SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended June 30, 1998
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X . NO .
As of July 31, 1998, there were outstanding 255,663,848 shares
of common stock, par value $1.00 per share, of the registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report contains 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 Johnson & Higgins,
Year 2000 remediation and testing of computer systems, market and
industry conditions, interest rates, foreign exchange rates,
contingencies and matters relating to the operations and income
taxes of Marsh & McLennan Companies, Inc. and subsidiaries (the
"Company"). Such forward-looking statements are based on available
current market and industry materials, experts' reports and
opinions, as well as management's expectations concerning future
events impacting the Company. Forward-looking statements by their
very nature involve risks and uncertainties. Factors that may
cause actual results to differ materially from those contemplated
by any forward-looking statements contained herein include, in the
case of the Company's risk and insurance services business, the
failure to successfully integrate the insurance services business
of Johnson & Higgins (including the achievement of synergies and
cost reductions), changes in competitive conditions, a decrease in
the premium rate levels in the global property and casualty
insurance markets, the impact of changes in insurance markets and
natural catastrophes; in the case of the Company's investment
management business, changes in worldwide and national securities
and fixed income markets and; with respect to all of the Company's
activities, the failure of the Company and/or its significant
business partners to be Year 2000 compliant on a timely basis,
changes in general worldwide and national economic conditions,
fluctuations in foreign currencies, actions of competitors or
regulators, changes in interest rates, developments relating to
claims and lawsuits, changes in the tax or accounting treatment of
the Company's operations and the impact of tax and other
legislation and regulation in the jurisdictions in which the
Company operates.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Six Months Ended
Ended June 30, June 30,
1998 1997 1998 1997
Revenue $1,750 $1,540 $3,526 $2,835
Expense 1,404 1,278 2,776 2,296
Operating Income 346 262 750 539
Interest Income 7 8 12 11
Interest Expense (33) (32) (61) (49)
Income Before Income Taxes 320 238 701 501
Income Taxes 127 93 277 192
Net Income $ 193 $ 145 $ 424 $ 309
Basic Net Income
Per Share (A) $.75 $.57 $1.65 $1.32
Diluted Net Income
Per Share (A) $.72 $.56 $1.59 $1.29
Average Number of Shares
Outstanding - Basic (A) 257 250 257 235
Average Number of Shares
Outstanding - Diluted (A) 265 256 264 240
Dividends Declared (A) $.40 $.33 $.73 $.63
(A) Restated to reflect the three-for-two stock split in the form
of a stock distribution issued on June 26, 1998.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
June 30, December 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents
(including interest-bearing amounts
of $532 at June 30, 1998 and
$378 at December 31, 1997) $ 598 $ 424
Receivables-
Commissions and fees 1,463 1,296
Advanced premiums and claims 123 95
Other receivables 161 160
1,747 1,551
Less-allowance for doubtful accounts (61) (53)
Net receivables 1,686 1,498
Other current assets 579 647
Total current assets 2,863 2,569
Long-term securities 893 720
Fixed assets, net 884 957
(net of accumulated depreciation and
amortization of $827 at June 30, 1998
and $798 at December 31, 1997)
Intangible assets 2,720 2,417
Other assets 1,239 1,251
$8,599 $7,914
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
June 30, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 648 $ 237
Accrued compensation and employee benefits 541 564
Accounts payable and accrued liabilities 1,150 1,276
Accrued income taxes 228 218
Dividends payable 103 85
Total current liabilities 2,670 2,380
Fiduciary liabilities 2,475 2,282
Less - cash and investments held in
a fiduciary capacity (2,475) (2,282)
- -
Long-term debt 1,294 1,240
Other liabilities 1,115 1,096
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
400,000,000 shares, issued 260,657,642
shares at June 30, 1998 and 258,586,766
at December 31, 1997 * 261 172
Additional paid-in capital 1,011 994
Retained earnings 2,211 1,975
Accumulated other comprehensive income 270 167
