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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 the quarter ended September 30, 2004
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, 2004, there were outstanding 526,926,858 shares of common
stock, par value $1.00 per share, of the registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their
representatives may from time to time make verbal or written statements
(including certain statements contained in this report and other MMC filings
with the Securities and Exchange Commission and in our reports to stockholders)
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 revenues, expenses,
earnings, cash flow, elimination of market services agreements ("MSA"), capital
structure, existing credit facilities, access to commercial paper markets,
pension funding, the adverse consequences arising from market-timing issues at
Putnam, including fines and restitution, the matters raised in the complaint
filed by the New York Attorney General's Office stating a claim for, among other
things, fraud and violations of New York State antitrust and securities laws, as
well as market and industry conditions, premium rates, financial markets,
interest rates, foreign exchange rates, contingencies, and matters relating to
MMC's operations and income taxes. Such forward-looking statements are based on
available current market and industry materials, experts' reports and opinions,
and long-term trends, 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 business,
changes in competitive conditions, the impact of litigation and other matters
concerning the claims brought by the New York Attorney General's Office and
state insurance regulators, loss of clients, inability to collect previously
accrued MSA revenue, movements in premium rate levels, the conditions for the
transfer of commercial risk and other changes in the global property and
casualty insurance markets, natural catastrophes, mergers between client
organizations, and insurance or reinsurance company insolvencies. Factors to be
considered in the case of MMC's investment management business include changes
in worldwide and national equity and fixed income markets, actual and relative
investment performance, the level of sales and redemptions, and the ability to
maintain investment management and administrative fees at historic levels; and
with respect to all of MMC's activities, the ability to amend or replace MMC's
existing credit facilities to provide long term support for commercial paper
borrowings following the claims brought by the New York Attorney General, the
continued strength of MMC's relationships with its employees and clients, the
ability to successfully integrate acquired businesses and realize expected
synergies, changes in general worldwide and national economic conditions, the
impact of terrorist attacks, changes in the value of investments made in
individual companies and investment funds, fluctuations in foreign currencies,
actions of competitors or regulators, changes in interest rates or in the
ability to access financial markets, developments relating to claims, lawsuits
and contingencies, prospective and retrospective 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.
Forward-looking statements speak only as of the date on which they are made, and
MMC undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to reflect the
occurrence of unanticipated events. Please refer to Marsh & McLennan Companies'
2003 Annual Report on Form 10-K for "Information Concerning Forward-Looking
Statements," its reports on Form 8-K, and quarterly reports on Form 10-Q.
MMC is committed to providing timely and materially accurate information to the
investing public, consistent with our legal and regulatory obligations. To that
end, MMC and its operating companies use their websites to convey meaningful
information about their businesses, including the anticipated release of
quarterly financial results and the posting of updates of assets under
management at Putnam. Monthly updates of total assets under management at Putnam
will be posted to the MMC website the first business day following the end of
each month. Putnam posts mutual fund and performance data to its website
regularly. Assets for most Putnam retail mutual funds are posted approximately
two weeks after each month-end. Mutual fund net asset value (NAV) is posted
daily. Historical performance and Lipper rankings are also provided. Investors
can link to MMC and its operating company websites through www.mmc.com.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
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(In millions, except per share figures) 2004 2003 2004 2003
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Revenue:
Service revenue $2,931 $2,809 $9,072 $8,490
Investment income (loss) 38 28 143 64
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Operating revenue 2,969 2,837 9,215 8,554
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Expense:
Compensation and benefits 1,716 1,486 4,947 4,339
Other operating expenses 1,125 758 2,735 2,306
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Operating expenses 2,841 2,244 7,682 6,645
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Operating income 128 593 1,533 1,909
Interest income 6 6 15 19
Interest expense (55) (48) (153) (137)
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Income before income taxes
and minority interest 79 551 1,395 1,791
Income taxes 52 188 527 609
Minority interest, net of tax 6 6 12 17
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Net income $ 21 $ 357 $ 856 $1,165
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Basic net income per share $ .04 $ .67 $ 1.64 $2.18
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Diluted net income per share $ .04 $ .65 $ 1.60 $2.12
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Average number of shares outstanding-Basic 521 531 522 534
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Average number of shares outstanding-Diluted 533 550 536 550
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The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
September 30, December 31,
(In millions of dollars) 2004 2003
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ASSETS
Current assets:
Cash and cash equivalents $ 577 $ 665
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Receivables
Commissions and fees 2,608 2,388
Advanced premiums and claims 79 89
Other 427 342
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3,114 2,819
Less-allowance for doubtful
accounts and cancellations (135) (116)
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Net receivables 2,979 2,703
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Prepaid dealer commissions - current portion 98 150
Other current assets 360 330
Total current assets 4,014 3,848
Goodwill and intangible assets 7,816 5,797
Fixed assets, net 1,385 1,389
(net of accumulated depreciation and
amortization of $1,647 at September 30, 2004
and $1,448 at December 31, 2003)
Long-term investments 566 648
Prepaid dealer commissions 30 114
Prepaid pension 1,294 1,199
Other assets 1,970 2,058
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$17,075 $15,053
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The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, December 31,
(In millions of dollars) 2004 2003
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,396 $ 447
Accounts payable and accrued liabilities 1,867 1,511
Accrued compensation and employee benefits 1,135 1,263
Accrued income taxes 391 272
Dividends payable 180 166
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Total current liabilities 4,969 3,659
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Fiduciary liabilities 4,068 4,228
Less - cash and investments held in
a fiduciary capacity (4,068) (4,228)
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- -
Long-term debt 3,458 2,910
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Other liabilities 2,990 3,033
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Commitments and contingencies
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Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
1,600,000,000 shares, issued 560,641,640
shares at September 30, 2004 and December 31, 2003 561 561
Additional paid-in capital 1,244 1,301
Retained earnings 5,724 5,386
Accumulated other comprehensive loss (336) (279)
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7,193 6,969
Less - treasury shares, at cost,
34,541,597 shares at September 30, 2004 and
33,905,497 shares at December 31, 2003 (1,535) (1,518)
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Total stockholders' equity 5,658 5,451
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$17,075 $15,053
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The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Nine Months Ended September 30, 2004 2003
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(In millions of dollars)
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Operating cash flows:
Net income $ 856 $1,165
Adjustments to reconcile net income
to cash generated from (used for) operations:
Depreciation and amortization of fixed assets,
capitalized software and other intangible assets 334 292
Provision for deferred income taxes 96 34
(Gains) losses on investments (143) (64)
Changes in assets and liabilities:
Net receivables (277) (151)
Prepaid dealer commissions 136 181
Other current assets 60 32
Other assets 131 (122)
Accounts payable and accrued liabilities 421 53
Accrued compensation and employee benefits (128) (150)
Accrued income taxes 76 312
Other liabilities (125) (6)
Effect of exchange rate changes (7) 49
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Net cash generated from operations 1,430 1,625
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Financing cash flows:
Net increase/(decrease) in commercial paper 882 (1,057)
Proceeds from issuance of debt 1,213 798
Other repayments of debt (613) (49)
Purchase of treasury shares (522) (886)
Issuance of common stock 436 481
Dividends paid (502) (466)
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Net cash provided by (used for) financing activities 894 (1,179)
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Investing cash flows:
Capital expenditures (281) (335)
Proceeds from sales related to fixed assets 9 12
Acquisitions (2,249) (99)
Other, net 106 89
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Net cash used for investing activities (2,415) (333)
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Effect of exchange rate changes on cash
and cash equivalents 3 32
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(Decrease)/Increase in cash & cash equivalents (88) 145
Cash & cash equivalents at beginning of period 665 546
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Cash & cash equivalents at end of period $ 577 $ 691
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The accompanying notes are an integral part of these consolidated statements.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
--------------------
MMC, a professional services firm, is organized based on the different
services that it offers. Under this organization structure, MMC operates in
three principal business segments: risk and insurance services, investment
management and consulting. The risk and insurance services segment provides
risk management and insurance broking, reinsurance broking and insurance
program management services for businesses, public entities, insurance
companies, associations, professional services organizations and private
clients. It also provides services principally in connection with
originating, structuring and managing insurance, financial services and
other industry-focused investments. The investment management segment
primarily provides securities investment advisory and management services
and administrative services for a group of publicly held investment
companies and institutional accounts. The consulting segment provides
advice and services to the managements of organizations primarily in the
areas of retirement services, human capital, health care and group benefit
programs, management consulting, organizational change and organizational
design, economic consulting and corporate identity.
2. Principles of Consolidation
---------------------------
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 accounting principles
generally accepted in the United States of America, 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-month and nine-month periods ended
September 30, 2004 and 2003. Certain reclassifications have been made to
the prior year amounts to conform to the current year presentation. The
caption "Investment income (loss)" in the consolidated statements of income
comprises realized and unrealized gains and losses from investments
recognized in current earnings. It includes other than temporary declines
in the value of available for sale securities, the change in value of
trading securities and the change in value of MMC's holdings in certain
private equity funds. MMC's investments may include seed shares for funds,
direct investments in insurance, consulting or investment management
companies and investments in private equity funds.
3. 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 services revenue, amounted to $94 million and $91
million for the nine-month periods ended September 30, 2004 and 2003,
respectively. Since fiduciary assets are not available for corporate use,
they are shown in the balance sheet as an offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to
$10.4 billion at September 30, 2004 and $11.5 billion at December 31, 2003,
respectively. MMC is not a principal to the contracts under which the right
to receive premiums or the right to receive reimbursement of insured losses
arises. Net uncollected premiums and claims and the related payables are,
therefore, not assets and liabilities of MMC and are not included in the
accompanying Consolidated Balance Sheets.
4. Per Share Data
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Basic net income per share is calculated by dividing net income by the
weighted 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 and adding back dividend equivalent
expense related to common stock equivalents. This result is then divided by
the weighted average common shares outstanding, which have been adjusted
for the dilutive effect of potentially issuable 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 nine-month
periods ended September 30,2004 and 2003.
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Three Months Ended Nine Months Ended
(In millions, except per share data) September 30, September 30,
2004 2003 2004 2003
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Net income $ 21 $ 357 $856 $1,165
Increase for dividend equivalent
expense related to common stock
equivalents net of potential
minority interest associated with
the Putnam Class B Common Shares - - 2 -
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Net income for diluted earnings
per share $ 21 $357 $858 $1,165
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Basic weighted average common
shares outstanding 521 531 522 534
Dilutive effect of potentially
issuable common shares 12 19 14 16
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Diluted weighted average common
shares outstanding 533 550 536 550
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Average stock price used to calculate
common stock equivalents $44.62 $50.30 $45.60 $47.39
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5. Supplemental Disclosure to the Consolidated Statements of Cash Flows
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The following schedule provides additional information concerning interest
and income taxes paid for the nine-month periods ended September 30, 2004
and 2003.
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In millions of dollars) 2004 2003
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Interest paid $158 $123
Income taxes paid $293 $233
6. Comprehensive Income
--------------------
The components of comprehensive income for the nine-month periods ended
September 30, 2004 and 2003 are as follows:
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(In millions of dollars) 2004 2003
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Foreign currency translation adjustments $ 12 $ 159
Unrealized investment holding (losses) / gains,
net of income taxes (5) 55
Less: Reclassification adjustment for realized gains
included in net income, net of income taxes (63) (12)
Deferred loss on cash flow hedges,
net of income taxes (1) (2)
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Other comprehensive (loss)/income (57) 200
Net income 856 1,165
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Comprehensive income $ 799 $1,365
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7. Acquisitions
------------
In July 2004, MMC acquired Kroll Inc. ("Kroll"), the world's leading risk
mitigation services firm in an all-cash $1.9 billion transaction in which
Kroll shareholders received $37 for each outstanding share of Kroll common
stock owned. The acquisition of Kroll broadens and deepens the capabilities
of MMC's risk consulting and advisory businesses by adding services which
clients need to reduce the impact of an adverse event. It expands MMC's
capacity in several important sectors that complement existing businesses,
such as corporate restructuring, business intelligence and investigations,
security services, employee screening, and electronic evidence and
litigation support. The estimated fair values of assets and liabilities are
recorded in the financial statements as follows: net tangible assets of
$148 million, identified intangible assets of $268 million; and goodwill of
$1.5 billion. Estimated fair values of assets acquired and liabilities
assumed are subject to adjustment when the purchase accounting is
finalized.
