SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No.1)
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036-2774
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
Common Stock New York Stock Exchange
(par value $1.00 Chicago Stock Exchange
per share) Pacific Exchange
Preferred Stock London Stock Exchange
Purchase Rights
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 .
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K X .
As of February 26, 1999, the aggregate market value of the voting
stock held by non-affiliates of the registrant was approximately
$17,772,000,000.
As of February 26, 1999, there were outstanding 257,382,716 shares
of common stock, par value $1.00 per share, of the registrant.
This Amendment No. 1 to the Annual Report on Form 10-K of Marsh & McLennan
Companies, Inc. is submitted to amend the following Items, which originally
were submitted as part of the Annual Report filed with the Securities and
Exchange Commission as of December 31, 1997. Pursuant to SEC Rule 12b-15,
each of the following Items, as amended hereby, is set forth below in its
entirety.
Part II
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 8. Financial Statements and Supplementary Data.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements (incorporated
herein by reference to Part II, Item 8):
Consolidated Statements of Income for the three years ended
December 31, 1997
Consoldiated Balance Sheets as of December 31, 1997 and
1996
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
Supplemental Notes to Consolidated Financial Statements
Other:
Selected Quarterly Financial Data and Supplemental
Information (Unaudited) for the three years ended
December 31, 1997 (incorporated herein by reference
to Part II, Item 8)
Ten-Year Statistical Summary of Operations
(incorporated herein by reference to Part II, Item 6)
2. All required Financial Statement Schedules are
included in the Consolidated Financial Statements,
the Notes to Consolidated Financial Statements or the
Supplemental Notes to Consolidated Financial
Statements.
3. Exhibits
23 Consent of Deloitte and Touche LLP.
27 Financial Data Schedule for the fiscal year ended
December 31, 1997.
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PART II
Item 6. Selected Financial Data
Marsh & McLennan Companies, Inc. and Subsidiaries
TEN-YEAR STATISTICAL SUMMARY OF OPERATIONS
Compound
For the Ten Years Ended Growth
December 31, 1997 Rate
(In millions of dollars, (Restated) 1987-
except per share figures) 1997(j) 1996(g) 1995 1994 1993(e) 1992(c) 1991(b) 1990(a) 1989 1988 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Risk and Insurance Services $2,788.4 $1,907.3 $1,963.9 $1,886.5 $1,790.5 $1,632.8 $1,571.0 $1,536.8 $1,400.3 $1,375.7 7%
Investment Management (l) 1,882.4 1,337.5 917.0 747.4 577.7 416.1 325.0 286.0 282.1 269.8 21%
Consulting 1,337.8 1,159.2 1,056.4 933.1 854.8 908.2 894.0 910.0 754.3 635.7 11%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Revenue 6,008.6 4,404.0 3,937.3 3,567.0 3,223.0 2,957.1 2,790.0 2,732.8 2,436.7 2,281.2 11%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Compensation and benefits 3,044.1 2,204.3 1,948.8 1,740.2 1,635.7 1,557.8 1,461.1 1,400.0 1,223.4 1,108.9 12%
Other operating expenses 2,166.7 1,484.4 1,293.6 1,156.5 994.5 858.3 830.8 805.5 703.8 656.9 13%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Expenses 5,210.8 3,688.7 3,242.4 2,896.7 2,630.2 2,416.1 2,291.9 2,205.5 1,927.2 1,765.8 13%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Income 797.8(k) 715.3(h) 694.9 670.3 592.8 541.0 498.1 527.3 509.5 515.4 4%
Interest Income 24.0 14.3 17.7 11.8 11.9 16.6 24.8 33.5 27.7 22.7
Interest Expense (106.4) (61.6) (62.8) (50.6) (46.1) (38.3) (39.1) (31.0) (18.9) (23.1)
Other Income (Expense) - - - - - - 43.0 (1.0) (1.0) 1.4
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Income Taxes
and Cumulative Effect of
Accounting Changes 715.4 668.0 649.8 631.5 558.6 519.3 526.8 528.8 517.3 516.4 2%
Income Taxes 281.2 208.7(i) 246.9 249.5 226.2 215.5 221.3 224.7 222.4 220.1
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income Before Cumulative
Effect of Accounting
Changes $434.2 $459.3 $402.9 $382.0 $332.4 $303.8 $305.5 $304.1 $294.9 $296.3 4%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net Income $434.2 $459.3 $402.9 $371.5(f)$332.4 263.7(d) $305.5 $304.1 $294.9 $296.3 4%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Basic Net Income Per Share
Information:
Income Before Cumulative
Effect of Accounting Changes $2.66 $3.17 $2.76 $2.60 $2.26 $2.10 $2.09 $2.07 $2.05 $2.05 3%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net Income Per Share $2.66 $3.17 $2.76 $2.52(f) $2.26 $1.83(d) $2.09 $2.07 $2.05 $2.05 3%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Average Number of Shares 163.0 144.8 145.8 147.2 147.0 144.4 146.2 146.6 143.8 144.8
Outstanding ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted Net Income Per Share
Information:
Income Before Cumulative $2.60 $3.12 $2.73 $2.57 $2.23 $2.07 $2.06 $2.05 $2.01 $2.02 3%
Effect of Accounting Changes ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net Income Per Share $2.60 $3.12 $2.73 $2.50(f) $2.23 $1.80(d) $2.06 $2.05 $2.01 $2.02 3%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Average Number of Shares 167.2 147.4 147.4 148.6 149.0 146.6 148.4 148.6 146.6 146.4
Outstanding ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Dividends Paid Per Share $1.90 $1.65 $1.48 $1.40 $1.35 $1.33 $1.30 $1.28 $1.25 $1.21 6%
Return on Average 17% 26% 26% 26% 27% 25% 29% 31% 36% 38%
Stockholders' Equity
Year-end Financial Position:
Working capital $224.3 $192.3 $109.6 $53.7 $133.7 $198.3 $336.2 $352.5 $312.7 $195.7
Total assets $7,912.0 $4,545.2 $4,329.5 $3,830.6 $3,546.6 $3,088.4 $2,382.2 $2,411.2 $2,035.2 $1,830.0
Long-term debt $1,239.8 $458.2 $410.6 $409.4 $409.8 $411.2 $318.0 $319.9 $319.4 $266.2
Stockholders' equity $3,233.6 $1,888.6 $1,665.5 $1,460.6 $1,365.3 $1,102.9 $1,035.0 $1,085.3 $873.0 $755.1
Total shares outstanding
(excluding treasury shares) 170.0 144.6 145.6 146.4 147.8 146.6 143.6 147.0 144.8 143.0
Other Information:
Number of employees 36,400 27,000 27,200 26,100 25,600 25,800 23,400 24,400 23,600 22,800
Stock price ranges-
U.S. exchanges - High $80.00 $57.44 $45.06 $44.38 $48.81 $47.25 $43.63 $40.50 $44.88 $29.88
- Low $51.31 $42.13 $38.06 $35.63 $38.50 $35.63 $34.56 $29.88 $27.56 $22.63
(pound) (pound) (pound) (pound) (pound) (pound) (pound) (pound) (pound) (pound)
London Stock
Exchange - High 49.06 34.17 29.25 29.47 33.72 30.94 24.81 24.50 27.97 17.50
- Low 30.56 27.44 23.94 22.66 26.28 19.66 17.78 15.75 15.41 12.50
Price/earnings multiple 28.7 16.7 16.3 15.9 18.2 25.4 19.8 19.0 19.4 13.9
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(a) Includes the operating results of Gradmann & Holler, a German insurance
broking acquisition.
(b) Included in Other Income (Expense) is a pre-tax gain of $43.9 million
related to the gain on sale of Hudig-Langeveldt B.V.
(c) Includes the operating results of Faugere & Jutheau, a French insurance
broking acquisition.
(d) Reflects the adoption, effective January 1, 1992, of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," and SFAS No. 109, "Accounting For Income Taxes."
(e) Includes the operating results of the Frizzell Group Limited, a
U.K.-based insurance program management firm, acquired in December
1992.
(f) Reflects the adoption, effective January 1, 1994, of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits."
(g) The Frizzell Group Limited was sold in June 1996.
(h) Includes net special charges of $92.6 million partially offset by a
$33.2 million gain on the sale of Frizzell.
(i) Includes a tax adjustment that reduced income taxes by $40 million.
(j) Includes the operating results of Johnson & Higgins, an insurance
broking and consulting services firm, acquired in March 1997 and CECAR,
a French insurance services firm.
(k) Includes a special charge of $243.8 million.
(l) In accordance with industry practice, the investment management segment
has restated both revenue and other operating expenses by identical
amounts to reclassify certain commission expenses.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations for discussion of significant items affecting the results of
operations in 1997 and 1996.
Item 7.
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 "Cautionary Language
Regarding Forward-Looking Information" on the inside back cover page of
this annual report.
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, management determined that certain costs which were accrued in
connection with the 1997 acquisition of Johnson & Higgins and certain
London real estate consolidations should be expensed as incurred.
Consequently, the 1997 results of operations presented herein have been
restated to reflect a $53 million reduction in the special charges
originally reported. Restated net income totals $434.2 million compared
with $399.4 million originally reported. Restated net income per diluted
share totals $2.60 compared with $2.39 originally reported.
The consolidated results of operations follow:
- ------------------------------------------------------------------------------
(In millions, except As Restated
per share figures) 1997 1996 1995
- ------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $2,788.4 $1,907.3 $1,963.9
Investment Management (a) 1,882.4 1,337.5 917.0
Consulting 1,337.8 1,159.2 1,056.4
-------- -------- --------
6,008.6 4,404.0 3,937.3
-------- -------- --------
Expense:
Compensation and Benefits 3,044.1 2,204.3 1,948.8
Other Operating Expenses (a) 1,922.9 1,425.0 1,293.6
Special Charges, net 243.8 59.4 -
-------- ---------- --------
5,210.8 3,688.7 3,242.4
-------- -------- --------
Operating Income $ 797.8 $ 715.3 $ 694.9
======== ======== ========
Net Income $434.2 $459.3 $402.9
====== ====== ======
Net Income Per Share:
Basic (b) $2.66 $3.17 $2.76
===== ===== =====
Diluted (b) $2.60 $3.12 $2.73
===== ===== =====
Average Number of Shares Outstanding:
Basic (b) 163.0 144.8 145.8
===== ===== =====
Diluted (b) 167.2 147.4 147.4
===== ===== =====
(a) In accordance with industry practice, the investment management
segment has restated both revenue and expense for prior periods by
identical amounts to reclassify certain commission expenses.
(b) Restated to reflect the two-for-one stock split in the form of a
100% stock distribution issued on June 27, 1997.
- ----------------------------------------------------------------------------
The Company has reflected its business combination with Johnson & Higgins
("J&H"), completed on March 27, 1997, in its results of operations
beginning with the second quarter of 1997.
Revenue, derived mainly from commissions and fees, rose 36% from 1996
primarily reflecting the impact of the combination with J&H and the
acquisition of Compagnie Europeenee De Courtage d'Assurances et de
Reassurances ("CECAR") in January 1997. Excluding acquisitions and
dispositions, revenue grew approximately 14% over 1996, principally due to
a 41% increase in the investment management segment attributable to higher
assets under management. In addition, a higher level of services provided
in the retirement consulting area contributed to a 10% growth in revenue
from the Company's consulting segment.
In 1996, revenue increased 12% over 1995. Adjusting both 1996 and 1995 to
reflect the disposition of The Frizzell Group Limited ("Frizzell"), a
U.K.-based insurance program management firm that was sold in June 1996,
revenue grew 14% from 1995 primarily due to a 46% increase in the
investment management segment, largely attributable to higher assets under
management. In addition, increased demand for the Company's consulting
services resulted in 10% revenue growth for that segment. Risk and
insurance services revenue declined 3% due to the sale of Frizzell.
Excluding the impact of Frizzell, insurance services revenue increased 1%
in 1996 reflecting growth in insurance broking and insurance program
management, offset, in large part, by a decline in reinsurance broking
revenue.
Expenses increased 41% over 1996 primarily due to the combination with J&H,
the acquisition of CECAR, and special charges totaling $243.8 million. The
special charges for 1997 include $167.5 million of merger costs
predominantly related to the combination with J&H, a charge of $61.3
million related to lease abandonment costs associated with the
consolidation of various London operations along with costs to abandon and
redevelop the Company's London building and $15.0 million for the disposal
of certain EDP assets, which were written off in 1997. Of the total $243.8
million special charges, $224.3 million is applicable to risk and insurance
services, $16.7 million relates to consulting and $2.8 million is recorded
in General Corporate. The net impact of the special charges was $158.1
million after tax, or $.94 per diluted share.
The $167.5 million of merger costs, which relate to employees and offices
of the Company, include personnel-related expenses primarily involving
severance and related benefits associated with the reduction of
approximately 1,300 positions worldwide ($116.9 million), costs principally
related to the planned consolidations of approximately 30 offices ($37.8
million) and other integration costs ($12.8 million). In addition, $142.8
million of merger costs for planned reductions of over 900 positions and
consolidations of approximately 50 offices of J&H were allocated to the
cost of the acquisition.
Of the combined merger related costs totaling $310.3 million, approximately
$86.0 million was utilized in 1997. The remaining action steps are expected
to be completed in 1998. Estimated cash payments of approximately $125
million are expected to be made in 1998. Some accruals, primarily
representing future rent under noncancelable leases (net of anticipated
sublease income) and salary continuance arrangements, primarily in Canada
and the Netherlands, are expected to be paid out over several years.
Management believes the gross annual savings associated with the J&H
integration should approximate $200 million when it is completed by the end
of 1999, most of which will result from reduced compensation and benefits
expense reflecting the elimination of approximately 2,200 positions and
lower facilities costs reflecting the consolidation of approximately 80
offices, primarily in the United States. Net annual savings are expected to
be approximately $125 million for the full year 1999 after giving effect to
incremental goodwill amortization and near-term higher integration related
spending on technology and systems.
During 1996, the Company completed the sale of Frizzell for approximately
$290 million which resulted in a $33.2 million pretax gain. In addition,
pretax charges aggregating $92.6 million were recorded representing a
provision of approximately $33.5 million principally for London real estate
consolidations; $27.1 million primarily for severance and related benefits
associated with the planned reduction of over 600 employees relating to
restructuring certain elements of the Company's insurance and reinsurance
back office operations in London and several office closings; $16.5 million
for goodwill write-offs; and $15.5 million related to the Lloyd's
Reconstruction and Renewal Plan. The net impact of the gain on sale, the
special charges and the 1996 tax adjustment discussed in Note 4 increased
diluted net income per share by $.02 for the year.