3,753 3,308
Less - treasury shares, at cost,
4,780,089 shares at June 30, 1998 and
3,661,256 shares at December 31, 1997 * (233) (110)
Total stockholders' equity 3,520 3,198
$8,599 $7,914
* Restated to reflect the three-for-two stock split in the form of
a stock distribution issued on June 26, 1998.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Six Months Ended
June 30,
1998 1997
Operating cash flows:
Net income $424 $309
Gain on sale of business - (10)
Depreciation and amortization 121 90
Deferred income taxes 90 (35)
Other liabilities 19 10
Prepaid dealer commissions (77) (96)
Other, net (7) (4)
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (188) (72)
Other current assets 63 (7)
Accrued compensation and employee benefits (23) (14)
Accounts payable and accrued liabilities (126) (52)
Accrued income taxes 13 10
Effect of exchange rate changes 25 3
Net cash generated from operations 334 132
Financing cash flows:
Net increase in commercial paper 619 213
Other borrowings 21 1,080
Other repayments (164) (570)
Purchase of treasury shares (109) -
Issuance of common stock 63 114
Dividends paid (171) (137)
Net cash provided by
financing activities 259 700
Investing cash flows:
Additions to fixed assets (134) (117)
Proceeds from sale of business,
net of cash sold - 29
Acquisitions (313) (550)
Other, net 30 16
Net cash used for
investing activities (417) (622)
Effect of exchange rate changes on cash
and cash equivalents (2) (10)
Increase in cash & cash equivalents 174 200
Cash & cash equivalents at beginning of period 424 300
Cash & cash equivalents at end of period $598 $ 500
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to
such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements
should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual
report on Form 10-K.
The financial information contained herein reflects all
adjustments which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the
three and six month periods ended June 30, 1998 and 1997.
2. Fiduciary Cash and Liabilities
In its capacity as an insurance broker or agent, the Company
collects premiums from insureds and, after deducting its
commissions, remits the premiums to the respective insurance
underwriters; the Company also collects claims or refunds from
underwriters on behalf of insureds. Unremitted insurance
premiums and claims are held in a fiduciary capacity.
Interest income on these fiduciary funds, included in revenue,
amounted to $62 million and $52 million for the six months
ended June 30, 1998 and 1997, respectively.
Net uncollected premiums and claims and the related payables
amounting to $6.3 billion at June 30, 1998 and $5.2 billion at
December 31, 1997, are not included in the accompanying
Consolidated Balance Sheets.
3. Per Share Data
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" which requires the
Company to include basic and diluted per share figures on the
face of the income statement.
Basic net income per share is calculated by dividing net
income by the average number of shares of the Company's common
stock outstanding. Diluted net income per share is calculated
by reducing net income for the potential minority interest
associated with unvested shares granted under the Putnam
Private Equity Plan. This result is then divided by the
average common shares outstanding which have been adjusted for
the dilutive effect of potential common shares.
The following reconciles net income to net income for diluted
earnings per share and basic weighted average common shares
outstanding to diluted weighted average common shares
outstanding for the three and six-month periods ended June 30,
1998 and 1997.
Three Months Six Months Ended
Ended June 30, June 30,
1998 1997 1998 1997
Net Income 193 145 424 309
Less: Potential Minority
Interest associated
with Putnam Private
Equity Plan (2) - (3) -
Net Income for Diluted
Earnings per Share 191 145 421 309
Basic Weighted Average
Common Shares Outstanding 257 250 257 235
Stock Options 8 6 7 5
Diluted Weighted Average
Common Shares Outstanding 265 256 264 240
4. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and displaying comprehensive income
and its components. Comprehensive income amounted to
$527 million and $309 million for the six months ended
June 30, 1998 and 1997. The difference between net income and
comprehensive income for the six months ended June 30, 1998
was primarily due to net unrealized securities holding gains.
5. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information
concerning acquisitions:
Six Months Ended
June 30,
(In millions of dollars) 1998 1997
Purchase acquisitions:
Assets acquired, excluding cash $313 $ 2,659
Liabilities assumed - (1,103)
Shares issued - (1,006)
Net cash outflow for acquisitions $313 $ 550
Interest paid during the six months ended June 30, 1998 and
1997 was $70 million and $45 million, respectively.
Income taxes paid during the six months ended June 30, 1998
and 1997 were $207 million and $194 million, respectively.
6. Income Taxes
The Company has received a Notice of Proposed Adjustment from
a field office of the Internal Revenue Service ("IRS")
challenging its tax treatment related to 12b-1 fees paid by
the Putnam Mutual Funds. The Company believes its tax
treatment of these fees is consistent with current industry
practice and applicable requirements of the Internal Revenue
Code and previously issued IRS technical advice. The field
office has referred the Notice to the national office of the
IRS for technical advice.
Taxing authorities periodically challenge positions taken by
the Company on its tax returns. On the basis of present
information and advice received from counsel, it is the
opinion of the Company's management that any assessments
resulting from current tax audits will not have a material
adverse effect on the Company's consolidated results of
operations or its consolidated financial position.
7. Acquisitions
On June 30, 1998, the Company purchased Kirke-Van Orsdel,
Inc., an administrator of insurance and health benefit
programs in the U.S.
On March 24, 1998, the Company purchased Brockman y Schuh
Group, a risk and insurance services and employee benefit
consulting firm in Mexico.
On March 27, 1997, the Company consummated a business
combination with Johnson & Higgins ("J&H"), a privately-held
risk and insurance services and employee benefit consulting
firm.
The following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the
J&H business combination had occurred on January 1, 1997. The
pro forma results are shown for illustrative purposes only and
do not purport to be indicative of the results which would
have been reported if the business combination had occurred on
the date indicated or which may occur in the future.
(In millions of dollars, except per share figures)
Six Months Ended
June 30, 1997
Revenue $3,149
Net Income 324
Basic Net Income per share 1.29
Diluted Net Income per share 1.27
8. Claims, Lawsuits and Other Contingencies
The Company and its subsidiaries are subject to various claims
and lawsuits consisting principally of alleged errors and
omissions in connection with the placement of insurance or
reinsurance and in rendering investment and consulting
services. Some of these claims and lawsuits seek damages,
including punitive damages, in amounts which could, if
assessed, be significant.
On November 24, 1997, an action captioned "Aiena et al. vs.
Olsen et al" was brought in the United States District Court
for the Southern District of New York by certain former
directors of J&H, which was acquired by the Company in March
1997, against twenty-four selling shareholders of J&H, as well
as J&H itself and the Company. The action essentially
challenges the allocation of the consideration paid in
connection with the Company's combination with J&H as between
the defendants who were directors and shareholders of J&H at
the time of the transaction and the plaintiffs who were former
directors and shareholders of J&H. The Complaint asserts,
among others, claims for breach of fiduciary duty, federal
securities law violations, breach of contract, and ERISA
violations. Plaintiffs seek compensatory and punitive
damages.
On or about April 14, 1998, an action captioned "Sempier v.
Olsen, et al" was brought in the United States District Court
for the District of New Jersey by another former director of
J&H against the same defendants named in the Aiena action,
including J&H and the Company, in connection with the same
transaction. The allegations and claims in the Sempier case
are substantially similar to those in the Aiena action.
Plaintiff seeks, among other relief, an unspecified amount of
compensatory and punitive damages. This action will be heard
together with the Aiena action in the District Court for the
Southern District of New York.
