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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended June 30, 1999
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No __ .
As of July 31, 1999, there were outstanding 264,062,450 shares of
common stock, par value $1.00 per share, of the registrant.
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INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report contains certain statements relating to future results, which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements may include, without limitation,
discussions concerning revenue and expense growth, cost savings and efficiencies
expected from the integration of Johnson & Higgins and Sedgwick Group plc, Year
2000 remediation and testing of computer systems, market and industry
conditions, interest rates, foreign exchange rates, contingencies and matters
relating to the operations and income taxes of Marsh & McLennan Companies, Inc.
and subsidiaries ("MMC"). Such forward-looking statements are based on available
current market and industry materials, experts' reports and opinions, as well as
management's expectations concerning future events impacting MMC.
Forward-looking statements by their very nature involve risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by any forward- looking statements contained herein include, in the
case of MMC's risk and insurance services and consulting businesses, the failure
to successfully integrate the businesses of Sedgwick Group plc (including the
achievement of synergies and cost reductions) or other adverse consequences from
that transaction; in the case of MMC's risk and insurance service business,
changes in competitive conditions, a decrease in the premium rate levels in the
global property and casualty insurance markets, the impact of changes in
insurance markets and natural catastrophes; in the case of MMC's investment
management business, changes in worldwide and national equity and fixed income
markets; and with respect to all of MMC's activities, the failure of MMC and/or
its significant business partners to be Year 2000 compliant on a timely basis,
changes in general worldwide and national economic conditions, fluctuations in
foreign currencies, actions of competitors or regulators, changes in interest
rates, developments relating to claims and lawsuits, changes in the tax or
accounting treatment of MMC's operations and the impact of tax and other
legislation and regulation in the jurisdictions in which MMC operates.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Ended Six Months Ended
Ended June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------- -------
Revenue $ 2,245 $ 1,750 $ 4,596 $ 3,526
Expense 1,898 1,404 3,730 2,776
------- ------- ------- -------
Operating Income 347 346 866 750
Interest Income 4 7 11 12
Interest Expense (55) (33) (115) (61)
------- ------- ------- -------
Income Before Income Taxes 296 320 762 701
Income Taxes 119 127 306 277
------- ------- ------- -------
Net Income $ 177 $ 193 $ 456 $ 424
======= ======= ======= =======
Basic Net Income
Per Share $ .68 $ .75 $ 1.76 $ 1.65
======= ======= ======= =======
Diluted Net Income
Per Share $ .63 $ .72 $ 1.66 $ 1.59
======= ======= ======= =======
Average Number of Shares
Outstanding - Basic 263 257 260 257
======= ======= ======= =======
Average Number of Shares
Outstanding - Diluted 272 265 269 264
======= ======= ======= =======
Dividends Declared $ .45 $ .40 $ .85 $ .73
======= ======= ======= =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
June 30, December 31,
1999 1998
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 599 $ 610
-------- --------
Receivables-
Commissions and fees 1,775 1,575
Advanced premiums and claims 132 129
Other receivables 355 294
-------- --------
2,262 1,998
Less-allowance for doubtful accounts (89) (89)
-------- --------
Net receivables 2,173 1,909
-------- --------
Prepaid dealer commissions -
current portion 315 315
Other current assets 339 411
-------- --------
Total current assets 3,426 3,245
Long-term securities 684 828
Fixed assets, net 1,264 1,287
(net of accumulated depreciation and
amortization of $817 at June 30, 1999
and $820 at December 31, 1998)
Intangible assets 4,846 4,826
Prepaid dealer commissions 805 799
Other assets 952 886
-------- --------
$ 11,977 $ 11,871
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
June 30, December 31,
1999 1998
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 957 $ 2,234
Accounts payable and accrued liabilities 1,451 1,438
Accrued compensation and employee benefits 759 841
Accrued income taxes 318 385
Dividends payable 119 104
-------- --------
Total current liabilities 3,604 5,002
-------- --------
Fiduciary liabilities 3,537 3,257
Less - cash and investments held in
a fiduciary capacity (3,537) (3,257)
-------- --------
- -
-------- --------
Long-term debt 2,597 1,590
-------- --------
Other liabilities 1,695 1,620
-------- --------
Commitments and contingencies - -
-------- --------
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
800,000,000 shares, issued 264,793,875
shares at June 30, 1999 and 258,867,125
at December 31, 1998 265 259
Additional paid-in capital 1,252 889
Retained earnings 2,644 2,412
Accumulated other comprehensive income (7) 206
-------- --------
4,154 3,766
Less - treasury shares, at cost,
1,050,059 shares at June 30, 1999 and
1,956,825 shares at December 31, 1998 (73) (107)
-------- --------
Total stockholders' equity 4,081 3,659
-------- --------
$ 11,977 $ 11,871
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Six Months Ended
June 30,
----------------
1999 1998
---- ----
Operating cash flows:
Net income $ 456 $ 424
Depreciation of fixed assets 109 85
Amortization of intangible assets 69 36
Provision for deferred income taxes 64 90
Other liabilities 47 19
Prepaid dealer commissions (6) (77)
Other, net 16 (7)
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (264) (188)
Other current assets 112 63
Accounts payable and accrued liabilities (87) (126)
Accrued compensation and employee benefits (82) (23)
Accrued income taxes (14) 13
Effect of exchange rate changes (29) 25
------- -------
Net cash generated from operations 391 334
------- -------
Financing cash flows:
Net (decrease) increase in commercial paper (1,359) 619
Other borrowings 1,109 21
Other repayments (36) (164)
Purchase of treasury shares - (109)
Issuance of common stock 369 63
Dividends paid (208) (171)
------- -------
Net cash (used for) provided by financing activities (125) 259
------- -------
Investing cash flows:
Additions to fixed assets (164) (134)
Acquisitions (92) (313)
Other, net (13) 30
------- -------
Net cash used for investing activities (269) (417)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (8) (2)
------- -------
(Decrease) increase in cash & cash equivalents (11) 174
Cash & cash equivalents at beginning of period 610 424
------- -------
Cash & cash equivalents at end of period $ 599 $ 598
======= =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have been prepared by
MMC pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and
regulations, although MMC believes that the disclosures are adequate to
make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the financial statements and
the notes thereto included in MMC's latest annual report on Form 10-K.
The financial information contained herein reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results of operations for the three-and six-month periods ended June 30,
1999 and 1998.
2. Fiduciary Assets and Liabilities
In its capacity as an insurance broker or agent, MMC collects premiums from
insureds and, after deducting its commissions, remits the premiums to the
respective insurance underwriters; MMC 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 $83 million and $62 million for the
six months ended June 30, 1999 and 1998, respectively.
Net uncollected premiums and claims and the related payables amounting to
$10.7 billion at June 30, 1999 and $10.0 billion at December 31, 1998 are
not included in the accompanying Consolidated Balance Sheets.
3. Per Share Data
Basic net income per share is calculated by dividing net income by the
average number of shares of MMC's common stock outstanding. Diluted net
income per share is calculated by reducing net income for the potential
minority interest associated with unvested shares granted under the Putnam
Equity Partnership Plan. This result is then divided by the average common
shares outstanding, which have been adjusted for the dilutive effect of
potential common shares.
The following reconciles net income to net income for diluted earnings per
share and basic weighted average common shares outstanding to diluted
weighted average common shares outstanding for the three-and six-month
periods ended June 30, 1999 and 1998.
