- --------------------------------------------------------------------------------
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 September 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 October 31, 1999, there were outstanding 266,794,823 shares of common
stock, par value $1.00 per share, of the registrant.
- --------------------------------------------------------------------------------
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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
Revenue $ 2,227 $ 1,719 $ 6,823 $ 5,245
Expense 1,802 1,384 5,532 4,160
------- ------- ------- -------
Operating Income 425 335 1,291 1,085
Interest Income 6 5 17 17
Interest Expense (59) (33) (174) (94)
------- ------- ------- -------
Income Before Income Taxes 372 307 1,134 1,008
Income Taxes 149 121 455 398
------- ------- ------- -------
Net Income $ 223 $ 186 $ 679 $ 610
======= ======= ======= =======
Basic Net Income
Per Share $ .84 $ .73 $ 2.60 $ 2.38
======= ======= ======= =======
Diluted Net Income
Per Share $ .81 $ .69 $ 2.47 $ 2.28
======= ======= ======= =======
Average Number of Shares
Outstanding - Basic 264 256 262 256
======= ======= ======= =======
Average Number of Shares
Outstanding - Diluted 273 263 270 264
======= ======= ======= =======
Dividends Declared $ .45 $ .40 $ 1.30 $ 1.13
======= ======= ======= =======
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 641 $ 610
-------- --------
Receivables-
Commissions and fees 1,807 1,575
Advanced premiums and claims 134 129
Other receivables 297 294
-------- --------
2,238 1,998
Less-allowance for doubtful accounts (85) (89)
-------- --------
Net receivables 2,153 1,909
-------- --------
Prepaid dealer commissions -
current portion 317 315
Other current assets 292 411
-------- --------
Total current assets 3,403 3,245
Long-term securities 576 828
Fixed assets, net 1,346 1,287
(net of accumulated depreciation and
amortization of $814 at September 30, 1999
and $820 at December 31, 1998)
Intangible assets 5,108 4,826
Prepaid dealer commissions 786 799
Other assets 1,170 886
-------- --------
$ 12,389 $ 11,871
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,015 $ 2,234
Accounts payable and accrued liabilities 1,142 1,338
Accrued compensation and employee benefits 919 841
Accrued income taxes 362 385
Dividends payable 121 104
-------- --------
Total current liabilities 3,559 4,902
-------- --------
Fiduciary liabilities 3,488 3,257
Less - cash and investments held in
a fiduciary capacity (3,488) (3,257)
-------- --------
-- --
-------- --------
Long-term debt 2,591 1,590
-------- --------
Other liabilities 1,967 1,720
-------- --------
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 268,042,036
shares at September 30, 1999 and
258,867,125 at December 31, 1998 268 259
Additional paid-in capital 1,383 889
Retained earnings 2,747 2,412
Accumulated other comprehensive income (30) 206
-------- --------
4,368 3,766
Less - treasury shares, at cost,
1,558,956 shares at September 30, 1999 and
1,956,825 shares at December 31, 1998 (96) (107)
-------- --------
Total stockholders' equity 4,272 3,659
-------- --------
$ 12,389 $ 11,871
======== ========
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
-------------------
1999 1998
Operating cash flows:
Net income $ 679 $ 610
Depreciation of fixed assets 165 125
Amortization of intangible assets 112 56
Provision for deferred income taxes 114 83
Other liabilities 21 61
Prepaid dealer commissions 11 (95)
Other, net 45 (10)
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (244) (138)
Other current assets 135 82
Accounts payable and accrued liabilities (295) (146)
Accrued compensation and employee benefits 78 86
Accrued income taxes 37 114
Effect of exchange rate changes (24) 39
------- -------
Net cash generated from operations 834 867
------- -------
Financing cash flows:
Net (decrease) increase in commercial paper (868) 453
Other borrowings 1,137 32
Other repayments (523) (204)
Purchase of treasury shares (13) (195)
Issuance of common stock 482 171
Dividends paid (327) (276)
------- -------
Net cash used for financing activities (112) (19)
------- -------
Investing cash flows:
Additions to fixed assets (276) (216)
Acquisitions (357) (373)
Other, net (56) (21)
------- -------
Net cash used for investing activities (689) (610)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (2) 5
------- -------
Increase in cash & cash equivalents 31 243
Cash & cash equivalents at beginning of period 610 424
------- -------
Cash & cash equivalents at end of period $ 641 $ 667
======= =======
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 nine-month
periods ended September 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 $129 million and
$98 million for the nine months ended September 30, 1999 and 1998,
respectively.
