<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
March 27, 1997
(Date of earliest event reported)
Marsh & McLennan Companies, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 1-5998 36-266-8272
(State of (Commission File No.) (IRS Employer
Incorporation) Identification No.)
1166 Avenue of the Americas
New York, New York
(Address of principal executive offices)
10036
(zip code)
(212) 345-5000
(Registrant's telephone number, including area code)
Exhibit Index is located on Page 6
<PAGE>
Item 2. Acquisition or Disposition of Assets
On March 27, 1997, Marsh & McLennan Companies, Inc. (the
"Registrant") consummated a strategic business combination with Johnson &
Higgins ("J&H"), pursuant to a Stock Purchase Agreement, dated as of March 12,
1997 and amended as of March 27, 1997 (the "Stock Purchase Agreement"), among
J&H, the stockholders of J&H, and the Registrant, whereby the Registrant
purchased from the stockholders of J&H all outstanding shares of common stock of
J&H (the "Transaction") and J&H became a wholly owned subsidiary of the
Registrant. Pursuant to the terms of the Stock Purchase Agreement, the total
Transaction payments to be made by the Registrant are approximately $1.8
billion, one-third payable in cash and two-thirds payable in the Registrant's
common stock, par value $1.00 per share. The terms of the Transaction were
determined as a result of arms' length negotiations.
The Registrant obtained the funds necessary to finance the cash
portion of the Transaction paid at the closing through a commercial paper
facility and expects to refinance such borrowings with bank financings in the
near future. The Registrant expects to finance any additional payments to be
made in connection with the Transaction with commercial paper or bank
financings.
Established in New York in 1845, J&H is the leading privately held
insurance services and employee benefit consulting firm in the world. In
addition to brokerage services, the firm provides risk management and benefit
consulting services to clients worldwide. The firm's global network of almost
9,000 employees includes 145 offices in major business centers around the world.
The foregoing description is qualified in its entirety by reference
to the Stock Purchase Agreement a copy of which is an exhibit hereto and is
incorporated by reference herein in its entirety.
Cautionary Statement Regarding Forward-Looking Information
All statements contained in the pro forma financial information
filed as an exhibit to this report, other than statements of historical facts,
which address activities, events or developments that the Registrant expects or
anticipates will or may occur in the future, including statements related to
anticipated future savings, are forward-looking statements. For a description of
certain important factors that could cause actual results to differ materially
from those expressed in any forward-looking statements contained herein,
reference is made to Item 5 of the Company's Current Report on Form 8-K, dated
March 14, 1997, which has been filed with the Securities and Exchange
Commission.
2
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired.
The audited consolidated financial statements of J&H for the year
ended December 31, 1996 is filed as an exhibit hereto. A copy of the
manually signed accountant's report required to be filed herewith is
filed as an exhibit hereto.
(b) Pro Forma Financial Information.
The pro forma financial data required to be filed herewith is filed
as an exhibit hereto.
(c) Exhibits
2(a) Stock Purchase Agreement, dated as of March 12, 1997, by and
among the Registrant, J&H and the stockholders of J&H.(1)
2(b) First Amendment to the Stock Purchase Agreement, dated as of
March 27, 1997, by and among the Registrant, J&H and the
stockholders of J&H.
4(a) Registration Rights Agreement, dated as of March 12, 1997,
by and among the Registrant and the stockholders of J&H.(2)
4(b) First Amendment to the Registration Rights Agreement, dated as
of March 27, 1997, by and among the Registrant and the
stockholders of J&H.
23(a) Consent of Arthur Andersen LLP.
- --------
(1) Incorporated by reference to Exhibit 2(a) of the Registrant's Form 8-K,
dated March 14, 1997 (File # 1-5998).
(2) Incorporated by reference to Exhibit 4(a) of the Registrant's Form 8-K,
dated March 14, 1997 (File # 1-5998).
3
<PAGE>
99(a) Consolidated Financial Statements of J&H.
-Report of Independent Public Accountants
-Consolidated Balance Sheet as of December 31, 1996
-Consolidated Statements of Income, Changes in
Stockholders' Equity and Cash Flows for the year
ended December 31, 1996
-Notes to Consolidated Financial Statements
99(b) Unaudited Pro Forma Condensed Combined Financial Statements.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MARSH & McLENNAN COMPANIES, INC.
By: /s/ Gregory Van Gundy
---------------------
Name: Gregory Van Gundy
Title: Secretary
Date: April 7, 1997
5
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
2(a) Stock Purchase Agreement, dated as of March 12, 1997, by and
among the Registrant, J&H and the stockholders of J&H.(1)
2(b) First Amendment to the Stock Purchase Agreement, dated as of
March 27, 1997, by and among the Registrant, J&H and the
stockholders of J&H.
4(a) Registration Rights Agreement, dated March 12, 1997, by and among
the Registrant and the stockholders of J&H.(2)
4(b) First Amendment to the Registration Rights Agreement, dated as of
March 27, 1997, by and among the Registrant and the stockholders
of J&H.
23(a) Consent of Arthur Andersen LLP.
99(a) Consolidated Financial Statements of J&H.
-Report of Independent Public Accountants
-Consolidated Balance Sheet as of December 31, 1996
-Consolidated Statements of Income, Changes in
Stockholders' Equity and Cash Flows for the
year ended December 31, 1996
-Notes to Consolidated Financial Statements
99(b) Unaudited Pro Forma Condensed Combined Financial Statements.
- --------
(1) Incorporated by reference to Exhibit 2(a) of the Registrant's Form 8-K,
dated March 14, 1997 (File # 1-5998).
(2) Incorporated by reference to Exhibit 4(a) of the Registrant's Form 8-K,
dated March 14, 1997 (File # 1-5998).
6
<PAGE>
Exhibit 2(b)
FIRST AMENDMENT TO THE
STOCK PURCHASE AGREEMENT
First Amendment, dated as of March 27, 1997 (the "First Amendment"),
to the Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of
March 12, 1997, between Johnson & Higgins, a New Jersey corporation (the
"Company"), the stockholders of the Company listed on Annex A to the Stock
Purchase Agreement (each such stockholder, a "Seller") and Marsh & McLennan
Companies, Inc., a Delaware corporation ("Buyer," and together with the Company
and Sellers, the "Parties").
WHEREAS, the Parties entered into the Stock Purchase Agreement,
providing for the terms of the business combination of the Company and Buyer;
and
WHEREAS, the Parties, in accordance with Section 10.1 to the Stock
Purchase Agreement, desire to amend the terms of such agreement;
NOW, THEREFORE, in consideration of the premises and mutual
representations, warranties and covenants contained in the Stock Purchase
Agreement, and subject to and on the terms and conditions set forth therein, the
Parties agree as follows:
Section 1. Amendment of Delivery of Stock Consideration Requirement.
The final sentence of Section 1.2(b) is amended to read as follows:
"Notwithstanding the foregoing requirement of delivery of the Stock
Consideration at the Closing, if Buyer is unable to deliver certificates
representing the Stock Consideration at Closing, the Closing shall occur in
any event, and Buyer shall deliver such certificates in accordance with the
foregoing as soon as practicable thereafter, but not later than April 9,
1997 and no Seller shall have any right of action against Buyer with
respect to such delivery occurring after the Closing if made as provided
herein."