In January 2004, MMC acquired Synhrgy HR Technologies, a leading provider
of human resource technology and outsourcing services to Fortune 1000
companies, for a total cost of $115 million. Substantially all former
employees of Synhrgy are now employees of MMC. Approximately $7 million of
the purchase consideration is subject to continued employment of the
selling shareholders and is being recorded as compensation expense over
three years. In addition, MMC acquired Prentis Donegan for $57 million in
cash in July of 2004, the Australia and New Zealand operations of Heath
Lambert for $53 million in cash in March of 2004, and an additional 30% of
the voting stock of PanAgora Asset Management (bringing its total to an 80%
voting majority) for $3 million in cash in July of 2004.
The allocation of purchase consideration resulted in acquired goodwill of
$1.7 billion in 2004. The acquisition of PanAgora added $8.2 billion to
assets under management.
In April 2003, MMC acquired Oliver, Wyman & Company ("OWC") for $265
million comprising $159 million in cash, which will be paid over 4 years,
and $106 million in MMC stock. Substantially all former employees of OWC
are now employees of MMC. Approximately $35 million of the purchase
consideration is subject to continued employment of the selling
shareholders and is being recorded as compensation expense over four years.
8. Goodwill and Other Intangibles
------------------------------
Changes in the carrying amount of goodwill for the nine-month period ended
September 30, 2004, are as follows:
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(In millions of dollars) 2004
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Balance as of January 1, $5,533
Goodwill acquired 1,706
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Balance as of September 30, $7,239
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Subsequent to the filing of a Civil Complaint by the New York Attorney
General (described in Note 13), MMC announced the suspension of market
services agreements effective October 1, 2004. On October 26, 2004, MMC
announced a number of reforms to its business model, including transparency
to our clients of all fees and remuneration earned by Marsh and the
permanent elimination of all market services agreements effective October
1, 2004. In addition, potential adverse client reaction to the allegations
contained in the complaint may impact future levels of new business and
renewals, particularly in the risk and insurance services segment. As a
result of these changes in business conditions, MMC will conduct an interim
goodwill impairment test during the fourth quarter of 2004.
Due to the timing of these events, and the need to fully assess the impact
of the new business model on expected cash flows, completion of an interim
goodwill impairment test was not practical prior to issuance of these
financial statements. A preliminary analysis, based primarily on MMC's
market capitalization movements since the last annual impairment test at
June 30, 2004 does not indicate a goodwill impairment in any of MMC's
reporting units. Goodwill allocable to each of MMC's reporting segments is
as follows: Risk and Insurance Services $6,029 million; Investment
Management $122 million; and Consulting $1,088 million.
The goodwill balance at September 30, 2004 and December 31, 2003 includes
approximately $119 million and $121 million, respectively, of equity method
goodwill.
Amortized intangible assets consist of the cost of client lists, client
relationships and trade names acquired, and the rights to future revenue
streams from certain existing private equity funds. MMC has no intangible
assets with indefinite lives. The gross cost and accumulated amortization
by major intangible asset class is as follows:
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September 30, 2004 December 31, 2003
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Net Net
Gross Accumulated Carrying Gross Cost Accumulated Carrying
(In millions of dollars) Cost Amortization Amount Amortization Amount
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Customer and marketing related $579 $105 $474 $222 $ 74 $148
Future revenue streams related to
existing private equity funds 199 104 95 199 92 107
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Total amortized intangibles $778 $209 $569 $421 $166 $255
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Aggregate amortization expense for the nine months ended September 30, 2004
and 2003 was $43 million and $30 million, respectively, and the estimated
future aggregate amortization expense is as follows:
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For the Years
Ending December 31, Estimated
(In millions of dollars) Expense
- -------------------------------------- ------- --------------------------------
2004 $68
2005 $105
2006 $85
2007 $76
2008 $72
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9. Stock Benefit Plans
-------------------
MMC has stock-based benefit plans under which employees are awarded grants
of restricted stock, stock options and other forms of awards. As provided
under SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
MMC has elected to continue to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and has provided the required
additional pro forma disclosures.
Pro Forma Information: In accordance with the intrinsic value method
allowed by APB 25, no compensation cost has been recognized in the
Consolidated Statements of Income for MMC's stock option and stock purchase
plans and the stock options awarded under the Putnam Investments Equity
Partnership Plan. If compensation cost for MMC's stock-based compensation
plans had been determined consistent with the fair value method prescribed
by SFAS No. 123, MMC's net income and net income per share for the three-
and nine-month periods ended September 30, 2004 and 2003 would have been
reduced to the pro forma amounts indicated in the table below.
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(In millions of dollars, Three Months Ended Nine Months Ended
except per share figures) September 30 September 30
2004 2003 2004 2003
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Net Income (loss):
As reported $ 21 $357 $856 $1,165
Adjustment for fair value method,
net of tax (33) (40) (117) (128)
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Pro forma net income (loss) $ (12) $317 $739 $1,037
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Net Income (loss) Per Share:
Basic:
As reported $ .04 $ .67 $1.64 $2.18
Pro forma $(.02) $ .60 $1.42 $1.94
Diluted:
As reported $ .04 $ .65 $1.60 $2.12
Pro forma $(.02) $ .58 $1.39 $1.90
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The pro forma information reflected above includes stock options issued
under MMC Incentive and Stock Award plans and the Putnam Investments Equity
Partnership Plan and stock issued under MMC stock purchase plans. Effective
October 1, 2004, certain features in the MMC stock purchase plan were
changed. Under these new features, the plan will purchase shares four times
during the plan year (instead of one annual purchase on the last business
day of the plan year as was done previously). Also, shares of MMC common
stock will be purchased at a price that is 85% of the average market price
of the stock on each quarterly purchase date. Previously, shares were
purchased at a price based on 85% of the lower of the market price at the
beginning or end of the plan year. The stock purchase plans represent
approximately 20% of the adjustment from applying the fair value method in
2004 and 2003.
The majority of option grants under the stock benefit plans are made in the
first quarter of each year. MMC granted 9.1 million and 15.9 million
options in the nine months ended September 30, 2004 and 2003, respectively.
A total of 17.2 million options were granted in the year ended December 31,
2003.
The estimated fair value of options granted was calculated using the
Black-Scholes option pricing valuation model. The weighted average
assumptions used in the valuation models are evaluated and revised, as
necessary, to reflect market conditions and experience.
10. Retirement Benefits
-------------------
MMC maintains qualified and non-qualified defined benefit pension plans for
its U.S. and non-U.S. eligible employees. MMC's policy for funding its tax
qualified defined benefit retirement plans is to contribute amounts at
least sufficient to meet the funding requirements set forth in the U.S. and
international law.
The target asset allocation for the U.S. plans is 70% equities and 30%
fixed income, and for the U.K. plans the target is 58% equities and 42%
fixed income. As of September 30, 2004, the actual allocation of assets for
the U.S. plan was 71% equities, 28% fixed income, and 1% cash. The
allocation of plan assets for the U.K. plan was 57% equities, 42% fixed
income and 1% cash.
Neither the U.S. nor the U.K. plan held any MMC securities.
The components of the net periodic benefit cost (income) for defined
benefit and other postretirement plans are as follows:
Combined U.S. and significant non-U.S. Plans
------------------------------------------------------------------------------------------------
For the Three Months Ended September 30, Pension Benefits Postretirement Benefits
--------------------------- -----------------------
(In millions of dollars) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------
Service cost $ 58 $ 47 $ 3 $ 2
Interest cost 105 90 4 5
Expected return on plan assets (154) (135) - -
Amortization of prior service credit (9) (9) (1) -
Amortization of transition asset (1) (1) - -
Recognized actuarial loss 22 6 - 1
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Net Periodic Benefit Cost (Income) 21 (2) 6 8
------------------------------------------------------------------------------------------------
Settlement loss - - - -
Special termination benefits 1 1 - -
------------------------------------------------------------------------------------------------
Total Expense (Income) $ 22 $ (1) $ 6 $ 8
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Combined U.S. and significant non-U.S. Plans
--------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, Pension Benefits Postretirement Benefits
--------------------------- -----------------------
(In millions of dollars) 2004 2003 2004 2003
------------------------------------------------------------------------------------------------
Service cost $173 $141 $ 8 $ 7
Interest cost 315 270 15 15
Expected return on plan assets (462) (405) - -
Amortization of prior service credit (28) (28) (1) (1)
Amortization of transition asset (3) (4) - -
Recognized actuarial loss 67 19 2 3
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Net Periodic Benefit Cost (Income) 62 (7) 24 24
------------------------------------------------------------------------------------------------
Settlement loss 1 - - -
Special termination benefits 2 3 - -
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Total Expense (Income) $ 65 $ (4) $ 24 $ 24
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U.S. Plans only
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For the Three Months Ended September 30, Pension Benefits Postretirement Benefits
--------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------
Service cost $ 20 $ 17 $3 $2
Interest cost 41 38 3 4
Expected return on plan assets (58) (57) - -
Amortization of prior service credit (9) (9) (1) -
Amortization of transition asset (1) (1) - -
Recognized actuarial loss 11 4 - 1
-----------------------------------------------------------------------------------------------
Net Periodic Benefit Cost (Income) $ 4 $ (8) $5 $7
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U.S. Plans only
-----------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, Pension Benefits Postretirement Benefits
-------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------
Service cost $ 58 $ 49 $ 7 $ 6
Interest cost 123 115 13 13
Expected return on plan assets (173) (171) - -
Amortization of prior service credit (28) (28) (1) (1)
Amortization of transition asset (3) (4) - -
Recognized actuarial loss 34 13 2 3
-----------------------------------------------------------------------------------------------
Net Periodic Benefit Cost (Income) $ 11 $ (26) $21 $21
------------------------------------------------------------------------------------------------
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("Act") became law. The net periodic benefit cost
shown above includes the subsidy which did not have a material impact and
reflects any changes in the third quarter of 2004. MMC will not change
previously reported information.
Significant non-U.S. Plans only
----------------------------------------------------------------------------------------
For the Three Months Ended September 30, Pension Benefits Postretirement Benefits
------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
----------------------------------------------------------------------------------------
Service cost $38 $30 $ - $ -
Interest cost 64 52 1 1
Expected return on plan assets (96) (78) - -
Recognized actuarial loss 11 2 - -
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Net periodic benefit cost $17 $ 6 $1 $1
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Settlement loss - - - -
Special termination benefits 1 1 - -
---------------------------------------------------------------------- --------------
Total Expense $18 $ 7 $1 $1
---------------------------------------------------------------------- --------------
Significant non-U.S. Plans only
-----------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, Pension Benefits Postretirement Benefits
----------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
-----------------------------------------------------------------------------------------------
Service cost $115 $ 92 $1 $1
Interest cost 192 155 2 2
Expected return on plan assets (289) (234) - -
Recognized actuarial loss 33 6 - -
-----------------------------------------------------------------------------------------------
Net periodic benefit cost $ 51 $19 $3 $3
-----------------------------------------------------------------------------------------------
Settlement loss 1 - - -
Special termination benefits 2 3 - -
-----------------------------------------------------------------------------------------------
Total Expense $54 $ 22 $3 $3
-----------------------------------------------------------------------------------------------
The weighted average actuarial assumptions utilized to calculate the net
periodic benefit costs for the U.S. and significant non-U.S. defined
benefit plans are as follows:
Combined U.S. and significant non-U.S. Plans
----------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
--------------------------- -- ----------------------------
2004 2003 2004 2003
------------------------------------------------- ------------ -- ------------ ---------------
Weighted average assumptions:
Expected return on plan assets 8.5% 8.5% - -
Discount rate 5.8% 6.1% 6.3% 6.6%
Rate of compensation increase 3.7% 3.8% - -
------------------------------------------------- ------------ -- ------------ ---------------
11. Debt
----
MMC's outstanding debt is as follows:
---------------------------------------------------------------------------------------------------
September 30, December 31,
(In millions of dollars) 2004 2003
---------------------------------------------------------------------------------------------------
Short-term:
Commercial paper $1,320 $ 440
Current portion of long-term debt 76 7
---------------------------------------------------------------------------------------------------
$1,396 $ 447
---------------------------------------------------------------------------------------------------
Long-term:
Senior notes - 6.625% due 2004 $ - $ 599
Senior notes - 7.125% due 2009 399 399
Senior notes - 5.375% due 2007 (4.0% effective interest rate) (a) 516 520
Senior notes - 6.25% due 2012 (5.1% effective interest rate) (a) 267 269
Senior notes - 3.625% due 2008 249 248
Senior notes - 4.850% due 2013 249 249
Senior notes - 5.375% due 2014 646 -
Senior notes - 3 year floating note due 2007 (currently 1.74%) 499 -
Senior notes - 5.875% due 2033 295 295
Mortgage - 9.8% due 2009 200 200
Notes payable - 8.62% due 2005 66 69
Notes payable - 7.68% due 2006 61 61
Bank loans (non-U.S.) 71 -
Other 16 8
---------------------------------------------------------------------------------------------------
3,534 2,917
Less current portion 76 7
---------------------------------------------------------------------------------------------------
$3,458 $2,910
---------------------------------------------------------------------------------------------------
(a) The effective interest rates result from unwinding fair value hedges,
as discussed below.