Net uncollected premiums and claims and the related payables amounting
to $10.7 billion at September 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-month
and nine-month periods ended September 30, 1999 and 1998.
(In millions)
Three Months Ended Nine Months Ended
September 30 September 30,
------------------ -----------------
1999 1998 1999 1998
Net income $ 223 $ 186 $ 679 $ 610
Less: Potential minority
interest associated
with Putnam Equity
Partnership Plan (4) (5) (12) (8)
----- ----- ----- -----
Net income for diluted
earnings per share $ 219 $ 181 $ 667 $ 602
===== ===== ===== =====
Basic weighted average
common shares outstanding 264 256 262 256
Dilutive effect of stock options 9 7 8 8
----- ----- ----- -----
Diluted weighted average
common shares outstanding 273 263 270 264
===== ===== ===== =====
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 nine-month periods ended
September 30, 1999 and 1998 are as follows:
1999 1998
---- ----
Foreign currency translation adjustments $ (76) $ 60
Unrealized securities holding gains (losses),
net of income taxes (139) 10
Less: Reclassification adjustment for gains
included in net income, net of income taxes (21) (21)
----- -----
Other comprehensive income (loss) (236) 49
Net income 679 610
----- -----
Comprehensive income $ 443 $ 659
===== =====
5. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information concerning
acquisitions and interest and income taxes paid:
Nine Months Ended
September 30,
-----------------
(In millions of do1lars) 1999 1998
Purchase acquisitions:
Assets acquired, excluding cash $357 $373
Liabilities assumed -- --
---- ----
Net cash outflow for acquisitions $357 $373
==== ====
Interest paid $144 $107
==== ====
Income taxes paid $274 $230
==== ====
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 July 1999, MMC acquired a 25% ownership interest in Thomas H. Lee
Partners, a private equity business.
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
the fourth quarter of 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 $185 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)
Nine Months Ended
September 30, 1998
Revenue $6,344
Net Income 478
Basic Net Income per share 1.82
Diluted Net Income per share 1.74
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 and accordingly, $76
million and $84 million of net assets of these businesses at September
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
nine months ended September 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, in the second quarter of 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 September 30, 1999, $50 million has
been paid related to the termination of approximately 980 MMC employees
and $70 million has been paid related to the termination of
approximately 1,300 Sedgwick employees.
A further charge will be taken in the fourth quarter related to
additional integration efforts including staff reductions and office
consolidations.
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. On October 12,
1999, the Court dismissed MMC entirely from these three cases and
dismissed certain (but not all) of the claims brought against J&H. The
principal surviving claims asserted against J&H in these cases include a
claim under the federal securities laws and a claim for breach of ERISA.
The cases are in their preliminary stages.
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. As of September 30, 1999, settlements and
related costs previously paid amount to approximately $110 million of
which approximately $30 million is due from or has been paid by
insurers. The contingent exposure of Sedgwick for pension redress and
related costs is estimated to be $305 million. Sedgwick has recorded
$155 million of reserves and recognized approximately $150 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 $135 million.
Approximately $120 million of this amount is expected to be recovered
from insurers and accounting reserves have been provided for the
remaining balance. As of September 30, 1999, settlements and related
costs previously paid total approximately $35 million.
