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
November 3, 1998
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(Date of earliest event reported)
Marsh & McLennan Companies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 1-5998 36-266-8272
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
1166 Avenue of the Americas, New York, New York 10036
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(Address of principal executive offices) (Zip Code)
(212) 345-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Exhibit Index at page 4
ITEM 2. ACQUISITION AND DISPOSITION OF ASSETS.
On November 12, 1998, Marsh & McLennan Companies, Inc. (the
"Registrant") filed a Current Report on Form 8-K reporting its acquisition
of ordinary shares and 7.25% Convertible Bonds 2008 of Sedgwick Group plc
("Sedgwick") and stated that it would file no later than January 15, 1999,
historical financial statements for Sedgwick and pro forma financial
information for the Registrant giving effect to the acquisition. Such
financial information is being filed herewith.
Information Concerning Forward-Looking Statements
This 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. Such statements may include,
without limitation, discussions concerning revenue and expense growth, cost
savings and efficiencies expected from the integration of Sedgwick. Please
refer to the Registrant's 1997 Annual Report on Form 10-K and its Quarterly
Reports on Form 10-Q under "Information Concerning Forward-Looking
Statements" for specific factors which would cause actual results to differ
materially from such forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The audited financial statements of Sedgwick for the year ended
December 31, 1997 and the unaudited financial statements for the
nine-months ended September 30, 1998 are filed as Exhibits 99.1 and 99.2
hereto.
(b) Pro Forma Financial Information.
The pro forma financial data required to be filed herewith is
filed as Exhibit 99.3 hereto.
(c) Exhibits.
23.1 Consent of PricewaterhouseCoopers
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: December 23, 1998
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
23.1 Consent of PricewaterhouseCoopers
99.1 Consolidated Year-End Audited Financial Statements
of Sedgwick
-Report of Independent Auditors
-Consolidated Statement of Income for the year
ended December 31, 1997
-Consolidated Balance Sheet as of December 31, 1997
-Consolidated Statement of Changes in Shareholders'
Equity for the year ended December 31, 1997
-Consolidated Statement of Cash Flows for the year
ended December 31, 1997
-Consolidated Statement of Total Recognized Gains
and Losses for the year ended December 31, 1997
-Notes to Consolidated Financial Statements
Financial Statement Schedule II - Valuation and
Qualifying Accounts
99.2 Consolidated Nine-Month Unaudited Financial Statements of Sedgwick
-Consolidated Statements of Income for the nine-months ended
September 30, 1998 and 1997
-Consolidated Balance Sheet as of September 30, 1998
-Notes to Consolidated Financial Statements
-Additional information for US investors
99.3 Unaudited Pro Forma Condensed Combined Financial Statements
EXHIBIT 23.1
Letter of Consent of Independent Auditors
PricewaterhouseCoopers, as the successor firm of Coopers & Lybrand, consent
to the inclusion in this Form 8-K, as amended, of Marsh & McLennan
Companies, Inc. (Commission File No. 1-5998 ) of our report dated February
17, 1998, except for notes 24(c) and 35 dated May 7, 1998, on our December
31, 1997 audit of the consolidated financial statements and financial
statement schedule of Sedgwick Group plc .
We also consent to the incorporation by reference in the previously filed
Registration Statements of Marsh & McLennan Companies, Inc. on Form S-8
(Registration File Nos. 2-58660, 2-65096, 33-32880, 33-48803, 33-48807, 33-
54349, 33-59603, 33-63389, 333-35741, 333-35739, 333-51141, and 333-29627)
and, the previously filed Registration Statements on Form S-3 (Registration
Nos. 333-25069, 333-28201, 333-41021, 333-48707 and 333-67543) of our
report dated February 17, 1998, except for notes 24(c) and 35 dated May 7,
1998, on our December 31, 1997 audit of the consolidated financial
statements and financial statement schedule of Sedgwick Group plc.
PricewaterhouseCoopers
Chartered Accountants
London, England
December 23, 1998
EXHIBIT 99.1
FINANCIAL INFORMATION ON SEDGWICK
REPORT OF INDEPENDENT AUDITORS
To the directors of Sedgwick Group plc
We have audited the accompanying consolidated balance sheet of
Sedgwick Group plc and subsidiary companies as of December 31, 1997, and
the related consolidated statements of income, changes in shareholders'
equity, cash flows, and total recognized gains and losses for the year
ended December 31, 1997. Our audit also included Schedule II on page 46.
These consolidated financial statements and the financial statement
schedule are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with United Kingdom auditing
standards which do not differ in any significant respect from United States
generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Sedgwick Group plc and subsidiary companies as of December 31,
1997, and the results of their operations and their cash flows for the year
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United Kingdom, which differ in certain respects from
generally accepted accounting principles in the United States (see note 32
to the consolidated financial statements, which provides the required
reconciliations for the year ended December 31, 1997 and as of December 31,
1997). Also, in our opinion, the related financial statement schedule on
page 46, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information
set forth therein.
Coopers & Lybrand
Chartered Accountants
London, England
February 17, 1998
except for notes 24(c) and 35 dated May 7, 1998.
The audited financial information set out below should be read in
conjunction with the unaudited results for the nine months ended September
30, 1998 of Sedgwick Group plc. These unaudited results include the effect
of developments in the pension transfer review during the period subsequent
to December 31, 1997.
AUDITED FINANCIAL INFORMATION
INTRODUCTION
The financial information contained in this Exhibit 99.1 is extracted
without material adjustment from the audited consolidated accounts of
Sedgwick for the year ended 31 December 1997 as presented in the 1997
annual report on form 20-F (item 18) filed with the US Securities and
Exchange Commission.
The information contained in this Exhibit 99.1 has been extracted from
previously published sources and does not constitute statutory accounts
within the meaning of Section 240 of the Companies Act 1985 (as amended)
(refer to Note 36). Audited statutory accounts have been delivered to the
Registrar of Companies for the year ended 31 December 1997. An unqualified
audit report in accordance with the requirements of the Companies Act for
the year ended 31 December 1997 has been given by Coopers & Lybrand,
Chartered Accountants, being the auditors of Sedgwick for the relevant
financial period.
SEDGWICK GROUP PLC
Consolidated statement of income
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1997
NOTES (pound)m US$m*
- -----------------------------------------------------------------------------
REVENUE
Brokerage and fees 931.6 1,527.8
Interest and investment income 43.6 71.5
------- --------
5 975.2 1,599.3
EXPENSES 6 869.4 1,425.8
------- --------
OPERATING INCOME 105.8 173.5
Share of profits of associated undertakings 4.5 7.4
Interest payable 9 (10.2 (16.7)
Cessation of insurance underwriting 6 1.1 1.8
------- --------
INCOME BEFORE TAXATION 5,7 101.2 166.0
Taxation 10 28.3 46.4
------- --------
INCOME AFTER TAXATION 72.9 119.6
Minority interests 2.5 4.1
------- --------
NET INCOME 70.4 115.5
DIVIDEND 11 38.6 63.3
------- --------
RETAINED EARNINGS FOR THE YEAR 31.8 52.2
------- --------
EARNINGS PER SHARE 12 12.8p 21.0c
UNDERLYING DIVIDEND PER SHARE 11 7.0p 11.5c
Average number of shares outstanding
(in millions) 549.5 549.5
The notes form an integral part of these consolidated financial statements.
*For illustration only, the results for the year ended December 31, 1997
shown above in US dollars have been translated at the year-end rate of 1 =
US$1.64. A summary of the significant adjustments that would be required to
restate net income for the year ended December 31, 1997 in accordance with
US GAAP is presented in note 32.
SEDGWICK GROUP PLC
Consolidated balance sheet
AT DECEMBER 31,
--------------------------------
1997 1997
NOTES (pound)m US$m*
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term deposits 14 538.8 883.6
Investments 13, 14 96.2 157.7
Reinsurers' share of technical provisions 22 177.8 291.6
Receivables: due within one year
Insurance broking receivables 14 2,643.5 4,335.4
Taxation recoverable 19.1 31.3
Prepayments and accrued income 23.1 37.9
Other receivables 72.2 118.4
--------- ---------
2,757.9 4,523.0
Receivables: due after more than one year
Advance Corporation Tax recoverable 12.6 20.7
Deferred taxation 22.2 36.4
Other receivables 49.1 80.5
--------- ---------
83.9 137.6
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Total current assets 3,654.6 5,993.5
FIXED ASSETS
Tangible assets, net 15 212.5 348.5
Associated undertakings 16 15.2 24.9
Assets backing retirement contracts 17 353.5 579.8
Investments 18 154.1 252.7
--------- ---------
Total fixed assets 735.3 1,205.9
--------- ---------
TOTAL ASSETS 4,389.9 7,199.4
--------- ---------
The notes form an integral part of these consolidated financial statements.
*For illustration only, the consolidated balance sheet at December 31, 1997
shown above in US dollars has been translated at the year-end rate of
(pound)1 = US$1.64. A summary of the significant adjustments that would be
required to restate shareholders' equity at December 31, 1997 in accordance
with US GAAP is presented in note 32.
SEDGWICK GROUP PLC
Consolidated balance sheet
AT DECEMBER 31,
-----------------------------
1997 1997
NOTES (pound)m US$m*
- ----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Insurance broking payables 14 3,052.8 5,006.5
Corporate tax 44.3 72.7
Accruals and deferred income 81.9 134.3
Bank loans and overdrafts 20 0.9 1.5
Dividends payable 22.2 36.4
Capital lease obligations 21 0.8 1.3
Other payables 53.4 87.6
-------- --------
Total current liabilities 3,256.3 5,340.3
NON-CURRENT LIABILITIES
Long-term borrowings 20 105.4 172.9
Capital lease obligations 21 9.5 15.6
Other payables 14.9 24.4
-------- --------
Total non-current liabilities 129.8 212.9
PROVISIONS FOR LIABILITIES AND CHARGES
Liabilities linked to retirement contracts 17 352.9 578.7
Insurance technical provisions 22 307.9 505.0
Other provisions 23 142.9 234.3
-------- --------
803.7 1,318.0
MINORITY INTERESTS 0.3 0.5
COMMITMENTS AND CONTINGENT LIABILITIES 24, 25
SHAREHOLDERS' EQUITY
Share capital (554 million ordinary shares
of 10p each) 29 55.4 90.9
Share premium 8.1 13.3
Retained earnings 136.3 223.5
-------- --------
Total shareholders' equity 199.8 327.7
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,389.9 7,199.4
-------- --------
The notes form an integral part of these consolidated financial statements.
*For illustration only, the consolidated balance sheet at December 31, 1997
shown above in US dollars has been translated at the year-end rate of
(pound)1 = US$1.64. A summary of the significant adjustments that would be
required to restate shareholders' equity at December 31, 1997 in accordance
with US GAAP is presented in note 32.
SEDGWICK GROUP PLC
Consolidated statement of changes in shareholders' equity
<TABLE>
<CAPTION>
ISSUED SHARE CAPITAL (i)
--------------------------------------
NOMINAL SHARE RETAINED
NUMBER VALUE PREMIUM(iii) EARNINGS TOTAL
MILLIONS (pound)m (pound)m (pound)m (pound)m
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At January 1, 1997 548.0 54.8 3.9 132.7 191.4
Year ended December
31, 1997
Shares issued(ii) 5.7 0.6 4.2 0.3 5.1
Goodwill on
acquisitions(iv) -- -- -- (30.9) (30.9)
Retained earnings for
the year -- -- -- 31.8 31.8
Translation
differences(v) -- -- -- 2.4 2.4
--------- --------- ---------- -------- --------
At December 31, 1997 553.7 55.4 8.1 136.3 199.8
--------- --------- ---------- -------- --------
</TABLE>
The notes form an integral part of these consolidated financial statements.
(i) The authorized share capital of the company throughout the period
covered by the above statements was (pound)81.0m comprising 810 million
ordinary shares of 10p each. At December 31, 1997, the authorized but
unissued share capital amounted to 256.3 million shares of which 25.1
million shares were reserved to meet options granted under the company's
employee share option plans described in note 29.
(ii) Shares issued during the period covered by the above statements were
either in lieu of dividends or in connection with the exercise of options
held under employee share option plans.
(iii) The share premium account is non-distributable.
(iv) The cumulative amount of goodwill written off at December 31, 1997,
net of goodwill relating to subsidiary and associated undertakings sold,
amounted to (pound)617.9m. An analysis of goodwill written off during the
period covered by the above statements is set out in note 3.
(v) At December 31, 1997, cumulative translation losses of (pound)19.3m had
been transferred directly to retained earnings.
SEDGWICK GROUP PLC
Consolidated statement of cash flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1997
NOTES (pound)m US$m*
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES 27(a) 97.9 160.6
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (7.9) (13.0)
Interest element of finance lease rental payments (1.1) (1.8)
Dividends received from associates 5.3 8.7
---------- ---------
(3.7) (6.1)
TAXATION
UK taxation paid (0.9) (1.5)
Overseas taxation paid (20.3) (33.3)
---------- ---------
(21.2) (34.8)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (24.7) (40.5)
Proceeds on disposal of tangible fixed assets 24.1 39.5
Purchase of investments (125.4) (205.6)
Disposal of investments 67.2 110.2
---------- ---------
(58.8) (96.4)
ACQUISITIONS AND DISPOSALS
Acquisition of businesses, net of cash acquired 3 (31.8) (52.2)
Disposal of businesses, net of cash disposed 4 4.4 7.2
---------- ---------
(27.4) (45.0)
DIVIDENDS PAID (35.3) (57.9)
MANAGEMENT OF LIQUID RESOURCES
Cash withdrawn from deposits 16.0 26.2
Purchase of investments (141.5) (232.0)
Disposal of investments 167.1 274.0
---------- ---------
41.6 68.2
FINANCING
Issue of shares 4.8 7.9
Increase in borrowings 14.7 24.1
Decrease in borrowings (40.7) (66.7)
Capital element of finance lease rental
payments (0.6) (1.0)
---------- ---------
(21.8) (35.7)
---------- ---------
DECREASE IN CASH IN THE PERIOD 27(b),(c) (28.7) (47.1)
---------- ---------
</TABLE>
The notes form an integral part of these consolidated financial statements.