The weighted average interest rates on MMC's outstanding short-term debt at
September 30, 2004 and December 31, 2003 are 1.3% and 1.2%, respectively.
At September 30, 2004, MMC had the following revolving credit facilities:
$700 million which expires in June 2005, $355 million which expires in July
2005, $1.0 billion which expires in June 2007, and $700 million which
expires in June 2009. These facilities support MMC's commercial paper
borrowings. At September 30, 2004 no amounts were outstanding on any of the
facilities. Because of MMC's current inability to access the commercial
paper markets, MMC expects to need to use these facilities to refinance
substantially all of its outstanding commercial paper. As of September 30,
2004, MMC had $$1.3 billion and as of October 26, 2004 had approximately
$1.9 billion aggregate face amount of commercial paper outstanding,
substantially all of which matures before December 30, 2004.
The matters raised in the civil complaint filed by the Attorney General of
the State of New York on October 14, 2004 (described in Note 13 to the
consolidated financial statements) may have prohibited MMC from borrowing
under the facilities, which contain standard representations as to no
material adverse litigation and compliance with laws. The required lenders
under each of the facilities agreed to waive the effect of such matters
until December 30, 2004. In exchange, MMC agreed that the facilities will
be used exclusively to support commercial paper borrowings, and that in
order for MMC to borrow under the facilities, the aggregate face amount of
outstanding commercial paper cannot exceed $1.9 billion. MMC also agreed
not to repurchase its stock and not to permit any of its subsidiaries to
incur debt other than under existing facilities during the waiver period.
MMC has commenced discussions with its lenders to amend or replace the
facilities to provide longer-term liquidity. While MMC believes those
discussions will achieve that goal before December 30, 2004, there is no
assurance that they will be completed by such date. If the negotiations are
unsuccessful, MMC will be in default under these facilities and has no
other committed source to refinance the amounts expected to be outstanding
under these facilities.
In July 2004 MMC purchased Kroll, Inc. in an all-cash transaction totaling
approximately $1.9 billion. The purchase was initially funded with
commercial paper borrowings. To support these borrowings, MMC negotiated a
new $1.5 billion, one-year revolving credit facility. Following the
acquisition, MMC issued $650 million of 5.375% Senior Notes due 2014 and
$500 million of Floating Rate Notes due 2007. The proceeds from these notes
were used to repay a portion of the commercial paper borrowings that had
funded the Kroll purchase. Under the terms of the agreement of the
above-mentioned credit facility, the amount of the facility was reduced by
the proceeds from the issuance of the Senior Notes and Floating Rate Notes
of approximately $1.15 billion. The available revolving credit facility now
totals $355 million.
MMC repaid $600 million of long-term debt that matured in June, 2004 by
issuing commercial paper.
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033.
In February 2003, MMC issued $250 million of 3.625% Senior Notes due in
2008 and $250 million of 4.85% Senior Notes due in 2013 (the "2003 Notes").
The net proceeds from the 2003 Notes were used to pay down commercial paper
borrowings.
12. Common Stock
------------
During the third quarter of 2004, MMC did not repurchase any of its common
stock. For the nine months ended September 30, 2004, MMC repurchased 11
million shares for $510 million, all of which was purchased in the first
and second quarter. During October 2004, MMC repurchased .4 million shares
for $14 million, under the terms of a pre-existing 10b5-1 plan. A 10b5-1
plan allows a company to purchase shares during a black-out period,
provided the company communicates its share purchase instructions to the
broker prior to the black-out period, pursuant to a written plan that may
not be changed.
13. Claims, Lawsuits and Other Contingencies
----------------------------------------
Putnam Matters
--------------
Regulatory Matters.
------------------
o On October 28, 2003, the Securities and Exchange Commission ("SEC")
commenced a civil administrative and cease and desist proceeding against
Putnam under the Investment Advisors Act of 1940 and the Investment Company
Act of 1940. On November 13, 2003, pursuant to an agreement with Putnam,
the SEC entered an order that made findings of certain facts, which Putnam
neither admitted nor denied, and concluded that Putnam violated the
Investment Advisors Act of 1940 and the Investment Company Act of 1940. The
order imposed partial relief, including final censure, remedial
undertakings, and a cease and desist order. The SEC's order found that
since 1998 at least six of Putnam's investment management professionals
engaged in excessive short-term trading of Putnam mutual funds in their
personal accounts. The order also found that four of these employees
engaged in trading in funds over which they had investment decision making
responsibilities and access to non-public information regarding their
funds' portfolios. The SEC further found that Putnam failed to disclose
this potentially self-dealing securities trading to the boards or
shareholders of the mutual funds it manages, failed to take adequate steps
to detect and deter such trading activity through internal controls and
failed in its supervision of these investment management professionals.
Under the terms of the order, Putnam agreed to a number of remedial
actions, including new employee trading restrictions, enhanced employee
trading compliance, determination by an independent assessment consultant
of the amount of restitution to be made by Putnam for losses attributable
to excessive short-term trading by Putnam employees, the retention of an
independent compliance consultant, the undertaking of periodic compliance
reviews, and certification of compliance with the SEC. On April 8, 2004,
Putnam entered into a final settlement of those charges under which Putnam
is required to pay $5 million in disgorgement plus a civil monetary penalty
of $50 million. In the event that the restitution calculated by the
independent assessment consultant under the SEC order exceeds $10 million,
Putnam will be responsible for paying any such excess. (The first $10
million would consist of the $5 million of disgorgement under the order and
$5 million of the penalty). These amounts are to be distributed in
accordance with the process established under the November 13, 2003 and
April 8, 2004 SEC orders.
On October 28, 2003, the Massachusetts Secretary of the Commonwealth
("Massachusetts Securities Division") commenced a civil administrative
proceeding against Putnam and two of its employees alleging violations of
the state's securities law anti-fraud provisions. On April 8, 2004,
simultaneously and in conjunction with the settlement of the
above-referenced SEC proceeding, the Massachusetts Securities Division
entered a Consent Order in final settlement of those charges. That Consent
Order included a cease and desist order, and requires Putnam to pay $5
million in restitution and an administrative fine of $50 million. In the
event that the restitution calculated by the independent assessment
consultant under the Massachusetts order exceeds $15 million, Putnam will
be responsible for paying any such excess. (The first $15 million would
consist of the $5 million of restitution under the order and $10 million of
the penalty). The restitution called for by the Consent Order will be
determined and distributed by the same independent assessment consultant
appointed pursuant to the November 13, 2003 and April 8, 2004 SEC orders.
The independent assessment consultant is currently engaged in the
calculation of the amount of restitution that will be payable by Putnam
under the SEC and Massachusetts orders. The Trustees of the Putnam funds
may separately seek additional amounts from Putnam to assure that full
restitution is made to Putnam fund shareholders.
In the fourth quarter of 2003, Putnam recorded a $10 million reserve for
restitution. The $100 million in penalties was recorded in March 2004.
In a separate action, the SEC is seeking an injunction against two of the
six investment management employees. All six are no longer employed by
Putnam.
Additionally, Putnam has received document subpoenas and/or requests for
information from the United States Attorney in Boston, the Florida
Department of Financial Services, the Office of the Attorney General for
the State of New York, Offices of the Secretary of State and the State
Auditor for the State of West Virginia, the Vermont Securities Division,
the NASD and the U.S. Department of Labor ("Department of Labor") inquiring
into, among other things, matters that are the subject of the SEC and
Massachusetts actions.
o Putnam has reached an agreement in principle with the staff of the
Philadelphia office of the SEC to enter into a settlement of matters
arising out of the SEC's investigation into Putnam's brokerage practices
(as previously disclosed by MMC). The settlement would involve the alleged
failure by Putnam to adequately disclosure its practices relating to the
allocation of brokerage on portfolio transactions to broker-dealers who
sold shares of Putnam mutual funds. Putnam ceased directing brokerage to
broker-dealers in connection with the sale of fund shares as of January 1,
2004. Under the agreement in principle, Putnam would pay a civil penalty in
the amount of $40 million and disgorgement in the amount of $1. The total
amount of the payment would be paid to certain Putnam funds. As part of the
settlement, Putnam would neither admit nor deny wrongdoing. The settlement
remains subject to final documentation and approval by the Commissioners of
the SEC.
o Putnam also has received document requests and subpoenas from the
Massachusetts Securities Division, the Office of the Attorney General for
the State of New York, the SEC, and the Department of Labor relating to
plan expense reimbursement agreements between Putnam and certain
multiemployer deferred compensation plans which are Putnam clients, and
also relating to Putnam's relationships with consultants retained by
multiemployer deferred compensation plans. The Massachusetts Securities
Division has taken testimony from a number of Putnam employees relating to
the same matters.
o Putnam also has received requests for information from the SEC's Boston
Office, the Massachusetts Securities Division, and the Department of Labor
relating to the correction of certain operational errors by Putnam
Fiduciary Trust Company ("PFTC") in connection with the January 2001
transfer and investment of assets on behalf of a 401(k) defined
contribution plan. These errors affected the plan and five of the Putnam
mutual funds in which certain plan assets were invested. Putnam has made
restitution to the plan and the affected funds. Putnam also has made a
number of personnel changes, including senior managers, and has implemented
changes in procedures.
Putnam also has received requests for information from the SEC's Boston
Office and the Massachusetts Securities Division regarding the source and
use of funds paid to a third-party vendor by PFTC in exchange for
information consulting services. Putnam has re-processed the payment of
these consulting expenses in accordance with Putnam's corporate expense
payment procedures.
Putnam has learned that on or about September 9, 2004, the SEC issued a
Formal Order directing a private investigation into the matters described
above and designating officers to take testimony in furtherance of this
investigation. In addition, on or about September 29, 2004, the Examination
Staff of the SEC's Boston District Office communicated to Putnam and to the
Board of Trustees of the Putnam mutual funds the Examination Staff's belief
that Putnam and certain of its employees may have violated certain
provisions of federal law in connection with these two matters. The
Examination Staff has requested that Putnam provide to it additional
information regarding these matters and a description of the step(s) Putnam
has taken or intends to take with respect to these matters.
o Putnam has also recently received a request for information from the
Department of Labor relating to investments by the Putnam Profit Sharing
Plan and certain discretionary ERISA accounts in Putnam mutual funds that
pay 12b-1 fees together with a preliminary indication from the Department
of Labor that, in making such investments, Putman may have violated several
provisions of ERISA. Putnam has also received requests for information from
the Department of Labor regarding PFTC's treatment of gains generated by
trading errors arising from securities trades effected by PFTC on behalf of
its 401(k) defined contribution plan clients.
o The Fort Worth office of the SEC has raised issues about whether the
current structure of the Putnam Research Fund's investment management fee,
which includes a performance component in addition to a base fee, fully
complies with SEC regulations concerning performance fees. Putnam is
currently engaged in discussions with the Staff regarding possible
adjustments to the fee structure. Retroactive application of such
adjustments over the period since April 1, 1997 (the period during which
the performance fee has been in effect) would result in a reduction in
aggregate management fees for that period.