The London insurance and reinsurance operations were restructured because
there were duplicative back office groups performing similar functions
which could be consolidated into shared services departments at an
estimated annual savings of between $20 and $25 million. Of the net $59.4
million special charge, $49.4 million was applicable to risk and insurance
services, $8.5 million related to consulting and $1.5 million was recorded
in general corporate. Of the total charge of $92.6 million, $24.4 million
of assets were written off and cash payments of $20 million were made
during 1997. Estimated cash payments of approximately $20 million are
expected to be made in 1998. The remaining reserve balance primarily
reflects future rental payments under noncancelable leases (net of
anticipated sublease income) and are expected to be paid out over several
years.
The staff reduction portion of the London restructuring plan was delayed in
1997 due to the acquisition of J&H. The Company remains committed to
carrying out this staff reduction plan in 1998.
During 1997, the Company continued the evaluation of its London real estate
issues and in the fourth quarter recorded an additional special charge of
$61.3 million relating to the further consolidation of offices and the
razing and redevelopment of its London building.
The above actions did not result in any meaningful disruptions of the
Company's operations.
Excluding acquisitions, dispositions, and the special charges, expenses
grew 12% mostly as a result of staff growth in the investment management
and consulting segments as well as higher incentive compensation levels in
the investment management segment commensurate with very strong operating
performance. Client service related costs for investment management also
increased resulting from the higher level of business activity.
Expenses increased 14% in 1996 compared with 1995. Included in 1996 were
special charges totaling $92.6 million which related to real estate
matters, integration of the Company's worldwide risk and insurance services
operations, goodwill write-offs, a provision related to the Lloyd's
Reconstruction and Renewal Plan and certain office closings. These charges
were offset, in part, by a gain of $33.2 million on the Company's sale of
Frizzell in June 1996. Of the net $59.4 million special charge, $49.4
million was applicable to insurance services, $8.5 million related to
consulting and $1.5 million was recorded in General Corporate.
Excluding the net special charges and the effect of only one-half year of
Frizzell, expenses increased 14% primarily due to increased incentive
compensation levels especially within investment management. Volume-related
costs, particularly those associated with higher staff levels, grew for
both investment management and consulting as a result of the increased
level of business activity.
Net income for 1996 includes a tax adjustment that reduced the income tax
provision by $40 million. The tax adjustment primarily related to the
permanent deployment of funds outside the United States in a tax-efficient
manner and favorable state and local tax developments in the U.S. The net
impact of the tax adjustment and the net special charges described above
increased earnings per share by $.02 for the year.
The translated values of revenue and expense from the Company's
international insurance services and consulting operations are subject to
fluctuations due to changes in currency exchange rates. However, the net
impact of these fluctuations on the Company's results of operations has not
been material.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," which is effective for annual and
interim periods ending after December 15, 1997. In accordance with this
statement, the required basic and diluted earnings per share figures are
included on the face of the income statement.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," both of which are
effective for fiscal years beginning after December 15, 1997. In February
1998, the FASB issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which is effective for fiscal years beginning after December 15, 1997. The
Company will adopt these disclosure standards in 1998.
Risk and Insurance Services
Revenue attributable to the risk and insurance services segment consists
primarily of fees paid by clients; commissions and fees paid by insurance
and reinsurance companies; interest income on funds held in a fiduciary
capacity for others, such as premiums and claims proceeds; and placement
services revenues earned from carriers.
Revenue generated by risk and insurance services is fundamentally derived
from the value of service provided to clients and markets, and is affected
by premium rate levels in the property and casualty insurance markets and
available insurance capacity because compensation is frequently related to
the premiums paid by insureds. Revenue is also affected by fluctuations in
the amount of risk retained by insurance and reinsurance clients themselves
and by insured values, the development of new products, markets and
services, new and lost business, merging of clients and the volume of
business from new and existing clients, as well as by interest rates for
fiduciary funds.
The Company has been instrumental in the formation of several substantial
insurance and reinsurance entities. Marsh & McLennan Risk Capital ("MMRC")
is also an adviser to The Trident Partnership L.P., an independent private
investment partnership formed in 1994 to invest selectively in the global
insurance and reinsurance industry, and Risk Capital Reinsurance Company, a
U.S. reinsurer formed in 1995 to provide traditional and other kinds of
reinsurance, both on a stand-alone basis and as part of integrated capital
solutions for insurance companies. Through MMRC, the Company receives
compensation in various forms including fees, royalties and dividends, as
well as appreciation that has been realized on sales of the Company's
holdings in insurance and related industry entities. These amounts are
reflected within the insurance services segment in the applicable line of
business to which they apply.
The results of operations for the Company's risk and insurance services
segment are presented below:
- ------------------------------------------------------------------------------
As Restated
(In millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------
Revenue:
Insurance Broking $2,125.0 $1,321.3 $1,260.0
Reinsurance Broking 293.1 258.5 295.1
Insurance Program Management 259.5 233.6 306.1
Interest Income on Fiduciary Funds 110.8 93.9 102.7
---------- --------- ----------
2,788.4 1,907.3 1,963.9
--------- -------- --------
Expense:
Operating Expenses 2,292.8 1,544.2 1,574.7
Special Charges, net 224.3 49.4 -
---------- ---------- -------------
2,517.1 1,593.6 1,574.7
--------- -------- --------
Operating Income (a) $ 271.3 $ 313.7 $ 389.2
========= ======== ========
Operating Income Margin (a) 9.7% 16.4% 19.8%
==== ===== =====
(a) Excluding special charges, operating income would have been $495.6
million and $363.1 million and operating income margin would have been
17.8% and 19.0% in 1997 and 1996, respectively.
- -----------------------------------------------------------------------------
Insurance Broking Revenue
Insurance broking services are provided to clients primarily in connection
with risk management and the insurance placement process and involve
analyzing various types of property and liability loss exposures including
large and complex risks that require access to world insurance markets.
Services include insurance broking activities and professional consulting
services on risk management issues, including risk analysis, coverage
requirements, self insurance and alternative insurance and risk financing
methods, as well as claims collection, injury management and loss
prevention. Insurance placement services include the placement of insurance
coverages with insurers worldwide, sometimes involving other
intermediaries.
Insurance broking revenue, received from a predominantly corporate
clientele, increased 61% in 1997 primarily due to the J&H and CECAR
transactions. Excluding acquisitions, revenue increased approximately 3%.
Client revenue rose due to net new business development partially offset by
declines in commercial property and casualty premium rates.
In 1996, insurance broking revenue increased 5% over 1995 levels. Client
revenue rose primarily due to an increase in new business in the United
States and Europe offset by declines in commercial property and casualty
premium rates worldwide. Global specialty lines of coverage, including
financial services, marine and energy, and aviation also experienced strong
new business levels.
Reinsurance Broking Revenue
Reinsurance broking services involve acting as an intermediary for
insurance and reinsurance organizations on all classes of reinsurance. The
intermediary assists the insurer by providing advice, placing reinsurance
coverage with reinsurance organizations located around the world, placing
risk transfer financing with capital markets, and furnishing related
services such as actuarial, financial and regulatory consulting, portfolio
analysis and catastrophe modeling. Generally, the purpose of reinsurance is
to spread the risk of primary insurance or the reinsurance thereof to
lessen the concentration of risk with any one insurance or reinsurance
company.
Reinsurance broking revenue increased 13% in 1997 primarily due to the
combination with J&H. Excluding acquisitions, client revenue fell 2%
compared with the prior year reflecting reduced demand for reinsurance
resulting from continued insurance company consolidations, higher risk
retentions by ceding insurance companies and the impact of lower premium
rates offset, in part, by new business.
Reinsurance broking revenue in 1996 declined 12% compared with 1995. This
decline was primarily due to reduced demand for reinsurance resulting from
the consolidation among various U.S. and U.K. insurance companies, reduced
reinsurance demand due to higher risk retentions by ceding insurance
companies and the impact of lower property catastrophe premium rates.
Insurance Program Management Revenue
Seabury & Smith, the Company's insurance program management operation,
primarily designs, places and administers life, health, accident,
disability, automobile, homeowners and professional liability and other
insurance programs primarily on a group marketing basis to individuals,
businesses and their employees, and associations and other affinity groups
and their members in the United States and Canada. In addition, it provides
underwriting management services to insurers in the United States, Canada
and the United Kingdom, primarily for professional liability coverages.
Insurance program management revenue increased 11% from 1996 reflecting the
J&H combination and the acquisition of Albert H. Wohlers & Co. in May 1997,
offset, in part, by the sale of Frizzell in 1996. Excluding the net impact
of acquisitions and dispositions, revenue for Seabury & Smith increased 6%
from 1996. This growth was largely due to increased insurance placed on
behalf of small businesses and new business associated with a marketing
program for the American Association of Retired Persons.
In 1996, insurance program management revenue decreased 24% due to the sale
of Frizzell. Revenue for Seabury & Smith, which comprised the whole of
program management subsequent to the sale of Frizzell, increased 6%. This
growth was largely the result of increased services provided to
corporations and institutions and their employees, along with increased
insurance placed on behalf of small businesses.
Interest Income on Fiduciary Funds
Interest income on fiduciary funds increased 18% largely due to the
combination with J&H and the CECAR acquisition. Excluding acquisitions,
interest income on fiduciary funds decreased approximately 2%. In 1996,
interest income on fiduciary funds decreased 9% due to generally lower
average short-term interest rates worldwide.
Operating Expense
Risk and insurance services operating expenses increased 48% primarily due
to the impact of acquisitions. Excluding acquisitions and dispositions,
operating expenses increased approximately 1% from 1996. The Company
expects that its level of spending on systems and technology will increase
in 1998 as a consequence of the integration process with J&H.
In 1996, risk and insurance services operating expenses decreased 2% from
1995. Excluding the impact of Frizzell, expenses increased 2% reflecting
normal salary progressions.
Special Charges, net
During 1997, the risk and insurance services segment recorded special
charges totaling $224.3 million representing $148.0 million of merger costs
predominantly related to the combination with J&H, a charge of $61.3
million related to London real estate and $15.0 million related to the
disposal of certain EDP assets.
The merger costs reflect personnel related costs primarily involving
severance and associated benefits for staff reductions ($102.1 million),
costs for real estate consolidations ($37.3 million) and other integration
costs of $8.6 million. The charge for London real estate relates to the
consolidation of various back-office operations into one central site
outside of the City of London and the razing and redevelopment of the
Company's London building. The disposition of EDP assets relates primarily
to the disposal of personal computers and associated software. Excluding
the impact of the special charges, the margin for insurance services was
17.8%.
During 1996, the Company completed the sale of Frizzell for approximately
$290 million which resulted in a $33.2 million pretax gain. In addition,
pretax charges aggregating $82.6 million were also recorded in the
insurance services segment representing a provision of approximately $31
million for U.K. real estate; $17 million for costs related to the
integration of the Company's worldwide insurance services operations; $17
million for goodwill write-offs; $15 million related to the Lloyd's
Reconstruction and Renewal Plan; and $3 million for office closings.
Excluding the impact of the Frizzell gain and the special charges, the
margin for insurance services was 19.0%.
The results of operations for the Company's risk and insurance services
segment by geographic area are presented below:
- -------------------------------------------------------------------------------
As Restated
(In millions of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
Revenue:
United States $1,635.5 $1,025.3 $1,006.9
Europe 878.5 696.1 784.0
Canada 109.8 96.4 93.9
Pacific Rim and Other 164.6 89.5 79.1
--------- ---------- ----------
$2,788.4 $1,907.3 $1,963.9
======== ======== ========
Operating Income:
United States (a) $144.9 $155.6 $186.9
Europe (a) 69.1 111.9 155.5
Canada (a) 12.7 27.0 25.9
Pacific Rim and Other (a) 44.6 19.2 20.9
------ -------- --------
$271.3 $313.7 $389.2
====== ====== ======
(a) Excluding special charges, operating income would have been $246.2
million and $179.2 million in the United States, $175.6 million and
$135.7 million in Europe, $26.9 million and $27.0 million in Canada,
$46.9 million and $21.2 million in the Pacific Rim and Other, and risk
and insurance services in total would have been $495.6 million and
$363.1 million in 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
The decline in 1997 operating income in the United States, Europe and
Canada reflects the effect of the special charges partially offset by the
combinations with J&H and CECAR.
The sale of Frizzell caused a decline in both revenue and operating income
in Europe in 1996. Operating income also declined in Europe as a result of
the special charges recorded which primarily related to the U.K. The
decline in operating income in the United States reflects reduced
reinsurance broking income due to lower revenues, as well as the impact in
the U.S. of the special charges.
Investment Management
The Company's investment management and related services, which are
performed principally in the United States, are provided primarily under
the "Putnam" name. The services include securities investment advisory and
management services consisting of investment research and management, and
accounting and related services for a group of publicly held investment
companies (the "Putnam Funds"). A number of the open-end funds serve as
funding media for variable insurance contracts. Investment management
services are also provided to corporate profit-sharing and pension funds,
state and other government and public employee retirement funds, university
endowment funds, charitable foundations, collective investment vehicles
(both U.S. and non-U.S.) and other domestic and foreign institutional
accounts. Putnam serves as transfer agent, dividend disbursing agent,
registrar and custodian for the Putnam Funds and provides custody services
to several external clients. In addition, Putnam provides administrative
and trustee (or custodial) services for employee benefit plans (in
particular 401(k) plans), IRA's and other clients for which it receives
compensation pursuant to service and trust or custodian contracts. Putnam
also acts as principal underwriter of the shares of the open-end Putnam
Funds, selling primarily through independent broker/dealers, financial
planners and financial institutions, including banks, and directly to
certain large 401(k) plans and other institutional accounts. Nearly all of
Putnam's mutual funds are available with a contingent deferred sales charge
in lieu of a front-end load.
Putnam's revenue is derived primarily from investment management fees
received from the Putnam Funds and institutional accounts. Fees paid by the
Funds are approved annually by the trustees or shareholders of the Funds
and are charged at various rates depending on the individual mutual fund or
account and are usually based upon a sliding scale in relation to the level
of assets under management and, in certain instances, are also based on
investment performance. The management of Putnam and the trustees of the
funds regularly review the fund fee structure in light of fund performance,
the level and range of services provided, industry conditions and other
relevant factors. Putnam also receives compensation for providing certain
shareholder and custody services.
The results of operations for the Company's investment management segment
are presented below:
- ------------------------------------------------------------------------------
(In millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------
Revenue $1,882.4 $1,337.5 $917.0
Expense 1,419.6 999.7 673.5
-------- -------- -------
Operating Income $ 462.8 $ 337.8 $243.5
======== ======== ======
Operating Income Margin 24.6% 25.3% 26.6%
===== ===== =====
- ------------------------------------------------------------------------------
Revenue
Putnam's revenue increased 41% in 1997 reflecting record growth in the
level of average assets under management on which management fees are
earned. Strong mutual fund sales and significantly higher equity market
valuations contributed to the higher asset level.