*For illustration only, the cash flows for the year ended December 31, 1997
shown above in US dollars have been translated at the year-end rate of
(pound)1 = US$1.64. Summary statement of cash flows for the year ended
December 31, 1997 presented in accordance with US GAAP are set out in note
32.
SEDGWICK GROUP PLC
Consolidated statement of total recognized gains and losses
YEAR ENDED DECEMBER 31,
------------------------
1997 1997
(pound)m US$m*
Net income 70.4 115.5
Translation differences on overseas undertakings 2.4 3.9
------- --------
Recognized gain for the year 72.8 119.4
======= ========
The notes form an integral part of these consolidated financial statements.
*For illustration only, the gains and losses for the year ended December
31, 1997 shown above in US dollars have been translated at the year-end
rate of (pound)1 = US$1.64.
SEDGWICK GROUP PLC
Notes to the consolidated financial statements
1 ACCOUNTING POLICIES
The financial statements have been prepared under the historical cost
convention, except for the revaluation of certain assets backing retirement
contracts, and in accordance with accounting standards applicable in the
UK.
PRESENTATIONAL CHANGES
For the reasons set out below, certain changes have been made to the
presentation of the financial statements.
CASH FLOW STATEMENT During 1997, the group adopted FRS No. 1 (Revised) Cash
flow statements. Under the revised standard, the cash flow statement shows
the movement in "pure cash" which comprises cash in hand, deposits
repayable on demand less overdrafts. In addition, to comply with the
revised standard, changes have been made to the analysis of cash flows and
the related disclosures.
RETIREMENT-RELATED INVESTMENT BUSINESS SuperFlex Limited, a subsidiary
undertaking based in South Africa which provides retirement-related
investment products, has grown significantly during 1997. It is now
appropriate to disclose the investments which it holds in relation to such
retirement contracts and its linked liabilities to policyholders which were
previously included within insurance broking receivables and payables.
INSURANCE TECHNICAL PROVISIONS During 1997, River Thames Insurance Company
Limited became a subsidiary undertaking (see note 3). As a result,
insurance technical provisions have become more significant to the group
and are now shown separately from other provisions for liabilities and
charges. In addition, amounts recoverable from reinsurers, which were
previously offset in arriving at insurance technical provisions, are now
shown as current assets.
BASIS OF CONSOLIDATION
The group financial statements include those of the company, its subsidiary
undertakings and the group's interest in associated undertakings.
Associated undertakings are accounted for under the equity method.
An undertaking is regarded as a subsidiary undertaking if the group has
control over its operating and financial policies. An undertaking is
regarded as an associated undertaking if the group has significant
influence but not control over its operating and financial policies, which
will generally be the case where the group controls more than 20% and less
than 50% of the shareholders' voting rights in the undertaking.
Unless stated otherwise, business combinations are accounted for by the
acquisition method of accounting. When a business is acquired, fair values
are attributed to its separable assets and liabilities at the date of
acquisition. Goodwill arising on acquisitions, which represents the
difference between the fair value of the purchase consideration and the
fair value of the separable net assets acquired, is written off to reserves
on consolidation.
Where it can be identified, goodwill not previously recorded within
operations is taken into account in calculating the profit or loss on
disposal or termination of acquired businesses.
FOREIGN CURRENCY TRANSLATION
Group companies record transactions in foreign currencies at the rate of
exchange ruling at the date of the transaction or, if hedged forward, at
the rate of exchange under the related forward currency contract. Foreign
currency monetary assets and liabilities, other than those hedged forward,
are translated into local currency at the rate ruling at the balance sheet
date. Exchange differences are recorded within operations.
On consolidation, the results of overseas group companies are translated
into sterling at the average exchange rates for the period and their assets
and liabilities are translated into sterling at the exchange rates ruling
at the balance sheet date. Exchange differences on translating the net
assets or liabilities of overseas businesses, together with the differences
on translating any foreign currency borrowings financing investments in
overseas businesses, are taken directly to reserves.
In the cash flow statement, cash flows denominated in foreign currency are
translated at the average exchange rates for the period.
REVENUE
Brokerage and fees derived from insurance and reinsurance services are
recognized when the counterparty is debited, except for certain business in
the US on which income is recognized on the later of the effective date of
the policy and the billing date. Brokerage and fees are stated after
allowing for commissions to other directly-involved parties. Contingent
commissions and certain life assurance and pension commissions and fees are
recognized in the period to which they relate, provided they can be
determined with reasonable accuracy. Where this is not possible, such
commissions and fees are recognized on a cash basis. Profit commissions
earned by the group's Lloyd's underwriting agency are brought into account
when they are able to be determined.
Interest on deposits and interest-bearing investments is credited as it is
earned.
PENSIONS AND SIMILAR BENEFITS
Defined contribution pension costs recorded within operations represent
contributions payable in respect of the period.
Defined benefit pension costs and the costs of providing other
post-retirement benefits are recorded within operations on a systematic
basis over the service lives of the eligible employees in accordance with
the advice of qualified actuaries.
TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at historical cost. Freehold land is not
depreciated. Freehold and long-leasehold properties are depreciated on a
straight-line basis such that they are written down to their residual
values over their useful economic lives, which are generally estimated to
be 50 years.
Other tangible fixed assets are depreciated on a straight-line basis over
their useful economic lives as follows:
Short-leasehold properties -- Lease term
Office fixtures and equipment -- 5-10 years
Motor vehicles -- 5 years
Any permanent diminution in the value of the group's tangible fixed assets
is recorded within operations.
RETIREMENT-RELATED INVESTMENT BUSINESS
Assets backing retirement contracts principally comprise investments which
are stated at their current values at the balance sheet date. Liabilities
linked to retirement contracts represent the benefits payable to
policyholders at the balance sheet date and are determined by reference to
the values of the related assets.
Realized and unrealized gains and losses on assets backing retirement
contracts are attributable to policyholders and are not, therefore,
reflected in operations.
INVESTMENTS
Fixed asset investments are stated at cost less provision for any permanent
diminution in value. Current asset investments are stated at the lower of
cost and net realizable value. The cost of redeemable interest-bearing
securities is adjusted to allow for the amortization of any premium or
discount to redemption value on a straight-line basis over the period to
maturity.
LEASED ASSETS
Assets acquired under capital leases are capitalized as tangible fixed
assets. Interest on such lease obligations is recorded within operations
over the term of the lease based on the capital element of future lease
rentals. All other leases are regarded as operating leases and rentals are
recorded within operations on a straight-line basis over the term of the
lease. When a leasehold property becomes surplus to the group's foreseeable
business requirements, provision is made for the expected future net cost
of the property.
INSURANCE BROKING RECEIVABLES AND PAYABLES
Certain group companies act as agents in placing the insurable risks of
their clients with insurers, either directly or through other insurance
intermediaries. Generally, these companies are not liable as principals
either for premiums due to insurers or for claims payable to their clients.
Notwithstanding the companies' legal relationships with clients and
insurers and since, in practice, premium and claim monies are ordinarily
accounted for by insurance intermediaries as if they were principals in the
insurance contract, fiduciary cash, receivables and payables relating to
insurance broking business are treated for accounting purposes as the
group's assets and liabilities.
DEFERRED TAXATION
Deferred taxation is provided using the liability method. Except for
pensions and other post-retirement benefits, in respect of which deferred
taxation is recognized on the full provision basis, deferred taxation is
recognized on timing differences to the extent that it is probable that a
liability or asset will crystallize. Deferred tax net debit balances are
recognized to the extent that they are expected to be recoverable without
replacement by equivalent debit balances.
INSURANCE UNDERWRITING (IN RUN OFF)
Insurance technical provisions are based on the estimated ultimate cost of
all claims incurred but not settled at the balance sheet date, whether
reported or not, together with related claims handling expenses. Insurance
technical provisions are stated gross of recoveries to be made on
reinsurance contracts in recognition of the fact that they are separate
liabilities and assets.
The adequacy of the insurance technical provisions is assessed by reference
to actuarial and other studies of the ultimate cost of liabilities, which
use exposure-based and statistical techniques. Significant delays occur in
the notification and settlement of certain claims, and a substantial
measure of experience and judgement is involved in assessing outstanding
liabilities, the ultimate cost of which cannot be known with certainty at
the balance sheet date. Insurance technical provisions and the related
reinsurance recoveries are determined on the basis of information currently
available. It is inherent in the nature of the business written that the
ultimate liabilities will vary as a result of subsequent developments.
DERIVATIVES
Derivatives are entered into for the purpose of mitigating risks from
potential movements in foreign exchange rates and interest rates which are
inherent in the group's assets and liabilities. Derivatives entered into by
the group are reviewed regularly for their effectiveness as hedges. A
derivative is designated as a hedge where there is an offset between the
effects of potential movements in the value of the derivative and the value
of the asset or liability in respect of which it is held. It is the group's
policy that derivatives may not be held or issued for trading purposes.
Contract or underlying principal amounts of financial instruments used for
hedging purposes are not reflected in the consolidated financial
statements. Details of the group's hedging activities are set out in note
33.
FORWARD EXCHANGE CONTRACTS The group's principal foreign exchange exposures
relate to foreign currency income earned in the UK and to the translation
into sterling of the profits and net assets of its overseas businesses.
Foreign currency income earned in the UK, which is principally denominated
in US dollars, is hedged mainly through the use of forward exchange
contracts. The group hedges both firm commitments and anticipated
transactions looking forward over a period of up to three years. As
described under foreign currency translation above, gains or losses arising
on these arrangements are deferred and recognized in operations as
adjustments to carrying amounts only when the hedged transaction has itself
been reflected in the consolidated financial statements.
It has not been the group's policy to hedge the profits and net assets of
overseas businesses because the translation of overseas profits at average
exchange rates mitigates exchange rate volatility and foreign currency
borrowings have provided a natural hedge against assets held overseas.
INTEREST RATE AGREEMENTS The group manages its exposure to interest rate
movements on its cash and investment balances, which include amounts held
in a fiduciary capacity, through the use of fixed rate instruments and
deposits, interest rate swaps and forward rate agreements (FRAs). Interest
rate swaps and FRAs are also used by the group to manage interest payable
on its borrowings. Interest rate swaps and FRAs are based on agreements
approved by the relevant regulatory bodies. Such arrangements are generally
used to manage interest rates looking forward over a period of two to three
years. Interest rate differential under interest rate swaps and FRAs are
recognized in operations by adjustment of the underlying interest
receivable or payable over the term of the agreement.
2 FOREIGN CURRENCIES
The principal exchange rates used to translate overseas group companies'
financial information were:
AVERAGE RATE YEAR ENDED RATE
--------------- -----------------
1997 1997
- ------------------------------ --------------- --------------------
Australian dollar 2.22 2.53
Belgian franc 58.46 60.93
Canadian dollar 2.28 2.35
French franc 9.54 9.90
German mark 2.83 2.96
Italian lire 2,790.00 2,908.00
Netherlands guilder 3.19 3.33
South African rand 7.60 8.00
US dollar 1.64 1.64
--------------- -----------------
3 ACQUISITIONS
YEAR ENDED DECEMBER 31, 1997
During 1997, the following acquisitions were completed by the group:
<TABLE>
<CAPTION>
OTHER
RTI NSBV BUSINESSES TOTAL
(pound)m (pound)m (pound)m (pound)m
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost of acquisition:
Cash consideration 12.0 7.3 11.7 31.0
Share of net liabilities of businesses
contributed -- (0.9) -- (0.9)
Contingent consideration -- 0.4 5.1 5.5
Sundry expenses 0.3 2.3 0.3 2.9
--------- --------- --------- ---------
12.3 9.1 17.1 38.5
Share of net (assets)/liabilities of
businesses acquired (20.8) 5.2 (0.5) (16.1)
--------- --------- --------- ---------
Goodwill on acquisitions (8.5) 14.3 16.6 22.4
--------- --------- --------- ---------
Add: Negative goodwill on RTI (note 6) 8.5
---------
Goodwill written off to reserves 30.9
---------
</TABLE>
RIVER THAMES INSURANCE COMPANY LIMITED (RTI)
In April 1997, the group completed the acquisition from Transamerica
Corporation of 35.7 million "A" ordinary shares in RTI. With effect from
completion, the group's interest in RTI increased from 48.8 percent to
98.7 percent and it became a subsidiary undertaking. As shown in the
summary table above, the purchase consideration was at a significant
discount to the fair value of the additional share of the net assets of the
company acquired, i.e. negative goodwill was recognized on the acquisition.
NIKOLS SEDGWICK B.V. (NSBV)
With effect from November 1, 1997, Sedgwick entered into a joint venture
with the Moratti Group which involved the transfer of our respective
businesses in Italy, Spain, Portugal and Latin America to a newly-formed
holding company, NSBV. Details of the joint venture were set out in the
circular to shareholders dated October 10, 1997. NSBV is treated as a
subsidiary undertaking in these financial statements.
Assets and liabilities of businesses acquired by the group during 1997:
<TABLE>
<CAPTION>
BOOK
VALUE ADJUSTMENTS FAIR VALUE
(pound)m (pound)m (pound)m
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tangible fixed assets 3.2 -- 3.2
Investments in associated undertakings (26.4) -- (26.4)
Fixed asset investments 74.4 (0.7) 73.7
Current assets
- --Reinsurers' share of technical provisions 170.6 -- 170.6
- --Other assets 164.0 4.8 168.8
Creditors due within one year (69.3) (1.4) (70.7)
Creditors due after more than one year (0.2) -- (0.2)
Provisions for liabilities and charges
- --Insurance technical provisions (295.5) (8.4) (303.9)
- --Other provisions (2.9) -- (2.9)
------------ ------------ ------------
17.9 (5.7) 12.2
Minority interests 6.3 (2.4) 3.9
------------ ------------ ------------
24.2 (8.1) 16.1
============ ============ ============
</TABLE>
Adjustments to the book values of the assets and liabilities acquired
principally reflected the strengthening of insurance technical provisions
held in relation to RTI and alignment with the group's accounting policies.