In 1993, several years prior to the acquisition of J&H, the
Equal Employment Opportunity Commission ("EEOC") commenced a
lawsuit against J&H in the United States District Court for
the Southern District of New York. The action alleges that a
mandatory retirement policy for directors then in effect at
J&H violated the federal Age Discrimination in Employment Act
("ADEA"). In 1995, the District Court ruled in the EEOC's
favor that the J&H mandatory retirement policy violated the
ADEA. The Court of Appeals for the Second Circuit affirmed
that ruling in 1996. The EEOC seeks to recover damages on
behalf of certain former directors and a trial on the matter
of damages is scheduled for October 5, 1998. Pursuant to the
Stock Purchase Agreement between the Company and J&H and the
stockholders of J&H, the Company will bear one-half of all
damages and expenses in this action.
Certain present and former English subsidiaries of the Company
are required by their regulatory body, the Personal Investment
Authority, to review transactions with, and advice to, clients
in relation to the sale of certain investments. The
disclosure and advice in connection with such sales has been
called into question by clients or by the Personal Investment
Authority on their behalf. Where the review discloses an
inappropriate sale, compensation is required to be paid to the
client. While the amount of compensation which has been and
may be paid, the liability of present subsidiaries of the
Company in connection therewith and the extent to which any
such liability is covered by insurance remains uncertain, the
aggregate amount claimed could be significant.
On the basis of present information, available insurance
coverage and advice received from counsel, it is the opinion
of the Company's management that the disposition or ultimate
determination of these claims and lawsuits will not have a
material adverse effect on the Company's consolidated results
of operations or its consolidated financial position.
9. Common Stock
On May 20, 1998, the Company's Board of Directors authorized
a three-for-two stock distribution of $1 par value common
stock, which was issued on June 26, 1998 to shareholders of
record on June 5, 1998. Upon issuance of the shares, paid-in
capital was reduced and the common stock account increased by
$87 million, the par value of the additional common shares
issued. All references to per share amounts have been
restated for this stock distribution.
10. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and
Related Information," and in February 1998, the FASB issued
Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other
Postretirement Benefits." Both statements are effective for
fiscal years beginning after December 15, 1997. The Company
will adopt the provisions of these standards in conjunction
with the preparation of the 1998 Annual Report.
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard, which
establishes new accounting and reporting requirements for
derivative instruments, must be adopted in the fiscal year
beginning after June 15, 1999. The Company does not expect
the adoption of this standard to have a material impact on its
operating results or financial position.
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Second Quarter and Six Months Ended June 30, 1998
General
Marsh & McLennan Companies, Inc. and Subsidiaries (the "Company")
is a professional services firm providing risk and insurance
services, investment management and consulting. More than 36,000
employees worldwide provide analysis, advice and transactional
capabilities to clients in over 100 countries.
This management's discussion and analysis of financial condition
and results of operations contains certain statements relating to
future results which are forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995.
See "Information Concerning Forward-Looking Statements" on page one
of this filing. This form 10-Q should be read in conjunction with
the Company's latest annual report on Form 10-K.
The consolidated results of operations follow:
Second Quarter Six Months
(In millions of dollars) 1998 1997 1998 1997
Revenue:
Risk and Insurance
Services $ 784 $ 747 $1,654 $1,310
Investment Management 587 446 1,145 873
Consulting 379 347 727 652
1,750 1,540 3,526 2,835
Expense:
Compensation and Benefits 866 798 1,717 1,425
Other Operating Expenses 538 480 1,059 871
1,404 1,278 2,776 2,296
Operating Income $ 346 $ 262 $ 750 $ 539
Operating Income Margin 19.8% 17.0% 21.3% 19.0%
Revenue, derived mainly from commissions and fees, rose 14% from
the second quarter of 1997 and grew by 24% for the six months. The
second quarter increase was driven principally by increased revenue
from the Investment Management segment as average assets under
management were substantially higher than the comparable figures in
the previous year. For the six months, the increase in the
Investment Management segment was supplemented by an increase in
Risk and Insurance Services as the Company's business combination
with Johnson & Higgins ("J&H"), which closed on March 27, 1997, was
not reflected in the consolidated results of operations for the
first quarter of 1997. Excluding acquisitions and dispositions,
revenue grew approximately 14% for the first six months of 1998.