Putnam is fully cooperating with the regulatory authorities in connection
with these matters.
"Market-Timing" Related Litigation. As of November 2, 2004, MMC and Putnam
have received complaints in over 70 civil actions based on allegations of
"market-timing" and "late trading" activities. These actions were filed in
courts in New York, Massachusetts, California, Illinois, Connecticut,
Delaware, Vermont, Kansas, and North Carolina. All of the actions except
five have been transferred, along with actions against other mutual fund
complexes, to the United States District Court for the District of Maryland
for coordinated or consolidated pretrial proceedings. Plaintiffs who were
appointed lead plaintiffs by the Court recently filed consolidated amended
complaints in the actions. MMC and Putnam intend to move to dismiss the
consolidated amended complaints pursuant to a schedule to be set by the
Court.
The consolidated amended complaints are as follows:
o MMC and Putnam, along with certain of their current and former officers
and directors, have been named in a consolidated amended class action
complaint (the "MMC Class Action") purportedly brought on behalf of all
purchasers of the publicly traded securities of MMC between January 3, 2000
and November 3, 2003 (the "Class Period"). In general, the MMC Class Action
alleges that the defendants, including MMC, allowed certain mutual fund
shareholders and fund managers to engage in market-timing in the Putnam
family of funds. The complaint further alleges that this conduct was not
disclosed until late 2003 in violation of the federal securities laws. The
complaint alleges that, as a result of defendants' purportedly misleading
statements or omissions, MMC's stock traded at inflated levels during the
Class Period. The suit seeks unspecified damages and equitable relief.
o A consolidated amended complaint asserting shareholder derivative claims
has been filed against members of MMC's Board of Directors, two of Putnam's
former officers, and MMC as a nominal defendant (the "MMC Derivative
Action"). The MMC Derivative Action generally alleges that the members of
MMC's Board of Directors violated the fiduciary duties they owed to MMC and
its shareholders by permitting, acquiescing in, and/or consciously
disregarding the lack of formal controls regarding the oversight or
monitoring of market-timing in Putnam mutual funds. The MMC Derivative
Action alleges that, as a result of the alleged violation of defendants'
fiduciary duties, MMC suffered damages. The suit seeks unspecified damages
and equitable relief.
o MMC and Putnam have also been named as defendants in a consolidated
amended complaint filed on behalf of a putative class of shareholders of
certain Putnam funds, and in another consolidated amended complaint in
which certain fund shareholders purport to assert derivative claims on
behalf of all Putnam funds. These suits seek to recover unspecified damages
allegedly suffered by the funds and their shareholders as a result of
purported market- timing and late trading activity that allegedly occurred
in certain Putnam funds. The derivative suit seeks additional relief,
including termination of the investment advisory contracts between Putnam
Investment Management and the funds, cancellation of the funds' 12b-1 plans
and the return of all advisory and 12b-1 fees paid by the funds over a
certain period of time. In addition to MMC and Putnam, the suits name as
defendants various Putnam affiliates, certain trustees of Putnam funds,
certain present and former Putnam officers and employees, and persons and
entities that allegedly engaged in market- timing and/or late trading
activities in Putnam funds. The complaints allege violations of the federal
securities laws and state law. Putnam has also been named as a defendant in
its capacity as a sub-advisor to a non-Putnam fund in a class action suit
pending in the District of Maryland against another mutual fund complex.
o MMC, Putnam, and various of their officers, directors and employees have
been named as defendants in two consolidated amended complaints that
purportedly assert class action claims under ERISA (the "ERISA Actions").
The ERISA Actions, which have been brought by participants in MMC's Stock
Investment Plan and Putnam's Profit Sharing Retirement Plan (collectively,
the "Plans"), allege, among other things, that, in view of the
market-timing trading activity that was allegedly allowed to occur at
Putnam, the defendants knew or should have known that the investment of the
Plans' funds in MMC's stock and Putnam's mutual fund shares was imprudent
and that the defendants breached their fiduciary duties to the Plans'
participants in making these investments. The ERISA actions seek
unspecified damages, as well as equitable relief including the restoration
to the Plans of all profits the defendants allegedly made through the use
of the Plan's assets, an order compelling the defendants to make good to
the Plans all losses to the Plans allegedly resulting from defendants'
alleged breaches of their fiduciary duties, and the imposition of a
constructive trust on any amounts by which any defendant allegedly was
unjustly enriched at the expense of the Plans.
Putnam has agreed to indemnify the Putnam funds for any liabilities arising
from market-timing activities, including those that could arise in the
securities litigations, and MMC has agreed to guarantee Putnam's
obligations in that regard.
Other Putnam Litigation. Putnam Investment Management, LLC and Putnam
Retail Management Limited Partnership have been sued in the United States
District Court for the District of Massachusetts for alleged violations of
Section 36(b) of the Investment Company Act of 1940 through the receipt of
purportedly excessive advisory and distribution fees paid by the mutual
funds in which plaintiffs purportedly owned shares. Plaintiffs seek, among
other things, to recover the compensation paid to defendants by the funds
for one year prior to the filing of the complaint, rescission of the
management and distribution agreements between defendants and the funds,
and a prospective reduction in fees. Defendants have filed a motion to
dismiss the complaint for failure to state a claim for relief.
The complaints in the above-referenced Putnam matters seek monetary damages
and other forms of relief. At the present time, MMC's management is unable
to estimate the impact that the outcome of the foregoing Putnam proceedings
may have on MMC's consolidated results of operations, financial position or
cash flows.
Marsh Related Matters
---------------------
New York Attorney General Investigation and Related Litigation
--------------------------------------------------------------
On October 14, 2004, the New York Attorney General's Office filed a civil
complaint in state court against MMC and Marsh Inc. (collectively "Marsh")
asserting claims under New York State law for fraudulent business
practices, antitrust violations, securities fraud, unjust enrichment, and
common law fraud. The complaint alleges that market services agreements and
other similar agreements between Marsh and various insurance companies (the
"Agreements"), created an incentive for Marsh to steer business to such
insurance companies and to shield them from competition. The complaint
further alleges that these Agreements were not adequately disclosed to
Marsh's clients or to Marsh's investors. In addition, the complaint alleges
that Marsh solicited fraudulent bids to create the appearance of
competitive bidding, and that Marsh steered business away from insurers
with less favorable Agreements and toward insurers with more favorable
Agreements. The complaint seeks relief including an injunction prohibiting
Marsh from engaging in the alleged wrongful conduct, disgorgement of all
profits related to such conduct, restitution and unspecified damages,
attorneys fees, and punitive damages. On October 25, 2004, the New York
Attorney General's Office announced that the adoption by Marsh of
dramatically new business procedures, installation of new leadership, a
full examination of prior wrongdoing and a pledge of restitution to those
harmed would make criminal prosecution of MMC unnecessary. MMC is assisting
the New York Attorney General's Office's investigation of the allegations
in the civil complaint and seeking to resolve the claims asserted therein.
Mercer Inc. ("Mercer") is not a defendant in the New York Attorney
General's civil complaint against Marsh. However, the subpoena issued by
the New York Attorney General's Office in connection with its investigation
covers MMC and all of MMC's subsidiaries, including Mercer, and the New
York Attorney General's Office has requested certain documents and
information from Mercer. These requests for information and documents have
primarily related to override payments earned by Mercer's health and group
insurance consulting group. Mercer is cooperating fully with these requests
for documents and information.
As of November 2, 2004, numerous private plaintiffs have filed civil
actions against MMC, and its directors, officers and affiliates, alleging
claims based on allegations that are similar or identical to those alleged
in the New York Attorney General's Office's complaint as follows:
o United Policyholders, a not-for-profit organization, which is purporting
to sue on behalf of the general public filed a complaint on August 3, 2004
in the Superior Court of California, San Diego County. The complaint
alleges, among other things, that the Agreements themselves and the alleged
failure to adequately disclose the Agreements constitute violations of the
California Business Code provisions concerning unfair business practices
and false advertising. The complaint seeks injunctive relief, restitution
in an unspecified amount and attorneys fees.
o Three purported class actions alleging claims on behalf of a purported
nationwide class of persons and entities who engaged MMC or its affiliates
to provide insurance brokerage services during the purported class periods
(the "purported client class actions") have been filed in United States
District Courts for the Southern District of New York, the Eastern District
of New York, and the District of New Jersey. The longest purported class
period extends from August 26, 1994 to the date of the certification of the
purported class, and the other two purported class periods extend from
approximately October 1998 to October 2004. These complaints collectively
include claims for violations of the Racketeering Influenced and Corrupt
Organizations Act ("RICO"), federal and state antitrust violations, state
unfair business practice violations, and common law claims including breach
of contract, breach of fiduciary duty, breach of duty of loyalty, and
unjust enrichment. The complaints seek unspecified damages, treble damages,
disgorgement, restitution, injunctive relief and attorneys fees.
o Three purported class actions on behalf of individuals and entities who
purchased or acquired MMC's publicly traded securities during the purported
class periods (the "purported securities class actions") have been filed in
the United States District Court for the Southern District of New York, and
the purported class periods extend from approximately October 1999 to
October 2004. These complaints allege, among other things, that MMC
inflated its earnings during the class period by engaging in an
unsustainable business practice which allegedly involved steering business
to insurers with Agreements and shielding such insurers from competition.
These complaints further allege, among other things, that defendants
deceived the investing public regarding MMC's business, operations,
management, and the intrinsic value of MMC's stock, and caused the
plaintiffs and other members of the purported class to purchase MMC's
securities at artificially inflated prices. These complaints include claims
for violations of the federal securities laws based on the company's
allegedly false or incomplete disclosures. The complaints seek unspecified
compensatory damages and attorneys fees.
o Nine purported class actions alleging violations of the Employee
Retirement Income Security Act ("ERISA") on behalf of participants in one
or more MMC sponsored employee benefit plans (the "Plans") during the
purported class periods (the "purported ERISA class actions") have been
filed in the United States District Court for the Southern District of New
York. The purported class periods vary, with the longest purposed class
period extending from October 1, 1998 to the present. These complaints
allege, among other things, that in view of the allegedly fraudulent bids
and the receipt of contingent commissions pursuant to Agreements with
insurers, the defendants knew or should have known that the investment of
the Plans' funds in MMC stock was imprudent. These complaints assert claims
for violations of ERISA based on, among other things, the alleged failure
to properly manage the Plans' assets, the alleged failure to monitor the
Plans' fiduciaries, the alleged failure to provide complete and accurate
information to participants and beneficiaries of the Plans, and the alleged
failure to avoid conflicts of interest and prohibited transactions. The
complaints seek, among other things, unspecified compensatory damages,
restitution, disgorgement, injunctive relief and attorneys fees.
o Seven derivative actions have been filed against MMC's directors and
officers during the relevant time period (the "derivative actions") in the
Court of Chancery of the State of Delaware and the United States District
Court for the Southern District of New York. These derivative actions
allege, among other things, that the directors and officers of MMC during
the relevant time period breached their fiduciary duties by permitting or
failing to take action to correct the alleged misconduct described in in
the New York Attorney General's Office's complaint, are liable to MMC for
damages arising from their breaches of fiduciary duty, and must contribute
to or indemnify MMC for any damages MMC has suffered. MMC has also received
demand letters asking the Board of Directors of MMC to take appropriate
legal action against those directors and officers who are alleged to have
caused damages to MMC based on the allegations contained in the New York
Attorney General's Office's complaint.
Following the New York State Attorney General's investigation and civil
complaint, MMC, Marsh Inc. and certain of their subsidiaries have become
the subjects of insurance regulatory activity as follows:
On October 21, 2004, the New York Insurance Department issued a citation
ordering MMC and a number of its affiliates which hold insurance licenses
in New York State to appear at a November 23, 2004 hearing to show cause
why regulatory action should not be taken against them. The citation
charges that respondents have: (1) used fraudulent coercive and/or
dishonest practices and has demonstrated untrustworthiness within the
meaning of New York Insurance Law Section 2110(a)(4) (authorizing license
nonrenewal, suspension, or revocation following notice and hearing); (2)
violated New York General Business Law Section 340 (relating to contracts
or agreements for monopoly or in restraint of trade); and (3) engaged in
determined violations within the meaning of New York Insurance Law Section
2402(c) (relating to unfair methods of competition and unfair or deceptive
acts or practices). The citation contemplates the following possible
actions by the Department: (1) suspension or revocation of all licenses and
denial of all pending licensing applications or renewals; (2) civil
penalties authorized by New York Insurance Law Section 2127; (3) a report
pursuant to New York Insurance Law Section 2405 charging determined
violations; and (4) other punitive, remedial or preventive action,
including restitution of all commissions and fees improperly received from
insurers and/or insureds.