Cash flow effect of acquisition of businesses:
1997
(pound)m
- -----------------------------------------------------------------------------
Cash consideration:
- --Acquisitions completed during the year 32.9
- --Acquisitions completed in previous years 3.0
Net cash of subsidiaries acquired (4.2)
Effect of movement in exchange rates 0.1
-----------
Net outflow of cash on acquisitions 31.8
===========
4 DISPOSALS
Profits recognized on the disposal of business, none of which were
individually significant, were as follows:
(pound)m
- ------------------------------------------------------------------------------
Year ended December 31, 1997 2.7
Cash flow effect of disposal of businesses:
1997
(pound)m
- ------------------------------------------------------------------------------
Cash proceeds:
- -- Disposals completed during the year 0.6
- -- Disposals completed in previous years 3.8
----------
Net inflow of cash on disposals 4.4
==========
5 SEGMENTAL INFORMATION
1997
(pound)m
- ---------------------------------------------------------------------------
REVENUE
GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION
United Kingdom 334.8
Continental Europe 132.2
North America 414.0
Asia Pacific 69.6
Rest of the world 24.6
----------
975.2
----------
ANALYSIS BY BUSINESS
Insurance and reinsurance services 741.9
Employee benefits consulting 233.3
Insurance underwriting (in run off) --
----------
975.2
----------
GEOGRAPHIC ANALYSIS BY CLIENT LOCATION
United Kingdom 275.1
Continental Europe 138.5
North America 438.2
Asia Pacific 86.3
Rest of the world 37.1
----------
975.2
==========
1997
(pound)m
- ---------------------------------------------------------------------------
INCOME BEFORE TAXATION
GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION
United Kingdom 45.5
Continental Europe 10.2
North America 43.1
Asia Pacific 4.5
Rest of the world 7.0
----------
110.3
Less: Interest payable (10.2)
----------
100.1
Exceptional items (note 6) 1.1
----------
101.2
----------
ANALYSIS BY BUSINESS
Insurance and reinsurance services 86.7
Employee benefits consulting 23.6
Insurance underwriting (in run off) --
----------
110.3
Less: Interest payable (10.2)
----------
100.1
Exceptional items (note 6) 1.1
----------
101.2
----------
Segmental information is shown before taking account of inter-segmental
borrowings and interest charges in order to present fairly the performance
of individual segments.
1997
(pound)m
- ----------------------------------------------------------------------------
DEPRECIATION
ANALYSIS BY BUSINESS
Insurance and reinsurance services 20.1
Employee benefits consulting 1.8
------------
21.9
Add: Properties 1.1
------------
23.0
------------
1997
(pound)m
- ----------------------------------------------------------------------------
CAPITAL EXPENDITURE
ANALYSIS BY BUSINESS
Insurance and reinsurance services 22.4
Employee benefits consulting 1.4
------------
23.8
Add: Properties 0.4
------------
24.2
------------
1997
(pound)m
- ----------------------------------------------------------------------------
TOTAL ASSETS
GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION
United Kingdom 2,921.5
Continental Europe 278.3
North America 673.4
Asia Pacific 105.9
Rest of the world 410.8
------------
4,389.9
------------
ANALYSIS BY BUSINESS
Insurance and reinsurance services 3,443.9
Employee benefits consulting 468.3
Insurance underwriting (in run off) 342.4
------------
4,254.6
Add: Properties 135.3
------------
4,389.9
------------
1997
(pound)m
- ---------------------------------------------------------------------------
NET CAPITAL EMPLOYED
GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION
United Kingdom 151.6
Continental Europe 27.8
North America 75.7
Asia Pacific 18.2
Rest of the world 33.1
-----------
306.4
Less: Borrowings (106.3)
-----------
200.1
-----------
ANALYSIS BY BUSINESS
Insurance and reinsurance services 89.5
Employee benefits consulting 42.2
Insurance underwriting (in run off) 39.4
-----------
171.1
Add: Properties 135.3
Less: Borrowings (106.3)
-----------
200.1
-----------
Net capital employed represents shareholders' equity and minority interests.
6 EXCEPTIONAL ITEMS
Year ended December 31, 1997
Cessation of insurance underwriting
In April 1997, the group increased its shareholding in River Thames
Insurance Company Limited (RTI) (note 3). Since the company is in run off,
the negative goodwill arising on the acquisition has been taken to
operations. Following completion, provisions amounting to (pound)8.4m were
established in respect of the strengthening of insurance technical
provisions, property and other closure costs.
(pound)m
- ----------------------------------------------------------------------------
Insurance underwriting subsidiaries in run off:
Closure provisions (8.4)
Other movements on insurance technical provisions 1.0
-----------
(7.4)
Negative goodwill (note 3) 8.5
-----------
1.1
===========
Insurance technical provisions are dealt with in note 22.
SEGMENTAL ANALYSIS OF EXCEPTIONAL ITEMS
1997
(pound)m
- -----------------------------------------------------------------------------
INCOME BEFORE TAXATION
GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION
United Kingdom (0.1)
North America 1.2
-----------
1.1
===========
ANALYSIS BY BUSINESS
Insurance underwriting (in run off) 1.1
-----------
1.1
===========
7 INCOME BEFORE TAXATION
Income before taxation is determined after charging/(crediting) the
following items:
1997
(pound)m
- -----------------------------------------------------------------------------
Depreciation of tangible fixed assets (note 15) 23.0
Operating lease rentals 54.7
Operating sub-lease rentals (5.8)
Foreign exchange gains (4.8)
Auditors' remuneration
- --For audit services 2.2
- --For other services provided in the UK 0.9
- --For other services provided outside the UK 0.2
-----------
In addition to the amounts stated above, in 1997 the auditors received
(pound)0.6m in connection with acquisitions which was capitalized;
(pound)0.5m for services provided in the UK and (pound)0.1m for services
provided outside the UK.
8 EMPLOYEE INFORMATION
1997
(pound)m
- ----------------------------------------------------------------------------
SALARIES AND ASSOCIATED EXPENSES
Salaries 512.9
Social security costs 36.4
Pension costs
- --Defined contribution plans 1.6
- --Defined benefit plans (note 26) 17.5
-----------
568.4
-----------
AVERAGE FOR THE YEAR YEAR END
1997 1997
- ----------------------------------------------------------------------------
NUMBER OF EMPLOYEES BY
GEOGRAPHIC REGION
United Kingdom 5,192 5,174
Continental Europe 2,132 2,478
North America 6,212 6,156
Asia Pacific 1,305 1,311
Rest of the world 720 866
---------------- -------------
15,561 15,985
================ =============
NUMBER OF EMPLOYEES BY
BUSINESS
Insurance and reinsurance
services 11,311 11,683
Employee benefits consulting 4,239 4,291
Insurance underwriting (in run off) 11 11
---------------- -------------
15,561 15,985
================ =============
9 INTEREST PAYABLE
1997
(pound)m
- ----------------------------------------------------------------------------
Interest on bank loans and overdrafts 8.8
Interest on other borrowings 0.3
Interest on finance leases 1.1
------------
10.2
============
10 TAXATION
1997
(pound)m
- ----------------------------------------------------------------------------
Current taxation:
UK corporation tax at 31.5% 28.4
UK relief for overseas taxation (19.6)
Advance Corporation Tax recoverable (4.8)
Overseas taxation 22.8
------------
26.8
Deferred taxation (note 19) 1.1
------------
27.9
Share of taxation of associated undertakings 0.4
------------
28.3
============
As a consequence of the group's foreign income dividend programme the tax
charge was reduced by (pound)7.4m.
Reconciliation of UK statutory rate to effective rate:
1997
%
- ---------------------------------------------------------------------------
UK statutory rate 31.5
Overseas profits taxed at other than UK statutory rate 5.7
Advance Corporation Tax recovered (4.8)
Tax relief in respect of intangibles (4.3)
-------
Effective rate 28.1
-------
At December 31, 1997 certain group companies had tax losses of some
(pound)50.6m available for carry forward against future taxable profits of
which approximately (pound)6.8m will expire in varying amounts in the years
1998 to 2008. Subject to certain restrictions, the balance of (pound)43.8m
is available for carry forward indefinitely.
Current overseas taxation is reduced by reason of overseas taxation relief
in respect of the amortization of intangible assets recognized in the
accounts of certain of the group's overseas subsidiaries. In accordance
with the group's accounting policies, these intangible assets were written
off to reserves on consolidation. Further such overseas taxation relief
amounting to (pound)22.9m is expected to be available over the period to
2012.
11 DIVIDEND
TOTAL
------------------
PER SHARE (pound)m
------- -------
Year ended December 31, 1997
Interim dividend
- --Paid October 20, 1997 3.0p 16.4
Proposed final dividend
- --Payable April 29, 1998 4.0p 22.2
------- -------
7.0p 38.6
======= =======
Both the interim and final dividends for 1997 have been designated foreign
income dividends (FIDS).
It is currently planned that dividends for 1998 will be declared as FIDs.
12 EARNINGS PER SHARE
Earnings per share is calculated by apportioning the net income for the
year over the weighted average number of shares in issue during the year.
In calculating earnings per share on the nil distribution basis, net income
is adjusted for those elements of the tax charge which arise from the
payment of dividends.
1997
- ------------------------------------------------------------------------
Net income (pound)70.4m
Weighted average number of shares in issue 549.5m
Earnings per share 12.8p
Advance Corporation Tax recoverable (pound) 4.8m
Earnings per share -- nil distribution basis 11.9p
---------
13 CURRENT ASSETS: INVESTMENTS
1997
(pound)m
- ------------------------------------------------------------------------
Listed securities 60.1
Unlisted securities 36.1
-----------
96.2
===========
The market value of listed securities was (pound)60.4m.
14 FIDUCIARY ASSETS AND LIABILITIES
Fiduciary balances comprise uncollected net premiums (i.e. after deduction
of brokerage and fees) and cash and investments representing net premiums
and claims which have been collected but not remitted to the relevant
client, insurer or other insurance intermediary. Fiduciary assets and
liabilities included under the respective balance sheet headings were as
follows:
1997
(pound)m
- ---------------------------------------------------------------------------
CURRENT ASSETS
Cash and short-term deposits 436.5
Investments 47.8
Insurance broking receivables 2,568.5
-----------
3,052.8
===========
CURRENT LIABILITIES
Insurance broking payables 3,052.8
===========
Cash, short-term deposits and investments held in a fiduciary capacity are
generally subject to regulatory controls prescribed by the relevant
authorities in the various countries in which the group operates.
Accordingly, such fiduciary assets are regarded as restricted.
Certain subsidiary companies in the UK have entered into a trust deed with
the Corporation of Lloyd's under which insurance transaction assets are
subject to a floating charge in favor of the trustee of Lloyd's for the
benefit of insurance transaction creditors. Insurance transaction payables
amounting to (pound)2,361.3m were secured through this arrangement. The
assets of subsidiary companies subject to this charge were insurance
broking receivables amounting to (pound)2,106.1m and cash and deposits
amounting to (pound)265.6m.
A floating charge is a charge which does not relate to a specific asset but
to a group of assets the composition of which may change from time to time
(in this case, insurance broking assets held by the group in relation to
business conducted at Lloyd's).
15 FIXED ASSETS: TANGIBLE ASSETS
<TABLE>
<CAPTION>
PROPERTIES
--------------------------------
OFFICE
LONG SHORT FIXTURES & MOTOR
FREEHOLD LEASEHOLD LEASEHOLD EQUIPMENT VEHICLES TOTAL
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
-------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COST
At January 1, 1997 115.7 10.1 22.5 208.9 23.9 381.1
Year ended December 31, 1997
Acquisition of subsidiaries -- -- 0.2 6.9 0.8 7.9
Additions -- -- 0.2 19.7 4.3 24.2
Disposals -- -- -- (16.8) (5.8) (22.6)
Translation differences (1.8) -- (0.6) (2.3) (0.6) (5.3)
-------- -------- -------- -------- -------- --------
At December 31, 1997 113.9 10.1 22.3 216.4 22.6 385.3
======== ======== ======== ======== ======== ========
DEPRECIATION
At January 1, 1997 -- -- 10.3 145.0 9.8 165.1
Year ended December 31, 1997
Acquisition of subsidiaries -- -- 0.1 4.3 0.3 4.7
Provided in the year -- -- 1.0 17.9 4.1 23.0
Disposals -- -- -- (14.4) (3.6) (18.0)
Translation differences -- -- (0.4 ) (1.2) (0.4) (2.0)
-------- -------- -------- -------- -------- --------
At December 31, 1997 -- -- 11.0 151.6 10.2 172.8
======== ======== ======== ======== ======== ========
NET BOOK VALUE
At December 31, 1997 113.9 10.1 11.3 64.8 12.4 212.5
======== ======== ======== ======== ======== ========
</TABLE>
The directors have reviewed the current market values of the group's
freehold and long-leasehold properties and are of the opinion that there is
no substantial difference between their costs and market values.
At each accounting date, the directors reassess the useful lives and
residual values of these properties based on prices prevailing at the date
of acquisition. Based on their assessments at December 31, 1997, the
directors consider that the depreciation charge for the year then ended
would not have been significant. Consequently, no depreciation charge has
been made in respect of these properties.
Freehold properties include an overseas asset held under a capital lease
which has a net book value of (pound)15.7m.
During 1997, proceeds amounting to (pound)19.5m were received on the
disposal in 1996 of the group's long-leasehold interest in Aldgate House,
London.
16 FIXED ASSETS: ASSOCIATED UNDERTAKINGS
SHARE OF
RETAINED
SHARES EARNINGS LOANS TOTAL
(pound)m (pound)m (pound)m (pound)m
-------- -------- -------- --------
At January 1, 1997 36.7 4.7 0.1 41.5
Year ended December 31, 1997
Additions 1.1 (1.0) 0.1 0.2
Disposals and other movements (35.0) 8.1 -- (26.9)
Translation differences -- 0.4 -- 0.4
-------- -------- -------- --------
At December 31, 1997 2.8 12.2 0.2 15.2
======== ======== ======== ========
- -----------------------------------------------------------------------------
Shares held in associated undertakings are unlisted. Shares are stated at
cost less amounts written off in respect of permanent diminution in value.
At December 31, 1997, the group's only significant associated undertaking
was ACE Holding Inc (ACE), an insurance broking business which is
incorporated in the British Virgin Islands and operates in the Middle East.
Sedgwick Group plc has an indirect interest in ACE comprising 100,000
ordinary shares of no par value representing 32.63% of its equity share
capital.
Disposals and other movements includes (pound)26.4m in respect of RTI,
which became a subsidiary undertaking in April 1997.