In accordance with industry practice, the investment management segment has
restated both revenue and expense for prior periods by identical amounts to
reclassify certain commission expenses.
Putnam's revenue increased 46% in 1996 reflecting exceptional growth in the
level of assets under management. The higher asset level reflected a
substantial increase in the level of mutual fund sales, higher equity
market valuations and new 401(k) business.
Expense
Putnam's expenses increased 42% in 1997 reflecting the effect of staff
growth to support new business, increased incentive compensation levels
commensurate with very strong operating performance and increased client
service-related costs, including a new service center, resulting from the
higher level of business activity.
Putnam's expenses rose 48% in 1996 reflecting the effect of significantly
higher incentive compensation levels, staff growth to support new business,
increased costs resulting from the higher level of business activity, and
expanding client needs.
Year-end and average assets under management are presented below:
- ------------------------------------------------------------------------------
(In billions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------
Mutual Funds:
Domestic Equity $119.0 $ 80.0 $ 46.8
Taxable Bond 35.6 29.9 26.0
Tax-Free Income 16.5 16.4 16.9
International Equity 10.9 7.5 3.7
------- ------- -------
182.0 133.8 93.4
------ ------ ------
Institutional Accounts:
Fixed Income 21.8 19.1 19.0
Domestic Equity 21.4 14.0 8.9
International Equity 9.9 6.5 4.4
-------- -------- --------
53.1 39.6 32.3
------- ------- -------
Year-end Assets $235.1 $173.4 $125.7
====== ====== ======
Average Assets $205.8 $148.5 $109.2
====== ====== ======
- ------------------------------------------------------------------------------
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 1997, assets held in equity securities represented 69% of
assets under management, compared with 62% in 1996 and 51% in 1995, while
investments in fixed income products represented 31%, compared with 38%
last year and 49% in 1995.
Consulting
The Company provides consulting services to a predominantly corporate
clientele from locations around the world, primarily in the areas of human
resources and employee benefit programs, including retirement, health care,
and compensation; and general management consulting, which comprises
strategy, operations and marketing. The Company also provides economic
consulting and analysis.
Revenue in the consulting business is affected by changes in clients'
industries including government regulation, as well as new products and
services, the stage of the economic cycle and broad trends in the
management of large organizations.
The results of operations for the Company's consulting segment are
presented below:
- -------------------------------------------------------------------------------
As Restated
(In millions of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
Revenue $1,337.8 $1,159.2 $1,056.4
-------- -------- --------
Expense:
Operating Expenses 1,189.4 1,039.8 947.7
Special Charges 16.7 8.5 -
--------- ----------- -----------
1,206.1 1,048.3 947.7
-------- --------- --------
Operating Income (a) $ 131.7 $ 110.9 $ 108.7
======== ======== ========
Operating Income Margin (a) 9.8% 9.6% 10.3%
==== ==== =====
(a) Excluding special charges, operating income would have been $148.4
million and $119.4 million and operating income margin would have been
11.1% and 10.3% in 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
Revenue
Consulting services revenue increased 15% in 1997 reflecting the J&H
combination as well as an increase in the level of services provided
partially offset by the transfer of certain business lines as part of a
strategic alliance with Automatic Data Processing, Inc., which became
effective October 1997. Adjusting for the impact of acquisitions and
dispositions, Consulting's revenue increased approximately 10% in 1997.
Retirement consulting revenue, which represented 43% of the consulting
segment, grew 10% over 1996 reflecting higher worldwide request for
services. In addition, revenue rose 24% in the global compensation
practice, 8% in general management consulting and 1% in health care
consulting in 1997.
In 1996, consulting services revenue increased 10% from 1995. Retirement
consulting revenue, which represented 43% of the consulting segment, grew
9% in 1996 reflecting higher demand in the United States, Europe and Latin
America. Revenue rose 14% in the global compensation practice, 10% in
health care consulting and 7% in general management consulting in 1996.
Operating Expense
Consulting services operating expenses increased 14% in 1997. Excluding
acquisitions and dispositions, expenses increased approximately 9%
reflecting normal salary progressions, the impact of staff growth to
support new business and investments in information technology systems and
networks.
Consulting services operating expenses increased 10% in 1996 compared with
1995 primarily reflecting staff growth to support new business, higher
incentive compensation and normal salary progressions.
Special Charges
During 1997, the consulting segment recorded special charges of $16.7
million representing costs associated with the combination with J&H. The
merger costs primarily reflect severance and related benefits for staff
reductions ($14.6 million), costs for real estate consolidations ($0.5
million) and other integration costs of $1.6 million. Excluding the impact
of the special charges, the margin for consulting services was 11.1%.
In 1996, pretax charges of $8.5 million were recorded in the consulting
segment reflecting a provision of approximately $6 million for office
realignments and consolidations and $2.5 million for a U.K. real estate
matter. Excluding the impact of the special charges, the operating income
margin for consulting services was 10.3%.
The results of operations for the Company's consulting segment by geographic
area are presented below:
- ------------------------------------------------------------------------------
As Restated
(In millions of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
Revenue:
United States $ 823.1 $ 707.2 $ 645.0
Europe 318.8 264.8 240.6
Canada 104.5 101.6 90.4
Pacific Rim and Other 91.4 85.6 80.4
---------- ---------- ----------
$1,337.8 $1,159.2 $1,056.4
======== ======== ========
Operating Income:
United States (a) $65.6 $ 69.6 $ 60.4
Europe (a) 41.5 24.2 33.9
Canada (a) 15.8 15.5 11.5
Pacific Rim and Other 8.8 1.6 2.9
------- -------- -------
$131.7 $110.9 $108.7
====== ====== ======
(a) Excluding special charges, operating income would have been $80.9
million and $75.6 million in the United States, $41.5 million and $26.7
million in Europe, $17.2 million and $15.5 million in Canada, and
consulting in total would have been $148.4 million and $119.4 million
in 1997 and 1996, respectively.
- ------------------------------------------------------------------------------
The decline in 1997 operating income in the United States reflects the
effect of the special charges. European results were positively impacted by
the expansion of retirement and general management consulting. The
improvement in Pacific Rim and Other reflects growth primarily in Australia
and Latin America.
In 1996, the European results for the consulting segment reflect the impact
of investments made in information technology, the expansion of retirement
consulting, and fee pressure in an expanding but competitive market for
general management consulting. Canadian results reflect improved market
conditions coupled with continued expense controls.
Interest
Interest income earned on corporate funds increased to $24.0 million in
1997 compared with $14.3 million in 1996 due, in large part, to the J&H
combination. Interest expense increased to $106.4 million in 1997 from
$61.6 million in 1996 as a result of increased bank borrowings used to
finance the acquisitions of J&H and CECAR as well as the assumption of
J&H's long-term debt.
Interest income earned on corporate funds declined to $14.3 million in 1996
compared with $17.7 million in 1995 primarily due to generally lower yields
worldwide. Interest expense decreased to $61.6 million in 1996 from $62.8
million in 1995. This decline was due to lower average interest rates on
commercial paper borrowings. The average level of commercial paper
borrowings was slightly higher than 1995 principally due to the funding of
Putnam's prepaid dealer commissions and the cash outflows associated with
the Company's share repurchases, which was offset in large part by the cash
proceeds realized on the sale of Frizzell.
Income Taxes
The Company's consolidated tax rate was 39.30% of income before income
taxes in 1997. Excluding the tax effect of the special charges, the
underlying tax rate was 38.25%. In 1996 the underlying rate was 37.25%
(prior to the tax adjustment described below), compared with 38.0% in 1995.
Comparing the underlying tax rates, the increase in the 1997 tax rate is
largely attributable to the nondeductibility of goodwill associated with
the J&H acquisition. The overall tax rates are higher than the U.S. federal
statutory rate primarily because of provisions for state and local income
taxes.
In 1996, the Company recorded a tax adjustment that reduced the income tax
provision by $40 million. The tax adjustment primarily related to the
permanent deployment of funds outside the United States in a tax-efficient
manner and favorable state and local tax developments in the U.S. The
reductions in the 1996 tax rate reflected the implementation of tax
minimization strategies primarily relating to the Company's non-U.S.
operations.
Liquidity and Capital Resources
The Company's cash and cash equivalents aggregated $424.3 million at the
end of 1997, an increase of $124.7 million from the end of 1996.
Operating Cash Flows
The Company generated $415.4 million of cash from operations in 1997
compared with $316.5 million in 1996. These amounts reflect the net income
earned by the Company in those years adjusted for non-cash charges and
working capital changes. Included in the cash flow from operations are the
net cash requirements of Putnam's prepaid dealer commissions, which
amounted to $139.7 million in 1997 compared with $338.7 million in 1996.
The tax benefit associated with these prepaid dealer commissions is
recorded as a deferred tax liability.
The increase in accrued compensation and employee benefits in 1997 was
caused principally by significantly higher incentive compensation levels
consistent with very strong operating performance in the investment
management segment. The increase in accounts payable and accrued
liabilities in 1997 reflects the impact of acquisition related reserves.
The Company anticipates that internally generated funds will be sufficient
to meet the Company's foreseeable recurring operating cash requirements, as
well as dividends, capital expenditures and scheduled repayments of
long-term debt.
Financing Cash Flows
As previously mentioned, the Company completed its business combination
with J&H, a leading insurance broker, on March 27, 1997 for total
consideration of approximately $1.8 billion. Approximately one-third of the
total consideration was cash and two-thirds the Company's common stock. The
Company also purchased CECAR for approximately $200 million during January
1997. The cash portion of these transactions is being financed with bank
borrowings.
Financing activities for the Company contributed cash of $398.9 million in
1997 and utilized cash of $325.0 million in 1996. Dividends paid by the
Company amounted to $305.6 million in 1997 ($1.90 per share) and $239.2
million in 1996 ($1.65 per share). The Company periodically purchases
shares of its common stock to meet the requirements of the various stock
compensation and benefit programs. The Company purchased 2.5 million shares
in 1996.
During 1997, the Company executed a new revolving credit facility with
several banks to support its commercial paper borrowings and to fund other
general corporate requirements. This facility, which expires June 2002,
provides that the Company may borrow up to $1.2 billion at market rates of
interest which may vary depending upon the level of borrowings and the
Company's credit ratings. Outstanding borrowings under revolving credit
facilities at December 31, 1997 and 1996 amounted to $708.4 million and
$250.0 million, respectively, with varying dates of maturity through
December 1998. Borrowings under revolving credit facilities have been
classified as long-term debt based on the Company's intent and ability to
maintain or refinance these obligations on a long-term basis. The Company
also maintains other credit facilities with various banks, primarily
related to operations located outside the United States, aggregating $241.7
million as of December 31, 1997. The Company has borrowed $184.2 million
under these facilities at December 31, 1997 and has included these
borrowings in long-term debt in the Consolidated Balance Sheets.
The Company has a fixed rate non-recourse mortgage note agreement due in
2009 amounting to $200 million, bearing an interest rate of 9.8%, in
connection with its 56% interest in its worldwide headquarters building.
Also related to the purchase and renovation of the building, the Company
has an interest rate swap that fixes the interest rate on $100 million of
variable rate borrowings at approximately 9.5% until February 1999.
The Company, in conjunction with the J&H transaction, assumed a mortgage
obligation to finance a condominium interest in office space located in New
York City. The outstanding balance of this debt was $19.3 million at
December 31, 1997. The rate on this debt, which is determined periodically
at a margin of 1/2 of 1% above the LIBOR rate, was 5.8% at December 31,
1997.
Also in conjunction with the J&H transaction, the Company assumed a note
related to an arrangement whereby a third party is obligated to pay rent,
on the Company's behalf, under a noncancelable long-term lease obligation
for office space it no longer occupies. The outstanding balance of this
note at December 31, 1997 is $111.4 million. Interest on $88.5 million of
this debt is fixed at 8.62% while the rate on the remaining balance, which
is determined periodically at a margin of 1/2 of 1% above the LIBOR rate,
was 5.8% at December 31, 1997. The variable interest rate on this $22.9
million, along with the variable rate on the $19.3 million mortgage has
been fixed at 5.8% through a $42.2 million interest rate swap expiring in
January 2005.
Investing Cash Flows
Investing activities for the Company reduced cash by $675.3 million in 1997
and by $13.8 million in 1996. In 1997, cash used for acquisition activity,
primarily related to J&H and CECAR, was $472.9 million. In 1996, the net
addition to cash resulting from the sale of Frizzell was $241.8 million.
The Company's capital expenditures, which amounted to $202.1 million in
1997 and $157.3 million in 1996, have primarily related to computer
equipment purchases and the refurbishing and modernizing of office
facilities.
The Company is continuing to update its computer systems in preparation for
the year 2000 and expects that all of its critical systems will be year
2000 compliant on a timely basis. The costs associated with addressing this
issue are not expected to have a material adverse impact on the Company's
financial position or results of operations. However, if the Company's
clients or vendors are unable to resolve such year 2000 processing issues
in a timely manner, a material operating and financial risk could result.
The Company has been instrumental in developing new sources of insurance
capacity. The Company, through MMRC, maintains ownership interest in
various entities it assisted in organizing. These investments have been
classified as securities available for sale and, as discussed more fully in
Note 10 to the consolidated financial statements, the aggregate fair value
of these holdings is included in long-term securities in the Consolidated
Balance Sheets. The Company, through Marsh & McLennan Risk Capital
Holdings, expects to continue to manage and develop further these
activities.
The Company has announced agreements in principle to acquire AB Max
Matthiessen and Max Matthiessen Reinsurance of Sweden, Brockman y Schuh
Group of Mexico, Interbrokers OY of Finland and the insurance-related
business of Kirke-Van Orsdel, Inc. These transactions are expected to be
completed during the first half of 1998. The combined cash requirement to
acquire these operations, which could approximate $275 million, will be
funded through incremental bank borrowings and commercial paper.
Other
The insurance coverage for potential liability resulting from alleged
errors and omissions in the professional services provided by the Company
includes elements of both risk retention and risk transfer. The Company
believes it has adequately reserved for the self-insurance contingencies.
Payments related to the respective self-insured layers are made as legal
fees are incurred and claims are resolved and generally extend over a
considerable number of years. The amounts paid in that regard vary in
relation to the severity of the claims and the number of claims active in
any particular year. The long-term portion of this liability is included in
other liabilities in the Consolidated Balance Sheets.
The Company's policy for funding its tax qualified U.S. defined benefit
retirement plan is to contribute amounts at least sufficient to meet the
funding requirements set forth in U.S. employee benefit and tax laws. As
described more fully in Note 5 to the consolidated financial statements,
the plan has been and continues to be well funded; consequently, the
Company has not been able to make a tax deductible contribution since 1986.
Because this situation is expected to continue, a 1998 cash contribution is
currently not anticipated. The related long-term pension liability is
included in other liabilities in the Consolidated Balance Sheets.