(In millions)
Three Months Six Months Ended
Ended June 30, June 30,
-------------- --------------
1999 1998 1999 1998
Net income $ 177 $ 193 $ 456 $ 424
Less: Potential minority
interest associated
with Putnam Equity
Partnership Plan (4) (2) (8) (3)
----- ----- ----- -----
Net income for diluted
earnings per share $ 173 $ 191 $ 448 $ 421
===== ===== ===== =====
Basic weighted average
common shares outstanding 263 257 260 257
Dilutive effect of stock options 9 8 9 7
----- ----- ----- -----
Diluted weighted average
common shares outstanding 272 265 269 264
===== ===== ===== =====
4. Comprehensive Income
MMC has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income", which establishes standards for
reporting and displaying comprehensive income and its components. Net
unrealized gains and losses on MMC's available for sale securities as well
as foreign exchange gains or losses, which prior to adoption were reported
separately in stockholders' equity, are now included in other comprehensive
income.
The components of comprehensive income for the six-month periods ended June
30, 1999 and 1998 are as follows:
1999 1998
---- ----
Foreign currency translation adjustments $(119) $ 11
Unrealized securities holding gains (losses),
net of income taxes (82) 105
Less: Reclassification adjustment for gains
included in net income,
net of income taxes (12) (13)
------ -----
Other comprehensive income (loss) (213) 103
Net income 456 424
------ -----
Comprehensive income $ 243 $527
===== ====
5. Supplemental Disclosure to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning
acquisitions and interest and income taxes paid:
Six Months Ended
June 30,
(In millions of dollars) 1999 1998
Purchase acquisitions:
Assets acquired, excluding cash $ 92 $313
Liabilities assumed - -
----- -----
Net cash outflow for acquisitions $ 92 $313
==== ====
Interest paid $101 $ 70
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Income taxes paid $222 $207
==== =====
6. Income Taxes
In 1997, MMC received a Notice of Proposed Adjustment from a local field
office of the Internal Revenue Service ("IRS") challenging its tax
treatment related to prepaid dealer commissions paid by Putnam and
subsequent 12b-1 fees received by Putnam. 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 IRS field office withdrew the Notice of Proposed
Adjustment and submitted the matter to the national office of the IRS for
consideration in a request for technical advice. Consequently, the issue is
under consideration by the IRS. MMC 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 MMC on its tax
returns. On the basis of present information and advice received from
counsel, it is the opinion of MMC's management that any assessments
resulting from current tax audits will not have a material adverse effect
on MMC's consolidated results of operations or its consolidated financial
position.
7. Acquisitions
In the fourth quarter of 1998, MMC consummated a business combination with
Sedgwick Group plc ("Sedgwick"), a London-based holding company of one of
the world's leading insurance and reinsurance broking and consulting
groups, for total cash consideration of approximately $2.2 billion, which
was initially funded with short-term commercial paper borrowings. In April
1999, MMC completed the sale of 4.1 million common shares, realizing
approximately $300 million of net proceeds. In June 1999, MMC sold $600
million of 6 5/8% Senior Notes due 2004 and $400 million of 7 1/8% Senior
Notes due 2009.
The proceeds of these sales were used to repay a portion of the commercial
paper borrowings. The business combination is being accounted for using the
purchase method of accounting. Accordingly, goodwill of approximately $2.1
billion resulting from the preliminary purchase price allocation is being
amortized over 40 years. Assets acquired and liabilities assumed have been
recorded at their estimated fair values and are subject to adjustment when
purchase accounting is finalized in 1999.
The following unaudited pro forma summary presents the consolidated results
of operations of MMC as if the Sedgwick business combination had occurred
on January 1, 1998. The pro forma results are shown for illustrative
purposes only and do not purport to be indicative of the results which
would have been reported if the business combination had occurred on the
date indicated or which may occur in the future. The pro forma information
reflected below includes the net impact of pretax special charges of $126
million recorded by Sedgwick prior to its being acquired by MMC, primarily
related to pension redress issues discussed in Note 9.
(In millions of dollars, except per share figures)
Six Months Ended
June 30, 1998
----------------
Revenue $ 4,259
Net Income 348
Basic Net Income per share 1.32
Diluted Net Income per share 1.27
Dispositions: As part of the combination with Sedgwick, MMC acquired
several insurance underwriting companies that were already in run-off as
well as consulting businesses not compatible with its existing operations.
MMC intends to sell these operations in the near future and accordingly,
$85 million and $84 million of net assets of these businesses at June 30,
1999 and December 31, 1998, respectively, are included in other current
assets in the Consolidated Balance Sheets as assets to be sold. The net
assets are stated at their estimated realizable value.
The results of operations as well as the incremental interest expense
incurred in financing the purchase of these companies is not material to
the consolidated results of operations of MMC for the three months and six
months ended June 30, 1999.
8. Special Charge
In the second quarter of 1999, MMC recorded a special charge of $84 million
that reduced diluted net income per share by $0.19. This charge includes
$71 million of merger costs related to the combination with Sedgwick and
$13 million representing acquisition-related awards pertaining to the
Sedgwick transaction.
The merger costs of $71 million represent severance and related benefits
associated with the planned reduction of approximately 1,000 MMC positions
worldwide. In addition, as of June 30, 1999, $99 million representing
severance and related benefits for the planned reduction of over 1,500
positions of Sedgwick has been allocated to the cost of the acquisition.
Through June 30, 1999, $22 million has been paid related to the termination
of approximately 650 MMC employees and $51 million has been paid related to
the termination of approximately 950 Sedgwick employees.
It is expected that another charge will be taken in the fourth quarter
related to additional integration efforts.
9. Claims, Lawsuits and Other Contingencies
MMC and its subsidiaries are subject to various claims, lawsuits and
proceedings 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 matters seek damages,
including punitive damages, in amounts which could, if assessed, be
significant.
An action captioned "Aiena et al. vs. Olsen et al." ("Aiena") is pending in
the United States District Court for the Southern District of New York by
certain former directors of Johnson & Higgins ("J&H"), which was acquired
by MMC in March 1997, against twenty-four selling shareholders of J&H, as
well as J&H itself and MMC. The action essentially challenges the
allocation of the consideration paid in connection with MMC'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. Two other former directors of J&H brought similar actions
(Sempier v. Olsen et al.; and Clements v. Olsen et al.), which are also
pending before the United States District Court for the Southern District
of New York and are contemplated to proceed together with the Aiena action.
In 1993, several years prior to the acquisition of J&H, the Equal
Employment Opportunity Commission ("EEOC") commenced a lawsuit against J&H
in the United States District Court for the Southern District of New York.
The action alleges that a mandatory retirement policy for directors then in
effect at J&H violated the federal Age Discrimination in Employment Act
("ADEA"). In 1995, the District Court ruled in the EEOC's favor that the
J&H mandatory retirement policy violated the ADEA. The Court of Appeals for
the Second Circuit affirmed that ruling in 1996. On July 28, 1999, J&H
entered into a Consent Judgment with the EEOC settling the litigation. The
Consent Judgment, which was approved by the Court, requires J&H to pay
certain former directors of J&H a total of $28 million. Pursuant to the
Stock Purchase Agreement between MMC and J&H and the stockholders of J&H,
MMC will bear one-half of the settlement amount and expenses in this
action. This lawsuit was fully reserved in MMC's financial statements.
Sedgwick Group plc, since prior to its acquisition, has been engaged in a
review of previously undertaken personal pension plan business as required
by United Kingdom regulators to determine whether redress should be made to
customers. Settlements and related costs previously paid amount to
approximately $100 million of which $30 million is due from insurers. The
contingent exposure of Sedgwick for pension redress and related costs is
estimated to be $200 million. Sedgwick has recorded $130 million of
reserves and recognized approximately $70 million of insurance recoveries
related to this exposure.