17 RETIREMENT-RELATED INVESTMENT BUSINESS
The group provides retirement-related investment products through SuperFlex
Limited, a subsidiary undertaking based in South Africa, the net assets of
which comprise:
1997
(pound)m
- ----------------------------------------------------------------------------
Listed investments at current value (cost(pound)128.0m) 112.3
Unlisted investments at current value (cost(pound)190.0m) 192.3
Current assets 49.1
Current liabilities (0.2)
-----------
Assets backing retirement contracts 353.5
Less: Attributable to shareholders 0.6
-----------
Liabilities linked to retirement contracts 352.9
===========
18 FIXED ASSETS: INVESTMENTS
LISTED UNLISTED
SECURITIES SECURITIES TOTAL
(pound)m (pound)m (pound)m
---------- ----------- -----------
At January 1, 1997 23.4 2.6 26.0
Year ended December 31, 1997
Acquisition of subsidiaries 34.1 39.6 73.7
Additions 97.6 26.1 123.7
Disposals and other movements (39.4) (30.4) (69.8)
Translation differences 0.5 -- 0.5
---------- ----------- -----------
At December 31, 1997 116.2 37.9 154.1
========== =========== ===========
The market value of listed securities was (pound)116.2m.
19 DEFERRED TAXATION
Deferred taxation assets/(liabilities):
PROVIDED UNPROVIDED
------------ ------------
1997 1997
(pound)m (pound)m
- --------------------------------------------------------------------------
Accelerated tax depreciation 0.5 --
Short-term timing differences 2.7 1.3
Potential remittance of retained
earnings of overseas companies (8.0) --
Pensions and similar obligations 17.8 --
Restructuring provisions 6.0 --
Advance Corporation Tax
recoverable -- 0.6
Overseas intangibles (note 10) 3.2 22.9
------------ ------------
22.2 24.8
============ ============
Movements on the deferred taxation account:
1997
(pound)m
- -------------------------------------------------------------------------
At January 1, 18.8
Acquisition of subsidiaries 4.9
Translation differences 0.7
Transfer from income (note 10) (1.1)
Other movements (1.1)
------------
At December 31, 22.2
============
20 BORROWINGS
a) BANK LOANS AND OVERDRAFTS
At December 31, 1997, the group had committed borrowing facilities
amounting to (pound)43.3m which expire within one year, all of which were
undrawn. The weighted average interest rate payable on short-term loans and
overdrafts outstanding at December 31, 1997, amounting to (pound)0.9m, was
6.9%.
b) LONG-TERM BORROWINGS
1997
(pound)m
- ---------------------------------------------------------------------------
Bank loans 20.0
7.68% Senior Loan Notes 2006 36.2
Other borrowings 7.7
------------
63.9
7.25% Convertible Bonds 2008 41.5
------------
105.4
------------
Falling due:
Between one and two years 7.7
Between two and three years 10.3
Between three and four years 9.5
Between four and five years --
Over five years 77.9
------------
105.4
============
Short-term borrowings under committed long-term facilities are classified
as non-current liabilities. At December 31, 1997 the group had committed
long-term facilities amounting to (pound)123.4m which expire between
January 1999 and January 2002 of which (pound)27.6m had been drawn down.
The weighted average interest rate payable on these borrowings was 6.0%.
The 7.68% Senior Loan Notes 2006 were issued by Sedgwick Group, Inc., the
group's US holding company, and mature on April 1, 2006 at their par value
of US$60m unless previously repaid by Sedgwick Group, Inc. in accordance
with the terms of the note purchase agreement. Sedgwick Group plc has
guaranteed the principal amount, interest payments and any other monies
which may be owed under the related note purchase agreement.
Holders of the 7.25% Convertible Bonds 2008 have the option to convert the
bonds into ordinary shares in the company at 183p per share at any time
prior to May 24, 2008. The company has the option to redeem the bonds after
December 14, 1998 or, if 15% or less of the initial (pound)41.5m principal
amount remains outstanding, on or prior to that date. Unless previously
repurchased by the company or any of its subsidiaries, redeemed or
converted, the bonds will be redeemed at par on May 31, 2008.
C) ANALYSIS BY CURRENCY
The group's borrowings were denominated in the following currencies:
1997
(pound)m
- ----------------------------------------------------------------------------
Sterling 41.8
US dollar 36.3
Norwegian krone 0.2
Irish punt 10.3
Netherlands guilder 3.3
Canadian dollar 7.7
Other currencies 6.7
------------
106.3
============
All borrowings are unsecured.
21 CAPITAL LEASE OBLIGATIONS
Capital lease obligations fall due as follows:
1997
(pound)m
- ----------------------------------------------------------------------------
Within one year 1.2
Between one and two years 2.2
Between two and three years 2.0
Between three and four years 2.1
Between four and five years 2.1
Over five years 3.3
-----------
12.9
Less: Imputed interest payable (2.6)
-----------
10.3
===========
22 PROVISIONS FOR LIABILITIES AND CHARGES: INSURANCE TECHNICAL PROVISIONS
1997
(pound)m
- ----------------------------------------------------------------------------
At January 1, 67.7
Acquisition of subsidiaries 303.9
Transfers from income 7.4
Utilization (73.5)
Transfers to creditors and other movements (0.5)
Translation differences 2.9
-----------
At December 31, 307.9
===========
At December 31, 1997, amounts recoverable from reinsurers in relation to
insurance technical provisions amounted to (pound)177.8m.
23 PROVISIONS FOR LIABILITIES AND CHARGES: OTHER PROVISIONS
<TABLE>
<CAPTION>
PENSIONS CLAIMS AND
AND LAWSUITS
SIMILAR RESTRUC- (NOTE
OBLIGATIONS TURING 24(A)) OTHER TOTAL
(pound)m (pound)m (pound)m (pound)m (pound)m
------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
At January 1, 1997 42.3 19.0 43.6 24.5 129.4
Year ended December 31, 1997
Acquisition of subsidiaries -- -- 2.9 -- 2.9
Transfers from income 5.7 7.2 14.8 8.8 36.5
Utilization (6.0) (6.5) (11.7) (3.8) (28.0)
Transfers (to)/from payables (1.3) 0.4 2.2 1.9 3.2
Translation differences 0.2 0.2 (0.1) (1.4) (1.1)
------------- ------------ ----------- ---------- ---------
At December 31, 1997 40.9 20.3 51.7 30.0 142.9
------------- ------------ ----------- ---------- ---------
</TABLE>
Provisions for pensions and similar obligations are in respect of defined
benefit pension costs, deferred compensation and other post-retirement
benefits.
Restructuring provisions comprise the following:
(i) Provision for the future net costs of leasehold properties which are
surplus to the group's foreseeable business requirements. At December 31,
1997, the provision amounted to (pound)11.0m and will be utilized over the
unexpired periods of the relevant leases.
(ii) Provision for costs to be incurred in relation to ongoing initiatives
aimed at improving the group's efficiency and the integration of
newly-acquired businesses. At December 31, 1997, the remaining provision
amounted to (pound)9.3m which is expected to be utilized during 1998.
Claims and lawsuits provisions are described in note 24(a)
Other provisions principally comprise personnel-related costs (including
performance-related bonuses), contingent consideration and sundry items.
24 CONTINGENT LIABILITIES
a) CLAIMS AND LAWSUITS
The group is subject to claims and lawsuits in the course of its business,
resulting principally from alleged errors and omissions in connection with
the group's insurance and consulting businesses. Claims may arise several
years after the original events which could be the subject to the dispute.
Although all claims are strenuously defended, provision is made, after
taking account of the group's insurance arrangements, for potential
liabilities including expenses that may arise in respect of these claims
and lawsuits. Provision is based on current information and legal advice
and provisions are adjusted from time to time according to developments.
While there is always uncertainty as to the outcome of any claim or
litigation, the directors do not expect such claims existing at the balance
sheet date, either individually or in aggregate, to have a material adverse
effect on the group's future results or financial position.
b) OTHER CONTINGENCIES
A group company has guaranteed undertakings totaling (pound)0.5m given by
banks in relation to the underwriting membership of Lloyd's of certain
directors and employees of fellow subsidiary undertakings. In no case does
the contingent liability under any single guarantee exceed (pound)50,000.
Certain group companies have opened letters of credit in favor of clients
on behalf of insurance markets and have given other guarantees and
indemnities in the ordinary course of their business.
The company has given guarantees in respect of certain liabilities of other
group companies.
No material unprovided liabilities are expected to arise either to the
company or the group as a result of these guarantees and indemnities.
c) SUBSEQUENT EVENT
On March 12, 1998 the Financial Services Authority (FSA) and the Personal
Investment Authority (PIA) issued a consultation document which proposes an
extension of the review of pension transfers and opt outs, specified by the
Securities and Investments Board in October 1994, to individuals not
considered to be priority cases. As explained in note 35, the potential
exists for the additional potential liabilities arising from the review to
have a material adverse effect on the group's future results and financial
position.
25 COMMITMENTS
a) OPERATING LEASES
Certain group companies have entered into operating lease arrangements in
respect of properties and equipment. Annual rental commitments under these
leases are analyzed below:
1997
---------------------------
PROPERTIES OTHER
(pound)m (pound)m
------------ ------------
Expiry of leases:
Within one year 3.9 3.6
Between one and two years 4.9 3.1
Between two and three years 5.0 2.7
Between three and four years 8.5 0.7
Between four and five years 3.3 0.4
Over five years 20.9 --
------------ ------------
46.5 10.5
Less: Recoveries from operating sub-leases (5.0) --
------------ ------------
41.5 10.5
============ ============
Future rentals arising under these leases are as follows:
RENT SUB-LEASE NET RENT
PAYABLE INCOME PAYABLE
(pound)m (pound)m (pound)m
-------------- --------------- --------------
Within one year 57.0 (5.0) 52.0
Between one and two years 47.6 (4.9) 42.7
Between two and three years 35.7 (3.5) 32.2
Between three and four years 25.1 (2.2) 22.9
Between four and five years 18.5 (1.3) 17.2
Over five years 133.8 (5.5) 128.3
-------------- --------------- --------------
317.7 (22.4) 295.3
============== =============== ==============
b) CAPITAL EXPENDITURE
At December 31, 1997, the group had commitments for contracted capital
expenditure amounting to (pound)1.8m.
26 PENSIONS AND SIMILAR BENEFITS
a) PENSIONS
The group's principal defined benefit pension plans are in the UK and the
US. These plans cover eligible current and retired employees and are funded
on the basis of local actuarial advice. For the purposes of determining the
group's pension cost, these plans are valued annually at January 1, using
the projected unit method, by qualified actuaries who are the group's
employees. At January 1, 1997, the date of the latest valuations, the
market value of the assets of these plans was (pound)837.0m. In assessing
the value of the assets held by the UK plan, allowance was made for the
abolition during 1997 of tax credits on UK dividend income paid to pension
plans. The actuarial value of the assets of these plans represented 115% of
the liabilities for pension benefits that had accrued to members at that
date, after allowing for expected future salary increases. Under the
relevant accounting standard, this surplus is being recognized over the
average remaining service lives of eligible employees.
The group's contributions to its defined benefit pension plans during the
year amounted to (pound)16.5m. The group's defined benefit pension cost was
(pound)17.5m. At December 31, 1997, a prepayment of (pound)10.0m is
included within other receivables falling due after more than one year
which represents the cumulative amount by which the group's contributions
to its pension plans have exceeded the pension costs charged to its profit
and loss account.
The principal assumptions made in the actuarial assessment of the group's
defined benefit pension costs were:
PER ANNUM
- ------------------------------------------------------------------------
Investment return 8.75% to 9%
Salary inflation (including the salary scale) 6.25% to 8%
Dividend growth 5%
Pension increase 4% to 5%
b) OTHER POST-RETIREMENT BENEFITS
Post-retirement benefits other than pensions were withdrawn from the
group's existing employees in the UK in 1989 and in the US in 1993, but the
group continues to provide certain of its pensioners with healthcare and
life assurance benefits. Participation is restricted to employees who had
retired and met eligibility requirements before January 1, 1994. At
December 31, 1997 there were approximately 1,500 pensioners eligible for
such benefits. The principal assumptions made in the actuarial assessment
of the cost of other post-retirement benefits were as follows:
PER ANNUM
- ---------------------------------------------------------------------
Medical cost inflation 7% to 10%
Discount rate 8%
27 CASH FLOWS
a) RECONCILIATION OF OPERATING INCOME TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
1997
(pound)m
- ----------------------------------------------------------------------------
Operating income 105.8
Depreciation and other non-cash items 20.5
Increase in net fiduciary payables 1.4
Decrease in reinsurers' share of technical provisions 47.4
Decrease in other receivables and prepayments 20.6
Decrease in other payables and accruals (43.0)
Decrease in insurance technical provisions (66.8)
Increase in long-term payables and provisions 12.0
-----------
Net cash inflow from operating activities 97.9
===========
b) ANALYSIS OF THE MOVEMENT IN NET FUNDS
<TABLE>
<CAPTION>
CASH AND OVERDRAFTS BORROWINGS
-------------------------- -----------------
LIQUID FINANCE
CASH OVERDRAFTS TOTAL RESOURCES LOANS LEASES NET FUNDS
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------- ---------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
At January 1, 1997 206.6 (0.5) 206.1 412.4 (131.8) (12.2) 474.5
Year ended December 31,
1997
Cash flows (17.7) 16.4 (1.3) (41.6) 26.0 0.6 (16.3)
Acquisitions and disposals (10.9) (16.5) (27.4) 78.7 -- -- 51.3
Translation differences (7.5) 0.1 (7.4) 3.0 -- 1.3 (3.1)
------- ---------- --------- --------- -------- -------- --------
At December 31, 1997 170.5 (0.5) 170.0 452.5 (105.8) (10.3) 506.4
======= ========== ========= ========= ======== ======== ========
</TABLE>
c) RECONCILIATION OF CASH AND LIQUID RESOURCES TO AMOUNTS SHOWN IN THE
BALANCE SHEET
1997
(pound)m
- ----------------------------------------------------------------------------
CASH
Cash and deposits 538.8
Less: Deposits classified as liquid resources (356.3)
Less: Deposits classified as financial investment (12.0)
-----------
170.5
===========
LIQUID RESOURCES
Current asset investments 96.2
Add: Deposits classified as liquid resources 356.3
-----------
452.5
===========
28 DIRECTORS' REMUNERATION
1997
(pound)000
- ---------------------------------------------------------------------------
Aggregate emoluments:
Salary and fees 1,497
Annual bonus 514
Benefits in kind 92
-----------
2,103
===========
Deferred bonus 439
-----------
Notional gains made on the exercise of share options 40
-----------
Deferred bonus figures stated above represent amounts accrued in respect of
directors who were in office during the period. At December 31, 1997, the
accumulated provision for deferred bonus attributable to directors in
office at that date was (pound)873,000. During 1997, no amounts were paid
to directors in respect of their accumulated deferred bonus entitlements.