MMC continues to refine evaluation of its United Kingdom Pension
Investment Authority review exposure. MMC 's ultimate exposure from such
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. 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 nine-month
periods ended September 30, 1999 and 1998 follow:
(In millions of dollars) Revenue Segment
from External Operating
Customers Income
1999
Risk and Insurance Services $3,403 (a) $ 630
Investment Management 1,963 630
Consulting 1,457 192
------ ------
$6,823 $1,452
====== ======
1998
Risk and Insurance Services $2,418 (a) $ 494
Investment Management 1,713 495
Consulting 1,114 141
------ ------
$5,245 $1,130
====== ======
(a) Includes interest income on fiduciary funds ($129 million in 1999 and
$98 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 $1,452 $1,130
Severance and related benefits (Note 8) (71) -
Acquisition-related charges (Note 8) (13) -
Corporate expense (73) (45)
Minority interest associated with the
Putnam Equity Partnership Plan (4) -
------ ------
Operating income 1,291 1,085
Interest income 17 17
Interest expense (174) (94)
------ ------
Total income before income taxes $1,134 $1,008
====== ======
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Third Quarter and Nine Months Ended September 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:
- --------------------------------------------------------------------------------
Third Quarter Nine Months
(In millions of dollars) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $1,055 $ 764 $3,403 $2, 418
Investment Management 673 568 1,963 1,713
Consulting 499 387 1,457 1,114
------ ------ ------ ------
2,227 1,719 6,823 5,245
------ ------ ------ ------
Expense:
Compensation and Benefits 1,118 860 3,413 2,577
Other Operating Expenses 684 524 2,035 1,583
Special Charge -- -- 84 --
------ ------ ------ ------
1,802 1,384 5,532 4,160
------ ------ ------ ------
Operating Income $ 425 $ 335 $1,291 $1,085
====== ====== ====== ======
Operating Income Margin 19.1% 19.5% 18.9% 20.7%
====== ====== ====== ======
- --------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, rose by 30% from both the
third quarter and nine months of 1998. This increase is primarily 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 nine months of 1998. In
addition, revenue from the Investment Management segment increased as average
assets under management were substantially higher than the comparable figures in
the previous year.
Excluding the impact of acquisitions and dispositions, revenue, on a
consolidated basis, grew approximately 10% over 1998 for the quarter with an 18%
revenue increase in the investment management segment, approximately a 4%
increase in risk and insurance services and 9% 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
nine months, revenue excluding acquisitions and dispositions rose approximately
9%.
Operating expenses rose 30% in the third quarter of 1999 primarily reflecting
the acquisition of Sedgwick. Excluding acquisitions and dispositions, expenses
grew approximately 8% in the third quarter primarily reflecting staff growth in
the consulting segment and higher incentive compensation within the investment
management and consulting segments commensurate with strong operating
performance. For the nine months, the increase in expenses of 33% is primarily
due to the Sedgwick acquisition and also includes a special charge of $84
million recorded in the second quarter of 1999, which is described in more
detail below. Excluding acquisitions, dispositions and the special charge,
expenses for the nine months rose approximately 7%.
MMC recorded a special charge of $84 million in the second quarter of 1999,
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 $120 million have been made as of September 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.
A further charge will be taken in the fourth quarter related to additional
integration efforts including staff reductions and office consolidations.
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. Net annual savings are expected to be at least $100 million after
giving effect to certain incremental costs including goodwill amortization.
Risk and Insurance Services
- --------------------------------------------------------------------------------
Third Quarter Nine Months
(In millions of dollars) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenue $1,055 $ 764 $ 3,403 $2,418
Expense 890 648 2,773 (a) 1,924
------ ------ --------- ------
Operating Income $ 165 $ 116 $ 630 $ 494
====== ====== ========= ======
Operating Income Margin 15.6% 15.2% 18.5% 20.4%
====== ====== ========= ======
- --------------------------------------------------------------------------------
(a) Excluding special charge.
Revenue
Revenue for the risk and insurance services segment increased 38% from the third
quarter of 1998 primarily due to the Sedgwick acquisition. Excluding
acquisitions, dispositions and the impact of foreign exchange, revenue for risk
and insurance services operations rose approximately 4% primarily reflecting the
effect of net new business development. For the nine months, revenue for risk
and insurance services increased 41% 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 nine
months of 1999.
Expense
Risk and insurance services expenses increased 37% for the third quarter and 44%
for the first nine months of 1999, largely attributable to the acquisition of
Sedgwick. Excluding acquisitions, dispositions and the effect of foreign
exchange, expenses increased approximately 1% from the third quarter of 1998
primarily reflecting costs associated with higher technology spending offset, in
large part, by the realization of net integration savings related to the
Sedgwick transaction. For the nine months, expenses for risk and insurance
services, excluding acquisitions and dispositions, rose approximately 3%.