Marsh also has been contacted by insurance departments and attorneys
general in a number of other states in which it is licensed to do business
requesting information in various forms. Marsh is cooperating fully with
each of these inquiries.
The complaints in the above-referenced Marsh Related Matters seek monetary
damages and other forms of relief. At the present time, MMC's management is
unable to estimate the ultimate impact that the outcome of the foregoing
Marsh proceedings may have on MMC's consolidated results of operations,
financial position or cash flows. MMC has recorded a reserve of $232
million in the third quarter of 2004 as the minimum potential liability in
connection with these matters.
Other Inquiries
---------------
The SEC is examining the practices, compensation arrangements and
disclosures of consultants that provide services to sponsors of pension
plans or other market participants, including among other things, practices
with respect to advice regarding the selection of investment advisors to
manage plan assets. Mercer Investment Consulting, Inc. has received
requests for information from the SEC in connection with this examination
and is fully cooperating.
MMC, Putnam and Mercer have been advised by the Boston Office of the SEC
that it is conducting an informal investigation of a program pursuant to
which companies within the MMC group refer business to one another and
receive compensation for such referrals. In connection with this
investigation, MMC, Putnam and Mercer have received requests for
information from the SEC and are fully cooperating.
Other Matters
-------------
MMC and its subsidiaries are subject to various other 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 that could, if assessed, be
significant. Insurance coverage applicable to such matters includes
elements of both risk retention and risk transfer.
As part of the combination with Sedgwick, MMC acquired several insurance
underwriting businesses that were already in run-off, including River
Thames Insurance Company Limited ("River Thames"), which was sold in 2001.
Sedgwick guaranteed payment of claims on certain policies underwritten
through the Institute of London Underwriters by River Thames ("ILU
Guarantee"). The policies covered by the ILU Guarantee are reinsured up to
GBP 40 million by a related party of River Thames. Payment of claims under
the reinsurance agreement is collateralized by segregated assets held in a
trust. As of September 30, 2004, the reinsurance coverage exceeded the best
estimate of the projected liability of the policies covered by the ILU
Guarantee. To the extent River Thames or the reinsurer is unable to meet
their obligations under those policies, a claimant may seek to recover from
MMC under the guarantee.
Although the ultimate outcome of these other matters cannot be ascertained
and liabilities in indeterminate amounts may be imposed on MMC and its
subsidiaries, on the basis of present information, it is the opinion of
MMC's management that the disposition or ultimate determination of these
claims, lawsuits or proceedings should not have a material adverse effect
on MMC's consolidated financial position or cash flows, but may be material
to MMC's operating results in any particular period.
14. Variable Interest Entities
---------------------------
MMC through Putnam, manages $3.7 billion in the form of Collateralized Debt
Obligations ("CDO") and Collateralized Bond Obligations ("CBO"). Separate
limited liability companies were established to issue the notes and to hold
the underlying collateral, which consists of high-yield bonds and other
securities. Putnam serves as the collateral manager for the CDOs and CBOs.
The maximum loss exposure related to the CDOs and CBOs is limited to
Putnam's investment totaling $7.7 million, reflected in Long-term
investments in the Consolidated Balance Sheets at September 30, 2004. MMC
has concluded it is not the primary beneficiary of these structures under
FIN 46 "Consolidation of Variable Interest Entities."
15. Segment Information
-------------------
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which
is after deductions for directly related expenses and minority interest but
before corporate expenses, charges, credits or insurance recoveries related
to September 11, 2001, and charges or credits related to integration and
restructuring reserves. 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, 2004 and 2003 follow:
- --------------------------------------------------------------------------------
Segment Operating
(In millions of dollars) Revenue Income
- --------------------------------------------------------------------------------
2004
Risk and Insurance Services $5,585 (a) $1,086
Investment Management 1,336 124
Consulting 2,294 308
- --------------------------------------------------------------------------------
$9,215 $1,518
- --------------------------------------------------------------------------------
2003
Risk and Insurance Services $5,093 (a) $1,351
Investment Management 1,447 364
Consulting 2,014 278
- --------------------------------------------------------------------------------
$8,554 $1,993
- --------------------------------------------------------------------------------
(a)Includes interest income on fiduciary funds ($94 million in 2004 and $91
million in 2003).
A reconciliation of the total segment operating income to income before
income taxes and minority interest in the consolidated statements of income
is as follows:
- --------------------------------------------------------------------------------
(In millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
Total segment operating income $1,518 $1,993
Corporate income/(expense) 3 (101)
Reclassification of minority interest 12 17
- --------------------------------------------------------------------------------
Operating income 1,533 1,909
Interest income 15 19
Interest expense (153) (137)
- --------------------------------------------------------------------------------
Total income before income taxes and
minority interest $1,395 $1,791
- --------------------------------------------------------------------------------
During the first quarter of 2004, MMC reached final settlement for insured
losses totaling $278 million related to the World Trade Center. The
replacement value of assets exceeded the book value by $105 million, which
was recorded as a reduction of Corporate operating expenses.
Operating segment revenue by product for the nine-month periods ended
September 30, 2004 and 2003 is as follows:
- ---------------------------------------------------------------------------
(In millions of dollars) 2004 2003
- ---------------------------------------------------------------------------
Risk & Insurance Services
Risk Management and Insurance Broking $3,725 $3,583
Reinsurance Broking and Services 688 646
Risk Consulting and Technology (a) 427 213
Related Insurance Services 745 651
- ---------------------------------------------------------------------------
Total Risk and Insurance Services 5,585 5,093
- ---------------------------------------------------------------------------
Investment Management 1,336 1,447
- ---------------------------------------------------------------------------
Consulting
Retirement Services 1,022 906
Management and Organizational Change 420 315
Health Care & Group Benefits 310 300
Human Capital 305 281
Economic 123 109
- ---------------------------------------------------------------------------
2,180 1,911
Reimbursed Expenses 114 103
- ---------------------------------------------------------------------------
Total Consulting 2,294 2,014
- ---------------------------------------------------------------------------
Total $9,215 $8,554
- ---------------------------------------------------------------------------
(a) Includes the operations of Kroll, acquired in 2004; Marsh risk
consulting, previously reported in Risk and Insurance broking; and claims
management, previously reported in Related Insurance Services.
Commissions and Fees Receivable by operating segment at September 30, 2004
and December 31, 2003 are as follows:
- -------------------------------------------------- ------------------------
(In millions of dollars) 2004 2003
- -------------------------------------------------- ------------------------
Risk and Insurance Services $1,480 $1,365
Investment Management 385 380
Consulting 743 642
- -------------------------------------------------- ------------------------
Total $2,608 $2,387
- -------------------------------------------------- ------------------------
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, 2004
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh Inc. ("Marsh"), the world's
largest risk and insurance services firm; Putnam Investments ("Putnam"),
one of the largest investment management companies in the United States;
and Mercer Inc. ("Mercer"), a major global provider of consulting services.
Approximately 60,000 employees worldwide provide analysis, advice and
transactional capabilities to clients in over 100 countries.
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which
is after deductions for directly related expenses and minority interest but
before corporate expenses, charges, credits or insurance recoveries related
to September 11, 2001, and charges or credits related to integration and
restructuring reserves.
For a description of critical accounting policies, including those which
involve significant management judgment, see Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 1 to the
consolidated financial statements in MMC's Annual Report on Form 10-K
("2003 10-K") for the year ended December 31, 2003.
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 two of this filing. This
Form 10-Q should be read in conjunction with the 2003 10-K.
Recent Developments
The historical financial results presented below should be viewed in light
of recent developments, which will significantly change the risk and
insurance services business model in the future.
Marsh Developments
------------------
On October 14, 2004, the New York Attorney General's Office filed a Civil
Complaint (the "Civil Complaint") in state court against MMC and Marsh,
Inc. ("Marsh") asserting claims under New York State law for fraudulent
business practices, antitrust violations, securities fraud, unjust
enrichment and common law fraud. The Civil Complaint is discussed more
fully in Note 13 to the consolidated financial statements.
MMC has launched an internal investigation of the issues raised in the
Attorney General's complaint (reporting directly to MMC's Board of
Directors). MMC is fully cooperating with the New York Attorney General's
Office.
On October 15, 2004, MMC announced the suspension of all market services
agreements effective October 1, 2004.
On October 25, 2004, Michael Cherkasky was named Chief Executive Officer of
MMC and was elected to MMC's Board of Directors. Robert Erburu was named
lead director of the MMC Board of Directors.
On October 26, 2004, MMC announced changes to its business model, focused
on the following:
o Complete transparency to clients of all fees and remuneration to be
received by Marsh for performing its services.
o Permanent elimination of market services agreements and similar
agreements.
o A centralized placement process to provide purchasing power and
industry expertise to our clients, which will also provide a clear and
auditable trail of placements to ensure compliance with business
practices.
On November 1, 2004, Marsh announced it is taking steps to collect all
amounts owed to it by insurance companies under market services agreements
that were in effect prior to October 15, 2004. Amounts collected will be
placed into a segregated account to be used in connection with any
agreement to compensate Marsh clients it may reach with the Attorney
General of the State of New York.
MMC recorded a $232 million charge in the third quarter of 2004, which
equals the recorded net accounts receivable related to market services
agreements at September 30, 2004. MMC believes that in light of existing
facts and circumstances, $232 million is the appropriate amount to reserve
as the minimum potential liability in connection with these matters. The
ultimate settlement may vary significantly from that amount. The liability
will be reviewed at each quarterly reporting date, based on the facts and
circumstances at that time as additional information becomes available and
settlement negotiations progress. In the future, the amount accrued will
not necessarily be equal to the amount of market services agreement revenue
collected and/or accrued.
These recent developments result in a number of near-term issues that MMC
must resolve and will impact the way MMC and Marsh conduct business.
Market services revenue declined to $46 million in the third quarter of
2004 from $177 million in the prior year. Due to the filing of the Attorney
General's civil complaint, MMC was unable to complete the normal process to
verify amounts earned or determine that collection of these amounts is
reasonably assured for certain contracts. As a result, MMC did not accrue a
significant portion of market services revenue related to placement
activity in the third quarter of 2004. Almost all of the decline in market
services revenue in the third quarter is due to the above factors and not a
decline in the amount of business placed. Although some insurance companies
have indicated they may delay payments until the issues concerning market
services agreements are clarified, MMC intends to collect all market
services revenue earned prior to October 1, 2004. Any such revenue not
accrued at September 30, 2004 will be recognized as revenue when collected
in the fourth quarter or in 2005. Market services revenues for the fourth
quarter and year ended December 31, 2003 were $293 million and $845
million, respectively. No market services revenue will be earned for
placements made after October 1, 2004.
The following table provides quarterly market services revenue for 2003 and
2004:
- ------------------------------------------------------------
Quarter Ended 2004 2003
- ------------------------------------------------------------
March 31 $211 $173
June 30 211 202
September 30 46 177
- ------------------------------------------------------------
Year to Date $468 552
- ------------------------------------------------------------
December 31 293
- ------------------------------------------------------------
Total $845
- ------------------------------------------------------------
Putnam Developments
-------------------
Putnam has reached an agreement in principle with the staff of the
Philadelphia office of the SEC to enter into a settlement of matters
arising out of the SEC's investigation into Putnam's brokerage practices
(as previously disclosed by MMC). The settlement would involve the alleged
failure by Putnam to adequately disclosure its practices relating to the
allocation of brokerage on portfolio transactions to broker-dealers who
sold shares of Putnam mutual funds. Putnam ceased directing brokerage to
broker-dealers in connection with the sale of fund shares as of January 1,
2004. Under the agreement in principle, Putnam would pay a civil penalty in
the amount of $40 million and disgorgement in the amount of $1. The total
amount of the payment would be paid to certain Putnam funds. As part of the
settlement, Putnam would neither admit nor deny wrongdoing. The settlement
remains subject to final documentation and approval by the Commissioners of
the SEC.