29 EMPLOYEE SHARE OPTION PLANS
For many years, the company has offered participation in its share option
plans to certain of the group's employees. The company's existing share
option plans expired during 1994. At the 1995 Annual General Meeting, the
shareholders approved the renewal of both plans for a further ten years. No
further options may be granted under the expired plans but outstanding
options remain exercisable. An explanation of the terms of the company's
share option plans is given below.
SHARESAVE
Sharesave is a savings-related share option plan which has been available
to all permanent members of staff based in the UK since 1984. In 1995, the
plan was extended to employees based in the Republic of Ireland and, in
1996, to employees in the Isle of Man and the Channel Islands. Participants
enter into a three or five-year savings contract to which they may
contribute up to (pound)250 per month. Within the six months following the
maturity of the savings contract, participants may use the proceeds to
purchase the company's shares at the exercise price which is determined at
the time they are invited to apply for options under the plan.
EXECUTIVE PLAN
The Executive plan is available to executive directors and senior
management throughout the world. Options granted under this plan are
normally exercisable within the period commencing on the third anniversary
and ending on the tenth anniversary of the date on which they were granted.
With the renewal of the plan in 1995, the group introduced a performance
condition. Options granted under the replacement plan may not be exercised
unless earnings per share growth exceeds that of the UK Retail Prices Index
by at least 2% per annum averaged over the number of years completed since
the date on which they were granted.
Information relating to the options outstanding under the company's share
option plans is given below.
<TABLE>
<CAPTION>
WEIGHTED
EXECUTIVE SHARESAVE AVERAGE
PLAN PLAN TOTAL EXERCISE
MILLIONS MILLIONS MILLIONS PRICE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 21.7 11.8 33.5 163p
Year ended December 31, 1997
Exercised -- (5.5) (5.5) 88p
Cancelled (1.7) (1.2) (2.9) 228p
----------- ---------- ----------- ----------
Outstanding at December 31, 1997 20.0 5.1 25.1 172p
----------- ---------- ----------- ----------
Exercisable at December 31, 1997 15.8 0.5 16.3 193p
----------- ---------- ----------- ----------
</TABLE>
No options were granted during 1997.
Options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------- ---------------------
WEIGHTED AVERAGE
----------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE PERIOD TO NUMBER EXERCISE
RANGE OF EXERCISE PRICES MILLIONS PRICE EXPIRY MILLIONS PRICE
- ------------------------------------ --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
88p-100p 3.9 97p 37 months 0.5 88p
100p-200p 12.7 160p 70 months 7.3 170p
200p-300p 8.5 224p 42 months 8.5 224p
--------- ---------- ---------- -------- ----------
25.1 16.3
--------- --------
</TABLE>
The market price of the company's shares at the close of business on
December 31, 1997 was 141p per share and, during the year, fluctuated in
the range 116p to 151.5p per share.
The number of shares which may be issued or issuable under the company's
employee share plans is limited such that in any ten-year period not more
than 10% of the issued ordinary share capital may be issued or issuable
under such plans. Options which have been cancelled are ignored for the
purpose of this calculation.
30 TRANSACTIONS WITH RELATED PARTIES
Mrs. L.M.B.A. Moratti, who was appointed a director of the Company on
December 17, 1997, together with certain family members, controls Securfin
S.p.A. and Securfin Altrida B.V. Those companies are parties to the
joint-venture agreement and related documentation in respect of the
creation of Nikols Sedgwick B.V., to which Sedgwick Group plc and certain
of its subsidiaries are also parties. Full details of the transaction were
contained in the circular to shareholders dated October 10, 1997, including
exit mechanisms involving Securfin S.p.A. and Securfin Altrida B.V.
Agreements subsisted during the year under which Lloyd's underwriting
agency services were provided by Sedgwick Oakwood to Q.O. Healey, S. Riley,
R.J.W. Titley and W.R.P. White-Cooper. There are no special terms in the
agreements under which Sedgwick Oakwood acts for the directors or persons
connected with them.
During the period under review, there were no other transactions or
balances with related parties reportable under FRS 8, Related Party
Disclosures.
31 POST-BALANCE SHEET EVENT
On January 16, 1998, the group sold its managing agencies based in The
Netherlands for NLG 37 million ((pound)11.2 million) in cash, of which 80
percent was paid on completion and 20 percent will be paid in July 1998.
It is expected that the proceeds will be used largely to fund the
reorganisation of the group's operations in The Netherlands and elsewhere
during 1998.
32 DIFFERENCES BETWEEN UK AND US GAAP
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the UK (UK GAAP), which differ
in certain respects from those applicable in the US (US GAAP). An
explanation of the differences which have a significant effect on the group
is given below.
USE OF ESTIMATES
Preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses for an accounting period. Such estimates
and assumptions could change in the future as more information becomes
known or circumstances alter, such that the group's actual results may
differ from the amounts reported and disclosed in the financial statements.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Under UK GAAP, goodwill and identifiable intangible assets arising from the
purchase of businesses are written off on acquisition against retained
earnings or other reserves. Under US GAAP, goodwill and identifiable
intangible assets are capitalized and amortized over their estimated useful
lives. For the purposes of the tabular reconciliations set out below, such
assets are amortized over periods of 5 to 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Under UK GAAP, provision is made against the carrying value of a long-lived
asset to the extent that there is believed to be permanent diminution in
its value. Provisions are not made for temporary diminutions in value.
Under UK GAAP there is no prescriptive guidance on impairment assessment.
Under US GAAP, SFAS No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of requires long-lived
assets and any related goodwill (so-called impairment test goodwill) to be
reviewed for impairment whenever events or changes in circumstances
indicate that their carrying values may not be recoverable. Impairment is
assessed by comparison of the cash flows expected to be derived from an
asset against the carrying values of the asset and any related goodwill. If
such cash flows fall below the related carrying values, an impairment loss
should be recognized being the shortfall of the discounted future cash
flows against the related carrying values.
Goodwill which is not related to long-lived assets (so-called enterprise
goodwill) continues to be assessed for impairment in accordance with APB
No. 17 Intangible assets. Management reviews the carrying value of
enterprise goodwill for impairment on an annual basis by reference to the
discounted cash flows expected to be derived from the relevant businesses.
Considerable judgement is necessary in estimating future cash flows. Actual
cash flows could differ significantly from such estimates.
During the year ended December 31, 1997, no adjustments were necessary in
respect of impairment of long-lived assets.
RESTRUCTURING INITIATIVES
Restructuring costs are incurred in relation to ongoing initiatives aimed
at improving the group's efficiency and the integration of newly-acquired
businesses. Such costs are principally personnel and property-related.
Under US GAAP, the requirements for making provision for restructuring
costs are more prescriptive than under UK GAAP. Accordingly, in 1997
adjustments have been made in respect of restructuring costs recognized
during 1997 under UK GAAP which will be recognized in future years under US
GAAP.
SOFTWARE DEVELOPMENT COSTS
Subject to certain conditions, the cost of software developed by the group
for its own use may be capitalized under UK GAAP. Under US GAAP, such costs
are expensed as incurred.
CONTINGENT COMMISSIONS
Contingent commissions represent income receivable from insurers based on
the volume and/or profitability of business placed with them by the group.
Under UK GAAP, contingent commissions are accrued for in the period to
which they relate provided that they can be reasonably estimated. Under US
GAAP, SFAS No. 5, Accounting for Contingencies, effectively precludes
accrual for contingent commissions which are based on the profitability of
business placed or are both volume and profit-based (so-called hybrid
arrangements). Accordingly, the group records income from profit-based and
hybrid arrangements on a cash-received basis under US GAAP.
PENSIONS
Under UK GAAP, the cost of providing defined benefit pension arrangements
is expensed over the average expected service lives of eligible employees
on the basis of a constant percentage of current and estimated future
earnings. Under US GAAP, SFAS No. 87 Employers' Accounting for Pensions,
requires that the cost is determined based on a comparison of the projected
benefit obligation with the market value of the underlying plan assets and
other unrecognized gains and losses assessed on an actuarial basis.
Principally as a result of this difference in methodology, the group's US
GAAP pension cost can be significantly different from that determined under
UK GAAP and tends to be more sensitive to changing economic conditions.
POST-EMPLOYMENT BENEFITS
Post-employment benefits are all types of benefits provided to former or
inactive employees after employment but before their retirement. In respect
of the group, such benefits primarily relate to compensation for long-term
sickness. Under UK GAAP, the cost of providing these benefits is recognized
on a cash basis. Under US GAAP, SFAS No. 112, Employers' Accounting for
Post-employment Benefits, requires that the expected cost of such benefits
is accrued over the estimated average service lives of eligible employees.
REVALUATION OF FORWARD EXCHANGE CONTRACTS
As an element of its treasury management strategy, the group enters into
forward exchange contracts and other financial instruments in respect of
future income denominated in foreign currencies principally US dollars.
Under UK GAAP, such instruments are regarded as hedges of future income and
are not reflected in the group's financial statements. Under US GAAP, such
instruments are regarded as anticipatory hedges and are revalued (or marked
to market) at each accounting date. Any gain or loss arising on revaluation
is recorded in operations.
INVESTMENTS
Under UK GAAP, fixed asset investments are stated at cost or amortized cost
less provision for any permanent diminution in value. Current asset
investments are stated at the lower of cost or amortized cost and net
realizable value. Under US GAAP, the group complies with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, under
which such investments are classified as available for sale and recorded at
their fair values. Unrealized gains and losses are reflected in
shareholders' equity (net of tax effects, if applicable).
LEASES
Certain property leases which are treated as operating leases under UK GAAP
must be accounted for as capital leases under US GAAP.
CONTINGENT CONSIDERATION
Under UK GAAP, contingent consideration payable in respect of businesses
acquired prior to January 1, 1995 is recognized when it becomes known.
Contingent consideration payable in respect of businesses acquired on or
after January 1, 1995 is estimated and provided for on completion. Under US
GAAP, contingent consideration is recognized when it becomes known.
Accordingly, the tabular reconciliations reflect an adjustment to
shareholders' equity in respect of contingent consideration payable on
businesses acquired on or after January 1, 1995.
DIVIDENDS PROPOSED
Under UK GAAP dividends are provided for in the accounting period to which
they relate. Under US GAAP, dividends are not provided for until they are
declared by the directors following approval by the shareholders.
SHARE OPTION PLANS
Under UK GAAP, the group does not recognize any cost in respect of options
granted under its share option plans. Under US GAAP, the group accounts for
its share option plans in accordance with APB No. 25, Accounting for Stock
Issued to Employees. The group's share option plans are described in note
29. The Sharesave plans are non-compensatory under APB No. 25. The
Executive plans are, however, compensatory under APB No. 25 and, in view of
its performance condition, the 1995 Executive Share Option Scheme is
accounted for as a variable plan. During the period under review, the
compensation cost determined in respect of the Executive plans was not
material to the group's net income and shareholders' equity. Information on
the fair value of share options granted since January 1, 1995 is given in
note 33.
DEFERRED TAXATION
Under UK GAAP, deferred taxation is accounted for using the liability
method to the extent that it is considered probable that a liability or
asset will crystallize in the foreseeable future. Under US GAAP, deferred
taxation is provided on all temporary differences. Deferred tax assets are
recognized to the extent that it is more likely than not that they will be
realized. Where doubt exists as to whether a deferred tax asset will be
realized, an appropriate valuation allowance is established.
DISCONTINUED OPERATIONS
For an operation to be categorized as discontinued under UK GAAP, its sale
or termination must have a material effect on the nature and focus of the
group's operations and represent a material reduction in its operating
facilities. Under US GAAP, discontinued operations represent reportable
segments which have been sold or terminated. Accordingly, the group's
insurance underwriting subsidiaries in run off are regarded as discontinued
operations under US GAAP but are not regarded as discontinued operations
under UK GAAP.
NET INCOME AND SHAREHOLDERS' EQUITY RECONCILIATION STATEMENTS
The effect on the group's net income and shareholders' equity of applying
the significant differences between UK GAAP and US GAAP is summarized in
the tabular reconciliation statements set out below.
NET INCOME
YEAR ENDED
DECEMBER 31,
1997
(pound)m
- ----------------------------------------------------------------------------
EARNINGS REPORTED UNDER UK GAAP 70.4
Adjustments:
Amortization of goodwill and identifiable intangible assets (13.3)
Restructuring initiatives 5.8
Contingent commissions (0.7)
Pensions 1.0
Post-employment benefits 0.2
Revaluation of forward exchange contracts (2.5)
Leases 0.8
Other items 0.5
Deferred taxation (10.1)
----------
NET INCOME IN ACCORDANCE WITH US GAAP 52.1
==========
Analysis of net income in accordance with US GAAP
- -- Continuing operations 50.9
- -- Discontinued operations 1.2
----------
52.1
==========
EARNINGS PER SHARE
Reported under UK GAAP 12.8p
----------
In accordance with US GAAP:
Basic 9.5p
Diluted 9.4p
----------
Earnings per share attributable to discontinued operations were not
material during the period under review.
With effect from 1 January 1997, the group adopted FAS 128, Earnings per
share. Earnings per share calculations in accordance with US GAAP are set
out in note 33. Additional information on earnings per share is set out in
note 34.