The Company contributes to certain health care and life insurance benefits
provided to its retired employees. As described more fully in Note 5 to the
consolidated financial statements, the cost of these postretirement
benefits for employees in the United States is accrued during the period up
to the date employees are eligible to retire, but is funded by the Company
as incurred. This postretirement liability is included in other liabilities
in the Consolidated Balance Sheets.
Cumulative translation adjustments, a component of stockholders' equity in
the Consolidated Balance Sheets, represent the cumulative effect of
translating the financial statements of the Company's international
operations from functional currencies to U.S. dollars.
In September 1997, Putnam adopted the Putnam Investments, Inc. Equity
Partnership Plan ("Plan") pursuant to which Putnam is authorized to grant
or sell to certain key employees of Putnam or its subsidiaries restricted
shares of a new class of common stock of Putnam ("Class B Common Stock")
and options to acquire the Class B Common Stock. Such awards or options
generally vest over a four-year period. Holders of Putnam Class B shares
are not entitled to vote and have no rights to convert their shares into
any other securities of Putnam. However, in the event of certain change in
control events, Class B shares will be converted into Class A Common Stock
on a share for share basis. Awards of restricted stock and/or options may
be made under the Plan with respect to a maximum of 12,000,000 shares of
Class B Common Stock, which would represent approximately 12% of the
outstanding shares on a fully diluted basis. Putnam made initial awards
pursuant to the Plan with respect to approximately 4,000,000 shares of
Class B Common Stock, including 2,000,000 shares of restricted stock and
2,000,000 shares subject to options. The purpose of the Plan is to foster
and promote the long-term success of Putnam and to increase shareholder
value by enabling Putnam to attract and retain the services of an
outstanding management team and professional staff. Pursuant to an
executive compensation agreement, Putnam awarded 300,000 restricted stock
units and 325,000 options related to Class B Common Stock to a key
executive of Putnam.
Item 8. Financial Statements and Supplementary Data.
Financial Highlights
- ------------------------------------------------------------------------------
For the Three Years Ended December 31,
(As Restated)
(In millions, except per share figures) 1997 1996 1995
- ------------------------------------------------------------------------------
Revenue $6,008.6 $4,404.0 $3,937.3
Income Before Income Taxes (1) $ 715.4 $ 668.0 $ 649.8
Net Income (1) $ 434.2 $ 459.3 $ 402.9
Stockholders' Equity $3,233.6 $1,888.6 $1,665.5
Diluted Net Income Per Share (1) $ 2.60 $3.12 $2.73
Dividends Paid Per Share $1.90 $1.65 $1.48
Year-end Stock Price $74.56 $52.00 $44.38
- ------------------------------------------------------------------------------
(1) The Company's 1997 operating results include the impact of a special
charge principally resulting from the combination with Johnson &
Higgins.
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Income
- ------------------------------------------------------------------------------
(As Restated -
For the Three Years Ended December 31, 1997 Note 16)
(In millions, except per share figures)
1997 1996 1995
- ------------------------------------------------------------------------------
Revenue $6,008.6 $4,404.0 $3,937.3
Expense 5,210.8 3,688.7 3,242.4
-------- -------- --------
Operating income 797.8 715.3 694.9
Interest income 24.0 14.3 17.7
Interest expense (106.4) (61.6) (62.8)
-------- -------- --------
Income before income taxes 715.4 668.0 649.8
Income taxes 281.2 208.7 246.9
-------- -------- --------
Net income $ 434.2 $ 459.3 $ 402.9
======== ======== ========
Basic net income per share $ 2.66 $ 3.17 $ 2.76
======== ======== ========
Diluted net income per share $ 2.60 $ 3.12 $ 2.73
======== ======== ========
Average number of shares outstanding-Basic 163.0 144.8 145.8
======== ======== ========
Average number of shares outstanding-Diluted 167.2 147.4 147.4
======== ======== ========
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
statements.
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
(As Restated -
December 31, 1997 and 1996 Note 16)
(In millions of dollars) 1997 1996
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (including
interest-bearing amounts of $378.0
in 1997 and $261.1 in 1996) $424.3 $ 299.6
------ --------
Receivables --
Commissions and fees 1,296.3 937.6
Advanced premiums and claims 94.8 88.5
Other 159.9 103.0
-------- --------
1,551.0 1,129.1
Less - allowance for doubtful accounts (52.8) (43.3)
-------- --------
Net receivables 1,498.2 1,085.8
Prepaid dealer commissions-current portion 283.0 222.8
Deferred tax assets 165.9 4.3
Other current assets 195.3 136.1
-------- --------
Total current assets 2,566.7 1,748.6
Long-term securities 720.2 573.3
Fixed assets, net 957.3 770.1
Intangible assets 2,417.1 545.3
Prepaid dealer commissions 756.1 676.6
Other assets 494.6 231.3
-------- --------
$7,912.0 $4,545.2
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
statements.
- ------------------------------------------------------------------------------
(As Restated-Note 16)
1997 1996
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 236.7 $ 392.4
Accrued compensation and employee benefits 563.8 391.7
Accounts payable and accrued liabilities 1,222.9 447.5
Accrued income taxes 233.9 259.6
Dividends payable 85.1 65.1
-------- --------
Total current liabilities 2,342.4 1,556.3
-------- --------
Fiduciary liabilities 2,281.6 1,685.9
Less--cash and investments held in a
fiduciary capacity (2,281.6) (1,685.9)
-------- --------
- -
-------- --------
Long-term debt 1,239.8 458.2
-------- --------
Other liabilities 1,096.2 642.1
-------- --------
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
172,391,177 shares in 1997 and 153,589,062
shares in 1996 172.4 76.8
Additional paid-in capital 993.9 148.1
Retained earnings 2,010.2 1,901.6
Unrealized securities holding gains,
net of income taxes 308.8 221.2
Cumulative translation adjustments (141.8) (75.7)
------- -------
3,343.5 2,272.0
Less - treasury shares, at cost, 2,440,837
shares in 1997 and 8,951,142 shares
in 1996 (109.9) (383.4)
-------- --------
Total stockholders' equity 3,233.6 1,888.6
-------- --------
$7,912.0 $4,545.2
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
statements.
<TABLE>
<CAPTION>
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997 (As Restated-Note 16)
(In millions of dollars) 1997 1996 1995
- -----------------------------------------------------------------------------------
Operating cash flows:
<S> <C> <C> <C>
Net income $434.2 $ 459.3 $402.9
Gain on sale of businesses (13.2) (33.2) -
Special charges 243.8 92.6 -
Depreciation and amortization 199.1 139.9 135.1
Deferred income taxes (138.9) (20.8) 34.7
Other liabilities 22.1 19.0 (2.4)
Prepaid dealer commissions (139.7) (338.7) (104.3)
Other, net (1.1) (11.9) (12.4)
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (154.8) (95.0) (177.0)
Other current assets (2.6) (61.3) 14.0
Accrued compensation and employee benefits 160.0 137.2 35.6
Accounts payable and accrued liabilities (111.2) (20.6) 13.0
Accrued income taxes (79.2) 28.6 (9.6)
Effect of exchange rate changes (3.1) 21.4 (11.5)
------ ------- ------
Net cash generated from operations 415.4 316.5 318.1
------ ------- ------
Financing cash flows:
Net (decrease) increase in commercial paper (161.6) (164.7) 57.4
Other borrowings 2,358.0 254.8 125.8
Other repayments (1,701.7) (91.4) (8.7)
Purchase of treasury shares - (230.1) (137.7)
Issuance of common stock 209.8 143.1 82.6
Dividends paid (305.6) (239.2) (217.0)
Other, net - 2.5 4.8
------- ------- ------
Net cash provided by (used for)
financing activities 398.9 (325.0) (92.8)
------- ------- ------
Investing cash flows:
Additions to fixed assets (202.1) (157.3) (136.9)
Net cash proceeds from sale of business 54.4 241.8 -
Acquisitions (472.9) (7.1) (6.8)
Other, net (54.7) (91.2) (54.4)
------ ------- ------
Net cash used for investing activities (675.3) (13.8) (198.1)
------ ------- ------
Effect of exchange rate changes on cash
and cash equivalents (14.3) (6.2) 6.0
------ ------- ------
Increase (decrease) in cash and cash
equivalents 124.7 (28.5) 33.2
Cash and cash equivalents at beginning
of year 299.6 328.1 294.9
------ ------ ------
Cash and cash equivalents at end of year $424.3 $299.6 $328.1
====== ====== ======
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
<TABLE>
<CAPTION>
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
- ----------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
(In millions of dollars, except
per share figures)
(As Restated-Note 16)
1997 1996 1995
- ---------------------------------------------------------------------------------
COMMON STOCK
<S> <C> <C> <C>
Balance, beginning of year $ 76.8 $ 76.8 $ 76.8
Acquisitions 9.4 - -
Common stock split 86.2 - -
- ---------------------------------------------------------------------------------
Balance, end of year $ 172.4 $ 76.8 $ 76.8
- ---------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year $ 148.1 $ 155.5 $ 166.1
Acquisitions 907.6 - -
Common stock split (86.2) - -
Exercise of stock options and related
tax benefits 15.4 (10.2) (7.5)
Issuance of shares under compensation plans
and related tax benefits 10.3 8.0 3.4
Issuance of shares under employee stock
purchase plans and related tax benefits (1.3) (5.2) (6.5)
- ---------------------------------------------------------------------------------
Balance, end of year $ 993.9 $ 148.1 $ 155.5
- ---------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year $1,901.6 $1,688.4 $1,507.7
Net income 434.2 459.3 402.9
Cash dividends declared-(per share amounts:
$1.95 in 1997, $1.70 in 1996, and
$1.53 in 1995) (325.6) (246.1) (222.2)
- ---------------------------------------------------------------------------------
Balance, end of year $2,010.2 $1,901.6 $1,688.4
- ---------------------------------------------------------------------------------
UNREALIZED SECURITIES HOLDING GAINS,
NET Of INCOME TAXES
Balance, beginning of year $ 221.2 $ 149.2 $ 91.6
Realized gains, net of income taxes (23.0) (10.9) (11.4)
Unrealized gains, net of income taxes 110.6 82.9 69.0
- ---------------------------------------------------------------------------------
Balance, end of year $ 308.8 $ 221.2 $ 149.2
- ---------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year $ (75.7) $ (86.7) $ (105.4)
Translation adjustments (66.1) 11.0 18.7
- ---------------------------------------------------------------------------------
Balance, end of year $ (141.8) $ (75.7) $ (86.7)
- ---------------------------------------------------------------------------------
TREASURY SHARES
Balance, beginning of year $ (383.4) $ (317.7) $ (276.2)
Acquisitions 46.9 - -
Purchase of treasury shares - (230.1) (137.7)
Exercise of stock options 147.2 95.2 27.4
Issuance of shares under compensation plans 15.7 9.9 14.0
Issuance of shares under employee stock purchase
plans 63.7 59.3 54.8
- ---------------------------------------------------------------------------------
Balance, end of year $ (109.9) $ (383.4) $ (317.7)
- ---------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $3,233.6 $1,888.6 $1,665.5
- ---------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
Marsh & McLennan Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Marsh & McLennan Companies, Inc. and all
its subsidiaries (the "Company"). Various subsidiaries and affiliates have
transactions with each other in the ordinary course of business. All
significant intercompany accounts and transactions have been eliminated.
Fiduciary Assets 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 $110.8 million in 1997, $93.9 million in 1996 and $102.7
million in 1995.
Net uncollected premiums and claims and the related payables, amounting
to $5.2 billion at December 31, 1997 and $3.2 billion at December 31, 1996,
are not included in the accompanying Consolidated Balance Sheets.
In certain instances, the Company advances premiums, refunds or claims
to insurance underwriters or insureds prior to collection. These advances
are made from corporate funds and are reflected in the accompanying
Consolidated Balance Sheets as receivables.
Revenue: Revenue includes insurance commissions, fees for services
rendered, compensation for services provided in connection with the
formation or capitalization of various insurers and reinsurers and related
firms, including gains from sales of interests in such entities,
commissions on the sale of mutual fund shares and interest income on
fiduciary funds. Insurance commissions generally are recorded as of the
effective date of the applicable policies or, in certain cases (primarily
in the Company's reinsurance and London market operations), as of the
effective date or billing date, whichever is later. Fees for services
rendered are recorded as earned. Sales of mutual fund shares are recorded
on a settlement date basis and commissions thereon are recorded on a trade
date basis, in accordance with industry practice.
Cash and Cash Equivalents: Cash and cash equivalents primarily consist of
certificates of deposit and time deposits, generally with original
maturities of three months or less.
Fixed Assets, Depreciation and Amortization: Fixed assets are stated at
cost less accumulated depreciation and amortization. Expenditures for
improvements are capitalized. Upon sale or retirement, the cost and related
accumulated depreciation and amortization are removed from the accounts and
the resulting gain or loss, if any, is reflected in income. Expenditures
for maintenance and repairs are charged to operations as incurred.
Depreciation of buildings, building improvements, furniture and
equipment is provided on a straight-line basis over the estimated useful
lives of these assets. Leasehold improvements are amortized on a
straight-line basis over the periods covered by the applicable leases or
the estimated useful life of the improvement, whichever is less.
The components of fixed assets at December 31, 1997 and 1996 are as
follows:
- -----------------------------------------------------------------------------
December 31, 1997 and 1996
(In millions of dollars) 1997 1996
- -----------------------------------------------------------------------------
Land and buildings $ 471.1 $ 404.9
Furniture and equipment 878.4 737.4
Leasehold and building improvements 405.4 323.5
-------- --------
1,754.9 1,465.8
Less - accumulated depreciation and amortization (797.6) (695.7)
-------- --------
$ 957.3 $ 770.1
======== ========
- -----------------------------------------------------------------------------
Intangible Assets: Acquisition costs in excess of the fair value of net
assets acquired are amortized on a straight-line basis over periods up to
40 years. Other intangible assets are amortized on a straight-line basis
over their estimated lives. The Company periodically assesses the
recoverability of intangible assets by comparing expected undiscounted
future cash flows from the underlying business operation with recorded
intangible asset balances. If such assessments indicate that the
undiscounted future cash flows are not sufficient to recover the related
carrying value, the assets are adjusted to fair values.
Prepaid Dealer Commissions: Essentially all of the mutual funds marketed by
the Company's investment management segment are made available with a
contingent deferred sales charge in lieu of a front end load. The related
commissions, initially paid by the Company to broker/dealers for
distributing the funds, are recovered through charges and fees received
over a number of years. The prepaid dealer commissions are generally
amortized over a six year period.
Capitalized Software Costs: The Company capitalizes certain computer
software costs, principally related to purchased software packages, which
are amortized on a straight-line basis not to exceed five years.
Unamortized computer software costs amounting to $52.7 million and $28.8
million at December 31, 1997 and 1996, respectively, are included in other
assets in the Consolidated Balance Sheets.