MMC Developments
----------------
Across all of its businesses, MMC must preserve its capabilities to serve
clients and the capacity to support staff development. Retention of
employees is critical to the organization. As a result, MMC is developing
compensation programs to retain, motivate, and reward employees.
MMC is examining all parts of its cost structure to identify areas where
expenses can be reduced appropriately. Discretionary expenses are under
review as are ways to increase efficiencies through technology and other
methods such as consolidating facilities. MMC's staff levels must also be
adjusted based on the realities of the marketplace and MMC's current
situation. On a global basis, MMC expects to reduce staff by 5% or
approximately 3,000 positions, with three-quarters coming from risk and
insurance services. This includes staff reductions associated with the
previously announced combination of the defined contribution administration
business of Putnam with Mercer's human resources outsourcing operations, as
well as the integration of Kroll.
The actions discussed above are expected to result in pretax restructuring
charges of approximately $325 million over the next six months. The of
certain discretionary expenses and the effect of the restructuring should
result in annual cost savings of approximately $400 million when fully
implemented. These initiatives will allow MMC to continue to provide
excellent service to clients, make the best use of its global capabilities,
and establish a level of profitability that will contribute to maximizing
long-term value for shareholders.
The uncertainty regarding the change in Marsh's business model, the impact
of eliminating market services agreements and potential fines and/or
penalties have resulted in credit rating downgrades, the inability to
access commercial paper markets in the short term and the need to
renegotiate MMC's revolving credit facilities.
At September 30, 2004 MMC had four revolving credit facilities aggregating
$2.755 billion, in the following amounts: $700 million which expires in
June 2005, $355 million which expires in July 2005, $1 billion which
expires in June 2007 and $700 million which expires in June 2009. These
facilities support MMC's commercial paper borrowings. On September 30,
2004, no amounts were outstanding under any of the facilities. Because of
MMC's inability to access the commercial paper markets, MMC expects to need
to use these facilities to refinance substantially all of its outstanding
commercial paper. As of September 30, 2004, MMC had $1.3 billion and as of
October 26, 2004 had approximately $1.9 billion aggregate face amount of
commercial paper outstanding, substantially all of which matures before
December 30, 2004.
The matters raised by the civil complaint filed by the Attorney General of
the State of New York on October 14, 2004 and described in MMC's Current
Report on Form 8-K filed on October 15, 2004 may have prohibited MMC from
borrowing under the facilities, which contain standard representations as
to no material adverse litigation and compliance with laws. The lenders
under each of the facilities agreed to waive the effect of such matters
until December 30, 2004. In exchange, MMC agreed that the facilities will
be used exclusively to repay existing commercial paper borrowings, and that
in order for MMC to borrow under the facilities, the aggregate face amount
of outstanding commercial paper cannot exceed $1.9 billion. MMC also agreed
not to repurchase its stock and not to permit any of its subsidiaries to
incur debt other than under existing facilities during the waiver period.
MMC has commenced discussions with its lenders to amend or replace the
facilities to provide longer-term liquidity. While MMC believes those
discussions will achieve that goal before December 30, 2004, there is no
assurance that they will be completed by such date. If the negotiations are
unsuccessful, MMC will be in default under these facilities and has no
other committed source to refinance the amounts expected to be outstanding
under these facilities.
In October 2004, MMC's credit ratings were lowered by Standard & Poor's
Corporation to "BBB-plus" and "A-2", for its senior debt and short term
debt, respectively and remain on credit watch with negative implications.
Moody's Investor Services also lowered MMC's ratings to Baa2 for its senior
debt and to P-2 for its short term debt and remain under review for
possible further downgrade. These downgrades will result in increased
borrowing costs and limit MMC's access to the commercial paper markets.
Consolidated Results of Operations
- ------------------------------------------------------------------------------
Third Quarter Nine Months
(In millions of dollars) 2004 2003 2004 2003
- ----------------------------------------------------------------- ------------
Revenue:
Services Revenue $2,931 $2,809 $9,072 $8,490
Investment Income (Loss) 38 28 143 64
- ------------------------------------------------------------------------------
Operating Revenue 2,969 2,837 9,215 8,554
- ------------------------------------------------------------------------------
Expense:
Compensation and Benefits 1,716 1,486 4,947 4,339
Other Operating Expenses 1,125 758 2,735 2,306
- ------------------------------------------------------------------------------
Operating Expenses 2,841 2,244 7,682 6,645
- -------------------------------------------------------- ----------------------
Operating Income $ 128 $ 593 $1,533 $1,909
- ------------------------------------------------------------------------------
Operating Income Margin 4.3% 20.9% 16.6% 22.3%
- ------------------------------------------------------------------------------
Diluted Earnings per Share $ .04 $ .65 $ 1.60 $ 2.12
- ----------------------------------------------------------------- ------------
Operating income in the third quarter of 2004 declined 78% to $128 million,
reflecting decreases in risk and insurance services and investment
management, partly offset by an increase in Consulting. Results in risk and
insurance services reflect a $232 million charge related to any agreement
to compensate Marsh clients it may reach with the New York Attorney General
concerning market services agreements, and a $132 million decrease in
revenue related to market services agreements, which declined to $46
million from $177 million in the prior year. Results at Putnam reflect a
decline in revenue resulting from lower assets under management. The
results also include a non-deductible charge of $40 million for an
agreement in principle with the Philadelphia office of the SEC to settle
Putnam's alleged failure to make adequate disclosures regarding certain
brokerage allocation practices prior to 2004. Consulting results reflect
growth in underlying revenue, with strong growth in management and
organizational change consulting.
An analysis of MMC's operating revenue by segment, and the impact of
foreign currency translation, acquisitions and dispositions is as follows:
- ------------------------------------------------------------------------------------------------------------------------------
Components of Revenue Change
--------------------------------------
Three Months Ended % Change Acquisitions/
September 30, GAAP Underlying Dispositions Currency
(In millions, except percentage figures) 2004 2003 Revenue Revenue (a) Impact Impact
- --------------------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $1,030 $1,134 (9)% (13)% 1% 3%
Reinsurance Broking and Services 206 209 (1)% (3)% - 2%
Risk Consulting and Technology (b) 272 73 268% 6% 262% -
Related Insurance Services (c) 266 224 18% 13% 4% 1%
- -------------------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services (d) 1,774 1,640 8% (7)% 13% 2%
- -------------------------------------------------------------------------------------------------------------------------
Investment Management 429 507 (16)% (16)% - -
- -------------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services (d) 333 300 11% (1)% 5% 7%
Management and Organizational Change 145 117 24% 17% 2% 5%
Health Care and Group Benefits (d) 99 99 1% (2)% - 3%
Human Capital 108 100 9% 6% - 3%
Economic 42 38 9% 7% - 2%
- --------------------------------------------------------------------------------------------------------------------------
727 654 11% 3% 3% 5%
Reimbursed Expenses 39 36
- --------------------------------------------------------------------------------------------------------------------------
Total Consulting 766 690 11% 3% 3% 5%
- --------------------------------------------------------------------------------------------------------------------------
Total Revenue $2,969 $2,837 5% (6)% 8% 3%
- --------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Components of Revenue Change
-------------------------------------
Nine Months Ended % Change Acquisitions/
September 30, GAAP Underlying Dispositions Currency
(In millions, except percentage figures) 2004 2003 Revenue Revenue (a) Impact Impact
- ---------------------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $3,725 $3,583 4% (1)% 1% 4%
Reinsurance Broking and Services 688 646 6% 4% - 2%
Risk Consulting and Technology (b) 427 213 100% 9% 91% -
Related Insurance Services (c) 745 651 14% 12% 1% 1%
- --------------------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services (d) 5,585 5,093 10% 2% 5% 3%
- --------------------------------------------------------------------------------------------------------------------------
Investment Management 1,336 1,447 (8)% (8)% - -
- --------------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services (d) 1,022 906 13% - 5% 8%
Management and Organizational Change 420 315 33% 12% 16% 5%
Health Care and Group Benefits (d) 310 300 3% 1% - 2%
Human Capital 305 281 9% 3% - 6%
Economic 123 109 12% 10% - 2%
- --------------------------------------------------------------------------------------------------------------------------
2,180 1,911 14% 3% 5% 6%
Reimbursed Expenses 114 103
- --------------------------------------------------------------------------------------------------------------------------
Total Consulting 2,294 2,014 14% 3% 5% 6%
- --------------------------------------------------------------------------------------------------------------------------
Total Revenue $9,215 $8,554 8% 1% 4% 3%
- --------------------------------------------------------------------------------------------------------------------------
(a) Underlying basis measures the change in revenue before the impact of
acquisitions and dispositions using constant currency exchange rates.
(b) Includes the operations of Kroll, acquired in 2004 and Marsh risk
consulting, previously reported in Risk and Insurance broking.
(c) Includes U.S. affinity, wholesale broking, underwriting management,
claims management and MMC Capital businesses.
(d) Certain reclassifications have been made to prior year amounts to
conform with current presentation. The table below provides an analysis of
revenue by quarter, which reflects the reclassification of previously
reported results.
- --------------------------------------------------------------------------------------------------
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, June 30, September 30, December 31,
- --------------------------------------------------------------------------------------------------
2004
Risk and Insurance Services
Risk Management and Insurance Broking 1,411 1,284 1,030 -
Reinsurance Broking and Services 275 207 206 -
Risk Consulting and Technology 75 80 272 -
Related Insurance Services 233 246 266 -
- --------------------------------------------------------------------------------------------
Total Risk and Insurance Services 1,994 1,817 1,774 -
- --------------------------------------------------------------------------------------------
2003
Risk and Insurance Services
Risk Management and Insurance Broking 1,250 1,199 1,134 1,298
Reinsurance Broking and Services 243 194 209 151
Risk Consulting and Technology 70 70 73 87
Related Insurance Services 210 217 224 239
- --------------------------------------------------------------------------------------------
Total Risk and Insurance Services 1,773 1,680 1,640 1,775
- --------------------------------------------------------------------------------------------
Revenue, derived mainly from commissions and fees, increased 5% from the
third quarter of 2003. The increase in revenue was primarily due to the
impact of acquisitions and foreign exchange. Consolidated revenue decreased
6% on an underlying basis, which measures the change in revenue before the
impact of acquisitions and dispositions and using constant currency
exchange rates. Underlying revenue growth in consulting was more than
offset by a decrease in investment management revenue and a decrease in
market services revenue in risk and insurance services.
Revenue increased 8% in risk and insurance services. Acquisitions,
including the acquisition of Kroll and Prentis Donegan in the third
quarter, contributed 13% to the segment's revenue growth. Revenue in this
segment declined 7% on an underlying basis in the third quarter of 2004
resulting primarily from the decline in market services revenues. The
impact of declining insurance premium rates was largely offset by new
business development within risk and insurance broking. Related insurance
services reflects growth in claims management and higher investment income
at MMC Capital. Consulting revenue grew 3% on an underlying basis. Higher
demand for management advice generated an increase in management and
organizational change consulting. Acquisitions contributed 3% to the
revenue growth of consulting largely reflecting the acquisition of Synhrgy
HR Technologies. Revenue decreased 16% in the investment management segment
due to a decline in the amount of assets under management on which fees are
earned, partially offset by transaction fees related to private equity
funds. Average assets under management declined 23% in the third quarter
compared with 2003.
Revenue in the first nine months of 2004 increased 8% from the same period
last year primarily due to the impact of acquisitions and foreign exchange,
while underlying revenue increased 1%. Underlying revenue grew 2% in the
risk and insurance services segment during the first nine months of the
year, due to growth in risk consulting, reinsurance broking, and related
insurance services. Underlying revenue declined 1% for risk management and
insurance broking primarily due to a decline in market services revenue.
Acquisitions and foreign exchange contributed 5% and 3%, respectively, to
revenue growth for the segment. Consulting revenue grew 3% on an underlying
basis and acquisitions increased revenue by 5%. Revenue decreased 8% in the
investment management segment due to lower fees resulting from the decline
in assets under management, partially offset by higher investment income
related to the sale of Putnam's interest in its Italian joint venture and
related securities.