Operating expenses rose 10% in the second quarter of 1998 primarily
due to costs associated with staff growth and higher incentive
compensation levels in the Investment Management segment
commensurate with strong operating performance. Service related
costs in this segment also increased due to the higher level of
business activity. For the six months, the increase in operating
expenses of 21% is also due to the impact of the J&H transaction.
Excluding acquisitions and dispositions, operating expenses rose
approximately 9% for the first six months of 1998.
The translated values of revenue and expense from the Company's
international operations are affected by fluctuations in currency
exchange rates. However, the net impact of these fluctuations on
the Company's results of operations has not been material.
Risk and Insurance Services
Second Quarter Six Months
(In millions of dollars) 1998 1997 1998 1997
Revenue $784 $747 $1,654 $1,310
Expense 639 617 1,276 1,022
Operating Income $145 $130 $ 378 $ 288
Operating Income Margin 18.5% 17.5% 22.8% 22.0%
Revenue
Revenue for the Risk and Insurance Services segment increased 5%
from the second quarter of 1997. Insurance broking revenue, which
represented 76% of Risk and Insurance Services, grew 5% in the
second quarter of 1998 as net new business development was
partially offset by continued premium rate declines in virtually
all lines of coverage. The increased level of net new business
development was primarily concentrated in the United States.
Revenue for reinsurance broking grew 5% over the second quarter of
1997 and program management rose 7%. For the six months, revenue
for Risk and Insurance Services increased 26% over the same period
last year primarily due to the J&H transaction at the end of the
first quarter of 1997. Excluding acquisitions and dispositions,
Risk and Insurance Services revenue rose approximately 5% during
the first half of 1998.
Expense
Risk and Insurance Services expense increased 3% from the second
quarter of 1997 reflecting the realization of substantial
integration related savings offset, in part, by higher technology
and systems spending. During the quarter, the Company realized
additional integration savings associated with the elimination of
redundant personnel and the consolidation of offices, primarily in
the United States. For the six months, expense increased 25%,
largely attributable to the business combination with J&H.
Investment Management
Second Quarter Six Months
(In millions of dollars) 1998 1997 1998 1997
Revenue $587 $446 $1,145 $873
Expense 423 334 829 657
Operating Income $164 $112 $ 316 $216
Operating Income Margin 28.0% 25.1% 27.6% 24.7%
Revenue
Putnam's revenue increased 32% compared with the second quarter of
1997 and 31% for the six months reflecting excellent growth in the
level of assets under management on which management fees are
earned. Net new sales of mutual funds and additional investments
by institutional accounts contributed $34 billion of the growth in
the level of assets under management since June 1997, while market
performance represented the remaining $37 billion of the increase.
During the second quarter of 1998, net new sales and additional
investments resulted in a $9 billion increase in the level of
assets under management since March 31, 1998 while market
performance contributed an additional $2 billion to the increase.
The $43 billion increase in assets under management during the
first half of 1998 was due to net new investments of $19 billion
and market performance of $24 billion.
Expense
Putnam's expenses rose 27% in the second quarter of 1998 and 26%
for the six months reflecting the effect of staff growth to support
new business and incentive compensation levels commensurate with
strong operating performance along with increased service related
costs resulting from the higher level of business activity.
Quarter-end and average assets under management for the second
quarter are presented below:
(In billions of dollars) 1998 1997
Mutual Funds:
Domestic Equity $143 $101
Taxable Bond 38 32
Tax-Free Income 16 16
International Equity 14 11
211 160
Institutional Accounts:
Fixed Income 24 20
Domestic Equity 29 18
International Equity 14 9
67 47
Quarter-end Assets $278 $207
Average Assets $271 $193
Assets under management are affected by fluctuations in domestic
and international bond and stock market prices and by the level of
investments and withdrawals for current and new fund shareholders
and clients. They are also affected by investment performance,
service to clients, the development and marketing of new investment
products, the relative attractiveness of the investment style under
prevailing market conditions and changes in the investment patterns
of clients. Revenue levels are sensitive to all of the factors
above, but in particular, to significant changes in bond and stock
market valuations.