<PAGE>
The following sentence is added at the end of Section 1.2(b):
"Notwithstanding anything in this Section 1.2(b) and the Retiree
Agreements, Buyer shall wire transfer the Cash Consideration payable to the
Sellers and Retirees, respectively, at the Closing, net of any amounts
payable by the Company with respect to Taxes (including withholding,
unemployment, social security, and other Taxes) in amounts agreed upon by
the Company and Buyer before the Closing (which amounts Buyer would be
responsible for paying to the relevant authorities), to an account
designated by the Sellers' Committee, and the Sellers' Committee shall be
responsible for paying to each such Seller or Retiree, the amount due to
such Seller or Retiree.
Section 2. Amendment of Appointment of Directors and Officers of
Insurance Brokerage Holding Company. The second, third and fourth sentences of
Section 6.5(b)(iii) are amended to read as follows:
"Buyer shall cause the board of directors and executive officers of the
Insurance Brokerage Holding Company to consist of Persons whose identity
and positions shall be determined, in accordance with this Section
6.5(b)(iii), by Buyer and the Sellers' Committee in consultation and
cooperation with one another. Such directors and executive officers shall
be employees of the Company or Buyer at the Closing Time. Such directors
and executive officers and their positions shall be set forth on Annex B
hereto, which Annex shall be prepared before April 30, 1997 and be subject
to the approval of the Executive Committee of the Board of Directors of
Buyer (which Buyer shall seek to obtain promptly following the preparation
of such schedules) and such Annex will be initialled by Buyer, the Company
and the Sellers' Committee."
Section 3. Amendment of Employee Award Agreements. The fourth,
fifth, sixth and seventh sentences of Section 6.5(c)(ii) are amended to read as
follows:
2
<PAGE>
"The Company and Buyer will use their respective best efforts to reach a
good faith agreement as to the names and other items to be specified in
Annex C as soon as practicable after the Closing but not later than May 31,
1997. A completed version of Annex C setting forth all such agreed upon
items shall be added to and made a part of this Agreement not later than
such specified date. Any Buyer Common Stock to be specified for an employee
in such version of Annex C shall be expressed as a dollar amount, and the
number of shares issuable under such employee's Employee Award Agreement
shall be determined prior to such specified date by dividing such specified
dollar amount by the Closing Stock Price, with any resulting fractional
share being Rounded. The number of shares of Buyer Common Stock issuable
under each Employee Award Agreement shall be set forth in the amended
version of Annex C, which shall be added to and made a part of this
Agreement prior to such specified date."
The following Section 6.5(c)(v) is added to the Stock Purchase
Agreement:
"(v) All actions to be taken by the Company with respect to Section
6.5(c) shall be taken by the Sellers' Committee."
Section 4. Amendment to Escrow Agreements. Section 6.14(a) is
amended to read as follows:
"(a) At the Closing, Buyer, Sellers, the Escrow Agent and each Retiree with
an effective Retiree Agreement at the Closing shall enter into an escrow
agreement substantially in the form of Exhibit D hereto (the "Indemnity
Escrow Agreement"). Buyer shall designate the Escrow Agent subject to the
Company's approval which shall not be unreasonably withheld. On April 9,
1997, Buyer will deliver an amount equal to ten percent of the Total
Purchase Price, consisting of shares of Buyer Common Stock to be funded by
Sellers and Retirees with effective Retiree Agreements as of April 2, 1997
or such other date not later than April 8, 1997 as the Sellers' Committee
may request (the "Effective Date") as provided below
3
<PAGE>
(the "Escrow Fund"), to the Escrow Agent in accordance with the terms of
the Indemnity Escrow Agreement to secure certain obligations of the Sellers
pursuant to this Agreement. Pursuant to the Indemnity Escrow Agreement, the
Escrow Agent shall hold the Escrow Fund for a period of two years following
the Closing subject to asserted claims for indemnification. Each Retiree
executing a Retiree Agreement shall have appointed the Seller's Committee
to act as his or her attorney-in-fact with respect to the matters set forth
in the Indemnity Escrow Agreement. Notwithstanding the foregoing, on the
first anniversary of the Closing Date, the Escrow Agent shall release to
the Sellers' Committee an amount equal to one-half of the Escrow Fund,
reduced by any amounts paid to Buyer prior to such anniversary date and any
amounts then reserved with respect to any unresolved asserted claims for
Damages made by the Buyer Group all as is provided in the Indemnity Escrow
Agreement. The Escrow Fund initially will consist of a number of shares of
Buyer Common Stock to be contributed ratably by each Seller and each
Retiree with an effective Retiree Agreement as of the Effective Date in an
amount equal to such Person's proportionate interest (based on the amount
to be received by such Person for their Shares or under their Retiree
Agreements, as the case may be) in the amount equal to the sum of (x) the
Total Purchase Price and (y) the aggregate payments to be received by the
Retirees with effective Retiree Agreements as of the Effective Date under
such Retiree Agreements. The Sellers' Committee and Buyer will discuss in
good faith the appropriateness of including as part of the Escrow Fund a
portion of the shares of Buyer Common Stock to be issued to Retirees
executing Retiree Agreements after the Effective Date. In respect of the
shares placed in the Escrow Fund, the number of shares of Buyer Common
Stock deliverable hereunder to each such Seller and Retiree will be reduced
by the amount to be delivered to the Escrow Agent as part of the Escrow
Fund; provided, that the shares to be delivered into the Escrow Fund on
behalf of each such Seller and Retiree shall be drawn first from the shares
of such Person that are subject to transfer restrictions under Section 7(a)
of the
4
<PAGE>
Registration Rights Agreement until the second anniversary of the Closing
Date and thereafter, as necessary from the shares of such Person that are
subject to such resale restrictions until the first anniversary of the
Closing Date (with any resulting fractional share being Rounded)."
Section 5. Amendment to Closing Company Financial Information. The
following Section 6.16(d) is added to the Stock Purchase Agreement:
"(d) For purposes of this Section 6.16, the 'Closing Date' shall be deemed
to mean March 31, 1997. For the purposes of this Section 6.16 and Section
6.17, the 'Pre-Closing Period' shall be deemed to mean the period
commencing on January 1, 1997 and ending on March 31, 1997."
Section 6. Amendment to Definition of "Closing Stock Price." The
definition of "Closing Stock Price" in Section 11.1 is amended to read as
follows:
"'Closing Stock Price' shall mean the average of the per share closing
prices of Buyer Common Stock as reported on the NYSE composite transactions
reporting system (as reported in the New York City edition of The Wall
Street Journal or, if not reported thereby, another authoritative source)
for the five consecutive trading days in such market ending on the first
trading day immediately preceding the Closing Date, provided that (i) if
such average price shall be more than $129, the Closing Stock Price shall
be deemed to be $129, and (ii) if such average price shall be less than
$111, the Closing Stock Price shall be deemed to be $111."
Section 7. Amendment of Share Numbers. Annex A to the Stock Purchase
Agreement is amended to read as set forth in Annex A to this Amendment. Section
6.1(b)(v)(A) is amended to read as follows:
"(A) in the case of the Company, repurchases of up to 33,000
shares of Company Common Stock for cash in an amount not in
excess of $10 per share (it being understood that the Company
will repur-
5
<PAGE>
chase, to the extent available in the case of each Seller from
whom the Company elects to repurchase shares, shares which are
presently non-dividend bearing, prior to repurchasing shares
which are presently dividend bearing) and".