Future revenues in risk and insurance services will be impacted by the
elimination of market services revenues and the implementation of a new
business model, discussed in more detail in the risk and insurance services
section of this MD&A.
Operating expenses increased 27% in the third quarter of 2004. The effect
of acquisitions and foreign exchange and charges for potential compensation
to Marsh clients and Putnam's regulatory settlements increased expenses by
13% and 12%, respectively. Underlying expenses excluding the charges for
potential damages and settlements increased 2%, resulting from a 4%
increase in compensation and benefits partly offset by a 3% decline in
other operating expenses.
Operating expenses increased 16% in the first nine months of 2004, of which
8% was due to the effects of acquisition and foreign exchange. Expenses in
2004 also include a $232 million charge for any agreement to compensate
Marsh clients related to market services agreements, regulatory fines of
$140 million related to Putnam's settlement agreements with the Securities
and Exchange Commission ("SEC") and the office of the Secretary of the
Commonwealth of Massachusetts, and a credit of $105 million from the final
settlements with insurers for claims related to the September 11, 2001
attack on the World Trade Center ("WTC"). Combined, these items increased
expenses by 4%. Underlying expenses excluding these three items increased
3% due to higher compensation and benefits costs which includes severance
and increased pension costs, and other costs related to regulatory issues.
These increases were partially offset by a decrease in amortization expense
for prepaid dealer commissions and a credit to compensation expense related
to the settlement with Putnam's former chief executive officer.
Risk and Insurance Services
- -------------------------------------------------------------------------------
Third Quarter Nine Months
- -------------------------------------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- ----------------------------------------------------------------- -------------
Revenue $1,774 $1,640 $5,585 $5,093
Expense 1,780 1,252 4,499 3,742
- ----------------------------------------------------------------- -------------
Operating Income $ (6) $ 388 $1,086 $1,351
- ----------------------------------------------------------------- -------------
Operating Income Margin (0.3)% 23.7% 19.4% 26.5%
- ----------------------------------------------------------------- -------------
Revenue
-------
Revenue for the risk and insurance services segment grew 8% over the third
quarter of 2003. Acquisitions, principally Kroll, along with other smaller
acquisitions, contributed 13% to revenue growth. Kroll is contributing to
Marsh's expanding risk consulting operations and produced strong revenues
and earnings growth in the quarter. Underlying revenue declined 7%. In risk
management and insurance broking, underlying revenue decreased 13%
primarily due to a reduction in market services revenue, discussed in more
detail below. The impact of the decline in insurance premium rates has been
largely offset by new business development. The insurance markets have
become more competitive with consistent rate decreases across most property
and casualty lines. Underlying revenue in reinsurance broking declined 3%.
Related insurance services revenue increased 13%, on an underlying basis,
resulting from an increase in claims management and higher investment
income at MMC Capital.
Market services revenue declined to $46 million in the third quarter of
2004 from $177 million in the prior year. Due to the filing of the Attorney
General's civil complaint, MMC was unable to complete the normal process to
verify amounts earned or determine that collection of these amounts is
reasonably assured for certain contracts. As a result, MMC did not accrue a
significant portion of market services revenue related to placement
activity in the third quarter. Almost all of the decline in market services
revenue in the third quarter is due to the above factors and not a decline
in the amount of business placed. Although some insurance companies have
indicated they may delay payments until the issues concerning market
services agreements are clarified, MMC intends to collect all market
services revenue earned prior to October 1, 2004. Any such revenue not
accrued at September 30, 2004 will be recognized in earnings when collected
in the fourth quarter or in 2005. Market services revenues for the fourth
quarter and year ended December 31, 2003 were $293 million and $845
million, respectively. No market services revenue will be earned for
placements made after October 1, 2004. Revenue for the first nine months of
2004 grew 10% over the same period of 2003, reflecting the impact of
acquisitions and foreign exchange and a higher volume of business.
Underlying revenue growth of 2% for the nine months was negatively impacted
by the reduction of market services revenues in the third quarter, and
declining insurance premium rates. Revenue from market services agreements
was $468 million and $552 million for the nine months in 2004 and 2003,
respectively. Reinsurance broking and services grew 4% on an underlying
basis primarily resulting from renewals and related insurance services grew
12% due to strong growth in claims management and higher investment income
at MMC Capital. As discussed above, future revenue levels may be impacted
by the implementation of a new business model in risk and insurance
services and an increasingly competitive insurance marketplace.
Expense
-------
Risk and insurance services expenses increased 42% over the third quarter
of 2003. Approximately 18% of the increase is due to a $232 million charge
for potential compensation to Marsh clients related to market services
agreements. The effects of acquisitions and foreign exchange increased
expenses by 19%. On an underlying basis expenses excluding the charge for
compensation to Marsh clients increased 5%. Compensation and benefits
increased by 7%, primarily due to increased pension and benefits costs, and
other operating expenses increased 2%. For the nine months, operating
expenses increased 20% over 2003. The effect of acquisitions and foreign
exchange, and the charge for potential compensation to Marsh clients
increased expenses by 10%, and 6%, respectively. Underlying expenses
excluding the charge for compensation to Marsh clients increased 4%. On an
underlying basis, compensation and benefits increased 6% and other
operating expenses were flat.
Acquisition
-----------
In July 2004, MMC acquired Kroll, Inc., the world's leading provider of
risk mitigation services. The combination of Marsh and Kroll expands MMC's
capabilities to assist clients in managing the total cost of risk. The
total cost of the acquisition was $1.9 billion.
Investment Management
- -------------------------------------------------------------------------------
Third Quarter Nine Months
- -------------------------------------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- -------------------------------------------------------------------------------
Revenue $429 $507 $1,336 $1,447
Expense 374 371 1,212 1,083
- -------------------------------------------------------------------------------
Operating Income $55 $136 $124 $364
- -------------------------------------------------------------------------------
Operating Income Margin 12.8% 26.8% 9.3% 25.2%
- -------------------------------------------------------------------------------
Revenue
-------
Putnam's revenue decreased 16% in the third quarter of 2004 reflecting a
decrease in fees due to a decline in assets under management partially
offset by transaction fees related to private equity investments and
transfer agent fees. Assets under management averaged $209 billion in the
third quarter of 2004, a 23% decline from the $270 billion managed in the
third quarter of 2003. Assets under management aggregated $209 billion at
September 30, 2004 compared with $272 billion at September 30, 2003 and
$240 billion at December 31, 2003. The change from December 31, 2003
primarily results from net redemptions of $32 billion.
Putnam receives service fees from the Putnam Mutual Funds for transfer
agency, custody and other administrative services, as contracted by the
Trustees of the Putnam Mutual Funds. In the third quarter of 2004, the
contract for transfer agency services was converted from cost of service to
a fixed rate per mutual fund shareholder account. As part of the change in
the service fee contract, Putnam will incur certain expenses previously
borne by the Putnam Mutual Funds. The change in the service fee calculation
resulted in an increase in service fee revenue of $19 million for the third
quarter of 2004. Expenses incurred under the contract increased third
quarter expenses by $21 million. The change in the service fee contract is
expected to have an immaterial impact on operating income in future
quarters, but will reduce operating margins by approximately 100 basis
points.
Putnam's revenue declined 8% in the first nine months of 2004 compared to
the same period in 2003. The decrease is primarily driven by lower fees due
to a decline in assets under management, partially offset by higher
investment gains and higher equity income related to T.H.Lee.
At September 30, 2004, assets held in equity securities represented 68% of
assets under management, compared with 74% at September 30, 2003, while
investments in fixed income products represented 32%, compared with 26% at
September 30, 2003.
Quarter-end and average assets under management are presented below:
- -------------------------------------------------------------------------------
(In billions of dollars) 2004 2003
- -------------------------------------------------------------------------------
Mutual Funds:
Growth Equity $37 $ 48
Value Equity 39 42
Blend Equity 27 36
Fixed Income 37 45
- -------------------------------------------------------------------------------
140 171
- -------------------------------------------------------------------------------
Institutional:
Equity 40 76
Fixed Income 29 25
- -------------------------------------------------------------------------------
69 101
- -------------------------------------------------------------------------------
Quarter-end Assets $209 $272
- -------------------------------------------------------------------------------
Assets from Non-US Investors $ 36 $ 39
- -------------------------------------------------------------------------------
Average Assets $209 $270
- -------------------------------------------------------------------------------
Components of quarter-to-date change
in ending assets under management
- -------------------------------------------------------------------------------
New Sales/(Redemptions)
including Dividends Reinvested $ (10.5) $(2.7)
- -------------------------------------------------------------------------------
Impact of PanAgora acquisition 8.2 -
- -------------------------------------------------------------------------------
Impact of Market/Performance (2.1) 7.4
- -------------------------------------------------------------------------------
The categories of mutual fund assets reflect style designations aligned
with each fund's prospectus. All prior year amounts have been reclassified
to conform with the current investment mandate for each product.
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international stock and bond market prices,
the composition of assets under management and by the level of investments
and withdrawals for current and new fund shareholders and clients. Items
affecting revenue also include, but are not limited to, actual and relative
investment performance, service to clients, the development and marketing
of new investment products, the relative attractiveness of the investment
style under prevailing market conditions, changes in the investment
patterns of clients and the ability to maintain investment management and
administrative fees at historic levels. Future revenue may be adversely
affected by continued net redemptions and by limits on fund expense ratios
and front end sales charges. Revenue levels are sensitive to all of the
factors above, but in particular, to significant changes in stock and bond
market valuations and net flows into or out of Putnam's funds.
Expense
-------
Putnam's expenses increased 1% in the third quarter of 2004 from the same
period of 2003. The increase was primarily due to a $40 million charge
related to a settlement agreement in principle with the SEC and $13 million
of legal and severance costs related to regulatory issues and repositioning
Putnam, mostly offset by a decline in amortization expense for prepaid
dealer commissions and lower compensation costs.
Expenses for the nine months ended September 30, 2004 increased 12% from
the same period in 2003. Expenses in 2004 include a $140 million charge for
Putnam's regulatory settlements with the SEC and the Secretary of the
Commonwealth of the State of Massachusetts. Other significant items
recorded in 2004 were severance of $57 million and incremental costs
related to regulatory issues and repositioning Putnam, including legal and
audit costs of $36 million, communications costs of $16 million and $5
million of other costs. These increases were partially offset by a decrease
in amortization expense for prepaid dealer commissions and a $25 million
credit to compensation expense associated with the settlement with Putnam's
former chief executive officer.
Acquisition
-----------
In July 2004, Putnam acquired an additional 30% of the voting stock of
PanAgora Asset Management, bringing its total interest to an 80% voting
majority. PanAgora offers enhanced index and structured products. This
transaction increased Putnam's assets under management by approximately $8
billion.
Consulting
- -----------------------------------------------------------------------------
Third Quarter Nine Months
- -----------------------------------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- -----------------------------------------------------------------------------
Revenue $766 $ 690 $2,294 $2,014
Expense 660 594 1,986 1,736
- -------------------------------------------------- --------------------------
Operating Income $106 $ 96 $ 308 $ 278
- -----------------------------------------------------------------------------
Operating Income Margin 13.8% 13.9% 13.4% 13.8%
- ----------------------------------------------------------------------------
Revenue
-------
Consulting revenue in the third quarter of 2004 increased 11% over the same
period in 2003, primarily due to the impact of acquisitions and foreign
currency. Underlying revenue increased 3% due to the higher demand for
consulting services resulting from improving economic conditions. On an
underlying basis, management and organization change grew 17% and economic
consulting grew 7%. Offsetting this growth were declines of 2% in health
care and group benefits and 1% in retirement services.
Consulting revenue for the first nine months of 2004 increased 14% over the
same period in 2003. Acquisitions, which accounted for 5% of the revenue
growth in 2004, include Oliver, Wyman & Company which closed on April 1,
2003 and Synhrgy HR Technologies which closed in January, 2004. On an
underlying basis, revenue increased 3%. Underlying revenue grew 10% in
economic consulting, 12% in management and organizational change, 1% in
health care & group benefits and 3% in the human capital practices.
Underlying revenue growth in retirement services was flat.