Putnam provides individual and institutional investors with a broad
range of equity and fixed income investment products and services
designed to meet varying investment objectives and which affords
its clients the opportunity to allocate their investment resources
among various alternative investment products as changing worldwide
economic and market conditions warrant. At the end of the second
quarter, assets held in equity securities represented 72% of assets
under management, compared with 67% in 1997, while investments in
fixed income products represented 28%, compared with 33% last year.
Consulting
Second Quarter Six Months
(In millions of dollars) 1998 1997 1998 1997
Revenue $379 $347 $727 $652
Expense 326 306 641 583
Operating Income $ 53 $ 41 $ 86 $ 69
Operating Income Margin 13.9% 11.7% 11.9% 10.6%
Revenue
Consulting revenue increased 9% in 1998 compared with the second
quarter of 1997 reflecting net new business and the impact of
several small acquisitions partially offset by the transfer of
certain business lines as part of a strategic alliance with
Automatic Data Processing. Adjusting for the impact of
acquisitions and dispositions, revenue increased approximately 10%
in the second quarter of 1998. Retirement consulting revenue,
which represented 41% of the Consulting segment, grew 12% in the
second quarter while revenue rose 16% in the global compensation
practice and 7% in general management consulting due to a higher
volume of business in these practice lines during the second
quarter of 1998. Economic consulting and health care consulting
grew 12% and 9%, respectively. For the six months, consulting
revenue increased 12% over the same period of 1997. A portion of
this increase reflects business acquired as part of the J&H
transaction. Excluding acquisitions and dispositions, revenue
increased 10% for the six months.
Expense
Consulting expenses increased 6% for the second quarter of 1998 and
10% for the six months. Excluding acquisitions and dispositions,
expenses increased 10% for the second quarter and six months
primarily reflecting normal salary and related benefit expense
increases.
Interest
Interest income earned on corporate funds was $7 million in the
second quarter of 1998 compared with $8 million in 1997. Interest
expense increased to $33 million in the second quarter of 1998 from
$32 million in 1997. Interest expense increased to $61 million for
the six months ended June 30, 1998 from $49 million in 1997 as a
result of increased bank borrowings used to finance a portion of
the acquisition of J&H as well as the assumption of J&H's long-term
debt.
Income Taxes
The Company's consolidated tax rate was 39.5% of income before
income taxes in the second quarter and first six months of 1998
compared with 39.1% and 38.25%, respectively, for the comparable
periods of 1997. The increase in the 1998 tax rate is largely
attributable to the nondeductibility of the goodwill amortization
associated with the J&H transaction. The overall tax rates are
higher than the U.S. statutory rates primarily because of state and
local income taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents aggregated $598 million on
June 30, 1998, compared with $424 million on December 31, 1997.
Cash flow from operations includes the net cash requirements of
Putnam's prepaid dealer commissions, which amounted to $77 million
for the six months compared with $96 million during the same period
of 1997.
The Company's capital expenditures, which amounted to $134 million
in the first six months of 1998 and $117 million in the second
quarter of 1997, were primarily related to computer equipment
purchases and the refurbishing and modernizing of office
facilities.
The Company is in the process of updating its computer systems in
preparation for the year 2000. As part of this process, the
Company has completed an assessment of major technical areas that
could be subject to year 2000 issues on its risk and insurance
services, investment management and consulting operating segments.
Remediation and testing is currently underway and the Company
expects that all of its critical systems will be year 2000
compliant in the first half of 1999. The ongoing costs associated
with addressing this issue have not been nor are they expected to
have a material adverse impact on the Company's financial position
or results of operations. The Company is also in the process of
inquiring as to the state of readiness of its clients and vendors.