The second and third sentences of Section 2.4(a) are amended as follows:
"Immediately prior to the Closing, 22,335 shares of Company Common
Stock will be issued and outstanding and all such outstanding shares
have been duly authorized and are validly issued, fully paid and
nonassessable. At the Closing, the Sellers' Shares, in the
aggregate, will constitute all the issued and outstanding shares of
capital stock of the Company."
The first parenthetical clause in Section 2.6 is amended to read as follows:
"(including the payment of any dividend, distribution or other
amount contemplated by Section 6.17 and any repurchase of shares contemplated by
Section 6.1(b)(v)(A))".
Section 8. Stock Purchase Agreement as Amended. The term "Agreement"
as used in the Stock Purchase Agreement shall be deemed to refer to the Stock
Purchase Agreement as amended hereby. The foregoing amendments shall be
effective as of the date hereof and, except as set forth herein, the Stock
Purchase Agreement shall remain in full force and effect and shall be otherwise
unaffected hereby.
Section 9. Execution in Counterparts. This Amendment may be executed
in any number of counterparts and each of such counterparts shall for all
purposes be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
Section 10. GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE MADE
IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
6
<PAGE>
IN WITNESS WHEREOF, this Amendment has been signed on behalf of each
of the parties hereto as of the date first written above.
JOHNSON & HIGGINS
By:/s/ Gardner M. Mundy
----------------------------------
Name: Gardner M. Mundy
Title: General Counsel
SELLERS' DESIGNEE
By:/s/ Gardner M. Mundy
----------------------------------
Name: Gardner M. Mundy
MARSH & MCLENNAN
COMPANIES, INC.
By:/s/ Barry W. Furst
----------------------------------
Name: Barry W. Furst
Title: Vice President
7
<PAGE>
Exhibit 4(b)
FIRST AMENDMENT TO THE
REGISTRATION RIGHTS AGREEMENT
First Amendment, dated as of March 27, 1997 (the "First Amendment"),
to the Registration Rights Agreement (the "Registration Rights Agreement"),
dated as of March 12, 1997, between Marsh & McLennan Companies, Inc., a Delaware
corporation (the "Company"), and the other persons signatories thereto (each
such person, a "Stockholders").
WHEREAS, the Company and Stockholders have entered into the
Registration Rights Agreement pursuant to the terms of the Stock Purchase
Agreement, dated as of March 12, 1997, between Johnson & Higgins, a New Jersey
corporation ("Johnson & Higgins"), the Sellers (as defined in the Registration
Rights Agreement) and the Company; and
WHEREAS, the Company and Sellers' Designee, in accordance with
Section 8(b) of the Registration Rights Agreement, desire to amend the terms of
such agreement;
NOW, THEREFORE, for their own benefit and the benefit of holders (as
defined in the Registration Rights Agreement) from time to time of the
Registrable Securities (as defined in the Registration Rights Agreement), the
Company and Sellers' Designee agree as follows:
Section 1. Amendment of Shelf Registration. The first sentence of
Section 2(a)(1) is amended to read as follows:
"The Company shall, as soon as practicable after the date hereof and in
any case within 21 calendar days following the Closing Date (as defined in
the Stock Purchase Agreement), subject to extension if the Sellers'
Designee or Sellers' Committee so requests, file with the Commission a
Shelf Registration Statement relating to the offer and sale of the
Registrable Securities."
Section 2. Registration Rights Agreement as Amended. The term
"Agreement" as used in the Registration Rights Agreement shall be deemed to
refer to the Registration Rights Agreement as amended hereby. The foregoing
amendments shall be effective as of the date hereof and,
<PAGE>
except as set forth herein, the Registration Rights Agreement shall remain in
full force and effect and shall be otherwise unaffected hereby.
Section 3. Execution in Counterparts. This Amendment may be executed
in any number of counterparts and each of such counterparts shall for all
purposes be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
Section 4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
2
<PAGE>
IN WITNESS WHEREOF, this Amendment has been signed on behalf of each
of the parties hereto as of the date first written above.
MARSH & McLENNAN COMPANIES, INC.
By: /s/ Gregory Van Gundy
-------------------------
Name: Gregory Van Gundy
Title: Secretary
SELLERS' DESIGNEE
By: /s/ Gardner M. Mundy
-------------------------
Name: Gardner M. Mundy
3
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Form 8-K of our report to the Board of Directors of Johnson & Higgins dated
March 11, 1997. It should be noted that we have not audited any financial
statements of Johnson & Higgins subsequent to December 31, 1996 or performed any
audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
------------------------
ARTHUR ANDERSEN LLP
April 4, 1997
New York, New York
<PAGE>
Exhibit 99(a)
JOHNSON & HIGGINS AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Johnson & Higgins:
We have audited the accompanying consolidated balance sheet of Johnson & Higgins
(a New Jersey corporation) and subsidiaries as of December 31, 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Johnson & Higgins and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
New York, New York
March 11, 1997
<PAGE>
JOHNSON & HIGGINS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(In thousands)
ASSETS 1996
- ------ ------
CURRENT ASSETS:
Cash and cash equivalents
Operating funds $250,288
Premium funds 462,112
Trustee accounts 5,911
----------
718,311
Marketable securities
Operating funds 8,000
Premium funds 50,063
----------
58,063
Commissions, insurance premiums, reinsurance
balances and consulting fees receivable 966,119
Other current assets 68,869
----------
Total Current Assets 1,811,362
Investments segregated to fund non-qualified retirement plans 76,914
Investments in affiliates 38,280
Loan receivable 13,020
Deferred Income Tax asset 54,902
Fixed Assets, net 168,430
Intangible Assets, net 246,768
----------
Total Assets $2,409,676
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Insurance premiums and reinsurance balances payable $1,301,063
Funds held for insureds 5,911
Accrued expenses 132,687
Income and other taxes payable 28,204
Notes payable 3,926
Other current liabilities 91,508
----------
Total Current Liabilities 1,563,299
Long-term debt 130,813
Accrued Retirement Benefits 141,474
Postretirement Benefits Other than Pensions 44,383
Other Long-term Liabilities 40,473
Minority Interests 27,048
Total Stockholders' Equity 462,186
----------
Total Liabilities & Stockholders' Equity $2,409,676
==========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
JOHNSON & HIGGINS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands) 1996
------
REVENUES:
Commissions and fees $1,106,535
Investment Income
Operating Funds 18,258
Premium Funds 28,603
Other 9,381
----------
1,162,777
----------
EXPENSES:
Compensation and Benefits 685,730
Selling, General and Administrative 341,133
Interest Expense 12,370
----------
1,039,233
----------
Income Before Taxes 123,544
PROVISION FOR INCOME TAXES (46,728)
MINORITY INTEREST IN INCOME OF
SUBSIDIARIES (5,811)
EQUITY IN INCOME OF AFFILIATES 3,190
----------
NET INCOME $74,195
==========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
JOHNSON & HIGGINS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands, except share information) 1996
------
CAPITAL STOCK/ADDITIONAL PAID-IN CAPITAL
($1 par value, 100,000 shares authorized, 83,240 shares issued,
including 28,275 shares in treasury)
Balance, beginning of year $31,965
Issuance of Capital Stock, net of repurchases 11
Tax Effect of Distributions 5,884
--------
Balance, end of year $37,860
========
RETAINED EARNINGS
Balance, beginning of year $378,714
Net Income 74,195
Cash Distributions (16,939)
--------
Balance, end of year $435,970
========
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year $(14,852)
Translation Adjustments (5,693)
--------
Balance, end of year $(20,545)
========
NET UNREALIZED INVESTMENT GAIN
Balance, beginning of year $14,500
Realized Gain (5,352)
Net Unrealized Loss (247)
--------
Balance, end of year $8,901
========
TOTAL STOCKHOLDERS' EQUITY $462,186
========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
JOHNSON & HIGGINS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands) 1996
------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $74,195
Adjustments to reconcile net income to net cash
provided from operating activities -
Depreciation and amortization 40,697
Minority interest in income of subsidiaries 5,811
Equity in income of affiliates (3,190)
Deferred income taxes (4,579)
Gain on sales of fixed assets (135)
Gain on sale of investment in affiliates (7,064)
--------
105,735
Changes in Assets and Liabilities (see Note 14) 47,339
--------
Net cash provided from operating activities 153,074
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 17,291
Purchase of investments in affiliates (19,900)
Investments segregated to fund certain retirement benefits (5,387)
Purchases of fixed assets (43,741)
Proceeds from sales of fixed assets 2,212
Purchases of marketable securities (12,735)
Sales of marketable securities 10,798
Other, net (6,442)
--------
Net cash used in investing activities (57,904)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (16,939)
Repayments of debt (3,587)
Payments received on Note Receivable 784
Issuance of stock, net of repurchases 11
--------
Net cash used in financing activities (19,731)
Net increase in cash and cash equivalents 75,439
OPERATING CASH, beginning of year 174,849
--------
OPERATING CASH, end of year $250,288
========
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
JOHNSON & HIGGINS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. NATURE OF OPERATIONS
Johnson & Higgins (the "Company") is a global leader in insurance brokerage and
risk management services. The Company operates in over 70 countries,
predominantly in the U.S., working with leading insurers to provide all lines of
commercial property and casualty insurance coverage.