Investment Management
- --------------------------------------------------------------------------------
Third Quarter Nine Months
(In millions of dollars) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenue $ 673 $ 568 $1,963 $1,713
Expense 463 389 1,333 1,218
------ ------ ------ ------
Operating Income $ 210 $ 179 $ 630 $ 495
====== ====== ====== ======
Operating Income Margin 31.2% 31.5% 32.1% 28.9%
====== ====== ====== ======
- --------------------------------------------------------------------------------
Revenue
Putnam's revenue increased 18% compared with the third quarter of 1998 and 15%
for the nine months reflecting a strong increase in the level of assets under
management on which management fees are earned. Assets under management
aggregated $318 billion at September 30, 1999 compared with $253 billion at
September 30, 1998, reflecting $15 billion of mutual fund net new sales and
additional investments by institutional accounts and a $50 billion increase
resulting from higher equity market levels. Compared with June 30, 1999, assets
under management declined $7 billion, as a $2 billion cash inflow from net new
fund sales and additional institutional investments was offset by a $9 billion
reduction in market value related to a decline in equity market levels during
the quarter.
Expense
Putnam's expenses rose 19% in the third quarter of 1999 reflecting an increase
in incentive compensation commensurate with operating performance, increased
amortization of deferred commissions from both increased sales and redemptions,
as well as goodwill amortization arising from the July 1999 joint venture
investment with Thomas H. Lee Partners. For the nine months, expenses rose 9%
from 1998 levels.
Quarter-end and average assets under management for the third quarter are
presented below:
- --------------------------------------------------------------------------------
(In billions of dollars) 1999 1998
- --------------------------------------------------------------------------------
Mutual Funds:
Domestic Equity $163 $125
Taxable Bond 37 37
Tax-Free Income 15 17
International Equity 22 12
---- ----
237 191
---- ----
Institutional Accounts:
Fixed Income 21 25
Domestic Equity 36 25
International Equity 24 12
---- ----
81 62
---- ----
Quarter-end Assets $318 $253
==== ====
Average Assets Under Management $268 $323
==== ====
- --------------------------------------------------------------------------------
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 third quarter, assets held in equity securities represented
77% of assets under management compared with 69% in 1998, while investments in
fixed income products represented 23% compared with 31% last year.
Consulting
- --------------------------------------------------------------------------------
Third Quarter Nine Months
(In millions of dollars) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenue $ 499 $ 387 $ 1,457 $1,114
Expense 427 332 1,265 (a) 973
------ ------ --------- ------
Operating Income $ 72 $ 55 $ 192 $ 141
====== ====== ========= ======
Operating Income Margin 14.5% 14.1% 13.2% 12.7%
====== ====== ========= ======
- --------------------------------------------------------------------------------
(a) Excluding special charge.
Revenue
Consulting revenue increased 29% in 1999 compared with the third quarter of 1998
reflecting an increase in the level of services provided as well as the Sedgwick
acquisition. Excluding acquisitions, consulting revenue increased approximately
9% in the third quarter of 1999. Retirement consulting revenue, which
represented 43% of the consulting segment, grew 9% in the third quarter while
revenue rose 15% in global compensation consulting, 9% in general management
consulting and 9% in the economic consulting practice due to a higher volume of
business in these practice lines. Health care consulting revenues remained
constant during the same period. For the nine months, consulting revenue
increased 31% over the same period of 1998 partially reflecting the Sedgwick
acquisition. Excluding acquisitions, revenue increased approximately 10% for the
nine months.
Expense
Consulting expenses increased 29% for the third quarter of 1999 and 30% for the
nine months primarily reflecting the Sedgwick acquisition. Excluding
acquisitions and dispositions, expenses increased 6% for the third quarter and
8% for the nine months primarily 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 $6 million in the third quarter of
1999 and $5 million in 1998. Interest expense increased to $59 million in the
third quarter of 1999 from $33 million in 1998. Interest expense increased to
$174 million for the nine months ended September 30, 1999 from $94 million in
1998. The increase in interest expense for the quarter and nine months is
primarily due to incremental debt incurred in November 1998 to finance the
Sedgwick acquisition as well as incremental debt incurred during the quarter to
support approximately $385 million of initiatives including Putnam's joint
venture investment with Thomas H. Lee Partners, the purchase of additional
floors at MMC's worldwide headquarters in New York City and several Marsh &
McLennan Capital initiated investments.