Other present and former subsidiaries of MMC are engaged in a comparable
review of their personal pension plan businesses, although the extent of
their activity in this area, and consequently their financial exposure, was
proportionally much less than Sedgwick. The contingent exposure of the
present and former non-Sedgwick subsidiaries of MMC for pension redress and
related costs is estimated to be approximately $125 million. Approximately
$100 million of this amount is expected to be recovered from insurers and
accounting reserves have been provided for the remaining balance.
Settlements and related costs previously paid total approximately $25
million.
MMC's ultimate exposure from the United Kingdom's personal pension plan
review, as presently calculated and including Sedgwick, is subject to a
number of variable factors including, among others, equity markets, the
rate of response to the pension review mailings, the interest rate
established quarterly by the U.K. Pension Investment Authority for
calculating compensation, and the precise scope, duration, and methodology
of the review as required by that Authority.
As part of the combination with Sedgwick, MMC acquired several insurance
underwriting companies that were already in run-off. MMC intends to sell
these operations in the near future. Sedgwick had given guarantees with
respect to certain liabilities relating to some of these operations.
On the basis of present information, anticipated insurance coverage and
advice received from counsel, it is the opinion of MMC's management that
the disposition or ultimate determination of these claims, lawsuits,
proceedings or guarantees will not have a material adverse effect on MMC's
consolidated results of operations or its consolidated financial position.
10. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This standard, which establishes new accounting and reporting requirements
for derivative instruments, is effective for fiscal years beginning after
June 15, 2000. MMC does not expect the adoption of this standard to have a
material impact on its results of operations or consolidated financial
position.
11. Reclassifications
Certain reclassifications have been made to the prior-year amounts to
conform to the current-year presentation.
12. Segment Information
MMC, a professional services firm, is organized based on the different
services that it offers. MMC operates in three principal business segments:
risk and insurance services, investment management and consulting. The risk
and insurance services segment provides insurance broking, reinsurance
broking and insurance program management for business, professional,
institutional and public-entity clients. It also provides services
principally in connection with originating, structuring and managing
insurance and related industry investments. The investment management
segment primarily provides securities investment advisory and management
services and administrative services for a group of publicly held
investment companies. The consulting segment provides advice and services
to the managements of organizations primarily in the areas of human
resource and employee benefit programs, general management consulting, and
economic consulting and analysis.
MMC evaluates segment performance based on operating income, which is
determined after deductions for directly related expenses but before
special charges. The accounting policies of the segments are the same as
those used for the consolidated financial statements.
Selected information about MMC's operating segments for the six-month
periods ended June 30, 1999 and 1998 follow:
(In millions of dollars)
Revenue Segment
from External Operating
Customers Income
------------- ---------
1999
Risk and Insurance Services $2,348 (a) $ 465
Investment Management 1,290 420
Consulting 958 120
------ ------
$4,596 $1,005
====== ======
1998
Risk and Insurance Services $1,654 (a) $ 378
Investment Management 1,145 316
Consulting 727 86
------ ------
$3,526 $ 780
====== ======
(a) Includes interest income on fiduciary funds ($83 million in 1999 and
$62 million in 1998).
A reconciliation of the total segment operating income to income before
income taxes in the consolidated financial statements is as follows:
1999 1998
------- ------
Total segment operating income $1,005 $ 780
Severance and related benefits (Note 8) (71) -
Acquisition-related charges (Note 8) (13) -
Corporate expense (53) (30)
Minority interest associated with the
Putnam Equity Partnership Plan (2) -
------- ------
Operating income 866 750
Interest income 11 12
Interest expense (115) (61)
------- ------
Total income before income taxes $ 762 $ 701
======= ======
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Second Quarter and Six Months Ended June 30, 1999
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a global
professional services firm. MMC subsidiaries include Marsh, the world's leading
risk and insurance services firm; Putnam Investments, one of the largest
investment management companies in the United States; and Mercer Consulting
Group, a major global provider of consulting services. More than 50,000
employees worldwide provide analysis, advice and transactional capabilities to
clients in over 100 countries.
MMC is organized in three principal business segments based on the services that
each provides. Segment performance is evaluated based on operating income, which
is after deductions for directly related expenses but before special charges.
This management's discussion and analysis of financial condition and results of
operations contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Information Concerning Forward-Looking
Statements" on page one of this filing. This Form 10-Q should be read in
conjunction with MMC's latest annual report on Form 10-K.
The consolidated results of operations follow:
- -------------------------------------------------------------------------------
Second Quarter Six Months
(In millions of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $1,092 $ 784 $2,348 $1,654
Investment Management 661 587 1,290 1,145
Consulting 492 379 958 727
------ ------ ------ ------
2,245 1,750 4,596 3,526
------ ------ ------ ------
Expense:
Compensation and Benefits 1,126 866 2,295 1,717
Other Operating Expenses 688 538 1,351 1,059
Special Charge 84 - 84 -
------ ------ ------ ------
1,898 1,404 3,730 2,776
------ ------ ------ ------
Operating Income $ 347 $ 346 $ 866 $ 750
====== ====== ====== ======
Operating Income Margin 15.5% 19.8% 18.8% 21.3%
====== ====== ====== ======
- -------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, rose 28% from the second
quarter of 1998 and grew by 30% for the six months. This increase primarily is
due to the acquisition in November 1998 of Sedgwick Group plc ("Sedgwick"), a
London-based holding company of one of the world's leading insurance and
reinsurance broking and consulting groups. Sedgwick's results were not reflected
in MMC's consolidated results of operations in the first half of 1998.
Excluding the impact of acquisitions and dispositions, revenue, on a
consolidated basis, grew approximately 8% over 1998 for the quarter with a 12%
revenue increase in the investment management segment, approximately a 5%
increase in risk and insurance services and 10% growth in revenue in the
consulting segment. The increases in the respective segments were driven
predominantly by higher levels of business activity in those businesses. For the
six months, revenue excluding acquisitions and dispositions rose approximately
8%.
Operating expenses rose 35% in the second quarter of 1999 primarily reflecting
the acquisition of Sedgwick and the impact of a special charge relating to costs
resulting from the Sedgwick integration process. Excluding acquisitions,
dispositions and the special charge, expenses grew approximately 6% in the
second quarter primarily reflecting staff growth in the consulting segment and
generally higher incentive compensation commensurate with strong operating
performance. Increased amortization of deferred commissions from both increased
sales and redemptions of Putnam Funds also contributed to the expense increase.
For the six months, expenses rose approximately 7% excluding acquisitions,
dispositions and the special charge.
In the second quarter of 1999, MMC recorded a special charge of $84 million
representing initial costs relating to the integration of Sedgwick. These costs
include severance and related benefits of $71 million associated with the
planned reduction of approximately 1,000 MMC positions worldwide and a $13
million charge associated with certain acquisition-related awards pertaining to
the Sedgwick transaction. Of the total special charge, $73 million was
applicable to risk and insurance services and $11 million related to consulting.
The net impact of the special charge was $51 million after tax, or $.19 per
diluted share. In addition, $99 million of severance and benefit-related costs
for the planned reduction of over 1,500 positions of Sedgwick were allocated to
the cost of the acquisition.
Of the combined severance-related costs totaling $170 million, cash payments of
approximately $73 million have been made as of June 30, 1999. The remaining
actions are expected to be completed by the end of 1999. The utilization of
these charges is summarized in Note 8 to the consolidated financial statements.