If these third parties are unable to resolve year 2000 processing
issues in a timely manner, a material operating and financial risk
could result.
The other liabilities in the Consolidated Balance Sheets, which
totaled $1.1 billion on June 30, 1998 and December 31, 1997,
include the Company's long-term pension liability, reserves related
to the Company's professional liability insurance program, and the
postretirement liability for certain health care and life insurance
benefits.
Other
Comprehensive income amounted to $527 million and $309 million for
the six months ended June 30, 1998 and 1997. The difference
between net income and comprehensive income for the six months
ended June 30, 1998 was primarily due to net unrealized securities
holding gains.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," and in February 1998, the FASB issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." Both statements
are effective for fiscal years beginning after December 15, 1997.
The Company will adopt the provisions of these standards in
conjunction with the preparation of the 1998 Annual Report.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This standard, which establishes new
accounting and reporting requirements for derivative instruments,
must be adopted in the fiscal year beginning after June 15, 1999.
The Company does not expect the adoption of this standard to have
a material impact on its operating results or financial position.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
JUNE 30, 1998
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Registrant was
held on May 20, 1998. Represented at the Meeting, at
which stockholders took the following actions, were
139,696,526 shares or 82.2 percent of the Registrant's
170,004,267 shares of common stock outstanding and
entitled to vote:
1. Each of the eight nominees for election as
directors received at least 134,501,187 or 96.3
percent of the shares represented at the meeting.
They are Norman Barham, Lewis W. Bernard, Richard
H. Blum, Frank J. Borelli, Robert F. Erburu, Ray J.
Groves, George Putnam and John D. Ong. The
remaining directors continuing in office are:
Jeffrey W. Greenberg, Lord Lang, Adele Smith
Simmons, A.J.C. Smith, Peter Coster, Lawrence J.
Lasser, David A. Olsen, John T. Sinnott and Frank
J. Tasco.
John D. Ong was elected to the board of directors
of Marsh & McLennan Companies, Inc. Mr. Ong is
chairman emeritus of the BFGoodrich Company. He
retired as chairman of its board of directors in
1997 after more than 36 years of service to the
company.
Richard S. Hickok and Richard M. Morrow retired
from the board of Marsh & McLennan Companies,
having served as directors since 1983 and 1991,
respectively.
2. Shareholders approved an amendment to the Company's
Stock Investment Plan for employees providing for
an increase in the Company's matching contribution
to the plan for certain categories of participants,
with a vote of 137,024,052 or 98.1 percent of the
shares represented (2,145,166 opposing and 527,308
abstaining).
3. Deloitte & Touche LLP was ratified as the Company's
independent public accountants for the year ending
December 31, 1998, with a vote of 139,003,824 or
99.5 percent of the shares represented (360,657
opposing and 332,045 abstaining).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed this
14th day of August, 1998 on its behalf by the undersigned,
thereunto duly authorized and in the capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Frank J. Borelli
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Marsh & McLennan Companies, Inc. and subsidiaries June 30,
1998 financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 598,000,000
<SECURITIES> 0
<RECEIVABLES> 1,747,000,000
<ALLOWANCES> 61,000,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,863,000,000
<PP&E> 1,711,000,000
<DEPRECIATION> 827,000,000
<TOTAL-ASSETS> 8,599,000,000
<CURRENT-LIABILITIES> 2,670,000,000
<BONDS> 1,294,000,000
0
0
<COMMON> 261,000,000
<OTHER-SE> 3,259,000,000
<TOTAL-LIABILITY-AND-EQUITY> 8,599,000,000
<SALES> 0
<TOTAL-REVENUES> 3,526,000,000
<CGS> 0
<TOTAL-COSTS> 2,776,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000,000
<INTEREST-EXPENSE> 61,000,000
<INCOME-PRETAX> 701,000,000
<INCOME-TAX> 277,000,000
<INCOME-CONTINUING> 424,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424,000,000
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.59
</TABLE>