SHAREHOLDERS' EQUITY
AT
DECEMBER 31,
1997
(pound)m
- ----------------------------------------------------------------------------
SHAREHOLDERS' FUNDS REPORTED UNDER UK GAAP 199.8
Adjustments:
Goodwill and identifiable intangible assets 218.8
Restructuring initiatives 5.0
Contingent commissions (10.5)
Pensions 8.5
Post-employment benefits (3.3)
Revaluation of forward exchange contracts 0.9
Investments 1.2
Leases (4.1)
Contingent consideration 12.3
Dividends proposed 22.2
Other (0.3)
Deferred taxation 24.9
Deferred taxation on US GAAP adjustments (9.4)
-----------
SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP 466.0
===========
Analysis of shareholders' equity in accordance with US GAAP
- -- Continuing operations 425.7
- -- Discontinued operations 40.3
-----------
466.0
===========
STATEMENTS OF CASH FLOWS
During 1997, the group adopted FRS No. 1 (Revised), Cash flow statements,
as the basis for preparing its consolidated statements of cash flows under
UK GAAP. An explanation of the changes introduced by FRS No. 1 (Revised) is
given in note 1 to these financial statements.
Under US GAAP, the group follows SFAS No. 95, Statement of Cash Flows,
which differs from FRS No. 1 (Revised) in the following respects:
(a) Under FRS No. 1 (Revised), cash flows are presented for operating
activities, returns on investments and servicing of finance, taxation,
capital expenditure and financial investment, acquisitions and disposals,
dividends, management of liquid resources and financing. SFAS No. 95
requires cash flows to be analyzed between those resulting from operating,
investing and financing activities.
(b) Under FRS No. 1 (Revised), the statement of cash flows shows the
movement in "pure cash" which comprises cash in hand, deposits repayable on
demand, less overdrafts. Under SFAS No. 95, the statement of cash flows
shows the movement in cash and cash equivalents which differs from the
movement in "pure cash" in the following respects:
(i) overdrafts are excluded;
(ii) investments which were within three months of maturity when acquired
are included; and
(iii)cash, deposits and investments held in a fiduciary capacity are excluded.
For illustrative purposes, summary consolidated statements of cash flows
under US GAAP are set out below:
YEAR ENDED
DECEMBER 31,
1997
(pound)m
- ----------------------------------------------------------------------------
Cash inflow from operating activities 71.6
Cash outflow from investing activities (21.8)
Cash outflow from financing activities (73.5)
-----------
Net increase in cash and cash equivalents under US GAAP (23.7)
Effect of exchange rate changes (1.4)
Cash and cash equivalents under US GAAP at January 1, 129.5
-----------
Cash and cash equivalents under US GAAP at December 31, 104.4
Less: Overdrafts (0.5)
Less: Investments within three months of maturity when acquired (270.1)
Add: Cash and deposits held in a fiduciary capacity 336.2
-----------
Cash and overdrafts under UK GAAP at December 31, 170.0
===========
RECENT ACCOUNTING PRONOUNCEMENTS
a) UK GAAP
GOODWILL AND INTANGIBLE ASSETS
During 1997, the Accounting Standards Board (ASB) published FRS No. 10,
Goodwill and intangible assets, which requires that goodwill arising on
acquisitions recognized during accounting periods ending on or after
December 23, 1998 must be capitalized and amortized over its useful
economic life.
Accordingly, the treatment of goodwill under UK GAAP will in future be
broadly similar to its treatment under US GAAP. Nevertheless, management
expects that the tabular reconciliations will continue to reflect
goodwill-related adjustments because FRS No. 10 need not be applied
retrospectively to goodwill written-off to reserves in previous years and
there will continue to be differences between the bases of calculating
goodwill (for example, in relation to fair valuation and the criteria for
accounting for business combinations as pooling of interests).
ASSOCIATES AND JOINT VENTURES
In November 1997, the ASB published FRS No. 9, Associates and joint
ventures, which restricts the circumstances in which equity accounting can
be applied and provides, for the first time under UK GAAP, detailed rules
for accounting for joint ventures. It also changes the presentation of the
group's share of the results of associates and joint ventures and
introduces additional disclosure requirements. FRS No. 9 applies to
accounting periods beginning on or after June 23, 1998.
Management does not expect that adoption of FRS No. 9 will have a material
impact on the group's results or financial position.
b) US GAAP
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
In February 1997, the SEC issued FRR No. 48 which requires certain
additional disclosures in relation to derivatives and other financial
instruments designed to help users of financial statements to assess the
market risks to which registrants are exposed and understand how those
risks are managed. In response to this pronouncement, management has
enhanced the disclosure of the group's accounting policy in relation to
derivatives presented in note 1 to these consolidated financial statements.
For accounting periods ending after June 15, 1998, management will be
required to provide additional qualitative and quantitative information
about the market risks inherent in derivatives and other financial
instruments in "Management's discussion and analysis."
The Financial Accounting Standards Board (FASB) is developing a new
accounting standard on derivatives and hedging activities. It is expected
that the standard will require all derivatives to be measured at fair value
and recognized on the balance sheet as assets or liabilities. It is
expected that net income will be affected only by changes in the fair
values of derivatives that are not designated as hedges. It is expected
that the standard will apply to accounting periods beginning after June 15,
1999. It is not yet possible for management to assess its financial effect.
COMPREHENSIVE INCOME
Comprehensive income represents all changes in shareholders' equity during
an accounting period other than those arising from investments by and/or
distributions to shareholders. In June 1997, the FASB published SFAS No.
130, Reporting Comprehensive Income, which requires that a statement of
comprehensive income is included in financial statements prepared in
accordance with US GAAP.
SFAS No. 130 applies to accounting periods beginning after December 15,
1997. The group already provides the required information under UK GAAP.
SEGMENTAL INFORMATION
Segmental information is currently reported on two bases: by industry and
by geographic area. In June 1997, the FASB published SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
will replace the industry-based disclosures with segmental information
based on the group's internal management reporting structures. In addition,
SFAS No. 131 requires segmental information by geographic area and by type
of products and services, and information on major customers.
SFAS No. 131 applies to accounting periods beginning after December 15, 1997.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
In February 1998, the FASB published SFAS No. 132, Employer's disclosures
about Pensions and Other Postretirement Benefits. It does not address
recognition or measurement issues but improves and standardizes the
disclosure requirements in respect of pensions and other post-retirement
benefits.
SFAS No. 132 applies to accounting periods beginning after December 15, 1997.
33 DISCLOSURES RELATING TO INFORMATION PRESENTED IN ACCORDANCE WITH US GAAP
INTANGIBLE ASSETS
Intangible assets comprise the following:
1997
(pound)m
- ----------------------------------------------------------------------------
Goodwill 247.5
Identifiable intangibles 104.6
-----------
352.1
Less: Accumulated amortization (133.3)
-----------
218.8
===========
INVESTMENTS
The group has classified all of its investments in debt and equity
securities as "available for sale" under SFAS No. 115. The costs and fair
values of the group's investments were as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
AT DECEMBER 31, 1997 (pound)m (pound)m (pound)m (pound)m
- -------------------- ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Debt securities:
UK government 5.1 -- -- 5.1
US government 31.5 1.1 (0.1) 32.5
Other government and public bodies 107.7 0.2 (0.2) 107.7
Corporate 98.3 -- (0.2) 98.1
Other issuers 4.8 0.1 -- 4.9
----------- ----------- ------------ --------
247.4 1.4 (0.5) 248.3
Equity securities 2.9 0.3 -- 3.2
----------- ----------- ------------ --------
250.3 1.7 (0.5) 251.5
=========== =========== ============ ========
</TABLE>
The contractual maturities of debt securities held at December 31, 1997 are
set out below:
1997
----------------------
COST OR
AMORTIZED
COST FAIR VALUE
(pound)m (pound)m
---------- ----------
Within one year 103.6 104.8
Between one and five years 129.2 129.0
Between five and ten years 14.6 14.5
---------- ----------
247.4 248.3
========== ==========
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or repay obligations prior to the contractual
maturity date.
Disposals of debt securities during the year ended December 31, 1997 did
not give rise to significant realized gains and losses.
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of the fair value of financial instruments held by the
group both on and off-balance sheet. The carrying values and fair values of
the material financial instruments held by the group were as follows:
1997
----------------------
CARRYING FAIR
VALUE VALUE
(Pound)m (pound)m
---------- ----------
Assets:
Cash and deposits 538.8 538.8
Current asset investments
- --Listed 60.1 60.4
- --Unlisted 36.1 37.1
Fixed asset investments
- --Listed 116.2 116.2
- --Unlisted 37.9 37.8
Liabilities:
Bank loans and overdrafts 28.5 28.5
7.68% Senior Loan Notes 2006 36.2 36.5
7.25% Convertible Bonds 2008 41.5 41.5
Off-balance sheet instruments:
Forward exchange contracts -- 0.9
Interest rate agreements -- 2.3
---------- ----------
In establishing its fair value disclosures for financial instruments, the
group has adopted the following methods and assumptions:
i) the carrying value of cash and deposits approximates to the fair value;
ii) the fair values of listed and unlisted investments are based on quoted
market prices, where available, or on a reasonable estimate of market value
based on the quoted market prices of similar financial instruments;
iii) the carrying value of bank loans and overdrafts approximates to the
fair value;
iv) the fair value of the 7.68% Senior Loan Notes 2006 is based on
discounted cash flows;
v) the fair value of the 7.25% Convertible Bonds 2008 represents the quoted
market price;
vi) the fair values of forward exchange contracts are based on market
rates; and
vii) the fair values of interest rate agreements are based on discounted
cash flows.
DERIVATIVES
As explained in note 1, the group uses derivatives to manage its exposure
to market risks arising from changes in foreign exchange rates and interest
rates. Information on the significant hedging arrangements outstanding at
December 31, 1997 is provided below.
a) FORWARD EXCHANGE CONTRACTS
The group had outstanding forward exchange contracts, including those to
sell US dollars for sterling, for underlying principal amounts of
(pound)64.7m at December 31, 1997. Forward exchange contracts to sell US
dollars for sterling in place at December 31, 1997 were as follows:
1997
--------------------
AVERAGE
PRINCIPAL RATE
MATURITY (pound)m (pound)m
- ------------------------------------------------------------- ---------
1998 44.4 1.59
1999 8.4 1.55
2000 1.2 1.57
--------- ---------
54.0
---------
b) INTEREST RATE AGREEMENTS
Underlying notional principal amounts of such contracts outstanding, their
termination dates and, where determinable, applicable interest rates were
as follows:
<TABLE>
<CAPTION>
INTEREST RATES
-------------------------------------------
AT DECEMBER 31, 1997 NOTIONAL FIXED VARIABLE FIXED VARIABLE
PRINCIPAL TERMINATION RECEIVABLE PAYABLE PAYABLE PAYABLE
CURRENCY MILLIONS DATES % % % %
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US dollar 490 1998 - 2001 5.94--7.87 5.81--6.00 -- --
Sterling
120 1998 - 2001 7.00--7.73 7.38--7.81 -- --
Sterling 20 1998 -- -- 7.16 7.07
German mark 90 1998 - 1999 4.12--4.55 -- -- --
---------- ----------- ---------- ---------- --------- -------
</TABLE>
CONCENTRATION OF CREDIT RISK
At December 31, 1997, the group did not consider there to be any
significant concentration of credit risk.
Potential concentrations of credit risk to the group comprise principally
cash and short-term deposits, investments and insurance broking
receivables.
The group places cash and short-term deposits with a range of banks and
financial institutions and controls its exposure to any one counterparty.
The group's investments comprise a broad range of highly-rated financial
instruments issued principally in the UK and the US.
Concentration of credit risk with respect to insurance broking receivables
is limited due to the large number of clients and underwriters with which
the group conducts business and their dispersion across many different
industries and/or geographic locations. As part of its on-going control
procedures, the group monitors both the credit worthiness of its clients
and underwriters with whom business is placed on behalf of clients.
PENSIONS
The group's principal defined benefit pension plans are in the UK and the
US. Pension costs for these plans computed in accordance with SFAS No. 87,
Employers' Accounting for Pensions, were as follows:
a) UK PLAN
YEAR ENDED
DECEMBER 31,
1997
(pound)m
- ----------------------------------------------------------------------------
Cost of benefits earned during the period (or service cost) 25.0
Interest cost on projected benefit obligation 44.6
Return on plan assets (56.2)
Net amortization and deferral (3.2)
-----------
Pension cost under US GAAP 10.2
===========
b) US PLAN
YEAR ENDED
DECEMBER 31,
1997
(pound)m
- ----------------------------------------------------------------------------
Cost of benefits earned during the period (or service cost) 7.7
Interest cost on projected benefit obligation 12.5
Return on plan assets (37.9)
Net amortization and deferral 20.9
-----------
Pension cost under US GAAP 3.2
===========
The funded status of the above plans determined in accordance with SFAS No.
87 was as follows:
<TABLE>
<CAPTION>
1997
----------------------
UK PLAN US PLAN
(pound)m (pound)m
- ----------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets 710.1 213.4
Less:
Accumulated benefit obligation (625.0) (146.0)
Additional benefits based on estimated future salary
levels (30.3) (27.6)
---------- ---------
Projected benefit obligation (655.3) (173.6)
---------- ---------
Plan assets in excess of projected benefit obligation 54.8 39.8
Amounts available to increase/(reduce) future pension
costs:
Unrecognized net (gain)/loss at transition (9.2) 0.4
Unrecognized net experience gain (39.6) (54.7)
Unrecognized prior service costs 18.4 2.5
Minimum pension liability adjustment -- (2.3)
---------- -----------
Prepaid/(accrued) pension cost under US GAAP 24.4 (14.3)
========== ===========
Vested benefit obligation 625.0 142.9
---------- -----------
</TABLE>
Plan benefits are based on length of service and final salary. Plan assets
are principally equity and fixed interest securities. Actuarial
computations are based on the projected unit method. The principal
assumptions used in computing the group's pension costs under US GAAP,
which were determined at January 1, 1997, were:
UK US
PER ANNUM PER ANNUM
- ----------------------------------------------------------------------------
Investment return 8.5% 8% to 9%
Discount rate 7.5% 8%
Salary inflation (excluding the salary scale) 5.25% 5%
========== ===========
OTHER POST-RETIREMENT BENEFITS
The cost of post-retirement benefits other than pensions computed in
accordance with SFAS No. 106, Employers' Accounting for Post-retirement
Benefits Other Than Pensions, was as follows:
YEAR ENDED
DECEMBER 31,
1997
(pound)m
- ---------------------------------------------------------------------------
Interest on accumulated benefit obligation 1.3
Net amortization and deferral 0.1
-----------
1.4
===========
The plans are unfunded. The benefit obligation determined in accordance
with SFAS No. 106 was as follows:
1997
(pound)m
-----------
Accumulated benefit obligation 16.4
Amounts available to increase future costs:
Unrecognized net experience gain (1.8)
-----------
14.6
===========
The principal assumptions made in the actuarial assessment of the cost of
other post-retirement benefits, which were determined at January 1, 1997,
were:
PER ANNUM
- -----------------------------------------------------------------------
Medical cost inflation 7% to 10%
Discount rate 8%
DEFERRED TAXATION
Deferred taxation assets/(liabilities) on the full provision basis under US
GAAP:
AT DECEMBER 31, 1997
-----------------------------------
FULL VALUATION
PROVISION ALLOWANCE NET
(pound)m (pound)M (pound)m
- ----------------------------------------------------------------------------
Accelerated tax depreciation 0.5 -- 0.5
Short-term timing differences 11.8 (2.9) 8.9
Potential remittance of retained
earnings
of overseas companies (8.0) -- (8.0)
Pensions and similar obligations 17.0 -- 17.0
Restructuring provisions 4.9 -- 4.9
Advance Corporation Tax recoverable 0.6 -- 0.6
Overseas intangibles (note 10) 13.9 -- 13.9
----------- ---------- -----------
40.7 (2.9) 37.8
=========== ========== ===========
A valuation allowance is provided to reduce the deferred tax asset to a
level which, more likely than not, will be realized, based on available
evidence including historical and projected operating results, estimated
reversals of temporary differences and tax-planning strategies. Management
projects the expected reversal of the timing differences giving rise to the
deferred tax assets and assesses whether there are likely to be sufficient
taxable profits in the year in which they reverse, or the relevant carry
forward period, against which the deduction arising on reversal may be set.