The Company derives most of its revenues from insurance brokerage but services
also include reinsurance brokerage, risk and loss control, claims management,
actuarial and employee benefit services, strategic risk analysis, and captive
management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and majority-owned subsidiaries. Investments in affiliated companies, in
which the Company has significant influence or ownership of 20% to 50%, are
accounted for under the equity method. Investments with ownership of less than
20% are accounted for under the cost method. Various subsidiaries and affiliates
have transactions with each other in the ordinary course of business. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Commissions, together with the related insurance premiums receivable from
clients and premiums payable to underwriters, are recognized on the later of the
effective or billing date of the related insurance policies. Commissions billed
prior to the effective date of the related insurance policies are deferred and
are included in "Other current liabilities" in the accompanying consolidated
balance sheet. Commissions on insurance policies billed and collected directly
by insurance companies are recognized upon notification by the insurance
companies. Contingent commissions are recognized when received. Premium
adjustments, including policy cancellations, are recognized as they occur.
Reinsurance commissions and fees, and the related receivable and payable
balances, are generally recognized when billed. Losses receivable and payable,
included in the respective reinsurance balances, are recorded upon notification
of loss by insureds.
<PAGE>
-2-
Fees for employee benefit plan, actuarial and other consulting services rendered
are recognized when billed, which generally coincides with the performance of
such services.
Cash and Cash Equivalents
The Company considers as cash equivalents all short-term, highly liquid
investments with original maturities of less than 90 days made as part of its
cash management activities. Operating funds' cash equivalents consist of money
market mutual funds and money market instruments, U.S. Treasury, U.S. Government
Agencies and foreign government notes, variable rate demand notes, banker's
acceptances and commercial paper. Premium funds' cash equivalents consist
primarily of certificates of deposit, U.S. Treasury bills and notes, Securities
of U.S. Government Agencies, Foreign Certificates of Deposit, Foreign Time
Deposits, and repurchase agreements, which are fully collateralized by U.S.
government securities held by the Company's custodian bank.
Marketable Securities
At December 31, 1996, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, marketable securities classified as held-to-maturity
were carried at amortized cost with no effect on income or stockholders' equity.
Available-for-sale securities were carried at fair market value with unrealized
gains and losses excluded from income and recorded, net of income tax, as a
separate component of stockholders' equity. The Company had no securities
classified as trading.
Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation and
amortization. Major improvements are capitalized while maintenance and repairs
are expensed currently. Software costs are expensed as incurred. Upon sale or
retirement, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss, if any, is reflected in income.
Depreciation expense is computed using the double declining balance method for
furniture, fixtures and equipment and the straight-line method for buildings
based upon the estimated useful lives of the related assets, as follows:
Furniture, fixtures and equipment 5 to 8 years
Buildings 25 to 50 years
Leasehold improvements are depreciated using the straight-line method over the
shorter of their estimated useful lives or the terms of the related leases.
Depreciation expense for 1996 totaled $32.9 million.
Intangible Assets, Net
Intangible assets, net includes the excess of cost over the fair value of
tangible net assets of purchased businesses, less accumulated amortization
provided by using the straight-line method over periods not exceeding 40 years.
As of December 31, 1996, accumulated amortization was $38.6 million.
<PAGE>
-3-
Intangible assets, net also includes a prepaid lease obligation, which is being
amortized over the useful life of the related building, recorded in conjunction
with the purchase of a condominium interest in 1995. See Note 8 for further
discussion.
Income Taxes
Income taxes are provided in the year transactions affect financial income,
regardless of when those transactions are reported for tax purposes.
The Company and its subsidiaries file separate foreign, state and local income
tax returns and, accordingly, provide for such income taxes on a separate
company basis. The Company does not provide income taxes on undistributed
earnings of equity subsidiaries.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars
at the exchange rates in effect at the end of the year. Results of operations
are translated using a weighted average exchange rate for the year. Translation
adjustments that arise from translating the net assets of these subsidiaries
from local currency to U.S. dollars are accumulated in the Cumulative
Translation Adjustments account in Stockholders' Equity. Other foreign currency
transaction gains and losses are included in determining net income.
For foreign subsidiaries operating in highly inflationary economies, net
non-monetary assets are translated using historical rates, while net monetary
assets are translated at current rates, with the U.S. dollar effects of rate
changes included in net income. At December 31, 1996, none of the Company's
subsidiaries were determined to be operating in highly inflationary economies.
Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of the fair values of most on and off balance sheet financial
instruments for which it is practicable to estimate that value.
The estimated fair value of the Company's cash and cash equivalents, marketable
securities, receivables and payables approximates their carrying value.
Refer to Notes 7 and 8 for fair values of other financial instruments.
Recently Issued Accounting Standards
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. The Company analyzes its
long-lived assets, including goodwill, for potential impairment losses. In
determining the need for recognition of impairment, the Company analyzes future
cash flows, on an undiscounted basis, and compares such total to the carrying
value. The adoption of SFAS No. 121 had an immaterial effect on the Company's
financial position or results of operations.