It is expected that another charge will be taken in the fourth quarter related
to additional integration efforts.
MMC expects to achieve gross consolidation savings of at least $200 million upon
the full integration of Sedgwick with the majority expected to be realized in
the year 2000.
Risk and Insurance Services
- -------------------------------------------------------------------------------
Second Quarter Six Months
(In millions of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Revenue $1,092 $ 784 $2,348 $1,654
Expense (a) 921 639 1,883 1,276
------ ------ ------ ------
Operating Income $ 171 $ 145 $ 465 $ 378
====== ====== ====== ======
Operating Income Margin 15.6% 18.5% 19.8% 22.8%
====== ====== ====== ======
- -------------------------------------------------------------------------------
(a) Excluding special charge.
Revenue
Revenue for the risk and insurance services segment grew 39% over the second
quarter of 1998 primarily due to the Sedgwick acquisition. Excluding
acquisitions and dispositions, revenue for risk and insurance services
operations rose approximately 5% primarily reflecting the effect of net new
business development. For the six months, revenue for risk and insurance
services increased 42% over the same period last year primarily as a result of
the Sedgwick acquisition. Excluding acquisitions and dispositions, risk and
insurance services revenue rose approximately 5% during the first half of 1999.
Overall, market conditions remained competitive in the second quarter as
substantial excess insurance capacity continued to exist. However, the rate of
decline in commercial insurance premium rates has lessened as compared with the
prior year.
Expense
Risk and insurance services expenses increased 44% for the second quarter and
48% for the first six months of 1999, largely attributable to the acquisition of
Sedgwick. Excluding acquisitions and dispositions, expenses increased
approximately 4% from the second quarter of 1998 primarily reflecting costs
associated with a higher volume of business and increased technology spending,
offset by the realization of net integration savings related to the Johnson &
Higgins transaction, which closed in March 1997. For the six months, expenses
for risk and insurance services, excluding acquisitions and dispositions, rose
approximately 4%.
Investment Management
- -------------------------------------------------------------------------------
Second Quarter Six Months
(In millions of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Revenue $ 661 $ 587 $1,290 $1,145
Expense 441 423 870 829
------ ------ ------ ------
Operating Income $ 220 $ 164 $ 420 $ 316
====== ====== ====== ======
Operating Income Margin 33.2% 28.0% 32.5% 27.6%
====== ====== ====== ======
- -------------------------------------------------------------------------------
Revenue
Putnam's revenue increased 12% compared with the second quarter of 1998 and 13%
for the six months, reflecting strong growth in the level of average assets
under management on which management fees are earned. Assets under management
aggregated $325 billion at June 30, 1999 compared with $306 billion at the end
of the first quarter, reflecting $4 billion of net new fund sales and additional
institutional investments, as well as growth in market value of $15 billion
related to an increase in equity market levels during the quarter.
Expense
Expenses grew 4% in the second quarter of 1999 and 5% for the six months
primarily due to increased amortization of deferred commissions from both
increased sales and redemptions.
Quarter-end and average assets under management for the second quarter are
presented below:
- -------------------------------------------------------------------------------
(In billions of dollars) 1999 1998
- -------------------------------------------------------------------------------
Mutual Funds:
Domestic Equity $174 $143
Taxable Bond 38 38
Tax-Free Income 16 16
International Equity 17 14
---- ----
245 211
---- ----
Institutional Accounts:
Fixed Income 22 24
Domestic Equity 38 29
International Equity 20 14
---- ----
80 67
---- ----
Quarter-end Assets $325 $278
==== ====
Average Assets $315 $271
==== ====
- -------------------------------------------------------------------------------
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international bond and stock market prices and by
the level of investments and withdrawals for current and new fund shareholders
and clients. They are also affected by investment performance, service to
clients, the development and marketing of new investment products, the relative
attractiveness of the investment style under prevailing market conditions and
changes in the investment patterns of clients. Revenue levels are sensitive to
all of the factors above, but in particular, to significant changes in bond and
stock market valuations.
Putnam provides individual and institutional investors with a broad range of
equity and fixed income investment products and services designed to meet
varying investment objectives and which affords its clients the opportunity to
allocate their investment resources among various alternative investment
products as changing worldwide economic and market conditions warrant.
At the end of the second quarter, assets held in equity securities represented
77% of assets under management, compared with 72% in 1998, while investments in
fixed income products represented 23%, compared with 28% last year.
Consulting
- -------------------------------------------------------------------------------
Second Quarter Six Months
(In millions of dollars) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Revenue $492 $379 $958 $727
Expense (a) 420 326 838 641
---- ---- ---- ----
Operating Income $ 72 $ 53 $120 $ 86
==== ==== ==== ====
Operating Income Margin 14.7% 13.9% 12.5% 11.9%
==== ==== ==== ====
- -------------------------------------------------------------------------------
(a) Excluding special charge.
Revenue
Consulting revenue increased 30% in 1999 compared with the second quarter of
1998 reflecting an increase in the level of services provided as well as the
Sedgwick acquisition. Excluding acquisitions, consulting revenue increased
approximately 10% in 1999. Retirement consulting revenue, which represented 43%
of the consulting segment, grew 9% in the second quarter while revenue rose 15%
in global compensation consulting, 7% in general management consulting and 23%
in the economic consulting practice due to a higher volume of business in these
practice lines. Health care consulting revenue grew 3% during the same period.
For the six months, consulting revenue increased 32% over the same period of
1998 primarily reflecting the Sedgwick acquisition. Excluding acquisitions,
revenue increased approximately 11% for the six months.
Expense
Consulting expenses increased 29% for the second quarter of 1999 and 31% for the
six months primarily reflecting the Sedgwick acquisition. Excluding
acquisitions, expenses increased approximately 7% for the second quarter and
approximately 9% for the six months reflecting the effect of staff growth to
support new business and higher incentive compensation commensurate with strong
operating performance.
Interest
Interest income earned on corporate funds was $4 million in the second quarter
of 1999 compared with $7 million in 1998. Interest expense increased to $55
million in the second quarter of 1999 from $33 million in 1998. Interest expense
increased to $115 million for the six months ended June 30, 1999 from $61
million in 1998. The increase in interest expense for the quarter and six
months is primarily due to incremental debt incurred in November 1998 to finance
the Sedgwick acquisition.
Income Taxes
MMC's consolidated tax rate was 40.4% of income before income taxes in the
second quarter and 40.2% for the first half of 1999. Excluding the tax effect of
the special charges, the underlying tax rate was 40.0% compared with 39.5% last
year. The increase in the 1999 tax rate is largely attributable to certain items
associated with recent acquisitions. The overall tax rates are higher than the
U.S. Federal statutory rate primarily because of provisions for state and local
income taxes.
Liquidity and Capital Resources
MMC's cash and cash equivalents aggregated $599 million on June 30, 1999, a
decrease of $11 million from the end of 1998.
Cash flow from operations includes the net cash requirements of Putnam's prepaid
dealer commissions, which amounted to $6 million for the six months compared
with $77 million during the same period of 1998.
MMC's capital expenditures, which amounted to $164 million in the first six
months of 1999 and $134 million during the same period last year, primarily
relate to computer equipment purchases and the refurbishing and modernizing of
office facilities.
As previously mentioned, during the fourth quarter of 1998, MMC acquired
Sedgwick for total cash consideration of (pound)1.25 billion or approximately
$2.2 billion. MMC initially financed the transaction with short-term commercial
paper that was supported by a committed bank facility led by J. P. Morgan.