Income Taxes: Income taxes provided reflect the current and deferred tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. U.S. Federal income taxes are provided on
unremitted foreign earnings except those that are considered permanently
reinvested, which at December 31, 1997 amounted to approximately $390
million. However, if these earnings were not considered permanently
reinvested, the incremental tax liability which otherwise might be due upon
distribution, net of foreign tax credits, would be approximately $40
million.
Risk Management Instruments: Net amounts received or paid under risk
management instruments are included in the Consolidated Statements of
Income as incurred.
Concentrations of Credit Risk: Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
cash and cash equivalents and commissions receivable. The Company maintains
a policy providing for the diversification of cash and cash equivalents and
places its investments in an extensive number of high quality financial
institutions to limit the amount of credit risk exposure. Concentrations of
credit risk with respect to receivables are limited due to the large number
of clients and markets in which the Company does business, as well as the
dispersion across many geographic areas.
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 while
diluted net income per share is calculated by adjusting the average common
shares outstanding for the dilutive effect of potential common
shares.
The following reconciles basic weighted average common shares outstanding
to diluted weighted average common shares outstanding for the three years
ended December 31, 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Basic weighted average common
shares outstanding 163.0 144.8 145.8
Stock options 4.2 2.6 1.6
----- ----- -----
Diluted weighted average common
shares outstanding 167.2 147.4 147.4
===== ===== =====
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Stock-Based Compensation: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The Company has elected to continue to account
for stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
pro forma net income and earnings per share information has been presented
in Note 6 as required under SFAS No. 123.
New Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information", both of which are effective for fiscal years
beginning after December 15, 1997. In February 1998, the FASB issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which is
effective for fiscal years beginning after December 15, 1997. The Company
will adopt these disclosure standards in 1998.
Reclassifications: In accordance with industry practice, the investment
management segment has restated both revenue and expense for prior periods
by identical amounts to reclassify certain commission expenses. Certain
other amounts have been reclassified to conform to the current year's
presentation.
2. Supplemental Disclosure to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning
acquisitions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
(In millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Purchase acquisitions:
<S> <C> <C> <C>
Assets acquired, excluding cash $ 2,831.8 $10.4 $21.9
Liabilities assumed (1,386.1) (3.3) (8.6)
Issuance of debt and other obligations - - (6.5)
Shares issued (972.4) - -
-------- ----- ----
473.3 7.1 6.8
Cash acquired in pooling of
interests acquisition (.4) - -
--------- ----- -----
Net cash outflow for acquisitions $ 472.9 $ 7.1 $ 6.8
========= ===== =====
- ------------------------------------------------------------------------------------------------
</TABLE>
Interest paid during 1997, 1996 and 1995 was $91.6 million, $60.2 million
and $66.0 million, respectively.
Income taxes paid during 1997, 1996 and 1995 were $471.1 million, $200.0
million and $231.0 million, respectively.
3. Acquisitions and Dispositions
Acquisitions:
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 Company agreed to pay total
consideration of approximately $1.8 billion consisting of $600 million in
cash and approximately $1.2 billion or 19.6 million shares (adjusted to
reflect the stock split) of the Company's common stock. Approximately $1.3
billion was paid at closing or shortly thereafter and approximately $500
million will be paid in annual installments over the four years following
the closing. The business combination is being accounted for using the
purchase method of accounting. Accordingly, goodwill of approximately $1.7
billion which results from the preliminary purchase price allocation will
be amortized over 40 years. In arriving at fair value, the Company
discounted the market value of the $1.2 billion stock issuance by $120
million reflecting certain transfer restrictions associated with the shares
issued. The Company allocated the cost of its acquisitions to assets
acquired and liabilities assumed based on its estimate of fair values. No
intangible assets, other than goodwill, were acquired as part of the
business combination with J&H.
An agreed upon number of shares issued in connection with this transaction
carry restrictions and, consequently, cannot be sold in the first and
second years following the closing. In addition, approximately 1.6 million
of the 19.6 million shares of common stock were placed in escrow for a
period of up to two years in order to secure indemnification obligations
with respect to representations and warranties.
In 1997, as part of the integration of J&H, the Company adopted plans to
consolidate duplicative offices and reduce staff. The estimated cost of the
plans relating to employees and offices of J&H ("J&H Plan") amounted to
$142.8 million and was allocated to the cost of the acquisition. Merger
related costs for employees and offices of Marsh & McLennan Companies ("MMC
Plan") amounted to $167.5 million and were recorded as part of a special
charge in 1997. The actions contemplated by these plans are expected to be
substantially complete by the end of 1998.
The $142.8 million allocated to the cost of the J&H acquisition included
$68.6 million of costs principally related to the planned consolidations of
approximately 50 offices and $74.2 million for employee related costs,
primarily severance and related benefits associated with the reduction of
over 900 positions worldwide. The $167.5 million recorded as part of the
Marsh & McLennan Companies special charge included $116.9 million of
employee related costs, primarily severance and related benefits associated
with the reduction of approximately 1,300 positions worldwide; $37.8
million of costs principally related to the planned consolidations of
approximately 30 offices; and $12.8 million for other integration related
costs. The office consolidation costs primarily represent future rent under
noncancellable leases (net of anticipated sublease income) and lease
termination payments.
The utilization of the charges is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Balance
Initial Utilized December 31,
Balance in 1997 1997
- ------------------------------------------------------------------------------------------------
J&H Plan:
<S> <C> <C> <C>
Termination payments to employees $ 70.0 $(17.0) $ 53.0
Other employee related costs 4.2 (1.6) 2.6
Future rent under noncancellable leases 44.4 (1.2) 43.2
Leasehold termination costs 24.2 (4.2) 20.0
------ ------ ------
$142.8 $(24.0) $118.8
====== ====== ======
Number of employee terminations 900 (600) 300
Number of office consolidations 50 (10) 40
- ------------------------------------------------------------------------------------------------
Balance
Initial Utilized December 31,
Balance in 1997 1997
- ------------------------------------------------------------------------------------------------
MMC Plan:
Termination payments to employees $116.9 $(44.3) $ 72.6
Future rent under noncancellable leases 21.0 (2.2) 18.8
Leasehold termination costs 14.9 (7.9) 7.0
Write-downs of leasehold improvements
and furniture and equipment 1.9 (1.9) -
Other integration related costs 12.8 (6.1) 6.7
------ ------ ------
$167.5 $(62.4) $105.1
====== ====== ======
Number of employee terminations 1,300 (800) 500
Number of office consolidations 30 (10) 20
- ------------------------------------------------------------------------------------------------
</TABLE>
Certain costs, primarily future rent under noncancellable leases (net of
anticipated sublease income) and salary continuance arrangements, primarily
in Canada and the Netherlands, are expected to be paid out over several
years.
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 and 1996, respectively. 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 dates indicated or which may occur in the
future. The 1997 pro forma information reflected below excludes the impact
of the $243.8 million special charge which principally relates to the
combination with J&H.
(In millions of dollars, except per share figures)
Year Ended December 31,
-----------------------
1997 1996
---- ----
Revenue $6,313.6 $5,551.7
Net Income 600.6 482.2
Basic net income per share 3.58 2.94
Diluted net income per share 3.49 2.90
During 1997, the Company also acquired or increased its interest in several
other insurance and reinsurance broking and consulting businesses for a
total cost of $284.9 million in transactions accounted for as purchases.
The cost of these acquisitions exceeded the fair value of net assets
acquired by $317.1 million. In addition, the Company issued approximately
944,000 shares of common stock (adjusted to reflect the stock split) in
connection with the acquisition of an insurance program management
business.
During 1996, the Company acquired an insurance broking business and various
other insurance and reinsurance broking assets for a total cost of $12.7
million in transactions accounted for as purchases. The cost of these
acquisitions exceeded the fair value of net assets acquired by $8.2
million.
During 1995, the Company acquired a portion of an insurance broking
business and several consulting businesses for a total cost of $15.2
million consisting of cash and future obligations in transactions accounted
for as purchases. The cost of these acquisitions exceeded the fair value of
net assets acquired by $16.0 million.
Dispositions:
During 1997, the Company sold an insurance program management business and
a consulting operation for $54.4 million. Pretax gains of $13.2 million
were recorded in the Consolidated Statements of Income.
During 1996, the Company sold The Frizzell Group Limited ("Frizzell") for
approximately $290 million. A pretax gain of $33.2 million was recorded in
the Consolidated Statements of Income.
4. Income Taxes
Income before income taxes shown below is based on the geographic location
to which such income is attributable. Although income taxes related to such
income may be assessed in more than one jurisdiction, the income tax
provision corresponds to the geographic location of the income.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
(In millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Income before income taxes:
<S> <C> <C> <C>
U.S. $509.6 $436.6 $381.2
Other 205.8 231.4 268.6
------ ------ ------
$715.4 $668.0 $649.8
====== ====== ======
Income taxes:
Current-
U.S. Federal $217.8 $ 93.8 $ 88.9
Other national governments 140.7 96.4 82.0
U.S. state and local 61.6 39.3 41.3
------ ------ ------
420.1 229.5 212.2
------ ------ ------
Deferred-
U.S. Federal (54.5) 48.0 24.7
Other national governments (71.0) (39.4) 9.2
U.S. state and local (13.4) (29.4) .8
------ ------ ------
(138.9) (20.8) 34.7
------ ------ ------
Total income taxes $281.2 $208.7 $246.9
====== ====== ======
- ------------------------------------------------------------------------------------------------
</TABLE>
The significant components of deferred income tax assets
and liabilities and their balance sheet classifications are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1997 and 1996
(In millions of dollars) 1997 1996
- ------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Accrued expenses not currently deductible $616.3 $248.1
Accrued retirement benefits 116.7 72.8
Differences related to non-U.S. operations 118.4 69.1
Depreciation and amortization 11.4 -
Other 15.0 8.5
------ ------
877.8 398.5
Valuation allowance - (27.4)
------ ------
$877.8 $371.1
====== ======
Deferred tax liabilities:
Depreciation and amortization $ - $ 25.3
Prepaid dealer commissions 375.9 328.8
Safe harbor leasing 14.2 17.6
Unbilled revenue 18.3 22.9
Unrealized securities holding gains 166.7 119.9
Differences related to non-U.S. operations 35.9 49.0
Other 18.3 28.2
------ ------
$629.3 $591.7
====== ======
Balance sheet classifications:
Current assets $165.9 $ 4.3
Accrued income taxes 97.8 69.8
Other assets (liabilities) 180.4 (155.1)
- ------------------------------------------------------------------------------------------------
</TABLE>
In 1997, the valuation allowance related to certain foreign deferred income
tax assets was written-off against the underlying tax assets since it has
been determined that the Company will not realize any future benefit from
the recorded amounts.
A reconciliation from the U.S. Federal statutory income tax rate to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory rate 35.00% 35.00% 35.00%
U.S. state and local income taxes-net of U.S.
Federal income tax benefit 4.40 3.90 4.20
Differences related to non-U.S. operations ( .20) (1.25) (.90)
Tax adjustment - (6.00) -
Other .10 (.40) (.30)
----- ----- -----
Effective tax rate 39.30% 31.25% 38.00%
===== ===== =====
- ------------------------------------------------------------------------------------------------
</TABLE>
During 1996, the Company recorded a tax adjustment that reduced the income
tax provision by $40 million. The tax adjustment primarily relates to the
permanent deployment of funds outside of the United States in a tax
efficient manner and favorable state and local tax developments in
the U.S.
The Company has received a Notice of Proposed Adjustment from a local field
office of the Internal Revenue Service ("IRS") challenging its tax
treatment related to 12b-1 fees paid by the Putnam Funds. The notice
reflected the preliminary thinking of the IRS field office and did not
constitute a formal assertion of liability by the IRS. The notice in
question asserts a position contrary to the position enunciated in an IRS
1993 Technical Advice Memorandum. 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.
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.
5. Retirement Benefits
The Company maintains pension or profit sharing plans for substantially all
employees.
Defined Benefit Plans - U.S.: The Marsh & McLennan Companies Retirement
Plan provides benefits to eligible U.S. employees. The benefits under this
plan are based on the participants' length of service and compensation,
subject to the Employee Retirement Income Security Act of 1974 and Internal
Revenue Service (IRS) limitations. The funding policy for this plan is to
contribute amounts at least sufficient to meet the requirements set forth
in U.S. employee benefit and tax laws. The plan assets are invested
primarily in listed stocks, corporate bonds and U.S. Government Securities.
The Marsh & McLennan Companies Benefit Equalization Program provides those
retirement benefits to which U.S. employees would otherwise be entitled
under the Marsh & McLennan Companies Retirement Plan if not for IRS
limitations.
The Marsh & McLennan Companies Supplemental Retirement Program provides a
minimum level of retirement benefits to employees based on the
participants' length of service and compensation. The program provides
benefits to participants to the extent that the minimum benefit exceeds the
aggregate retirement benefit provided by the Marsh & McLennan Companies
Retirement Plan, the Marsh & McLennan Companies Benefit Equalization
Program and Social Security.
The Company has a plan of funding the vested benefits under the Benefit
Equalization and Supplemental Retirement Programs by periodically
purchasing annuity contracts.
Effective January 1, 1998, the J&H Retirement Income Plan was merged into
the Marsh & McLennan Companies Retirement Plan.
The following schedules provide information on the Company's U.S. defined
benefit plans, which in 1997 include the pension plans of J&H.
The components of pension cost for the U.S. defined benefit plans
are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
(In millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $38.9 $27.8 $24.5
Interest cost on projected
benefit obligations 90.4 60.5 56.0
Expected return on plan assets (114.5) (81.2) (73.0)
Net amortization (2.9) (3.6) (6.9)
----- ----- -----
$11.9 $ 3.5 $ .6
===== ===== =====
- ------------------------------------------------------------------------------------------------
</TABLE>
The actual returns on plan assets were $271.7 million, $138.7 million and
$167.2 million for 1997, 1996 and 1995, respectively. These returns reflect
the general securities market conditions experienced in the respective
years and, in 1997, the inclusion of the former J&H pension assets.