<PAGE>
-4-
3. INVESTMENTS
The following is a summary of investments included in the Consolidated Balance
Sheet:
(In thousands)
Dec. 31, 1996
-------------
Available-for-sale $97,038
Held-to-maturity $58,063
Available-for-sale securities include the Company's investment in GCR (see Note
7) and Investments Segregated to Fund Certain Retirement Benefits which consist
primarily of money market instruments, corporate convertible and equity
securities, tax-exempt debt securities, and corporate bonds. Held-to-maturity
securities are operating and premium funds' marketable securities. Operating
funds marketable securities consist primarily of certificates of deposit and
municipal bonds. Premium funds marketable securities consist primarily of
certificates of deposit, U.S. Treasury bills and notes, variable rate notes,
foreign certificates of deposit and commercial paper.
4. LOAN RECEIVABLE
During 1995, the Company loaned $15 million to KVI, a third-party who is part
owner in the J&H/KVI joint venture, in which the Company has a 51% interest. The
loan bears interest at a rate of Prime + 1% and matures on March 31, 1998.
In conjunction with the foregoing note receivable, the Company entered into an
agreement with KVI whereby the Company can exercise options to purchase the
remaining 49% of J&H/KVI at any time up until March 31, 1999.
5. FIXED ASSETS
The components of Fixed Assets, net are as follows:
(In thousands)
Dec. 31, 1996
-------------
Furniture, fixtures and
equipment $242,242
Leasehold Improvements 44,269
Buildings 77,152
--------
363,663
Less: accumulated depreciation
and amortization (195,233)
--------
$168,430
========
6. INCOME TAXES
Consolidated income before taxes consists of the following:
(In thousands)
1996
------
U.S. $ 66,829
Foreign 56,715
--------
$123,544
========
<PAGE>
-5-
The provision for income taxes consists of the following:
(In thousands)
1996
------
Current:
Federal $27,451
State and Local 9,500
Foreign 14,356
-------
51,307
Deferred:
Federal (2,823)
State and Local (2,000)
Foreign 244
-------
(4,579)
-------
Total provision for income taxes $46,728
=======
The deferred income tax benefit relates primarily to the excess of book over tax
expense for pension and other postretirement benefit plans.
The components of deferred tax assets and liabilities resulting from temporary
differences in the timing of deductions or income for book and tax purposes at
December 31, 1996 are as follows:
(In thousands)
Deferred Tax Assets 1996
- ------------------- ------
Pensions & Other Postretirement Benefits $ 74,045
Accrued Liabilities 9,197
State & Local Taxes 2,673
Amortization of Leasehold Improvements 3,391
Other Deferred Tax Assets 8,351
---------
97,657
---------
Deferred Tax Liabilities
- ------------------------
Unremitted Earnings of Foreign Subsidiaries ( 15,972)
Investment Losses ( 2,553)
Depreciation & Amortization ( 4,070)
Unrealized Gain on Investments ( 4,793)
Other Deferred Tax Liabilities ( 6,812)
---------
( 34,200)
---------
Deferred Tax Assets, net $ 63,457
========
<PAGE>
-6-
Through 1990, the Company provided income taxes on the unremitted earnings of
certain foreign subsidiaries. However, since that period, the Company has not
provided for federal income taxes on the unremitted earnings of its
international operations that have been, or are intended to be, reinvested
indefinitely. At December 31, 1996, the unrecognized deferred tax liability on
unremitted foreign earnings is $26.0 million.
Net long-term deferred tax assets at December 31, 1996 totaled $54.9 million.
The current portion of net deferred tax assets is included in "Other current
assets" in the accompanying consolidated balance sheet.
The Company's effective income tax rate was 37.8% in 1996. A reconciliation of
this rate to the U.S. Federal statutory income tax rate is as follows:
1996
------
U.S. Federal statutory rate 35.0%
U.S. state and local income taxes, net
of U.S. Federal income tax benefit 3.0
Amortization of goodwill 1.4
Non-deductible portion of
meals and entertainment 2.1
Tax-exempt interest income (0.8)
Losses on non-U.S. operations with
no related tax benefit 0.2
Non-U.S. operations taxed at rates lower
than U.S. Federal statutory rate (3.6)
Other, net 0.5
----
Effective tax rate 37.8%
====
The Company's consolidated Federal income tax returns for the years ended
December 31, 1992 through 1994 are presently under examination by the Internal
Revenue Service. Based on the results of the examinations completed for prior
years, it is the opinion of management that any assessment which may result will
not have a material effect on the financial position of the Company.
7. ACQUISITIONS AND DIVESTITURES
During 1996, the Company acquired several brokers located in the U.K., the
Netherlands, and the U.S. for a total cost of $27 million. The cost of these
acquisitions exceeded the fair value of net assets acquired by $25 million. The
effect of these acquisitions was not material to the Company's results of
operations.
During 1993, the Company and Goldman, Sachs & Co. promoted and co-sponsored the
offering of equity interests in Global Capital Reinsurance, Ltd. ("GCR"). GCR
was capitalized through a private placement in October 1993, and specializes in
worldwide property catastrophe reinsurance written on an excess of loss basis.
The Company purchased 4.4% of the shares offered.
<PAGE>
-7-
During 1995, the Company exercised its option to buy additional shares which
brought its ownership up to 7.5%. Subsequently, GCR completed an initial public
offering (IPO) whereby it sold 26% of its shares to the public. As part of the
IPO, the Company sold some of its shares, reducing its ownership to 6.4%. During
1996, GCR completed a secondary public offering whereby the Company sold more of
its shares, reducing its ownership to 3.7%. Gains related to the partial
disposition of GCR shares of $7.1 million in 1996 are included in Revenues
(primarily "Commissions and fees") in the accompanying consolidated income
statement.
The Company's investment in GCR is carried at fair value based on a quoted
market price of $20 million at December 31, 1996, and is included in
"Investments in affiliates" in the accompanying consolidated balance sheet.
8. LONG-TERM DEBT
Long-term debt consists of:
(In thousands) Dec. 31, 1996
-------------
Notes Payable $134,739
Less: Current Portion 3,926
--------
$130,813
========
In 1995, the Company entered into two long-term debt transactions.
The Company borrowed $21.3 million and issued a mortgage obligation, with an
expiration date of January 5, 2012, to purchase a condominium interest in its
headquarters located at 125 Broad Street, New York, New York. The rate on this
debt is determined periodically at a margin of 1/2 of 1% above the LIBOR rate
(5.99% at December 31, 1996).
The Company issued a note for $120 million to enter into an arrangement whereby
a third party will pay the rent under a noncancellable long-term lease
obligation. This note has an original term of 17 years (the remaining term of
the lease). Interest on $95 million of this debt is fixed at 8.62%. The rate on
the remaining portion is determined periodically at a margin of 1/2 of 1% above
the LIBOR rate (5.99% at December 31, 1996).
In 1996, the Company entered into an amortizing interest swap with an initial
notional amount of $44 million to effectively fix the floating rate on these
obligations at a rate of 6.30%. At December 31, 1996, the interest rate swap had
a fair value of $1.7 million.
The cost of the condominium interest is reflected in buildings with the cost of
the lease arrangement included in Intangible assets, net.
The Company's debt of $135 million at December 31, 1996 has a fair value of
approximately $142 million, based on discounted future cash flows using interest
rates available for debt with similar terms and remaining maturities.
Scheduled maturities of long-term debt are as follows:
1997 - $3.9 million; 1998 - $4.2 million; 1999 - $4.6 million; 2000 - $4.9
million, 2001 - $5.3 million.