Income Taxes
MMC's consolidated tax rate was 40.0% of income before income taxes in the third
quarter and 40.1% for the first nine months of 1999. Excluding the tax effect of
the special charges, the underlying tax rate was 40% 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 $641 million on September 30, 1999,
an increase of $31 million from the end of 1998.
Cash flow from operations includes the net cash flows associated with
Putnam's prepaid dealer commissions, which amounted to an $11 million cash
inflow for the nine months of 1999 compared with a $95 million outflow during
the same period of 1998 as prepaid dealer commissions have stabilized at
approximately $1.1 billion.
MMC's capital expenditures, which amounted to $276 million in the first nine
months of 1999 and $216 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.
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.
During the third quarter of 1999, MMC completed investments totaling
approximately $385 million relating to Putnam's joint venture with Thomas H. Lee
Partners (THL), the purchase of additional floors at its worldwide headquarters
in New York City and several Marsh & McLennan Capital investments. MMC has
committed to potential future investments of approximately $500 million in
connection with the formation of Marsh & McLennan Capital's Trident II Fund and
the THL joint venture. MMC expects to fund these commitments, in part, with
sales proceeds from existing investments. These commitments will be funded over
the next several years if certain investment levels and performance targets are
met.
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 $440
million of which $270 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, MMC may 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 remediating its systems in preparation for the
Year 2000 and believes all mission critical systems have been remediated.
Remaining efforts include planned installations of certain systems in
conjunction with the integration of Sedgwick offices and contingency planning
efforts. These installations are expected to be completed by November 15, 1999.
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 $60 million. Of the
total cost, $17 million is anticipated to be incurred in 1999, $26 million was
expensed during 1998 and $17 million prior to 1998. Approximately $12 million
was expensed during the first nine 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. For 1999 anticipated expenses represent
approximately 3% of the 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 its
remediation efforts have been sufficient to prevent significant disruption,
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.
To prepare for the potential for disruptions as noted above, MMC and each of its
operating companies are 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 the existing disaster recovery process of MMC and its operating
companies. These analyses and contingency plans will be completed during the
fourth quarter 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
SEPTEMBER 30, 1999
Item 1. Legal Proceedings
On July 28, 1999, J&H entered into a Consent Judgment with the Equal
Employment Opportunity Commission ("EEOC"), settling a litigation
brought by the EEOC against J&H in 1993 in the United States District
Court for the Southern District of New York. The action alleged that a
mandatory retirement policy for directors then in effect at J&H
violated the federal Age Discrimination in Employment Act. The Consent
Judgment, which requires J&H to pay certain former directors of J&H a
total of $28 million, was approved by the Court, and the action has
since been closed by the Court. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, MMC has
duly caused this report to be signed this 15th day of November, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated Marsh & McLennan Companies, Inc. and subsidiaries September 30,
1999 financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 641,000,000
<SECURITIES> 0
<RECEIVABLES> 2,238,000,000
<ALLOWANCES> 85,000,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,403,000,000
<PP&E> 2,160,000,000
<DEPRECIATION> 814,000,000
<TOTAL-ASSETS> 12,389,000,000
<CURRENT-LIABILITIES> 3,559,000,000
<BONDS> 2,591,000,000
0
0
<COMMON> 268,000,000
<OTHER-SE> 4,004,000,000
<TOTAL-LIABILITY-AND-EQUITY> 12,389,000,000
<SALES> 0
<TOTAL-REVENUES> 6,823,000,000
<CGS> 0
<TOTAL-COSTS> 5,532,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,000,000
<INTEREST-EXPENSE> 174,000,000
<INCOME-PRETAX> 1,134,000,000
<INCOME-TAX> 455,000,000
<INCOME-CONTINUING> 679,000,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 679,000,000
<EPS-BASIC> 2.60
<EPS-DILUTED> 2.47
</TABLE>