To the extent that such profits are insufficient, taxable income in prior
years, against which the deductions arising could be set, is taken into
account. In making this assessment, future tax-planning strategies are
taken into account only if they are considered to be feasible and are more
likely than not to be implemented.
When SFAS No. 109, Accounting for Income Taxes, became effective in 1993,
it was necessary to establish valuation allowances in respect of unutilized
ACT which, although available to carry forward for recovery against future
UK tax liabilities, was considered unlikely to be utilized in the
foreseeable future and deferred tax assets arising in the group's US
subsidiaries which, at that time, had only recently recovered from a period
in which it made losses.
In subsequent years it has been possible to reduce these valuation
allowances for the following reasons:
(i) in 1995, the group implemented its foreign income dividend (FID)
strategy enabling it both to avoid incurring further unutilized ACT and to
utilize ACT brought forward against current year tax liabilities; and
(ii) the performance of the group's US operation has enabled management to
adopt an increasingly favorable expectation of its future profitability.
EARNINGS PER SHARE
Basic and diluted earnings per share in accordance with US GAAP are
calculated as follows:
YEAR ENDED DECEMBER 31, 1997
---------------------------------
NET
INCOME SHARES EARNINGS
(pound)m MIllIONS PER SHARE
- ------------------------------------------------------------------------------
Basic 52.1 549.5 9.48p
Effect of potentially dilutive securities:
Share options -- 2.5 (0.04)p
7.25% Convertible Bonds 2008 2.1 22.7 (0.01)p
--------------------------------
2.1 25.2 (0.05)p
--------------------------------
Diluted 54.2 574.7 9.43p
--------------------------------
The weighted average number of share options outstanding during the year
but not included in the calculation of diluted earnings per share because
their exercise prices exceeded the average market price of the company's
shares during the year was 22.2m in 1997.
SHARE OPTION PLANS
A description of the group's share option plans, an analysis of the number
and exercise prices of options outstanding and other relevant information
is given in note 29.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based
Compensation, which permits disclosure of the cost to the group of share
options granted to employees on or after January 1, 1995 based on the fair
value of the options on the date on which they were granted. Had the group
accounted for share options granted since January 1, 1995 in accordance
with SFAS No. 123, net income under US GAAP would have been reduced by
(pound)0.9m in 1997. Such adjustments are unlikely to be indicative of the
effect of share option plans on future pro-forma net income because they do
not take into account any cost associated with share options granted before
January 1, 1995.
In calculating the above pro-forma adjustments the fair value of options
granted was assessed using the Black-Scholes option-pricing model. No
options were granted in 1997.
34 ADDITIONAL INFORMATION ON EARNINGS PER SHARE
In management's opinion, basic earnings per share before interest payable,
taxation, and amortization of goodwill and identifiable intangible assets
(EBITA) provides a more meaningful indicator of the group's trading
performance than the measures of earnings per share shown in note 32.
EBITA per share is calculated as follows:
YEAR ENDED
DECEMBER 31,
1997
(pound)m
-----------
Net income in accordance with US GAAP 52.1
Adjustments:
Interest payable 10.2
Taxation
- --In accordance with UK GAAP 28.3
- --US GAAP adjustments 10.1
-----------
38.4
Amortization of goodwill and identifiable intangible assets 13.3
-----------
EBITA 114.0
===========
Average number of shares in issue 549.5
-----------
EBITA per share 20.75p
-----------
It should be noted that EBITA as defined above may not be comparable with
similarly-titled measures reported by other companies as it is not defined
under either UK GAAP or US GAAP.
35 SUBSEQUENT EVENT
In October 1994, the Securities and Investments Board (SIB), issued its
report Pension Transfers and Opt Outs, Review of Past Business. Its
objective was to secure compensation for individuals who, between April 29,
1988 (the effective date of regulation under the Financial Services Act
1986) and June 30, 1994 (when new guidance on pension transfers and opt
outs came into force), were wrongly advised to transfer benefits from, or
opt out of, an occupational pension plan and enter into a personal pension
plan and have thereby suffered actual or potential loss.
During the period under review, such business was undertaken by the Noble
Lowndes group, largely prior to its acquisition by Sedgwick in September
1993, and by Sedgwick Consulting Group, the group's employee benefits
operation at the time. Based on criteria and procedures set out in the
SIB's report, the group is required to conduct a review of this business
and to determine the compensation which should be paid to clients.
The SIB required the review to be conducted only on priority cases; in
particular, those who transferred from an occupational pension plan and
have since died or retired or are now nearing retirement and those who
opted out of an occupational plan and are now over 35 years old. Sedgwick
has satisfied the interim targets set by the regulator and expects to
complete this review by December 31, 1998.
On March 12, 1998, the FSA and the PIA issued a consultation document on
the review of individuals not considered to be priority cases. This further
review will focus on younger investors; typically those who are still more
than 15 years away from retirement. The consultation document envisages
that clients falling within this category will be contacted by the relevant
entity and that the FSA will concurrently conduct a publicity campaign to
alert clients to their right to request a review. The consultation document
contains an indication that the extension of the review will give rise to a
material increase in the total estimated cost to the pensions industry.
Some market commentators believe that the additional cost could be
significantly higher than that indicated by the consultation document.
Management believes Sedgwick has very few pension opt outs but does have
some 25,000 pension transfers to review. Management has conducted an
initial review of the impact on the group's financial position taking into
account the assumptions contained in the consultation document and the
changes in the long-term interest rate assumptions, set by the PIA, which
are increasing the cost of compensating clients for the losses they have
suffered. Management is currently unable to give a reliable estimate of the
potential range of loss but, based on the upper limit of the range for
calculating compensation set out in the consultation document and assuming
full recoveries against the group's insurers, it is expected that there
would be an additional cost to the group of not less than (pound)35
million. The potential exists, however, for this estimate to be materially
exceeded if the assumptions set out in the consultation document or
long-term interest rate assumptions turn out to be too conservative.
Additional costs arising from the review will be recognized as an
exceptional item during 1998.
36 UK COMPANIES ACT
The consolidated financial statements and notes to the financial statements
do not comprise statutory accounts within the meaning of Section 240 of the
Companies Act 1985 (as amended) insofar as such accounts have to comply
with the disclosure and other provisions of that Act. Certain
reclassifications and changes in presentation and disclosure have been made
to the group's statutory accounts in order to conform more closely with the
accounting presentation and disclosure requirements applicable in the US.
Statutory accounts for the year ended December 31, 1997, on which the
auditors expressed unqualified opinions, have been delivered to the
Registrar of Companies for England and Wales.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT MOVEMENT MOVEMENT
BEGINNING CHARGED CHARGED TO BALANCE AT
OF TO OTHER END OF
PERIOD INCOME ACCOUNTS DEDUCTIONS PERIOD
(pound)m (pound)m (pound)m (pound)m (pound)m
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Provision for bad and doubtful debts 32.7 (0.5) 0.9 (0.7) 32.4
---------- --------- ---------- --------- ----------
</TABLE>
EXHIBIT 99.2
UNAUDITED INTERIM RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
SEDGWICK GROUP PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Nine months ended September 30, 1998
<TABLE>
<CAPTION>
BEFORE EXCEPTIONAL
EXCEPTIONAL ITEMS TOTAL TOTAL
ITEMS (NOTE 2) 1998 1997 1998
----------- ----------- ---------- ---------- ----------
(pound)m (pound)m (pound)m (pound)m US $m*
<S> <C> <C> <C> <C> <C>
REVENUE
Brokerage and Fees.................... 694.2 -- 694.2 677.2 1,145.4
Interest and investment income........ 34.1 -- 34.1 31.9 56.3
---------- ---------- ---------- ---------- ---------
728.3 -- 728.3 709.1 1,201.7
EXPENSES.............................. (644.2) (121.4) (765.6) (623.5) (1,263.2)
---------- ---------- ---------- ---------- ---------
Operating profit/(loss)............... 84.1 (121.4) (37.3) 85.6 (61.5)
Share of profits of associated
undertakings........................ 3.5 -- 3.5 3.1 5.8
Interest payable...................... (8.4) -- (8.4) (7.0) (13.9)
Profit on disposal of businesses...... -- 9.4 9.4 -- 15.5
Cessation of insurance underwriting... -- -- -- 0.3 --
---------- ---------- ---------- ---------- ---------
PROFIT/(LOSS) BEFORE TAXATION......... 79.2 (112.0) (32.8) 82.0 (54.1)
Taxation.............................. (22.2) 25.7 3.5 (24.6) 5.8
---------- ---------- ---------- ---------- ---------
PROFIT/(LOSS) AFTER TAXATION.......... 57.0 (86.3) (29.3) 57.4 (48.3)
Minority interests.................... 1.9 -- 1.9 (0.3) 3.1
---------- ---------- ---------- ---------- ---------
EARNINGS/(LOSS)....................... 58.9 (86.3) (27.4) 57.1 (45.2)
---------- ----------
DIVIDEND.............................. (16.7) (16.4) (27.5)
---------- ---------- ---------
RETAINED EARNINGS/(LOSS).............. (44.1) 40.7 (72.7)
---------- ---------- ---------
EARNINGS/(LOSS) PER SHARE
Before exceptional items.............. 10.6p 10.4p 17.5c
---------- ---------- ---------
After exceptional items............... (4.9)p 10.4p (8.1)c
---------- ---------- ---------
DIVIDEND PER SHARE.................... 3.0p 3.0p 5.0c
---------- ---------- ---------
Average number of shares in issue
(millions)............................ 554.1 548.4 --
</TABLE>
These results should be read in conjunction with the notes.
* For illustration only, the unaudited consolidated statement of income for
the nine months ended September 30, 1998 shown above in US dollars has been
translated at the average rate of pound1 = US$1.65 and not the convenience
translation rate which would be pound1 = US$1.70 at September 30, 1998. The
average rate has been used for the purposes of providing pro forma results
set out in Exhibit 99.3. A summary of the significant adjustments that
would be required to restate net income for the nine months ended September
30, 1998 in accordance with US GAAP is set out under "Additional
information for US investors."
UNAUDITED CONSOLIDATED BALANCE SHEET
As at September 30, 1998
1998 1998
-------- -------
(pound)m US $m*
ASSETS EMPLOYED
FIXED ASSETS
Tangible assets...................................... 209.5 356.2
Associated undertakings.............................. 16.9 28.7
Assets backing retirement contracts.................. 431.7 733.9
Investments.......................................... 205.0 348.5
-------- -------
863.1 1,467.3
-------- -------
CURRENT ASSETS
Debtors.............................................. 2,780.1 4,726.2
Reinsurers' share of technical provisions............ 151.7 257.9
Investments.......................................... 83.0 141.1
Cash and deposits.................................... 502.8 854.7
-------- -------
3,517.6 5,979.9
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR....... (3,160.1) (5,372.2)
-------- -------
NET CURRENT ASSETS................................... 357.5 607.7
-------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES................ 1,220.6 2,075.0
-------- -------
CREDITORS: AMOUNTS FALLING DUE AFTER MORE
THAN ONE YEAR
Borrowings
Loans and other borrowings........................... (84.1) (142.9)
7.25% Convertible Bonds 2008......................... (41.5) (70.5)
-------- -------
(125.6) (213.4)
Other liabilities.................................... (18.4) (31.3)
-------- -------
(144.0) (244.7)
PROVISIONS FOR LIABILITIES AND CHARGES
Liabilities linked to retirement contracts........... (431.1) (732.9)
Insurance technical provisions....................... (264.4) (449.5)
Other provisions..................................... (231.3) 393.2
-------- -------
149.8 254.7
-------- -------
FINANCED BY
SHAREHOLDER'S FUNDS.................................. 151.7 257.9
MINORITY INTERESTS................................... (1.9) (3.2)
-------- -------
NET CAPITAL EMPLOYED................................. 149.8 254.7
-------- -------
- ----------
The balance sheet should be read in conjunction with the notes.
* For illustration only, the unaudited consolidated balance sheet at
September 30, 1998 shown above in US dollars has been translated at the
period end rate of pound1 = US$1.70. A summary of the significant
adjustments that would be required to restate shareholders' equity at
September 30, 1998 in accordance with US GAAP is set out under "Additional
information for US investors."
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The results for the nine months ended September 30, 1998 have been prepared
on the basis of the accounting policies set out in the 1997 annual report.
No adjustments have been made to restate the results or the balance sheet
to comply with generally accepted accounting principles in the United States
of America (US GAAP). Additional information for US investors follows the
notes.