<PAGE>
-8-
In 1995, the Company entered into a $60 million Revolving Credit Agreement with
several banks. The facility, which expires in 1998, provides that the Company
may borrow up to $60 million at a variable interest rate per annum equal to the
greater of the (a) Prime Rate or (b) Federal Funds Effective Rate plus 1/2 of
1%. The Company pays a facility fee of 1/8 of 1% per annum on the total (used or
unused) commitment. The Company has not utilized the facility in 1996.
In conjunction with the debt and credit agreements, the Company is required to
maintain certain ratios and to comply with other financial covenants. As of
December 31, 1996, the Company is in compliance with all such ratios and
covenants.
9. BENEFIT PLANS
Pension Plans
Domestic
The Company has a qualified defined benefit retirement income plan covering
substantially all domestic employees. The plan provides pension benefits that
are based on the employee's years of service and compensation prior to
retirement. Pension costs are calculated using an accepted actuarial cost
method. The Company presently plans to make the maximum contribution allowed
under income tax regulations.
The Company also has non-qualified retirement plans covering certain key
executives. The Company has segregated funds to cover these benefits which are
included in "Investments segregated to fund non-qualified retirement plans" in
the accompanying consolidated balance sheet.
Foreign
The Company also has various defined benefit plans in foreign subsidiaries,
largely in the United Kingdom, Canada and Netherlands.
Pension expense for 1996 included the following components:
(In thousands)
1996
----------------------------------------------
Domestic Foreign
---------------------------------- -------
Qualified Non-qualified Total
--------- ------------- -----
Service cost $ 12,974 $ 6,134 $ 19,108 $ 7,485
Interest cost 20,890 9,158 30,048 8,282
Actual return on plan assets (57,752) -- (57,752) (8,926)
Net amortization and deferral 25,648 2,363 28,011 324
-------- ------- -------- -------
$ 1,760 $17,655 $ 19,415 $ 7,165
======== ======= ======== =======
<PAGE>
-9-
The following table presents a reconciliation of the status of the plans at
December 31, 1996:
<TABLE>
<CAPTION>
(In thousands)
December 31, 1996
----------------------------------------------
Domestic Foreign
---------------------------------- -------
Qualified Non-qualified Total
--------- ------------- -----
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested $ 243,022 $ 115,394 $ 358,416 $ 106,913
Nonvested 8,174 444 8,618 7,029
--------- --------- --------- ---------
Accumulated benefit obligation 251,196 115,838 367,034 113,942
Effects of salary progression 48,983 16,515 65,498 27,275
--------- --------- --------- ---------
Projected benefit obligation 300,179 132,353 432,532 141,217
Plan assets at fair value 396,347 -- 396,347 125,056
--------- --------- --------- ---------
Plan assets over (under)
projected benefit obligation 96,168 (132,353) (36,185) (16,161)
Unrecognized net (gain) loss (129,990) (2,416) (132,406) 4,829
Unrecognized net (asset) liability (6,115) 13,543 7,428 1,576
Unrecognized prior service cost 11,756 15,368 27,124 2,321
--------- --------- --------- ---------
Accrued pension cost $ (28,181) $(105,858) $(134,039) $ (7,435)
========= ========= ========= =========
</TABLE>
The assumptions used in determining the funded status at December 31, 1996 and
the following year's pension expense were as follows:
1996
------------------------------------
Domestic Foreign
------------------------- -------
Qualified Non-qualified
--------- -------------
Weighted average discount rate 7.75% 7.75% 5-12%
Rate of salary progression 5.0% 5.0% 2-10%
Expected long-term rate of 9.0% - 5-13%
return on assets
At December 31, 1996, approximately 60% of domestic qualified plan assets were
invested in equity securities and 40% in cash equivalents, debt securities and
annuity contracts.
Cash Accumulation Plan
The Company's qualified defined contribution plan covers substantially all of
its domestic employees. Company contributions to the plan are made at the
discretion of the Company's Board of Directors. In addition, employees may
contribute to the plan with such contributions matched by the Company up to a
maximum of 6% of the employee's salary. Company contributions, including the
matching amount, for 1996 were $16.9 million.
<PAGE>
-10-
Other Postretirement Benefits
Substantially all of the Company's U.S. employees may become eligible for
certain postretirement health care and life insurance benefits if they reach
normal retirement age while working for the Company.
The cost of postretirement benefits are accrued during the service lives of
employees. The Company funds medical and life insurance benefit costs
principally on a pay-as-you-go basis.
Net periodic postretirement benefit cost included the following components:
(In thousands)
1996
------
Service cost-benefits attributed to
service during the period $1,180
Interest cost on accumulated
postretirement benefit obligation 2,501
Amortization of unrecognized gain on
accumulated postretirement obligation ( 367)
------
Net periodic postretirement benefit cost $3,314
======
The amounts recognized in the accompanying consolidated balance sheet at
December 31, 1996 were as follows:
(In thousands)
Accumulated postretirement benefit obligation:
1996
----
Retirees $20,287
Fully eligible active plan participants 2,510
Other active plan participants 12,171
-------
34,968
Unrecognized net gain 7,008
Prior unrecognized service cost 2,407
-------
Accrued postretirement benefit cost $44,383
=======
For measurement purposes, a 12.00% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was assumed
to decrease gradually to 5.5% for 2007 and remain at that level thereafter. The
Company has limited its commitment to absorbing future medical cost increases by
announcing its intentions to continue providing retiree medical coverage under
the current cost-sharing arrangement through 1997. After 1997, medical cost
increases will be the retirees' responsibility, unless the Company elects at
that time to change its commitment. A change in the health care cost trend rate
assumption ordinarily would have a significant effect on the amounts reported if
it were not for the Company's announced limitation in absorbing future medical
cost increases beyond 1997. Because of this limitation, increasing the assumed
health care cost trend rates by 1 percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31, 1996 by
$0.8 million and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year then ended by $0.1
million.
<PAGE>
-11-
At December 31, 1996, the weighted-average discount rate and rate of increase in
future compensation levels used in determining the accumulated postretirement
benefit obligation were 7.75% and 5.0%, respectively.
As part of its long-range financing plans, the Company, in 1992, implemented a
corporate-owned life insurance program covering most of its domestic employees.
After paying employee death benefits, proceeds from this program are available
for general corporate purposes and also could be used to offset future employee
benefit costs, including retiree medical benefits. The Company's investment in a
corporate-owned life insurance policy is recorded net of policy loans and the
amount at December 31, 1996 of $1.6 million is included in "Other current
assets" in the accompanying consolidated balance sheet.
10. LEASE OBLIGATIONS
The Company and certain of its subsidiaries lease office facilities and
equipment under noncancelable operating leases, expiring through 2008.
Certain of the office space leases include subleases and renewal options and are
subject to increases for cost of living, additional assessment of tax and other
adjustments. At December 31, 1996, the future minimum rental commitments under
all noncancellable operating lease agreements were as follows:
(In thousands)
1997 $ 47,394
1998 42,765
1999 36,341
2000 32,866
2001 27,958
Thereafter 104,429
---------
Total $ 291,753
=========
Consolidated rent expense for 1996 was $67.6 million.
In addition, a domestic subsidiary has lease agreements for office space and
computer equipment which are classified as capital leases. Future minimum lease
payment obligations at December 31, 1996 were as follows:
1996
----
(In thousands)
1997 $1,191
1998 1,209
1999 1,453
2000 551
2001 -
------
Total minimum lease payments 4,404
Less: Amount representing interest ( 854)
------
Present value of net minimum
lease payments $3,550
======
The above liability is included in the balance sheet captions "Other current
liabilities" and "Other Long-term liabilities".