In April 1999, MMC completed the sale of 4.1 million common shares realizing
approximately $300 million of net proceeds. In June 1999, MMC sold $600 million
of 6 5/8% Senior Notes due 2004 and $400 million of 7 1/8% Senior Notes due
2009, the proceeds of which were used to repay a portion of the commercial paper
borrowings that were used initially to finance the Sedgwick acquisition. The
balance of the commercial paper remains outstanding.
In June 1999, MMC arranged a new $1.4 billion revolving credit facility for the
use of its subsidiary, Marsh USA, Inc. Borrowings under the facility are
guaranteed by MMC and support Marsh USA, Inc.'s commercial paper borrowings. The
previously existing J. P. Morgan facility has been terminated.
As further explained in Note 9 to the consolidated financial statements, certain
present and former subsidiaries in the United Kingdom are under review by the
Personal Investment Authority concerning the disclosure and advice given to
clients regarding certain personal pension transactions. The contingent exposure
for pension redress and related cost is estimated to be approximately $325
million of which $170 million is expected to be recovered from insurers.
Approximately two-thirds of the contingent exposure is associated with the
Sedgwick acquisition while the balance is associated with other current and
former subsidiaries of MMC. All amounts in excess of anticipated insurance
recoveries have been reserved for in the accompanying balance sheet. Although
the timing and amount of payments relating to the pension review process cannot
be predicted with certainty, it may be that MMC will temporarily fund such
payments by drawing upon its existing credit lines.
Other
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard, which establishes new accounting and
reporting requirements for derivative instruments, is effective for fiscal years
beginning after June 15, 2000. MMC does not expect that the adoption of this
standard will have a material impact on its results of operations or
consolidated financial position.
Market Risk
Certain of MMC's recorded revenues, expenses, assets and liabilities are exposed
to the impact of interest rate changes and fluctuations in foreign currency
exchange rates. MMC manages its net exposure to interest rate changes by
utilizing a mixture of variable and fixed rate borrowings to finance MMC's asset
base. Interest rate swaps are utilized on a very limited basis. MMC does not
enter into foreign currency or interest rate transactions for trading or other
speculative purposes.
The translated values of revenue and expense from MMC's international risk and
insurance services and consulting operations are subject to fluctuations due to
changes in currency exchange rates. However, the net impact of these
fluctuations on MMC's results of operations or cash flows has not been material.
Year 2000 Issue
MMC has substantially completed updating its systems in
preparation for the Year 2000. Remaining efforts include planned installations
of certain systems in conjunction with the integration of Sedgwick offices and
contingency planning efforts. The systems installations are scheduled to be
completed by the end of the third quarter of 1999 and contingency planning is
discussed below. For this purpose, the term "systems" includes computer
equipment and software that are commonly thought of as information technology
("IT") systems including accounting, data processing, telephone and other
miscellaneous systems, as well as non-information technology ("non-IT") systems,
such as embedded technology in MMC's facilities and equipment.
In connection with this project, which began in 1995, MMC and each of its
operating segments have undertaken a five-step process consisting of (1) taking
an inventory of all technical areas, including hardware, software (application
and system), data, third-party services and infrastructure that could
potentially be affected by the Year 2000 issue, (2) assessing the scope and
severity of the issue, (3) performing necessary remediation, (4)
testing/implementation and (5) preparing contingency plans for possible internal
and/or external failures. Management level steering committees have been
established in each operating segment and at the MMC level. The Audit Committee
of MMC's Board of Directors is regularly updated on the status of MMC's Year
2000 efforts.
The individual operating units of MMC have integrated the Year 2000 risks
assumed as a result of the Sedgwick acquisition. Accordingly, the statements
included in this filing cover those risks.
The total cost of the Year 2000 project is estimated to be $65 million. Of the
total cost, $22 million is anticipated to be incurred in 1999, $26 million was
expensed during 1998 and $17 million prior to 1998. Approximately $10 million
was expensed during the first six months of 1999. Such costs do not include
expenses incurred in replacing systems and applications in the ordinary course
which have the effect of making such systems and applications Year 2000
compliant, but which were not incurred for that specific purpose. Costs of
modifying computer software for Year 2000 conversion are being charged to
expense as they are incurred and are funded from operating cash flows. No
significant projects have been deferred or canceled as a result of Year 2000
efforts. In 1998, Year 2000 expenses represented approximately 5% of MMC's
overall information technology budget. Future costs associated with addressing
this issue are not expected to have a material adverse impact on MMC's financial
position or results of operations.
Non-mission critical IT and non-IT systems that could impact MMC's ability to
serve clients and conduct business beyond January 1, 2000 have been assessed and
are expected to be Year 2000 ready before the end of 1999. MMC recognizes that
there may be some non-mission critical IT and non-IT systems utilized for
internal purposes that may not be compliant by the end of 1999. It is expected
that these systems will be replaced or phased out of use.
In addition, MMC is continuing its inquiries as to the state of readiness of its
significant third party relationships including clients and vendors. This
process has included a review of third parties' Year 2000 readiness statements
and the incorporation of certain third party dependencies into MMC's test plans.
Where MMC has been unable to obtain information concerning the status of a third
party or has received information such that the timing or readiness status of
that third party's Year 2000 project does not align with MMC's, if significant,
that supplier has been or will be replaced. For example, Marsh is notifying
clients when responses to its inquiries as to the status of their readiness have
not been received from insurance companies.
The individual operating segments of MMC continue to analyze and monitor the
potential operational problems and costs (including loss of revenues) that would
be reasonably likely to result from MMC's failure or the failure of certain
third parties to complete efforts necessary to achieve Year 2000 readiness on a
timely basis. For internal systems, although MMC's expectation is that no
significant disruption will occur, MMC's 1999 test plans and contingency
processes have been or will be designed to address such a risk. For third party
risks, efforts are being made to assess and test those risks. For example,
Putnam has been actively involved in industry-wide Year 2000 testing. Putnam has
successfully participated in all aspects of "Street-wide Testing" carried out
under the auspices of the Securities Industry Association. Putnam will
participate in all future testing.
To prepare for the potential for disruptions as noted above, MMC is in the
process of identifying the most reasonably likely worst case scenarios presented
by the Year 2000 problem and completing a contingency plan for dealing with such
scenarios. This process has been based, in part, upon MMC's existing disaster
recovery process. These analyses and contingency plans will be completed during
the second half of 1999. While MMC expects its Year 2000 efforts to reduce the
scope and likelihood of potential Year 2000 failures, due to the overall
uncertainty of the effect of a potential failure in Year 2000 readiness,
particularly with respect to MMC's business partners or the communities in which
MMC operates, MMC is unable specifically to determine whether any particular
failure or groups of failures will have a material adverse impact on MMC.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
JUNE 30, 1999
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of MMC was held on May 20, 1999.
Represented at the Meeting, at which stockholders took the following
actions, were 203,474,355 shares or 79.3 percent of MMC's 256,478,034
shares of common stock outstanding and entitled to vote:
1. Each of the seven nominees for election as directors received at
least 200,171,753 or 98.4 percent of the shares represented at
the meeting. They are Jeffrey W. Greenberg, Stephen R. Hardis,
The Rt. Hon. Lord Lang of Monkton, John D. Ong, Saxon Riley,
Adele Smith Simmons and A.J.C. Smith.
George Putnam retired from the board, having served as a director
since 1987.