2. EXCEPTIONAL ITEMS
A. OPERATING EXCEPTIONAL ITEMS
EXPENSES TAX EARNINGS
-------- -------- --------
(pound)m (pound)m (pound)m
Pension transfer review............ 115.0 (24.0) (91.0)
Restructuring costs................ 6.4 (1.7) (4.7)
-------- -------- --------
121.4 (25.7) (95.7)
-------- -------- --------
Restructuring costs relate to certain of the group's European operations.
In 1997, there were no operating exceptional items.
Pension transfer review costs are stated net of pound 54.0 million of
expected recoveries from third parties.
EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF
INDEPENDENT AUDITORS
In October 1994, the Securities and Investments Board (SIB), now known as
the Financial Services Authority (FSA), issued its report, Pension
Transfers and Opt-Outs, Review of Past Business. Its objective was to
secure redress for individuals who between April 29, 1988 and June 30, 1994
were wrongly advised to transfer benefits from, or opt-out of, an
occupational pension plan and enter into a personal pension plan, and have
thereby suffered actual or potential loss.
Based on criteria and procedures set out in the SIB's report, Sedgwick is
required to review pension transfer and opt-out business conducted during
the relevant period and to determine whether redress should be made to
clients. At that time, the review was required to be conducted only in
respect of individuals considered by the SIB to be priority cases. Sedgwick
has satisfied the interim targets set by the regulator in this review and
expects the review to be completed by December 31, 1998.
On March 12, 1998, the FSA and the Personal Investment Authority (PIA)
issued a consultation document on the extension of the review to include
non-priority cases.
Based on Sedgwick's experience to date and with reference to the
methodology contained in the consultation document, the directors have
recognized an exceptional charge in the six months ended June 30, 1998 of
(pound)80m and an additional exceptional charge of (pound)35.0m during the
third quarter ended September 30, 1998, based on their best estimate of the
cost to Sedgwick of completing pension review (assuming expected recoveries
from third parties).
It should be noted that the estimated cost of reviewing pensions may be
subject to change due to factors which are beyond Sedgwick's control, such
as future movements in long-term interest rates, equity markets, response
rates, and the precise scope and duration of the review. The "Final
Statement of Policy and Final Guidance" has been recently published by the
FSA of which certain issues remain under discussion.
In view of the above uncertainties, the group has entered into insurance
arrangements specifically to protect it up to (pound)37m in the
estimated total cost of completing the review. The cost of this cover is
included in the (pound)115.0m exceptional charge recognized in the nine
months ended September 30, 1998. In addition, the group has an option to
extend this cover at additional cost to give protection of a further
(pound)25m. The cost of purchasing this option itself is also included in
the exceptional charge. There still remain potential exposures relating to
pension review which are excluded from the scope of this policy or may
exceed its limits, but based on current information available, management
believes that no further material adjustment is required to the provision
made through September 30, 1998.
B. PROFIT ON DISPOSAL OF BUSINESS
In January 1998, the group sold its managing agencies based in The
Netherlands for NLG 37 million ((pound)11.0 million) realising a profit on
disposal of (pound)9.4 million.
C. CESSATION OF INSURANCE UNDERWRITING
Cessation of insurance underwriting represents the net amount recognized in
respect of the group's insurance underwriting subsidiaries which are in run
off.
3. NIKOLS SEDGWICK GROUP
EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
In December 1998, Sedgwick disposed of its 49% interest in Nikols Sedgwick
B.V. following the exercise of the call option by Securfin S.p.A and
Securfin Altrida B.V.
ADDITIONAL INFORMATION FOR US INVESTORS
The results for the nine months ended September 30, 1998 have been prepared
in accordance with UK GAAP. Estimates of the effect on the group's net
income of applying the significant differences between UK GAAP and US GAAP
are set out below.
NET INCOME
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(pound)m (pound)m
(LOSS)/EARNINGS REPORTED UNDER UK GAAP............... (27.4) 57.1
Adjustments:
Amortization of goodwill and identifiable
intangible assets.................................. (9.8) (9.1)
Other items.......................................... (3.7) 1.1
Deferred taxation.................................... (4.0) (2.8)
Deferred taxation on US GAAP adjustments............. 12.9 1.2
------- -------
NET (LOSS)/INCOME IN ACCORDANCE WITH US GAAP......... (32.0) 47.5
------- -------
(LOSS)/EARNINGS PER ADS*
Reported under UK GAAP............................. (24.7)p 52.1p
------- -------
In accordance with US GAAP
Basic.............................................. (28.9)p 43.3p
Diluted**.......................................... (28.9)p 42.7p
------- -------
Comparative earnings per ADS figures under US GAAP have been restated in
accordance with FAS 128, Earnings per share.
- ----------
* Each American Depositary Security (ADS) represents five ordinary shares.
** Options exercisable under Sedgwick's share option schemes could dilute
basic earnings per ADS. However, as the options have an anti-dilutive
effect on net loss per ADS for the nine months ended September 30,
1998 as Sedgwick had a loss from continuing operations, diluted net
loss per ADS is not presented.
SHAREHOLDERS' EQUITY
AT SEPTEMBER 30,
1998
---------------
(pound)m
SHAREHOLDERS' FUNDS REPORTED UNDER UK GAAP.................... 151.7
Adjustments:
Goodwill and identifiable intangible assets................... 211.7
Other items................................................... 4.2
Deferred taxation............................................. 20.5
Deferred taxation on US GAAP adjustments...................... 2.8
------
SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP............... 390.9
------
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this document are made pursuant to the
safe-harbor provisions of the US Private Securities Litigation Reform Act
of 1995. As a result of, among other things, interest and exchange rate
changes, regulatory changes, and competition, actual results may differ
materially from those anticipated by, or which may be assumed from,
statements made in this document.
EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
The following unaudited pro forma condensed combined statements of income
for the nine months ended September 30, 1998 and the year ended December
31, 1997 and the unaudited pro forma condensed combined balance sheet as of
September 30, 1998 give effect to the acquisition of Sedgwick. The purchase
method of accounting has been applied to the transaction. Accordingly,
assets acquired and liabilities assumed have been reflected at their
estimated fair values which, ultimately, will be subject to further
refinement. The pro forma statements of income assume the acquisition
occurred on January 1, 1997 and the pro forma balance sheet assumes the
transaction occurred on September 30, 1998.
The unaudited pro forma statements of income do not include potential cost
savings that may be realized as a result of the acquisition or the effect
of a special charge that is expected to include, among other items, the
Registrant's cost (non-goodwill) related to severance arrangements, the
closing of existing facilities and the issuance of certain deferred stock
units. The Registrant has indicated that it anticipates ultimately
achieving gross pretax cost savings in the range of $200 million per year,
over a period of years. See "Information Concerning Forward-Looking
Statements".
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 and reflect
the Registrant's expectation that it will acquire 100% of Sedgwick's issued
share capital and issued convertible bonds. 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
Quarterly Report on Form 10-Q for the nine months ended September 30, 1998
and Annual Report on Form 10-K for the year ended December 31, 1997 and the
Sedgwick financial statements included in Exhibits 99.1 and 99.2 of this
Form 8-K.
MARSH & MCLENNAN COMPANIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(In millions, except per share figures)
<TABLE>
<CAPTION>
Historical (1)
--------------------------------
Marsh & McLennan Sedgwick Group, Pro Forma Pro Forma
Companies, Inc. as adjusted (Adjustments) Combined
---------------- --------------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue $ 5,245 $1,214 $ $6,459
Expense 4,160 1,282 34 (b) 5,476
------- ------ ----- ------
Operating Income (Loss) 1,085 (68) (34) 983
Interest, net (77) (4) (75)(c) (156)
------- ------ ----- ------
Income (Loss) Before Income Taxes 1,008 (72) (109) 827
Provision (Benefit) for Income Taxes 398 (19) (26)(d) 353
------- ------ ----- ------
Net Income (Loss) $ 610 $ (53) $ (83) $ 474
======= ====== ====== ======
Basic Net Income Per Share $ 2.38 $ 1.78
======= ======
Diluted Net Income Per Share $ 2.28 $ 1.70
======= ======
Average Number of Shares
Outstanding - Basic 256 10 (e) 266
======= ===== ======
Average Number of Shares
Outstanding - Diluted 264 10 (e) 274
======= ===== ======
(1) Sedgwick's net loss for the nine months ended September 30, 1998 includes a $16
million exceptional pretax gain and a $200 million exceptional pretax charge.
</TABLE>
See accompanying notes to pro forma condensed combined financial
statements.
MARSH & MCLENNAN COMPANIES, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
(In millions, except per share figures)
<TABLE>
<CAPTION>
Historical (1)
--------------------------------
Marsh & McLennan Sedgwick Group, Pro Forma Pro Forma
Companies, Inc. as adjusted (Adjustments) Combined
---------------- --------------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue $6,009 $1,588 $ $7,597
Expense 5,264 1,436 46(b) 6,746
------- ------- ------ -------
Operating Income (Loss) 745 152 (46) 851
Interest, net (83) (6) (100)(c) (189)
------- ------- ------ -------
Income (Loss) Before Income Taxes 662 146 (146) 662
Provision (Benefit) for Income Taxes 263 61 (35)(d) 289
------- ------- ------ -------
Net Income (Loss) $ 399 $ 85 $ (111) $ 373
======= ======= ====== =======
Basic Net Income Per Share $ 1.63 (2) $ 1.46
======= =======
Diluted Net Income Per Share $ 1.59 (2) $ 1.43
======= =======
Average Number of Shares
Outstanding - Basic 245 (2) 10 (e) 255
======= ====== =======
Average Number of Shares
Outstanding - Diluted 251 (2) 10 (e) 261
======= ====== =======
</TABLE>
(1) Marsh & McLennan's expense includes special charges amounting to $297
million for the year ended December 31, 1997.
(2) Restated to reflect the three-for-two stock split in the form of a
stock distribution issued on June 26, 1998.
See accompanying notes to pro forma condensed combined financial
statements.
<TABLE>
<CAPTION>
MARSH & MCLENNAN COMPANIES, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 (UNAUDITED)
(In millions of dollars)
Historical (1)
--------------------------------
Marsh & McLennan Sedgwick Group, Pro Forma Pro Forma
Companies, Inc. as adjusted (Adjustments) Combined
---------------- --------------- ------------ ---------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 667 $ 340 $ - $ 1,007
------- ------- ------ --------
Receivables 1,704 642 2,346
Less - allowance for doubtful accounts (68) (54) - (122)
------- ------- ------ --------
Net receivables 1,636 588 0 2,224
Other current assets 543 91 61(g) 695
------- ------- ------ --------
Total current assets 2,846 1,019 61 3,926
------- ------- ------ --------
Long-term securities 752 1,083 1,835
Fixed assets, net 934 373 (25)(g) 1,282
Intangible assets 2,822 360 1,840(h) 5,022
Other assets 1,374 70 149(g) 1,593
------- ------- ------ --------
$ 8,728 $2,905 $2,025 $ 13,658
======= ======= ====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 480 $ 44 $ 200(i) $ 724
Accounts payable and accrued
liabilities 1,880 309 150(g) 2,339
Accrued income taxes 354 47 401
------- ------- ------ --------
Total current liabilities 2,714 400 350 3,464
------- ------- ------ --------
Fiduciary liabilities 2,570 571 3,141
Less - cash and investments
held in a fiduciary capacity (2,570) (571) (3,141)
------- ------- ------ --------
- - - -
------- ------- ------ --------
Long-term debt 1,280 235 1,386(i) 2,901
------- ------- ------ --------
Other liabilities 1,157 1,605 425(g) 3,187
------- ------- ------ --------
Commitments and contingencies - - - -
Stockholders' equity:
Preferred stock - - - -
Common stock 261 91 (91)(j) 271
10 (j)
Other stockholders' equity 3,490 574 (574)(j) 4,009
519 (j)
------- ------- ------ --------
3,751 665 (136) 4,280
Less - treasury shares (174) (174)
------- ------- ------ --------
Total shareholders' equity 3,577 665 (136) 4,106
------- ------- ------ --------
$8,728 $2,905 $2,025 $13,658
======= ======= ====== ========
</TABLE>
See accompanying notes to pro forma condensed combined financial
statements.
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 Sedgwick consolidated statements 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 and have been presented in accordance with U.S.
Generally Accepted Accounting Principles. (See note 32 of the
financial statements in Exhibit 99.1 and Additional information for
US investors in Exhibit 99.2) Results for the year ended December 31,
1997 and the nine months ended September 30, 1998 have been
translated at(pound) = US$1.64 and(pound) = US$1.65, respectively.
(b) To reflect the incremental estimated annual goodwill amortization
charge associated with the acquisition of Sedgwick (the
"acquisition"). Goodwill is being amortized over a forty-year period.
(c) To record the additional annual interest expense associated with the
estimated incremental debt that is expected to be incurred by the
Registrant as a result of the acquisition at an assumed interest rate
of 6.31%.
(d) To record the tax effect of the pro forma adjustments (exclusive of
the goodwill amortization) at an assumed tax rate of 35%.
(e) To reflect the estimated portion of the acquisition cost to be
financed through equity.
(f) Certain amounts included in the Sedgwick consolidated balance sheet
have been reclassified to conform with the Registrant's financial
statement presentation. In particular, fiduciary cash and investments
of $571 million have been offset against the related liabilities and
presented in the liability section of the balance sheet. In addition,
receivables and payables for uncollected premiums and claims are
presented in footnote disclosure in the Registrant's financial
statements. The balance sheet has been translated at(pound) =
US$1.70.
(g) To reflect the impact of $600 million in assumed purchase related
matters which are principally related to severance, duplicative real
estate, adjustments of asset and liability balances under purchase
accounting and transaction costs net of the related income tax impact
of $210 million. This figure is subject to further refinement as the
Registrant's management continues to review these purchase related
matters.
(h) Represents the net of the $2.1 billion acquisition consideration
adjusted for the items described in Notes (g) and (j)(2). The
preliminary allocation of the acquisition consideration to the
underlying assets and liabilities of Sedgwick, 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.
(i) To reflect the incremental debt assumed to be incurred to finance $1.6
billion of the acquisition.
(j) To record the net adjustment required in stockholders' equity to
reflect (1) the issuance of $0.5 billion of the Registrant's $1 par
value common stock representing the estimated portion of the
acquisition cost to be financed through equity and (2) the
elimination of $0.7 billion of Sedgwick net assets.