<PAGE>
-12-
11. COMMITMENTS AND CONTINGENCIES
Payments to Former Stockholders
If dividends are paid to current stockholders, the Company is obligated to make
equivalent payments to certain retired former stockholders each year for up to
ten years after retirement. Such payments to former stockholders are based on
the number of shares held at the date of retirement which were exchanged for ten
year certificates, as provided by the Shareholders Purchase Agreement and
By-Laws. For financial statement purposes, such amounts are reflected as
distributions and the related tax effects of these distributions increase
Additional Paid-in Capital.
Claims and Lawsuits
The Company and certain of its subsidiaries are subject to claims and lawsuits
which arise in the ordinary course of business consisting principally of alleged
errors and omissions in the placement of insurance or reinsurance. In connection
with any potential litigation costs, including costs of defense and settlement,
the Company has various levels of self and third party insurance coverage. Such
coverage includes premium payments for indemnification and restricted amounts on
deposit with carriers. On the basis of information presently available,
insurance policies in place, and advice received from counsel representing the
Company and its subsidiaries, it is the opinion of management that the
disposition or ultimate determination of such claims and lawsuits against the
Company will not have a material adverse effect on the Company's financial
position or results of operations.
Although a minor part of its business, the Company also derives revenues from
reinsurance activities. The Company reinsures its risk with a non-related
insurance entity. Reinsurance does not relieve the Company of its liabilities
under the original policies; however, in the opinion of management, the
Company's reinsurer is sound and any potential exposure from non-payment is
minimal.
12. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company invests its operating and fiduciary premium cash and marketable
securities, with a large number of banks and other institutions, in certificates
of deposit, time deposits, U.S. Treasury, U.S. Government Agencies and foreign
government notes, variable rate demand notes, banker's acceptances, commercial
paper, money market funds and repurchase agreements, which are fully
collateralized by U.S. Treasury bills, notes or bonds.
Similarly, in the ordinary course of business, credit is extended to clients in
the form of accounts receivable for commissions and fees for brokerage and
consulting services. The Company believes that due to the diversification of its
portfolio and its large number of clients, there is no unusual concentration of
credit risk in either case.
The Company operates in a global marketplace and generally receives U.S. dollar
revenues. To serve this global market, the Company has established a number of
subsidiaries in foreign countries which incur local currency denominated costs,
the largest of which is in the United Kingdom. To minimize the impact of foreign
exchange movements between the U.S. dollar and the U.K. Sterling, the Company
may enter into forward exchange contracts periodically during each year to hedge
anticipated U.K. Sterling denominated costs. From time to time, the Company may
also enter into forward exchange contracts to hedge anticipated dividend flows
from foreign subsidiaries and equity affiliates. During 1995, the Company
entered into a forward exchange contract to hedge an intercompany loan
denominated in Dutch Guilders.
<PAGE>
-13-
At December 31, 1996, there were forward exchange contracts outstanding of $24.3
million, expiring through December 1997, to hedge the U.K. Sterling, and $17.4
million, expiring through November 2000, to hedge the Dutch Guilder loan.
At December 31, 1996, the U.K. Sterling and Dutch Guilder contracts had fair
values of $1.4 million and $(1.6) million, respectively.
13. SEGMENTATION BY GEOGRAPHIC AREA
The following table presents information about the Company's operations by
geographic area:
For the year ended December 31, 1996:
(In thousands)
Income
Revenue Before Taxes Total Assets
------- ------------ ------------
1996
- -----
North America $ 906,385 $ 78,135 $1,538,476
Europe 190,406 29,239 712,273
All Other 65,986 16,170 158,927
---------- ---------- ----------
$1,162,777 $ 123,544 $2,409,676
========== ========== ==========
14. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in Assets and Liabilities in the Consolidated Statement of Cash Flows,
excluding the impact of acquisitions, is comprised of:
(In thousands)
1996
---------
Premium related balances:
Cash - premium funds $(126,787)
Marketable securities - premium funds (11,192)
Insurance premiums and reinsurance balances receivable 99,874
Insurance premiums and reinsurance balances payable 38,105
---------
--
---------
Commissions and consulting fees receivable (6,638)
Other current assets 1,034
Accrued expenses and other current liabilities 17,570
Income and other taxes payable 19,452
Accrued retirement benefits 13,736
Other long-term liabilities 2,185
---------
$ 47,339
---------
<PAGE>
-14-
The impact of exchange rate changes on cash was not material at December 31,
1996.
Supplemental disclosures of cash flow information:
Cash paid during the year for: 1996
------
Income taxes $28,484
Interest 12,364
Non-cash activity:
Assets acquired through assumed debt $ 7,400
15. SUBSEQUENT EVENTS
In 1997, the Company continued to explore various ways to enhance shareholder
value. The Company has or may give consideration to a partial or outright sale
of the business, joint ventures with others, or investing in majority or
minority positions of direct and indirect competitors. On March 11, 1997, the
Company's shareholders approved the sale of all of the stock of the Company for
cash and securities. In anticipation of the closing of this transaction, the
Company intends to remit approximately $75 million from its Bermuda operations.
U.S. Federal taxes associated with remitting such funds approximate $26 million,
of which $16 million have previously been provided.
The accompanying financial statements do not reflect any adjustments or
reclassifications which may arise as a result of the above-mentioned
transaction.
<PAGE>
Exhibit 99(b)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined statement of income for the
year ended December 31, 1996 and the unaudited pro forma condensed combined
balance sheet as of December 31, 1996 give effect to the Transaction with J&H.
The purchase method of accounting has been applied to the Transaction.
Accordingly, assets acquired and liabilities assumed have been reflected at
their current estimated fair values which, ultimately, will be subject to
further refinement. The pro forma statement of income assumes the Transaction
occurred on January 1, 1996 and the pro forma balance sheet assumes the
Transaction occurred on December 31, 1996.
The unaudited pro forma statement of income does not include any potential cost
savings that may be realized as a result of the Transaction, except as
specifically described in Note (b) to the unaudited pro forma combined financial
statements. The Registrant has indicated that it anticipates ultimately
achieving pretax cost savings in the range of $150 million per year, over a
period of years.
The unaudited pro forma condensed combined financial statements have been
prepared by the Registrant based upon the assumptions disclosed in the notes to
the pro forma condensed combined financial statements. The unaudited pro forma
financial statements presented herein are shown for illustrative purposes only
and do not purport to be indicative of the results which would have been
reported if the Transaction had occurred on the dates indicated or which may
occur in the future. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996 and the J&H financial statements
included in Exhibit 99(a) of this Form 8-K.