2. Shareholders approved an amendment to MMC's Restated Certificate
of Incorporation increasing the number of authorized shares of
common stock to 800 million from 400 million with a vote of
178,519,697 or 69.6 percent of the shares issued and outstanding
(24,187,956 opposing and 766,702 abstaining).
3. Shareholders approved the Marsh & McLennan Companies 1999
Employee Stock Purchase Plan with a vote of 172,573,833 or 90.5
percent of the shares represented (17,356,764 opposing, 692,554
abstaining and 12,851,204 broker non-votes).
4. Deloitte & Touche LLP was ratified as MMC's independent public
accountants for the year ending December 31, 1999, with a vote of
202,047,523 or 99.3 percent of the shares represented (577,938
opposing and 848,894 abstaining).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture dated as of June 14, 1999 between MMC and
State Street Bank and Trust Company, as trustee
(incorporated by reference to the registrant's
Registration Statement on Form S-3, Registration No.
333-67543)
4.2 First Supplemental Indenture dated as of June 14, 1999
between MMC and State Street Bank and Trust Company, as
trustee
10.1 First Amendment dated as of May 20, 1999 to the Marsh &
McLennan Capital, Inc. Long Term Incentive Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated April 12, 1999 was
filed by MMC in connection with its registered block trade
of 4.1 million shares of its common stock to Goldman, Sachs
& Co.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, MMC has
duly caused this report to be signed this 13th day of August, 1999 on its behalf
by the undersigned, thereunto duly authorized and in the capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Frank J. Borelli
Senior Vice President and
Chief Financial Officer
MARSH & McLENNAN COMPANIES INC.,
Issuer,
and
STATE STREET BANK AND TRUST COMPANY,
Trustee
--------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of June 14, 1999
--------------
$600,000,000 principal amount of 6-5/8% Senior Notes Due 2004
$400,000,000 principal amount of 7-1/8% Senior Notes Due 2009
FIRST SUPPLEMENTAL INDENTURE, dated as of June 14, 1999, between MARSH &
McLENNAN COMPANIES, INC., a Delaware corporation (the "Company" and hereinafter
the "Issuer"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust
company, as trustee (the "Trustee").
W I T N E S S E T H:
WHEREAS, the Issuer and the Trustee executed and delivered an Indenture
dated as of June 14, 1999 (as supplemented hereby, the "Indenture"), to provide
for the issuance by the Issuer from time to time of senior debt securities
evidencing its unsecured indebtedness;
WHEREAS, pursuant to a Board Resolution, the Issuer has authorized the
issuance of $600,000,000 principal amount of 6-5/8% Senior Notes due 2004 (the
"6-5/8% Notes") and $400,000,000 principal amount of 7-1/8% Senior Notes due
2009 (the "7-1/8% Notes", together with the 6-5/8% Notes, the "Offered
Securities");
WHEREAS, the entry into this First Supplemental Indenture by the parties
hereto is in all respects authorized by the provisions of the Indenture;
WHEREAS, the Issuer desires to establish the terms of the Offered
Securities in accordance with Section 2.01 of the Indenture and to establish the
form of the Offered Securities in accordance with Section 2.02 of the Indenture;
WHEREAS, all things necessary to make this First Supplemental Indenture a
valid indenture and agreement according to its terms have been done; and
NOW, THEREFORE, for and in consideration of the premises, the Issuer and
the Trustee mutually covenant and agree for the equal and proportionate benefit
of the respective holders from time to time of the Offered Securities as
follows:
ARTICLE 1.
Section 1.1. Terms of Offered Securities. The following terms relating to
the Offered Securities are hereby established:
(1) The 6-5/8% Notes shall constitute a series of securities having the
title "6-5/8% Senior Notes due 2004" and the 7-1/8% Notes shall constitute a
series of securities having the title "7-1/8% Senior Notes due 2009."
(2) The aggregate principal amount of the 6-5/8% Notes that may be
authenticated and delivered under the Indenture (except for Notes authenticated
and delivered upon registration of, transfer of, or in exchange for, or in lieu
of, other Notes pursuant to Sections 2.05, 2.06, 2.07 or 9.01) shall be up to
$600,000,000. The aggregate principal amount of the 7-1/8% Notes that may be
authenticated and delivered under the Indenture (except for Notes authenticated
and delivered upon registration of, transfer of, or in exchange for, or in lieu
of, other Notes pursuant to Sections 2.05, 2.06, 2.07 or 9.01) shall be up to
$400,000,000.
(3) The entire outstanding principal of the 6-5/8% Notes shall be payable
on June 15, 2004 plus any unpaid interest accrued to such date and the entire
outstanding principal of the 7-1/8% Notes shall be payable on June 15, 2009 plus
any unpaid interest accrued to such date.
(4) The rate at which the 6-5/8% Notes shall bear interest shall be 6-5/8%
per annum and the rate at which the 7-1/8% Notes shall bear interest shall be
7-1/8% per annum; the date from which interest shall accrue on the Offered
Securities shall be June 14, 1999; the Interest Payment Dates for the Offered
Securities on which interest will be payable shall be June 15 and December 15 in
each year, beginning December 15, 1999; the Regular Record Dates for the
interest payable on the Offered Securities on any Interest Payment Date shall be
the June 1 and December 1 preceding the applicable Interest Payment Date; and
the basis upon which interest shall be calculated shall be that of a 360-day
year consisting of twelve 30-day months.
(5) (A) Each of the Offered Securities may be redeemed in whole at any time
or in part from time to time, at the option of the Issuer, at a redemption price
equal to the greater of (i) 100% of the principal amount of the applicable
series of Offered Securities to be redeemed and (ii) the sum of the present
values of the remaining scheduled payments of principal and interest on the
applicable series of Offered Securities discounted to the date of redemption on
a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months)
at the applicable Treasury Rate plus 10 basis points for the 6-5/8% Notes or the
applicable Treasury Rate plus 15 basis points for the 7-1/8% Notes, plus, in
either case, accrued and unpaid interest on the principal amount being redeemed
to the redemption date (the "Redemption Price").
(B)(i) In case the Company shall desire to exercise such right to redeem
all or, as the case may be, a portion of the Offered Securities in accordance
with Section 1.1(5)(A), the Company shall, or shall cause the Trustee to, give
notice of such redemption to holders of the Offered Securities of such series to
be redeemed by mailing, first class postage prepaid, a notice of such redemption
not less than 30 days and not more than 60 days before the date fixed for
redemption of that series to such holders at their last addresses as they shall
appear upon the Security Register. Any notice that is mailed in the manner
herein provided shall be conclusively presumed to have been duly given, whether
or not the registered holder received the notice. In any case, failure duly to
give such notice to the holder of any Offered Security designated for redemption
in whole or in part, or any defect in the notice, shall not affect the validity
of the proceedings for the redemption of any other Offered Security of such
series or of another series.
Each such notice of redemption shall specify the date fixed for redemption
and the Redemption Price at which the Offered Securities are to be redeemed, and
shall state that payment of the Redemption Price of such Offered Securities to
be redeemed will be made at the office or agency of the Company in the Borough
of Manhattan, the City and State of New York, upon presentation and surrender of
such Offered Securities, that interest accrued to the date fixed for redemption
will be paid as specified in said notice and, that from and after said date
interest will cease to accrue. If less than all the Offered Securities of a
series are to be redeemed, the notice to the holders of the Offered Securities
of that series to be redeemed in whole or in part shall specify the particular
Offered Securities to be redeemed. In case any Offered Security is to be
redeemed in part only, the notice that relates to such Offered Security shall
state the portion of the principal amount thereof to be redeemed, and shall
state that on and after the redemption date, upon surrender of such security, a
new Offered Security or Offered Securities of such series in principal amount
equal to the unredeemed portion thereof will be issued.