The funded status of the U.S. defined benefit plans and the actuarial
assumptions used to measure the projected benefit obligation are as
follows:
- -------------------------------------------------------------------------------
December 31, 1997 and 1996
(In millions of dollars) 1997 1996
- -------------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation:
Vested
$1,281.8 $686.5
Nonvested 37.9 25.3
-------- ------
$1,319.7 $711.8
======== ======
Projected benefit obligation $1,433.9 $797.7
Fair value of plan assets 1,650.7 947.1
-------- ------
216.8 149.4
Unrecognized net gain from past
experience different from that assumed (216.0) (170.8)
Unrecognized prior service cost 14.9 21.4
Unrecognized SFAS No. 87 transition amount (32.5) (37.0)
-------- ------
Accrued pension liability $ (16.8) $(37.0)
======== ======
Actuarial assumptions:
Discount rate 7.25% 8.0%
Weighted average rate
of compensation increase 4.00% 4.75%
Expected long-term rate of return
on plan assets 10% 10%
- -------------------------------------------------------------------------------
In 1997, the discount rate used to value the liabilities of the U.S.
defined benefit plans was decreased to reflect current interest rates of
high quality fixed income debt securities. Assumptions, including projected
compensation increases and potential cost of living adjustments for
retirees, were also revised to reflect current expectations as to future
levels of inflation. The increase in the accumulated benefit obligation and
the projected benefit obligation reflect the change in these assumptions
and the addition of the former J&H pension plans. The increase in the fair
value of plan assets reflects the actual return on plan assets and the
inclusion of the former J&H pension assets.
Defined Benefit Plans - Non-U.S.: The Company maintains various plans that
provide benefits to eligible non-U.S. employees. The benefits under these
plans are based on the participants' length of service and compensation.
The funding policy for these plans is to contribute amounts at least
sufficient to meet the requirements under foreign government regulations.
The plans' assets are primarily invested in listed stocks, bonds and time
deposits. The following schedules provide information on the Company's
significant non-U.S. defined benefit plans, which in 1997 include the
pension plans of J&H's significant non-U.S. defined benefit plans. The
information presented below also reflects the disposition of Frizzell in
1996.
The components of pension expense for the significant non-U.S. defined
benefit plans are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
(In millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $41.4 $31.5 $34.7
Interest cost on projected benefit obligations 61.5 51.2 57.2
Expected return on plan assets (90.0) (74.5) (82.1)
Net amortization (6.1) (6.3) (6.4)
----- ----- -----
$ 6.8 $ 1.9 $ 3.4
===== ===== =====
- ------------------------------------------------------------------------------------------------
</TABLE>
The actual returns on plan assets were $172.6 million, $106.2 million and
$139.6 million for 1997, 1996 and 1995, respectively. These returns
primarily reflect the general securities market conditions
experienced in the respective years.
The funded status of the significant non-U.S. defined benefit plans and
the weighted average actuarial assumptions used to measure the projected
benefit obligation are as follows:
- ----------------------------------------------------------------------------
December 31, 1997 and 1996
(In millions of dollars) 1997 1996
- ----------------------------------------------------------------------------
Actuarial present value of accumulated
benefit obligation:
Vested $ 768.7 $624.7
Nonvested 20.5 8.3
-------- ------
$ 789.2 $633.0
======== ======
Projected benefit obligation $ 899.9 $724.2
Fair value of plan assets 1,201.9 947.8
-------- ------
302.0 223.6
Unrecognized net gain from past experience
different from that assumed (170.2) (89.3)
Unrecognized prior service cost (benefit) 8.2 (2.7)
Unrecognized SFAS No. 87 transition amount (18.2) (24.6)
-------- ------
Prepaid pension cost $ 121.8 $107.0
======== ======
Actuarial assumptions:
Discount rate 7.6% 8.2%
Weighted average rate of compensation increase 5.4% 6.0%
Expected long-term rate of return
on plan assets 9.1% 9.6%
- ----------------------------------------------------------------------------
In 1997, the discount rates used to value the liabilities of the non-U.S.
plans were decreased to reflect current worldwide interest rates.
Assumptions, including projected compensation increases and potential cost
of living adjustments for retirees, were also revised to reflect current
expectations as to future levels of inflation. The increase in the
accumulated benefit obligation and the projected benefit obligation
primarily reflects the impact of the change in these assumptions and the
addition of J&H.
Postretirement Benefits: The Company contributes to the cost of certain
health care and life insurance benefits provided to its retired employees.
The amount of the Company's contribution, if any, is based, in part, on the
employees' length of service with the Company. The cost to the Company of
these postretirement benefits is principally associated with employees in
the United States, as retired employees outside the United States receive
these benefits, in large part, from governmental health care programs.
United States employees become eligible for these benefits if they attain
retirement age while working for the Company, subject in certain instances
to minimum service requirements. The cost of these postretirement benefits
is accrued during the period up to the date employees are eligible to
retire, but is funded by the Company as incurred.
The components of the United States postretirement benefits costs are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
(In millions of dollars) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $3.6 $1.5 $1.4
Interest cost on accumulated postretirement benefits 10.7 6.5 6.6
Net amortization (.9) (.9) (.6)
----- ---- ----
$13.4 $7.1 $7.4
===== ==== ====
- ------------------------------------------------------------------------------------------------
</TABLE>
The accumulated postretirement benefit obligation at December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31, 1997 and 1996
(In millions of dollars) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Retirees $ 93.2 $ 60.2
Fully eligible active plan participants 30.8 11.9
Other active plan participants 50.7 15.8
------ ------
Accumulated postretirement benefit obligation 174.7 87.9
Unrecognized net gain from past experience different
from that assumed 1.3 14.8
------ ------
Accrued postretirement liability $176.0 $102.7
====== ======
- ------------------------------------------------------------------------------------------------
</TABLE>
The discount rates used in determining the accumulated postretirement
benefit obligations were 7.25% and 8% for 1997 and 1996, respectively. The
assumed health care cost trend rate was approximately 9% in 1997, gradually
declining to 4% in the year 2040. A 1% increase in the assumed health care
cost trend rates for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by $18.7 million
and the postretirement benefit expense for the year then ended by $2.1
million.
In 1997, the discount rate used to value the accumulated postretirement
benefit obligation was decreased to reflect current interest rates of high
quality fixed income debt securities. The increase in the accumulated
postretirement benefit obligation primarily reflects the impact of the
change in the discount rate and the acquisition of J&H.
Defined Contribution Plans: The Company maintains certain defined
contribution plans for its employees, including the Marsh & McLennan
Companies Stock Investment Plan ("SIP") the Putnam Investments, Inc. Profit
Sharing Retirement Plan (the "Putnam Plan") and the Johnson & Higgins Cash
Accumulation Plan ("J&H Plan"). Under these plans, eligible employees may
contribute a percentage of their base salary, subject to certain
limitations. For the SIP and the J&H Plan, the Company matches a portion of
the employees' contributions, while under the Putnam Plan the contributions
are at the discretion of the Company subject to IRS limitations. The cost
of these defined contribution plans was $55.3 million, $39.5 million and
$35.3 million for 1997, 1996 and 1995, respectively. The J&H Plan
contributions are reflected in 1997 only.
6. Stock Benefit Plans
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company has elected to continue to account for
stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
has provided additional pro forma disclosures required by SFAS 123. The
adoption of this standard did not have an impact on the Company's financial
position or results of operations.
In accordance with APB 25, no compensation cost has been recognized in the
Consolidated Statements of Income for the Company's stock option and stock
purchase plans and the stock options awarded under the new Putnam
Investments, Inc. Equity Partnership Plan. Had compensation cost for the
Company's stock-based compensation plans been determined consistent with
the fair value method contained in SFAS 123, the Company's net income and
net income per share for 1997, 1996 and 1995 would have been reduced to the
pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In millions of dollars, except per share figures) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
Net Income:
<S> <C> <C> <C>
As reported $434.2 $459.3 $402.9
Pro forma $413.5 $447.9 $400.0
Net Income Per Share:
Basic:
As reported $2.66 $3.17 $2.76
Pro forma $2.53 $3.09 $2.74
Diluted:
As reported $2.60 $3.12 $2.73
Pro forma $2.47 $3.04 $2.71
- -----------------------------------------------------------------------------------------------
</TABLE>
The pro forma information reflected above may not be representative of the
amounts to be expected in future years as the fair value method of
accounting contained in SFAS 123 has not been applied to
options granted prior to January 1995.
Incentive and Stock Award Plans: During 1997, the Company adopted the Marsh
& McLennan Companies, Inc. 1997 Employee Incentive and Stock Award Plan
(the "Employee Plan") and the Marsh & McLennan Companies, Inc. 1997 Senior
Executive Incentive and Stock Award Plan (the "Executive Plan"). The
Employee and Executive Plans (the "1997 Plans") replace the 1992 Incentive
and Stock Award Plan (the "1992 Plan"). The types of awards permitted under
these Plans include stock options, restricted stock, stock bonus units,
restricted and deferred stock units payable in Company common stock or
cash, and other stock-based and performance-based awards. The Compensation
Committee of the Board of Directors (the "Compensation Committee")
determines, in its discretion, which affiliates may participate in the
plans, which eligible employees will receive awards, the types of awards to
be received and the terms and conditions thereof. The right of an employee
to receive an award may be subject to performance conditions as specified
by the Compensation Committee. The 1997 Plans contain provisions which, in
the event of a change in control of the Company, may accelerate the vesting
of the awards. Awards relating to not more than 12,000,000 shares of common
stock may be made over the life of the Employee Plan plus shares remaining
unused under pre-existing approved stock plans. Awards relating to not more
than 5,000,000 shares of common stock may be made over the life of the
Executive Plan plus shares remaining unused under pre-existing approved
stock plans. There were 20,802,624 and 4,662,888 shares available for
awards under the 1997 Plans and prior plans at December 31, 1997 and 1996,
respectively.
Stock Options: Options granted under the 1997 Plans may be designated as
incentive stock options or as non-qualified stock options. The Compensation
Committee shall determine the terms and conditions of the option, including
the time or times at which an option may be exercised, the methods by which
such exercise price may be paid and the form of such payment. Except under
certain limited circumstances, no stock option may be granted with an
exercise price of less than the fair market value of the stock at the time
the stock option is granted.
Stock option transactions under the 1997 Plans and prior plans are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------
Balance at beginning
<S> <C> <C> <C> <C> <C> <C>
of period 17,110,954 $42.16 17,441,590 $40.32 16,242,282 $39.92
Granted 3,444,080 $62.09 2,748,120 $47.55 2,265,580 $39.51
Exercised (3,910,107) $39.89 (2,574,060) $35.32 (719,232) $27.72
Forfeited (423,246) $47.99 (504,696) $42.75 (347,040) $42.37
---------- ---------- ----------
Balance at end of period 16,221,681 $46.77 17,110,954 $42.16 17,441,590 $40.32
- ----------------------------------------------------------------------------------------------------------
Options exercisable at year
end 9,804,415 $42.26 10,979,330 $40.68 11,324,044 $38.70
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options at
December 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------ ------------------------------------------------
Weighted Average
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31 Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$24.69 - 39.67 5,295,878 4.2 years $37.50 4,367,843 $37.13
$40.41 - 50.03 7,594,223 6.2 years $46.51 5,434,472 $46.39
$52.88 - 76.09 3,331,580 9.2 years $62.09 2,100 $61.91
---------- ---------
$24.69 - 76.09 16,221,681 6.2 years $46.77 9,804,415 $42.26
========== =========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each of the Company's option grants included in the pro
forma net income is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in 1997, 1996 and 1995, respectively; dividend yield of 3.0% in
1997 and 3.5% for 1996 and 1995; expected volatility of 17.5% in 1997 and
14.0% for 1996 and 1995; risk-free interest rate of 6.5% for 1997, 6.0% for
1996 and 6.4% for 1995; and an expected life of five years. The
compensation cost as generated by the Black-Scholes model, may not be
indicative of the future benefit, if any, that may be received by the
option holder. The weighted average fair value of options granted during
the years ended December 31, 1997, 1996 and 1995 was $12.71, $7.35 and
$6.50 per share, respectively.
Restricted Stock: Restricted shares of the Company's common stock may be
awarded and shall be subject to such restrictions on transferability and
other restrictions, if any, as the Compensation Committee may impose. The
Compensation Committee may also determine when and under what circumstances
the restrictions may lapse and whether the participant shall have the
rights of a stockholder, including, without limitation, the right to vote
and receive dividends. Unless the Compensation Committee determines
otherwise, restricted stock that is still subject to restrictions shall be
forfeited upon termination of employment.
There were 90,000, 105,600 and 191,800 restricted shares granted in 1997,
1996 and 1995, respectively. The Company recorded compensation expense of
$5.6 million in 1997 and $5.7 million in 1996 and 1995, related to these
shares. Shares that have been granted generally become unrestricted at the
earlier of: (1) January 1 of the eleventh year following the grant or (2)
the later of the recipient's normal or actual retirement date.
Restricted Stock Units: Restricted stock units, payable in stock or cash,
may be awarded under the Plans. The Compensation Committee shall determine
the restrictions on such units, when the restrictions shall lapse, when the
shares of stock shall vest and be paid, and upon what terms the units shall
be forfeited.
There were 165,904, 79,518 and 135,128 restricted stock units awarded
during 1997, 1996 and 1995, respectively. The Company recorded compensation
expense of $4.3 million, $4.7 million and $2.9 million in 1997, 1996 and
1995, respectively, related to restricted stock units.
Deferred Stock Units: Deferred stock units, payable in stock or cash, may
be awarded under the Plans. The Compensation Committee shall determine the
restrictions on such units, when the restrictions shall lapse, when the
shares of stock shall vest and be paid, and upon what terms the units shall
be forfeited.
There were 297,222 deferred stock units awarded during 1997. The Company
recorded compensation expense of $1.7 million in 1997 related to deferred
stock units.
Putnam Investments, Inc. Equity Partnership Plan: In September 1997, Putnam
adopted the Putnam Investments, Inc. Equity Partnership Plan (the "Equity
Plan") pursuant to which Putnam is authorized to grant or sell to certain
key employees of Putnam or its subsidiaries restricted shares of a new
class of common stock of Putnam ("Class B Common Stock") and options to
acquire the Class B Common Stock. Such awards or options generally vest
over a four year period. Holders of Putnam Class B shares are not entitled
to vote and have no rights to convert their shares into any other
securities of Putnam. However, in the event of certain change in control
events, Class B shares will be converted into Class A common stock on a
share for share basis. Awards of restricted stock and/or options may be
made under the Equity Plan with respect to a maximum of 12,000,000 shares
of Class B Common Stock which represent approximately 12% of the
outstanding shares on a fully diluted basis. Putnam made initial awards
pursuant to the Equity Plan with respect to approximately 4,000,000 shares
of Class B Common Stock, including 2,000,000 shares of restricted stock and
2,000,000 shares subject to options. The Company recorded compensation
expense of $82.9 million in 1997 related to the restricted stock grants.
There were approximately 8,000,000 shares available for grant related to
the Equity Plan at December 31, 1997.
Pursuant to an executive compensation agreement, Putnam awarded 300,000
restricted stock units and 325,000 options related to Class B Shares to a
key executive of Putnam. The Company recorded compensation expense of $14.4
million in 1997 related to the restricted stock unit grants.
