reporting format. |
| 4 | Represents notes payable. |
| 5 | Redeemable preferred stock. Includes Company obligated Mandatorily Redeemable Preferred Capital Securities of Subsidiary Trust Holding Solely the Company's Junior Subordinated Debentures. |
| 6 | Represents total expenses. |