(ii) If less than all the Offered Securities of a series are to be
redeemed, the Company shall give the Trustee at least 45 days' notice in advance
of the date fixed for redemption as to the aggregate principal amount of Offered
Securities of the series to be redeemed, and thereupon the Trustee shall select,
by lot or in such other manner as it shall deem appropriate and fair in its
discretion and that may provide for the selection of a portion or portions
(equal to one thousand U.S. dollars ($1,000) or any integral multiple thereof)
of the principal amount of such Offered Securities of a denomination larger than
$1,000, the Offered Securities to be redeemed and shall thereafter promptly
notify the Company in writing of the numbers of the Offered Securities to be
redeemed, in whole or in part.
The Company may, if and whenever it shall so elect, by delivery of
instructions signed on its behalf by its President or any Vice President,
instruct the Trustee or any paying agent to call all or any part of the Offered
Securities of a particular series for redemption and to give notice of
redemption in the manner set forth in this Section, such notice to be in the
name of the Company or its own name as the Trustee or such paying agent may deem
advisable. In any case in which notice of redemption is to be given by the
Trustee or any such paying agent, the Company shall deliver or cause to be
delivered to, or permit to remain with, the Trustee or such paying agent, as the
case may be, such Security Register, transfer books or other records, or
suitable copies or extracts therefrom, sufficient to enable the Trustee or such
paying agent to give any notice by mail that may be required under the
provisions of this Section.
(C) As used herein:
"Treasury Rate" means, with respect to any redemption date, (i) the yield,
under the heading which represents the average for the immediately preceding
week, appearing in the most recently published statistical release designated
"H.15(519)" or any successor publication which is published weekly by the Board
of Governors of the Federal Reserve System and which establishes yields on
actively traded United States Treasury securities adjusted to constant maturity
under the caption "Treasury Constant Maturities," for the maturity corresponding
to the Comparable Treasury Issue (if no maturity is within three months before
or after the Remaining Life, yields for the two published maturities most
closely corresponding to the Comparable Treasury Issue will be determined and
the Treasury Rate will be interpolated or extrapolated from such yields on a
straight line basis, rounding to the nearest month) or (ii) if such release (or
any successor release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per annum equal to
the semi-annual equivalent yield-to-maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price of
such redemption date. The Treasury Rate will be calculated by the Independent
Investment Banker on the third Business Day preceding the redemption date.
"Business Day" means any calendar day that is not a Saturday, Sunday or
legal holiday in New York, New York and on which commercial banks are open for
business in New York, New York.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term ("Remaining Life") of the Offered Securities to be redeemed
that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining term of such Offered Securities.
"Independent Investment Banker" means either Chase Securities Inc. or
Morgan Stanley & Co. Incorporated, and their respective successors, or, if both
firms are unwilling or unable to select the Comparable Treasury Issue, an
independent investment banking institution of national standing appointed by the
Trustee after consultation with the Issuer.
"Comparable Treasury Price" means (i) the average of five Reference
Treasury Dealer Quotations for such redemption date, after excluding the highest
and lowest Reference Treasury Dealer Quotations, or (ii) if the Independent
Investment Banker obtains fewer than five such Reference Treasury Dealer
Quotations, the average of all such quotations.
"Reference Treasury Dealer" means (i) Chase Securities Inc. and Morgan
Stanley & Co. Incorporated, and their respective successors, provided, however,
that if any of the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), the Company
will substitute for such underwriter another Primary Treasury Dealer and (ii)
any other Primary Treasury Dealer selected by the Independent Investment Banker
after consultation with the Issuer.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Independent Investment Banker, of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Independent Investment Banker at 5:00
p.m., New York City time, on the third Business Day preceding such redemption
date.
With respect to Section 5(A)(ii) above, the Trustee shall be entitled to
rely upon the calculations of the Independent Investment Banker.
(6) The Offered Securities shall not be redeemable at the option of any
holder thereof, upon the occurrence of any particular circumstances or
otherwise. The Offered Securities will not have the benefit of any sinking fund.
(7) The Offered Securities shall be issuable in denominations of $1,000 and
any integral multiple thereof.
(8) The Trustee shall also be the security registrar and paying agent for
the Offered Securities.
(9) Payments of the principal of and interest on the Offered Securities
shall be made in U.S. Dollars, and the Notes shall be denominated in U.S.
Dollars.
(10) The holders of the Offered Securities shall have no special rights in
addition to those provided in the Indenture upon the occurrence of any
particular events.
(11) The Notes shall not be subordinated to any other debt of the Issuer,
and shall constitute senior unsecured obligations of the Issuer.
(12) The Offered Securities are issuable in book entry form and are not
convertible into shares of common stock or other securities of the Company.
Section 1.2. Amendment to Article IV. Article IV of the Indenture is hereby
amended to include the following covenant with respect to the Offered Securities
only (and not with respect to any other series of securities issuable pursuant
to the Indenture unless the supplemental indenture relating thereto expressly so
provides), which reads in its entirety as follows:
Section 4.06. Limitation on Liens on Stock of Significant Subsidiaries. The
Company will not, and it will not permit any Subsidiary of the Company to, at
any time directly or indirectly create, assume, incur or permit to exist any
Indebtedness secured by a pledge, lien or other encumbrance (any pledge, lien or
other encumbrance being hereinafter in this Section referred to as a "lien") on
the voting stock of Marsh Inc., Putnam Investments, Inc. or Mercer Consulting
Group, Inc. (each a "Significant Subsidiary") without making effective provision
whereby the Offered Securities then Outstanding (and, if the Company so elects,
any other Indebtedness of the Company that is not subordinate to the Offered
Securities and with respect to which the governing instruments require, or
pursuant to which the Company is otherwise obligated or required, to provide
such security) shall be equally and ratably secured with such secured
Indebtedness so long as such other Indebtedness shall be so secured.
"Indebtedness" of any person means the principal of and premium, if any,
and interest due on indebtedness of such Person, whether outstanding on the date
of this Indenture or thereafter created, incurred or assumed, which is (a)
indebtedness for money borrowed, and (b) any amendments, renewals, extensions,
modifications and refundings of any such indebtedness. For the purposes of this
definition, "indebtedness for money borrowed" means (i) any obligation of, or
any obligation guaranteed by, such Person for the repayment of borrowed money,
whether or not evidenced by bonds, debentures, notes or other written
instruments, (ii) any obligation of, or any such obligation guaranteed by, such
Person evidenced by bonds, debentures, notes or similar written instruments,
including obligations assumed or incurred in connection with the acquisition of
properly, assets or businesses (provided, however, that the deferred purchase
price of any business or property or assets shall not be considered Indebtedness
if the purchase price thereof is payable in full within 90 days from the date on
which such indebtedness was created), and (iii) any obligations of such Person
as lessee under leases required to be capitalized on the balance sheet of the
lessee under generally accepted accounting principles and leases of property or
assets made as part of any sale and lease-back transaction to which such Person
is a party. For purposes of this covenant only, Indebtedness also includes any
obligation of, or any obligation guaranteed by, any Person for the payment of
amounts due under a swap agreement or similar instrument or agreement, or under
a foreign currency hedge or similar instrument or agreement.