<PAGE>
MARSH & McLENNAN COMPANIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
(In millions, except per share figures)
<TABLE>
<CAPTION>
Historical
-------------------------------------
Marsh & Johnson &
McLennan Higgins, as Pro Forma Pro Forma
Companies, Inc. adjusted (a) Adjustments Combined (f)
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenue $4,149.0 $1,147.7 $5,296.7
Expense 3,433.7 1,032.7 $15.3(b) 4,481.7
---------------- ---------------- ---------------- ---------------
Operating Income 715.3 115.0 (15.3) 815.0
Interest, net (47.3) 5.9 (45.6)(c) (87.0)
---------------- ---------------- ---------------- ---------------
Income Before Income Taxes 668.0 120.9 (60.9) 728.0
Income Taxes 208.7 46.7 (9.6)(d) 245.8
---------------- ---------------- ---------------- ---------------
Net Income $459.3 $74.2 ($51.3) $482.2
================ ================ ================ ===============
Net Income Per Share $6.34 $5.87
================ ===============
Average Number of Shares
Outstanding 72.4 9.8(e) 82.2
================ ================ ===============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
<PAGE>
MARSH & McLENNAN COMPANIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996 (UNAUDITED)
(In millions of dollars)
<TABLE>
<CAPTION>
Historical
-------------------------------------------
Marsh & Johnson &
McLennan Higgins, as Pro Forma Pro Forma
Companies, Inc. adjusted (g) Adjustments Combined (f)
-------------------- ----------------- -------------------- ------------------
<S> <C> <C> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $299.6 $258.3 ($175.0)(h) $382.9
-------------------- ----------------- -------------------- ------------------
Receivables 1,129.1 177.2 1,306.3
Less-allowance for doubtful accounts (43.3) - (43.3)
-------------------- ----------------- -------------------- ------------------
Net receivables 1,085.8 177.2 - 1,263.0
-------------------- ----------------- -------------------- ------------------
Other current assets 363.2 68.9 432.1
-------------------- ----------------- -------------------- ------------------
Total current assets 1,748.6 504.4 (175.0) 2,078.0
-------------------- ----------------- -------------------- ------------------
Long-term securities 573.3 - 573.3
Fixed assets, net 770.1 168.4 - 938.5
Intangible assets 545.3 246.8 1,414.5(i) 2,206.6
Other assets 907.9 183.1 - 1,091.0
-------------------- ----------------- -------------------- ------------------
$4,545.2 $1,102.7 $1,239.5 $6,887.4
==================== ================= ==================== ==================
LIABILITIES AND
STOCKHOLDERS' EQUITY
- -------------------------------------
Current liabilities:
Short-term debt $392.4 $3.9 $144.0(j) $540.3
Accounts payable and accrued liabilities 904.3 224.2 31.2(k) 1,159.7
Accrued income taxes 259.6 28.2 - 287.8
-------------------- ----------------- -------------------- ------------------
Total current liabilities 1,556.3 256.3 175.2 1,987.8
-------------------- ----------------- -------------------- ------------------
Fiduciary liabilities 1,685.9 518.1 - 2,204.0
Less - cash and investments held in
a fiduciary capacity (1,685.9) (518.1) - (2,204.0)
-------------------- ----------------- -------------------- ------------------
- - - -
-------------------- ----------------- -------------------- ------------------
Long-term debt 458.2 130.8 289.0(j) 878.0
-------------------- ----------------- -------------------- ------------------
Other liabilities 642.1 253.4 62.5(k)
167.0(j) 1,125.0
-------------------- ----------------- -------------------- ------------------
Commitments and contingencies - - - -
-------------------- ----------------- -------------------- ------------------
Stockholders' equity:
Preferred stock - - -
Common stock 76.8 - 9.8(l) 86.6
Other stockholders' equity 2,195.2 462.2 (462.2)(l)
998.2(l) 3,193.4
-------------------- ----------------- -------------------- ------------------
2,272.0 462.2 545.8 3,280.0
Less - treasury shares (383.4) - - (383.4)
-------------------- ----------------- -------------------- ------------------
Total stockholders' equity 1,888.6 462.2 545.8 2,896.6
-------------------- ----------------- -------------------- ------------------
$4,545.2 $1,102.7 $1,239.5 $6,887.4
==================== ================= ==================== ==================
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
A description of the adjustments reflected in the pro forma condensed combined
financial statements follows:
(a) Certain amounts included in the Johnson & Higgins ("J&H")
consolidated statement of income (interest income, interest expense,
equity in income of affiliates and minority interest in income of
subsidiaries) have been reclassified to conform with the
Registrant's financial statement presentation.
(b) To reflect the additional goodwill amortization expense of $35.4
million to be incurred as a result of the Transaction partially
offset by $20.1 million of contractually provided adjustments to
ongoing compensation and benefits expenses, which are a direct
result of J&H no longer being a private company. Goodwill is being
amortized over a forty year period.
(c) To record: (1) additional interest expense of $28.1 million
associated with the incremental $433 million of borrowings that was
incurred by the Registrant to finance the cash portion of the
Transaction consideration which was paid at closing at an assumed
interest rate of 6.5% and $8.4 million associated with $167 million
of the Transaction consideration which will be issued in
installments at a contractual interest rate of 5.0%, and; (2) a
reduction in interest income of $9.1 million on the $175 million of
permitted distributions by J&H at an assumed interest rate of
5.2%.
(d) To record the tax effect of the pro forma adjustments (exclusive of
the goodwill amortization) at an assumed tax rate of 37.50%.
(e) To reflect the issuance of approximately 9.8 million shares of the
Registrant's common stock in connection with the Transaction.
(f) The pro forma condensed combined statement of income and the pro
forma condensed combined balance sheet do not include the effects of
the Registrant's January 1997 acquisition of Compagnie Europeenne De
Courtage d'Assurances et de Reassurances ("CECAR"), an insurance
broker headquartered in France, for approximately $200 million.
(g) Certain amounts included in the J&H consolidated balance sheet have
been reclassified to conform with the Registrant's financial
statement presentation. In particular, fiduciary cash and
investments of $518.1 million have been offset against the related
liabilities and presented in the liability section of the balance
sheet. In addition, the receivables and payables for uncollected
premiums and claims amounting to $788.9 million have been excluded
from the asset and liability sections of the consolidated balance
sheet as they are presented in footnote disclosures in the
Registrant's financial statements.
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(h) To reflect the $175 million of permitted distributions by J&H.
(i) Represents the net of the $1.8 billion Transaction consideration
adjusted for the items described in Notes (h), (k), (l)(2) and
(l)(3). The preliminary allocation of the Transaction consideration
to the underlying assets and liabilities of J&H, including goodwill,
is subject to further refinement as the Registrant's management
continues to review the estimated fair values of the assets acquired
and the liabilities assumed.
(j) To reflect the debt being incurred to finance the $433 million cash
portion of the Transaction consideration which was paid at closing
and the additional obligation of $167 million for the cash portion
of the Transaction consideration which will be issued in
installments. The cash portion of the Transaction consideration paid
at closing was initially financed through commercial paper
borrowings. The Registrant has classified $289 million as long-term
debt based upon the Registrant's intent and ability to maintain or
refinance these borrowings on a long-term basis.
(k) To reflect the impact of the $150 million in purchase related
liabilities which are principally related to severance, real estate
and transaction costs net of the related income tax impact of $56.3
million. The short-term portion of $31.2 million has been included
as an increase in accounts payable and accrued liabilities and the
long-term portion of $62.5 million has been reflected as an increase
in other liabilities.
(l) To record the net adjustment required in stockholders' equity to
reflect (1) the issuance of $1.2 billion of the Registrant's $1 par
value common stock; (2) the elimination of the $462.2 million of J&H
net assets, and; (3) the $192 million discount on the Registrant's
common stock which is being issued in the Transaction. This discount
relates to a contractual restriction that limits the amount of stock
which can be sold by the recipients during the two years following
the closing date of the Transaction.