The fair value of each option grant included in the pro forma net income is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1997:
dividend yield of 5%; expected volatility of 26.4%; risk-free interest rate
of 6.1%; and an expected life of five years. The compensation cost as
generated by the Black-Scholes model, may not be indicative of the future
benefit, if any, that may be received by the option holder. The weighted
average fair value of each Class B option in 1997 was $8.30.
Stock Purchase Plans: In May 1994, the Company's stockholders approved an
employee stock purchase plan (the "1994 Plan") to replace the 1990 Employee
Stock Purchase Plan which terminated on September 30, 1994 following its
fourth annual offering. Under these plans, eligible employees may purchase
shares of the Company's common stock, subject to certain limitations, at
prices not less than 85% of the lesser of the fair market value of the
stock at the beginning or end of any offering period. Under the 1994 Plan,
no more than 8,000,000 shares of the Company's common stock plus the
remaining unissued shares in the 1990 Plan may be sold. Employees purchased
1,237,000, 1,306,000 and 1,364,000 shares in 1997, 1996 and 1995,
respectively. At December 31, 1997, 4,955,000 shares were available for
issuance under the 1994 Plan. During 1995, the Company's Board of Directors
approved the Marsh & McLennan Companies Stock Purchase Plan for
International Employees (the "International Plan") which is similar to the
1994 Plan. Under the International Plan, no more than 1,000,000 shares of
the Company's common stock may be sold. Employees purchased 141,000 shares
during 1997, and at December 31, 1997, 849,000 shares were available for
issuance under the International Plan. The fair value of each employee
purchase right granted under these Stock Purchase Plans is included in the
pro forma net income for 1997, 1996 and 1995 and was estimated using the
Black-Scholes model with the following assumptions: dividend yield of 3.0%
for 1997 and 3.5% for 1996 and 1995; expected life of one year; expected
volatility of 17.5% for 1997 and 14% for 1996 and 1995; and risk-free
interest rate of 5.5% for 1997 and 5.6% for 1996 and 1995. The weighted
average fair value of each purchase right granted in 1997, 1996 and 1995
was $16.44, $9.57 and $8.77, respectively. Beginning in 1998, these plans
will include employees who were formerly associated with J&H.
7. Long-term Obligations
The Company leases office facilities, equipment and automobiles under
noncancelable operating leases. These leases expire on varying dates; in
some instances contain renewal and expansion options; do not restrict the
payment of dividends or the incurrence of debt or additional lease
obligations; and contain no significant purchase options. In addition to
the base rental costs, occupancy lease agreements generally provide for
rent escalations resulting from increased assessments for real estate taxes
and other charges. Approximately 94% of the Company's lease obligations are
for the use of office space.
The accompanying Consolidated Statements of Income include net rental
costs of $265.2 million, $217.3 million and $218.1 million for 1997, 1996
and 1995, respectively, after deducting rentals from subleases ($7.4
million in 1997, $8.4 million in 1996 and $9.1 million in 1995).
At December 31, 1997, the aggregate future minimum rental commitments
under all noncancelable operating lease agreements are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Gross Rentals Net
For the Years Ending December 31, Rental from Rental
(In millions of dollars) Commitments Subleases Commitments
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 202.4 $ 5.7 $ 196.7
1999 177.0 4.0 173.0
2000 149.5 2.8 146.7
2001 118.4 2.4 116.0
2002 90.8 1.9 88.9
Subsequent years 371.5 5.0 366.5
---------- ------- ----------
$1,109.6 $21.8 $1,087.8
========== ======= ==========
- -----------------------------------------------------------------------------------------------
</TABLE>
The Company has entered into agreements with various service companies to
outsource certain information systems activities and responsibilities which
previously were performed by the Company. Under these agreements, the
Company is required to pay minimum annual service charges. Additional fees
may be payable depending upon the volume of transactions processed with all
future payments subject to increases for inflation. At December 31, 1997,
the aggregate fixed future minimum commitments under these agreements are
as follows:
- -----------------------------------------------------------------
Future
For the Years Ending December 31, Minimum
(In millions of dollars) Commitments
- -----------------------------------------------------------------
1998 $24.8
1999 13.7
2000 9.4
2001 9.0
2002 9.0
Subsequent years 12.5
-----
$78.4
=====
- -----------------------------------------------------------------
8. Short-term Debt
The Company's outstanding short-term debt is as follows:
- ---------------------------------------------------------------------------
December 31, 1997 and 1996
(In millions of dollars)
1997 1996
- ---------------------------------------------------------------------------
Commercial paper $229.3 $387.6
Current portion of long-term debt 7.4 4.8
------ ------
$236.7 $392.4
====== ======
- ---------------------------------------------------------------------------
The weighted average interest rates on outstanding commercial paper
borrowings at December 31, 1997 and 1996 are 6.1% and 5.9%, respectively.
During 1997, the Company executed a new revolving credit facility with
several banks to support its commercial paper borrowings and to fund other
general corporate requirements. This facility, which expires June 2002,
provides that the Company may borrow up to $1.2 billion at market rates of
interest which may vary depending upon the level of borrowings and the
Company's credit ratings. Commitment fees of 7 basis points are payable on
any unused portion. The facility requires the Company to maintain
consolidated net worth of at least $1.7 billion and contains other
restrictions relating to consolidations, mergers and the sale or pledging
of assets.
The Company maintains credit facilities with various banks, primarily
related to operations located outside the United States, aggregating $241.7
million at December 31, 1997. The Company has borrowed $184.2 million under
these facilities and has included these borrowings in Long-term
Debt.
9. Long-term Debt
The Company's outstanding long-term debt is as follows:
- -------------------------------------------------------------------------
December 31, 1997 and 1996
(In millions of dollars) 1997 1996
- -------------------------------------------------------------------------
Revolving credit facility $ 708.4 $250.0
Bank borrowings 184.2 -
Notes payable - due 2012 111.4 -
Mortgage - 9.8% due 2009 200.0 200.0
Mortgage - due 2012 19.3 -
Mortgage - 7.25% due 1999 4.2 4.2
Other 19.7 8.8
-------- ------
1,247.2 463.0
Less current portion 7.4 4.8
-------- ------
$1,239.8 $458.2
======== ======
- -------------------------------------------------------------------------
Outstanding borrowings under the revolving credit facility at December 31,
1997 amounted to $708.4 million. This facility expires in June 2002.
Borrowings under the Company's revolving credit facilities in 1997 and 1996
have been classified as long-term debt based on the Company's intent and
ability to maintain or refinance these obligations on a long-term basis.
The weighted average interest rate associated with these borrowings was
6.0% and 5.9% at December 31, 1997 and 1996, respectively.
Bank borrowings of $184.2 million at December 31, 1997 have been classified
as long-term debt based on the Company's intent and ability to maintain or
refinance these obligations on a long-term basis. The weighted average
interest rate associated with these borrowings was 3.8%.
The Company has a fixed rate non-recourse mortgage note agreement due in
2009 amounting to $200 million, bearing an interest rate of 9.8%, in
connection with its 56% interest in its worldwide headquarters building. In
the event the mortgage is foreclosed following a default, the Company would
be entitled to remain in the space and would be obligated to pay rent
sufficient to cover interest on the notes or, starting in 1999, at fair
market value if greater.
The Company has an interest rate swap which was entered into as part of the
acquisition and renovation of the Company's worldwide headquarters which
fixes the interest rate at approximately 9.5% on $100 million of variable
rate borrowings until February 1999. The weighted average interest rate
received on this swap at December 31, 1997, 1996 and 1995 was 5.8%, 5.7%
and 6.1%, respectively. The difference between the fixed rate and the
weighted average rate is included in interest expense in the Consolidated
Statements of Income.
The Company, in conjunction with the J&H transaction, assumed a mortgage
obligation to finance a condominium interest in office space located in New
York City. The outstanding balance of this debt was $19.3 million at
December 31, 1997. The rate on this debt, which is determined periodically
at a margin of 1/2 of 1% above the LIBOR rate, was 5.8% at December 31,
1997.
In conjunction with the J&H transaction, the Company assumed a note related
to an arrangement whereby a third party is obligated to pay rent, on the
Company's behalf, under a noncancelable long-term lease obligation for
office space it no longer occupies. The outstanding balance of this note at
December 31, 1997 is $111.4 million. Interest on $88.5 million of this debt
is fixed at 8.62% while the rate on the remaining balance, which is
determined periodically at a margin of 1/2 of 1% above the LIBOR rate, was
5.8% at December 31, 1997. The variable interest rate on the remaining
$22.9 million, along with the variable rate on the $19.3 million mortgage
has been fixed at 5.8% through a $42.2 million interest rate swap expiring
in January 2005.
Scheduled repayments of long-term debt, in 1998 and in the four succeeding
years are $7.4 million, $20.5 million, $6.7 million, $4.6 million and
$896.9 million, respectively.
10. Financial Instruments
The estimated fair value of the Company's significant financial instruments
is provided below. Certain estimates and judgments were required to develop
the fair value amounts. The fair value amounts shown below are not
necessarily indicative of the amounts that the Company would realize upon
disposition nor do they indicate the Company's intent or ability to dispose
of the financial instrument.
Cash and Cash Equivalents: The estimated fair value of the Company's cash
and cash equivalents approximates their carrying value.
Long-term Investments: The Company has certain long-term investments, for
which there are no readily available market prices, amounting to $72.8
million and $53.9 million at December 31, 1997 and 1996, respectively,
which are carried on a cost basis. Based on present information, the
Company believes that the cost of these investments approximates their fair
value.
Short-term and Long-term Debt: The fair value of the Company's short-term
debt, which consists primarily of commercial paper borrowings, approximates
its carrying value. The estimated fair value of the Company's mortgage debt
related to its worldwide headquarters building is approximately $254
million and $240 million at December 31, 1997 and 1996, respectively, while
the estimated fair value of the fixed rate portion of the notes payable is
approximately $108 million at December 31, 1997. These estimated fair
values are based on discounted future cash flows using current interest
rates available for debt with similar terms and remaining maturities. The
estimated fair value of borrowings under the revolving credit facility
approximates the carrying value.
Interest rate swaps: Historically, the Company has managed its net exposure
to interest rate changes by utilizing a mixture of variable and fixed rate
borrowings to finance the Company's asset base. At December 31, 1997 the
Company had two interest rate swap agreements with a total notional amount
of $142.2 million expiring in 1999 and 2005 which were entered into in
order to convert variable rate borrowings into fixed rate borrowings. The
Company does not utilize financial instruments for trading or other
speculative purposes. The counterparties to these contracts are major
financial institutions. Management believes that risk of loss is remote and
in any event would be immaterial.
The fair value of these interest rate swaps are the estimated amounts that
the Company would pay to terminate the agreements at the reporting date,
taking into account the current interest rate environment. Such agreements
were estimated as a liability of approximately $5 million and $8 million at
December 31, 1997 and 1996, respectively. Amounts currently due to or from
interest rate swap counterparties are recorded in interest expense in the
period in which they accrue.
Unrealized Securities Holding Gains: The Company has classified as
available for sale primarily equity securities having an aggregate fair
value of $647.4 million and $519.4 million at December 31, 1997 and 1996,
respectively. Gross unrealized gains, amounting to $475.5 million and
$341.1 million at December 31, 1997 and 1996, respectively, have been
excluded from earnings and reported as a separate component of
stockholders' equity, net of deferred income taxes.
Proceeds from the sale of available for sale securities for the years ended
December 31, 1997, 1996 and 1995 were $68.7 million, $28.3 million and
$53.7 million, respectively. Gross realized gains on available for sale
securities sold during 1997, 1996 and 1995 amounted to $36.3 million, $17.5
million and $23.2 million, respectively. The cost of securities sold is
determined using the average cost method for equity securities.
A portion of insurance fiduciary funds which the Company holds to satisfy
fiduciary obligations are invested in high quality debt securities which
are generally held to maturity. The difference between
cost and fair value of these investments is not material.
11. Special Charges
During 1997, the Company recorded special charges totaling $243.8 million.
These charges include $167.5 million of merger costs predominantly related
to the combination with J&H, a charge of $61.3 million related to London
real estate, and $15.0 million for the disposal of certain EDP assets,
which were written-off in 1997. The merger costs are discussed in detail in
Note 3. The $61.3 million charge for London real estate includes $34.7
million associated with a plan to demolish a company owned building and
$26.6 million of lease abandonment costs (net of anticipated sublease
income) relating to vacating several leased locations. Payments and
write-offs associated with this reserve are expected to begin in 1998 and
continue for several years. The net impact of the special charges on
diluted net income per share was $.94 for the year. (See Note 16).
During 1996, the Company completed the sale of Frizzell for approximately
$290 million which resulted in a $33.2 million pretax gain. In addition,
pretax charges aggregating $92.6 million were also recorded. The net impact
of these special charges and the 1996 tax adjustment discussed in Note 4
increased diluted net income per share by $.02 for the year. These charges
included a provision of $33.5 million primarily for London real estate
representing lease abandonment costs for certain leased locations (net of
anticipated sublease income); $27.1 million primarily for severance and
related benefits associated with the planned reduction of over 600
employees relating to restructuring certain elements of the Company's
insurance and reinsurance back office operations in London and several
office closings; $16.5 million for goodwill write-offs; and $15.5 million
related to the Lloyd's Reconstruction and Renewal Plan. Certain costs,
primarily future rent under noncancellable leases (net of anticipated
sublease income), are expected to be paid out over several years.
The utilization of the 1996 special charges is summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Initial Non-Cash Payments December 31,
Balance Charges Made 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate consolidations $33.5 $ (7.9) $ (0.4) $25.2
Staff reductions and office closings 27.1 - (11.9) 15.2
Goodwill write-offs 16.5 (16.5) - -
Lloyds R&R Plan 15.5 - (7.7) 7.8
----- ------ ------ -----
$92.6 $(24.4) $(20.0) $48.2
===== ====== ====== =====
- -----------------------------------------------------------------------------------------------
</TABLE>
The London real estate and staff reduction plans were expected to commence
in 1997 and continue through 1998; however, execution of these plans was
delayed as a result of the J&H acquisition. The Company is still committed
to carrying out these plans and in the fall of 1997, it leased space in the
East India Dock section of London to begin the consolidation of its back
office operations.
12. Common Stock
On May 21, 1997, the Board of Directors approved a two-for-one stock split
of the Company's common stock in the form of a 100% stock distribution
which was issued on June 27, 1997. All references to per share amounts have
been restated for this stock distribution.