If the Company shall hereafter be required to secure the Offered Securities
equally and ratably with any other Indebtedness pursuant to this Section, (i)
the Company will promptly deliver to the Trustee an Officers' Certificate
stating that the foregoing covenant has been complied with, and an Opinion of
Counsel stating that in the opinion of such counsel the foregoing covenant has
been complied with and (ii) the Trustee is hereby authorized to enter into an
indenture or agreement supplemental hereto and to take such action, if any, as
it may deem advisable to enable it to enforce the rights of the holders of the
Offered Securities so secured.
Section 1.3. Amendment of Section 6.01(a)(1). Section 6.01(a)(1) of the
Indenture is hereby amended and restated in its entirety with respect to the
Offered Securities only (and not with respect to any other series of securities
issuable pursuant to the Indenture unless the supplemental indenture relating
thereto expressly so provides) as follows:
(1) the Company defaults in the payment of any installment of interest upon
any of the Securities of that series, as and when the same shall become due and
payable, and continuance of such default for a period of 30 days; provided,
however, that a valid extension of an interest payment period by the Company in
accordance with the terms of any indenture supplemental hereto shall not
constitute a default in the payment of interest for this purpose.
Section 1.4. Amendment of Article Ten. Article Ten of the Indenture is
hereby amended and restated in its entirety with respect to the Offered
Securities only (and not with respect to any other series of securities issuable
pursuant to the Indenture unless the supplemental indenture relating thereto
expressly so provides) as follows:
Section 10.01. Company May Consolidate, Etc., Only on Certain Terms. (a)
Subject to Section 10.01(c) below, the Company shall not consolidate with or
merge into any other Person or convey, transfer or lease all or substantially
all of its properties and assets to any Person, and the Company shall not permit
any Person to consolidate with or merge into the Company, unless:
(1) in case the Company shall consolidate with or merge into another Person
or convey, transfer or lease all or substantially all of its properties and
assets to any Person, the Person formed by such consolidation or into which the
Company is merged or the Person which acquires by conveyance or transfer, or
which leases, all or substantially all of the properties and assets of the
Company shall be a corporation, partnership or trust, shall be organized and
validly existing under the laws of the United States of America, any State
thereof or the District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, the due and punctual
payment of the principal of and any premium and interest on all the Securities
and the performance or observance of every covenant of this Indenture on the
part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would become
an Event of Default, shall have happened and be continuing; and
(3) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with this Article and
that all conditions precedent herein provided for relating to such transaction
have been complied with.
Section 10.02. Successor Substitute. Upon any consolidation of the Company
with, or merger of the Company into, any other Person or any conveyance,
transfer or lease of all or substantially all of the properties and assets of
the Company in accordance with Section 10.01 above, the successor Person formed
by such consolidation or into which the Company is merged or to which such
conveyance, transfer or lease is made shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Indenture with
the same effect as if such successor Person had been named as the Company
herein, and thereafter, except in the case of a lease, the predecessor Person
shall be relieved of all obligations and covenants under the Indenture and the
Offered Securities.
Section 10.03. Evidence of Consolidation, Etc. to Trustee. The Trustee,
subject to the provisions of Section 7.01, may receive an Opinion of Counsel as
conclusive evidence that any such consolidation, merger, sale, conveyance,
transfer or other disposition, and any such assumption, comply with the
provisions of this Article.
Section 1.5. Trustee's obligations with respect to the Covenants. The
Trustee shall not be obligated to monitor or confirm, on a continuing basis or
otherwise, the Issuer's compliance with the covenants contained in this Article
One or with respect to reports or other documents filed under the Indenture;
provided, however, that nothing herein shall relieve the Trustee of any
obligations to monitor the Issuer's timely delivery of all reports and
certificates required under Sections 5.01 and 5.03 of the Indenture and to
fulfill its obligations under Article Seven of the Indenture.
Section 1.6. Form of Note. The form of the 6-5/8 Notes and the 7-1/8 Notes
is attached hereto as Exhibit A.
ARTICLE II
MISCELLANEOUS
Section 2.1. Definitions. Capitalized terms used but not defined in this
First Supplemental Indenture shall have the meanings ascribed thereto in the
Indenture.
Section 2.2. Confirmation of Indenture. The Indenture, as heretofore
supplemented and amended by this First Supplemental Indenture, is in all
respects ratified and confirmed, and the Indenture, this First Supplemental
Indenture and all indentures supplemental thereto shall be read, taken and
construed as one and the same instrument.
Section 2.3. Concerning the Trustee. The Trustee assumes no duties,
responsibilities or liabilities by reason of this First Supplemental Indenture
other than as set forth in the Indenture and, in carrying out its
responsibilities hereunder, shall have all of the rights, protections and
immunities which it possesses under the Indenture.
Section 2.4. Governing Law. This First Supplemental Indenture, the
Indenture and the Securities shall be governed by and construed in accordance
with the law of the State of New York.
Section 2.5. Seperability. In case any provision in this First Supplemental
Indenture shall for any reason be held to be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
Section 2.6. Counterparts. This First Supplemental Indenture may be
executed in any number of counterparts each of which shall be an original, but
such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, this Supplemental Indenture has been duly executed by
the Company and the Trustee as of the day and year first written above.
MARSH & McLENNAN COMPANIES, INC.
By: /s/ Pierre D. Bognon
Authorized Signatory
Name: Pierre D. Bognon
Title: Vice President &
Treasurer
STATE STREET BANK AND TRUST
COMPANY, as Trustee
By: /s/ Roland S. Gustafsen
Authorized Signatory
Name: Roland S. Gustafsen
Title: Assistant Vice President
EXHIBIT 10.1
First Amendment dated as of May 20, 1999 to the Marsh & McLennan Capital,
Inc. Long Term Incentive Plan.
Section II(h) of the Marsh & McLennan Capital, Inc. Long Term Incentive
Plan is amended to read in its entirety as follows:
"II.(h) LTIP Committee shall mean a committee with authority
to administer the LTIP, initially comprised of the following
individuals: Jeffrey W. Greenberg, Robert Clements, Stephen
Friedman and Charles A. Davis. The appointment of any
additional or successor members to the LTIP Committee shall be
subject to approval by the MMC Compensation Committee.
Notwithstanding the foregoing, the MMC Compensation Committee
shall serve as the LTIP Committee with respect to employees of
M&M Capital who are members of the LTIP Committee or the MMC
Partners Group, and the Chief Executive Officer of MMC shall
serve as the LTIP Committee with respect to consultants of M&M
Capital who are members of the LTIP Committee. In the event of
a deadlock on any matter submitted to the LTIP Committee, the
composition of the LTIP Committee will be expanded (solely for
purposes of resolving such matter) by the appointment of an
additional member selected by MMC."
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Marsh & McLennan Companies, Inc. and subsidiaries June 30, 1999
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 599,000,000
<SECURITIES> 0
<RECEIVABLES> 2,266,000,000
<ALLOWANCES> 93,000,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,426,000,000
<PP&E> 2,081,000,000
<DEPRECIATION> 817,000,000
<TOTAL-ASSETS> 11,977,000,000
<CURRENT-LIABILITIES> 3,604,000,000
<BONDS> 2,597,000,000
0
0
<COMMON> 265,000,000
<OTHER-SE> 3,816,000,000
<TOTAL-LIABILITY-AND-EQUITY> 11,977,000,000
<SALES> 0
<TOTAL-REVENUES> 4,596,000,000
<CGS> 0
<TOTAL-COSTS> 3,730,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,000,000
<INTEREST-EXPENSE> 115,000,000
<INCOME-PRETAX> 762,000,000
<INCOME-TAX> 306,000,000
<INCOME-CONTINUING> 456,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 456,000,000
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.66
</TABLE>