13. Stockholder Rights Plan
On September 18, 1997, the Company's Board of Directors approved the
extension of the benefits afforded by the Company's existing rights plan by
adopting a new stockholder rights plan. Under the new plan, Rights to
purchase stock, at a rate of one Right for each common share held, were
distributed to shareholders of record on September 29, 1997 and
automatically attach to shares acquired thereafter. Under the plan, the
Rights generally become exercisable after a person or group (i) acquires
15% or more of the Company's outstanding common stock or (ii) commences a
tender offer that would result in such a person or group owning 15% or more
of the Company's common stock. When the Rights first become exercisable, a
holder will be entitled to buy from the Company a unit consisting of one
two-hundredth of a share of Series A Junior Participating Preferred Stock
of the Company at a purchase price of $260. Alternatively, if any person
acquires 15% or more of the Company's common stock except pursuant to an
offer for all shares at a price which is fair and not inadequate or if a
15% holder acquires the Company by means of a reverse merger in which the
Company and its stock survive, each Right not owned by a 15% or more
shareholder would become exercisable for common stock of the Company (or in
certain circumstances, other consideration) having a market value equal to
twice the exercise price of the Right. The Rights expire on September 29,
2007, except as otherwise provided in the plan.
14. 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 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.
15. Segmentation of Activity by Type of Service
and Geographic Area of Operation
The Company, a professional services firm, operates in three principal
business segments: risk and insurance services, investment management and
consulting. Operating income for each type of service is after deductions
for all directly related expenses and allocations of common expenses.
General corporate expenses primarily are comprised of employee compensation
and benefits and related occupancy costs for administrative personnel.
General corporate assets primarily consist of cash and cash equivalents,
deferred income tax assets and a portion of the Company's headquarters
building.
The following table presents information about the Company's
operations by type of service and geographic area:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
For the Three Years Ended December 31, 1997
(In millions of dollars)
Depreciation &
Operating Identifiable Amortization Capital
Revenue Income Assets of Fixed Assets Expenditures
------- --------- ------------ --------------- ------------
Type of Service:
1997- (a)
Risk and Insurance
<S> <C> <C> <C> <C> <C>
Services $2,788.4 $271.3 $4,095.1 $ 80.8 $ 87.0
Investment Management 1,882.4 462.8 1,755.8 36.9 80.7
Consulting 1,337.8 131.7 888.1 26.7 32.6
General Corporate - (68.0) 1,173.0 4.3 1.8
-------- ------ -------- ------ ------
$6,008.6 $797.8 $7,912.0 $148.7 $202.1
======== ====== ======== ====== ======
1996- (b)
Risk and Insurance
Services $1,907.3 $313.7 $1,926.8 $ 64.5 $ 66.7
Investment
Management 1,337.5 337.8 1,457.6 27.4 52.4
Consulting 1,159.2 110.9 679.6 22.6 32.7
General Corporate - (47.1) 481.2 4.0 5.5
-------- ------ -------- ------ ------
$4,404.0 $715.3 $4,545.2 $118.5 $157.3
======== ====== ======== ====== ======
1995-
Risk and Insurance
Services $1,963.9 $389.2 $2,193.6 $ 65.6 $ 77.2
Investment
Management 917.0 243.5 997.9 21.5 29.4
Consulting 1,056.4 108.7 638.4 20.4 25.7
General Corporate - (46.5) 499.6 3.9 4.6
-------- ------ -------- ------ ------
$3,937.3 $694.9 $4,329.5 $111.4 $136.9
======== ====== ======== ====== ======
Geographic Area:
1997- (a)
United States $4,316.3 $672.0 $5,160.4
Europe 1,221.1 114.4 1,238.7
Canada 214.3 28.5 120.7
Pacific Rim and Other 256.9 50.9 219.2
General Corporate - (68.0) 1,173.0
-------- ------ --------
$6,008.6 $797.8 $7,912.0
======== ====== ========
1996- (b)
United States $3,064.2 $566.3 $2,863.6
Europe 967.1 136.9 951.6
Canada 198.0 42.5 111.8
Pacific Rim and Other 174.7 16.7 137.0
General Corporate - (47.1) 481.2
-------- ------ --------
$4,404.0 $715.3 $4,545.2
======== ====== ========
1995-
United States $2,565.4 $494.1 $2,195.9
Europe 1,028.2 189.7 1,413.6
Canada 184.3 37.4 107.1
Pacific Rim and Other 159.4 20.2 113.3
General Corporate - (46.5) 499.6
-------- ------ --------
$3,937.3 $694.9 $4,329.5
======== ====== ========
</TABLE>
(a) The 1997 special charges included in operating income are allocated
by type of service and geographic area as follows: $224.3 million for
Risk and Insurance Services, $16.7 million for Consulting and $2.8
million for General Corporate; $116.6 million for U.S., $106.5
million for Europe, $15.6 million for Canada, $2.3 million for
Pacific Rim and Other and $2.8 million for General Corporate.
(b) The 1996 net special charges included in operating income are
allocated by type of service and geographic area as follows: $49.4
million for Risk and Insurance Services, $8.5 million for Consulting
and $1.5 million for General Corporate; $29.6 million for U.S., $26.3
million for Europe, $2.0 million for Pacific Rim and Other and $1.5
million for General Corporate.
16. Restatement Of 1997 Financial Statements
Subsequent to the issuance of the Company's 1997 consolidated financial
statements, management determined that certain costs which were accrued in
connection with the 1997 acquisition of Johnson & Higgins and certain
London real estate consolidations should be expensed as incurred.
Consequently, the 1997 results of operations presented herein have been
restated to reflect a $53 million reduction in the special charges
originally reported. The effect of this restatement was to increase 1997
net income and retained earnings by $34.8 million and to increase basic net
income per share and diluted net income per share by $.21 per share. The
following table summarizes the effect of the restatement on previously
reported financial information:
Year Ended December 31, 1997
-----------------------------------
As Previously
(In millions, except per share figures) Reported As Restated
- --------------------------------------- -----------------------------------
Consolidated Statement of Income:
- ---------------------------------
Operating expenses $5,263.8 $5,210.8
Operating income $ 744.8 $ 797.8
Income before income taxes $ 662.4 $ 715.4
Income taxes $ 263.0 $ 281.2
Net income $ 399.4 $ 434.2
Basic net income per share $2.45 $2.66
Diluted net income per share $2.39 $2.60
December 31, 1997
----------------------------------
As Previously
(In millions) Reported As Restated
-----------------------------------
Consolidated Balance Sheet:
- ---------------------------
Assets
- ------
Deferred tax assets - current $ 168.1 $ 165.9
Total current assets $2,568.9 $2,566.7
Total assets $7,914.2 $7,912.0
Liabilities and Stockholders' Equity
- ------------------------------------
Accounts payable and accrued liabilities $1,275.9 $1,222.9
Accrued income taxes $ 217.9 $ 233.9
Total current liabilities $2,379.4 $2,342.4
Retained earnings $1,975.4 $2,010.2
Total stockholders' equity $3,198.8 $3,233.6
Total liabilities and stockholders' equity $7,914.2 $7,912.0
REPORT OF MANAGEMENT
The management of Marsh & McLennan Companies, Inc. has prepared and is
responsible for the accompanying financial statements and other related
financial information contained in this annual report. The Company's
financial statements were prepared in accordance with generally accepted
accounting principles, applying certain estimates and informed judgments as
required. Deloitte & Touche LLP, independent auditors, have audited the
financial statements and have issued their report thereon.
The Company maintains a system of internal accounting controls designed
to provide reasonable assurance that transactions are executed in
accordance with management's authorization, that assets are safeguarded and
that proper financial records are maintained. Key elements of the Company's
internal controls include securing the services of qualified personnel and
proper segregation of duties. Internal auditors monitor the control system
by examining financial reports, by testing the accuracy of transactions,
and by otherwise obtaining assurance that the system is operating in
accordance with the Company's objectives.
The Audit Committee of the Board of Directors is composed entirely of
outside directors and is responsible for recommending to the Board the
independent auditors to be engaged to audit the Company's financial
statements, subject to stockholder ratification. In addition, the Audit
Committee meets periodically with internal auditors and the independent
auditors, both with and without management, to discuss the Company's
internal accounting controls, financial reporting and other related
matters. The internal auditors and independent auditors have full and
unrestricted access to the Audit Committee.
Frank J. Borelli
Senior Vice President and
Chief Financial Officer
March 6, 1998
REPORT OF INDEPENDENT
AUDITORS
The Board of Directors and Stockholders of
Marsh & McLennan Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Marsh &
McLennan Companies, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedules listed in
the Index at Item 14. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Marsh & McLennan
Companies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 16, the accompanying 1997 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1998, except for Note 16, as to which the date is March 19, 1999.
<TABLE>
<CAPTION>
Marsh & McLennan Companies, Inc. and Subsidiaries
SELECTED QUARTERLY FINANCIAL DATA AND
SUPPLEMENTAL INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share figures)
Net Net Income(Loss) Per Share(a)(b) Dividends Stock
Operating Income -------------------------------- Paid Per Price Range
Revenue Income(a) (Loss)(a) Basic Diluted Share High-Low
- ----------------------------------------------------------------------------------------------------------------------
1997:
<S> <C> <C> <C> <C> <C> <C> <C>
First quarter $1,295.2 $277.3 $164.4 $1.13 $1.10 $ .45 $64.81 - 51.31
Second quarter 1,539.5 261.6 145.0 .87 .85 .45 $75.25 - 56.56
Third quarter 1,548.4 248.9 140.0 .83 .81 .50 $79.75 - 68.25
Fourth quarter 1,625.5 10.0 (15.2) (.08) (.08) .50 $80.00 - 66.00
-------- ------ ------ ----- ----- -----
$6,008.6 $797.8 $434.2 $2.66 $2.60 $1.90 $80.00 - 51.31
======== ====== ====== ===== ===== =====
1996:
First quarter $1,122.6 $242.5 $143.1 $ .98 $ .97 $ .40 $50.81 - 42.13
Second quarter 1,097.9 193.3 115.2 .79 .78 .40 $48.81 - 44.50
Third quarter 1,057.0 174.2 102.6 .72 .70 .40 $49.50 - 44.00
Fourth quarter 1,126.5 105.3 98.4 .68 .67 .45 $57.44 - 47.75
-------- ------ ------ ----- ----- -----
$4,404.0 $715.3 $459.3 $3.17 $3.12 $1.65 $57.44 - 42.13
======== ====== ====== ===== ===== =====
1995:
First quarter $ 994.7 $213.6 $124.8 $ .85 $ .85 $ .36 $42.50 - 38.13
Second quarter 974.5 174.9 101.8 .70 .69 .36 $42.00 - 38.06
Third quarter 963.9 158.4 91.3 .63 .62 .36 $44.69 - 38.31
Fourth quarter 1,004.2 148.0 85.0 .58 .57 .40 $45.06 - 40.25
-------- ------ ------ ----- ----- -----
$3,937.3 $694.9 $402.9 $2.76 $2.73 $1.48 $45.06 - 38.06
======== ====== ====== ===== ===== =====
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The fourth quarter and full year amounts have been restated (Refer to
Note 16).
(b) Net income per share is computed independently for each of the
periods presented. Accordingly, the sum of the quarterly net income
per share amounts exceeds the total for the year in 1997.
The Company's common stock (ticker symbol:MMC) is traded on the New York,
Chicago, Pacific and London stock exchanges. As of February 28, 1998, there
were 20,483 stockholders of record.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securtities Exchange Act of 1934, the registrant has duly caused this
amendment to the report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, in the State of New
York on March 24, 1999.
MARSH & MCLENNAN COMPANIES, INC.
By /s/ A.J.C. Smith
--------------------------------
Name: A.J.C. Smith
Title: Chairman & Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this amendment to the report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ A.J.C. Smith Chairman & Chief Executive Officer
A.J.C. Smith (Principal Executive Officer) March 24, 1999
/s/ Frank J. Borelli Senior Vice President
Frank J. Borelli & Chief Financial Officer
(Principal Financial Officer) March 24, 1999
/s/ Douglas C. Davis Vice President and Controller
Douglas C. Davis (Principal Accounting Officer) March 24, 1999
*
Norman Barham Director March 24, 1999
*
Lewis W. Bernard Director March 24, 1999
*
Peter Coster Director March 24, 1999
*
Robert F. Erburu Director March 24, 1999
*
Jeffrey W. Greenberg Director March 24, 1999
*
Ray J. Groves Director March 24, 1999
*
Stephen R. Hardis Director March 24, 1999
*
Gwendolyn S. King Director March 24, 1999
*
The Rt. Hon. Director March 24, 1999
Lord Lang of Monkton
*
Lawrence J. Lasser Director March 24, 1999
*
David A. Olsen Director March 24, 1999
*
John D. Ong Director March 24, 1999
*
George Putnam Director March 24, 1999
*
Adele Smith Simmons Director March 24, 1999
*
John T. Sinnott Director March 24, 1999
*
Frank J. Tasco Director March 24, 1999
*
Saxon Riley Director March 24, 1999
*
W. R. P. White-Cooper Director March 24, 1999
* Gregory F. Van Gundy, by signing his name hereto, does hereby
execute this Registration Statement on behalf of the directors of the
Registrant indicated above by asterisks, pursuant to powers of attorney
duly executed by such directors and filed as exhibits to the Registration
Statement.
By: /s/ Gregory C. Davis
-----------------------
Gregory F. Van Gundy
Attorney-in-fact
Exhibit Index
Exhibit Number Description
23 Consent of Deloitte and Touche LLP.
27 Financial Data Schedule for the
fiscal year ended December 31, 1997.
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the previously filed
Registration Statements of Marsh & McLennan Companies, Inc. on Form S-8
(Registration Statement Nos. 2-58660, 2-65096, 2-82938, 33-21566, 33-32880,
33-48803, 33-48804, 33-48807, 33-54349, 33- 59603, 33-63389, 333-35739,
333-35741, 333-29627 and 333-51141) and, the previously filed Registration
Statements on Form S-3 (Registration Statement Nos. 333-25069, 333- 28201,
333-41021, 333-48707 and 333-67543) of our report dated March 6, 1998,
March 19, 1999, as to Note 16 (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the restatement described in
Note 16), appearing in this Annual Report on Form 10-K/A of Marsh & McLennan
Companies, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
New York, New York
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Marsh & McLennan Companies, Inc. and subsidiaries December 31,
1997 financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 424,300,000
<SECURITIES> 0
<RECEIVABLES> 1,551,000,000
<ALLOWANCES> 52,800,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,566,700,000
<PP&E> 1,754,900,000
<DEPRECIATION> 797,600,000
<TOTAL-ASSETS> 7,912,000,000
<CURRENT-LIABILITIES> 2,342,400,000
<BONDS> 1,239,800,000
0
0
<COMMON> 172,400,000
<OTHER-SE> 3,061,200,000
<TOTAL-LIABILITY-AND-EQUITY> 7,912,000,000
<SALES> 0
<TOTAL-REVENUES> 6,008,600,000
<CGS> 0
<TOTAL-COSTS> 5,210,800,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,600,000
<INTEREST-EXPENSE> 106,400,000
<INCOME-PRETAX> 715,400,000
<INCOME-TAX> 281,200,000
<INCOME-CONTINUING> 434,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 434,200,000
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.60
</TABLE>