Expense
-------
Consulting expenses increased 11% in the third quarter of 2004 compared to
2003. The increase is primarily due to higher compensation and benefit
costs and higher amortization expense for intangible assets due to
acquisitions and the impact of foreign exchange. On an underlying basis,
expenses increased 2% due to increased benefits costs, primarily pension
costs. For the nine months, expenses increased 14% over 2003 due to the
impact of acquisitions and foreign exchange on compensation and benefit
costs and facility costs, as well as increased pension charges. On an
underlying basis, expenses increased 3%.
Corporate Items
---------------------------------------------------------------------------
Corporate Expenses
Corporate expenses declined 1% in the third quarter of 2004 compared to the
same period last year. Corporate expenses for the nine months ended
September 30, 2004 include the impact of the final settlement for insured
losses related to the WTC. The replacement value of the assets exceeded
their book value by $105 million which was recorded in the first quarter as
a reduction of other operating expenses.
Interest
Interest income earned on corporate funds in the third quarter amounted to
$6 million, which was unchanged from the third quarter of 2003. Interest
expense of $55 million in 2004 increased from $48 million in the third
quarter of 2003 due to an increase in the average outstanding debt.
Interest income on corporate funds amounted to $15 million in the first
nine months of 2004, a $4 million decrease from the same period in 2003.
Interest expense of $153 million increased from $137 million in the same
period of 2003 due to an increase in the average outstanding debt due to
the issuance of commercial paper and long term debt to fund the acquisition
of Kroll. Future borrowing costs will increase due to the credit downgrades
discussed in "Financing Cash Flows".
Income Taxes
MMC's consolidated effective tax rate was 65.8% of income before income
taxes and minority interest in the third quarter of 2004 compared with 34%
in the third quarter of 2003. The effective tax rate for the third quarter
of 2004 reflects the impact of Putnam's non-deductible settlement of $40
million, a 38% tax rate on the accrual for potential compensation to Marsh
clients of $232 million, and a 34.5% effective tax rate on ongoing
operating income excluding these items. The third quarter also reflects the
impact of adjusting the year-to-date effective tax rate on ongoing
operating income from 33.1% to 34.5%, resulting from changes in the
expected geographic mix of MMC's income following the termination of market
services agreements. The effective tax rate of 37.8% for the nine months of
2004 includes the impact of Putnam's non-deductible settlements of $140
million, a 40% tax rate on the WTC settlement gain of $105 million, and a
38% tax rate on the accrual of $232 million for potential compensation to
Marsh clients. Excluding these items, the effective tax rate applicable to
ongoing operations was 34.5% for the first nine months of 2004, compared to
34% for the same period in 2003.
The American Jobs Creation Act of 2004 was enacted on October 22, 2004, and
includes an incentive for U.S. multinationals to repatriate foreign
earnings that have previously been permanently reinvested outside the U.S.
The elective incentive would allow a dividend received deduction for 85% of
certain cash dividends paid in either 2004 or 2005. Management is analyzing
this incentive and expects to utilize it to the extent it is beneficial to
MMC.
Liquidity and Capital Resources
---------------------------------------------------------------------------
At September 30, 2004 MMC had total cash and cash equivalents of $577
million, compared with $665 million at December 31, 2003. Historically,
cash flows generated from operations have been sufficient to fund ongoing
working capital requirements, and to fund dividends and capital
expenditures. Historically, MMC has used commercial paper to manage its
short term liquidity needs and has maintained revolving credit facilities
to support its commercial paper borrowings. MMC's liquidity is currently
affected by its current inability to access the commercial paper markets
and restrictions on the use of its revolving credit facilities. The
potential impact of the issues raised in the civil complaint on MMC's
ability to use its revolving credit facilities is discussed in "Financing
Cash Flows" below.
Operating Cash Flows
--------------------
MMC generated $1.4 billion of cash from operations for the nine months
ended September 30, 2004 compared with $1.6 billion for the same period in
2003. These amounts reflect the net income earned by MMC during those
periods adjusted for non-cash charges and changes in working capital which
relate, primarily, to the timing of payments for accrued liabilities or
receipts of assets. The decrease in cash generated from operations compared
with the prior year results primarily from higher tax payments in 2004, a
higher amount of investment gains, which are included in investing cash
flows, as well as normal fluctuations in the timing of payments and
receipts of various working capital items. The increase in 2004 of cash
outflows related to deferred compensation plans was largely offset by cash
generated from the liquidation of assets related to these plans included in
the change in other assets in the consolidated statements of cash flows.
In October 2004 MMC announced the elimination of market services agreements
and similar agreements ("MSAs"), effective October 1, 2004. At September
30, 2004 accounts receivable related to accrued market services revenue was
$232 million. Subsequent to the filing of the Attorney General's complaint,
some insurance companies indicated they may delay payments until the issues
concerning market services agreements are clarified. Given the current
negative publicity related to MSAs, collection of previously accrued MSA
revenue may occur more slowly than expected, or carriers may attempt to
avoid payment of MSA fees that were earned by Marsh. On November 1, 2004,
MMC announced its intention to collect the market services revenue earned
prior October 1, 2004. MMC also announced its intention to place amounts
collected into a segregated account to be used in connection with any
agreement to compensate Marsh clients that it may reach with the Attorney
General of the State of New York.
For the nine months ended September 30, 2004 and 2003, MSA revenue was $468
million and $552 million, respectively. MSA revenue in the fourth quarter
2003 was $293 million. As discussed earlier, MMC is revising its business
model so that revenue for all services provided by MMC is negotiated
directly with clients and has eliminated all market services agreements and
similar agreements. The elimination of MSAs will negatively impact
near-term revenue and operating income. Although MMC expects to be fairly
and fully compensated for the services it provides, there is no assurance
that revenues under the new model will be sufficient to achieve operating
margins and cash flows that are comparable to historical levels. In
addition, client revenue may also be reduced due to negative reaction to
the issues raised in the complaint.
MMC's policy for funding its tax qualified defined benefit retirement plans
is to contribute amounts at least sufficient to meet the funding
requirements set forth in U.S. and international law. There are no current
funding requirements for the U.S. plan for the remainder of 2004. MMC has
funding requirements for the U.K. plans of approximately $28 million for
the remainder of 2004 and $105 million for 2005.
Under generally accepted accounting principles, if the Accumulated Benefit
Obligation of a plan exceeds the fair value of that plan's assets (an "ABO
deficit"), an additional minimum liability is recorded. The additional
minimum liability is equal to the ABO deficit plus the amount of prepaid
pension cost recognized for that plan. The additional minimum liability is
established through a charge to other comprehensive income (equity), net of
applicable taxes. At September 30, 2004, MMC has prepaid pension costs of
approximately $1.3 billion which relate primarily to the U.S. qualified
plan and two U.K. plans, as well as some smaller plans in various
countries. If one or more plans has an ABO deficit at the December 31, 2004
measurement date, some or all of the prepaid pension costs would be charged
as a reduction of equity, in addition to the ABO deficit.
Financing Cash Flows
--------------------
Net cash provided from financing activities was $894 million for the nine
months ended September 30, 2004 compared with a $1.2 billion use of cash in
the same period of the prior year. Cash generated in 2004 relates primarily
to the issuance of commercial paper and long term debt to fund the
acquisition of Kroll, Inc in July 2004.
At September 30, 2004 MMC had four revolving credit facilities aggregating
$2.755 billion, in the following amounts: $700 million which expires in
June 2005, $355 million which expires in July 2005, $1 billion which
expires in June 2007 and $700 million which expires in June 2009. These
facilities support MMC's commercial paper borrowings. On September 30,
2004, no amounts were outstanding under any of the facilities. Because of
MMC's inability to access the commercial paper markets, MMC expects to need
to use these facilities to refinance substantially all of its outstanding
commercial paper. As of September 30, 2004, MMC had approximately $1.3
billion and as of October 26, 2004 had approximately $1.9 billion aggregate
face amount of commercial paper outstanding, substantially all of which
matures before December 30, 2004.
The matters raised by the civil complaint filed by the Attorney General of
the State of New York on October 14, 2004 and described in MMC's Current
Report on Form 8-K filed on October 15, 2004 may have prohibited MMC from
borrowing under the facilities, which contain standard representations as
to no material adverse litigation and compliance with laws. The lenders
under each of the facilities agreed to waive the effect of such matters
until December 30, 2004. In exchange, MMC agreed that the facilities will
be used exclusively to repay existing commercial paper borrowings, and that
in order for MMC to borrow under the facilities, the aggregate face amount
of outstanding commercial paper cannot exceed $1.9 billion. MMC also agreed
not to repurchase its stock and not to permit any of its subsidiaries to
incur debt other than under existing facilities during the waiver period.
MMC has commenced discussions with its lenders to amend or replace the
facilities to provide longer-term liquidity. While MMC believes those
discussions will achieve that goal before December 30, 2004, there is no
assurance that they will be completed by such date. If the negotiations are
unsuccessful, MMC will be in default under these facilities and has no
other committed source to refinance the amounts expected to be outstanding
under these facilities.
In October 2004, MMC's credit ratings were lowered by Standard & Poor's
Corporation to "BBB-plus" and "A-2", for its senior debt and short term
debt, respectively. The ratings remain on Credit Watch with negative
implications. Moody's Investor Services also lowered MMC's ratings to Baa2
for its senior debt and to P-2 for its short term debt. These ratings
remain under review for possible further downgrade. These downgrades will
result in increased borrowing costs and limit MMC's access to the
commercial paper markets.
During the third quarter of 2004, MMC did not repurchase any of its common
stock. For the nine months ended September 30, 2004, MMC repurchased 11
million shares for $510 million, all of which was purchased in the first
and second quarter. During October 2004, MMC repurchased .4 million shares
for $14 million, under the terms of a pre-existing 10b5-1 plan. A 10b5-1
plan allows a company to purchase shares during a black-out period,
provided the company communicates its share purchase instructions to the
broker prior to the black-out period, pursuant to a written plan that may
not be changed.
MMC paid dividends in the amount of approximately $176 million ($0.34 per
share) in the third quarter of 2004. Year to date, MMC has paid dividends
of approximately $502 million ($.96 per share). On September 14, 2004,
MMC's Board of Directors declared a dividend of $0.34 per share, to be paid
on November 15, 2004. MMC's Board will meet in the normal course of
business to consider the level of future dividends.
In July 2004 MMC purchased Kroll, Inc. in an all-cash transaction totaling
approximately $1.9 billion. The purchase was initially funded with
commercial paper borrowings. To support these borrowings, MMC negotiated a
new $1.5 billion, one-year revolving credit facility. Following the
acquisition, MMC issued $650 million of 5.375% Senior Notes due 2014 and
$500 million of Floating Rate Notes due 2007. The proceeds from these notes
were used to repay the commercial paper borrowings. Under the terms of the
above-mentioned credit facility, the amount of the facility was reduced by
the proceeds from the notes issued. That facility now totals $355 million.
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033.
In February 2003, MMC issued $250 million of 3.625% Senior Notes due in
2008 and $250 million of 4.85% Senior Notes due in 2013 (the "2003 Notes").
The net proceeds from the 2003 Notes were used to pay down commercial paper
borrowings.
Investing Cash Flows
--------------------
Cash used for investing activities amounted to $2.4 billion in the first
nine months of 2004 and $333 million for the same period in the prior year.
The primary use of cash in the first nine months was for the acquisition of
Kroll, Inc., Synhrgy HR Technologies and the Australia and New Zealand
operations of Heath Lambert, and payments of approximately $57 million for
acquisitions completed in prior years. Remaining cash payments of
approximately $67 million related to acquisitions completed in 2004 and
2003 are recorded in Other liabilities in the Consolidated Balance Sheets
at September 30, 2004.
MMC's additions to fixed assets and capitalized software, which amounted to
$281 million in the first nine months of 2004 and $335 million in the first
nine months last year, primarily relate to computer equipment purchases and
the refurbishing and modernizing of office facilities and software
development costs.
The sale of Putnam's interest in its Italian joint venture and related
securities along with sales of securities by MMC Capital, generated $174
million of cash during the first nine months of 2004. Securities sales
during the same period last year generated $83 million. These sales are
included in Other, net in the Consolidated Statements of Cash Flows.
MMC has committed to potential future investments of approximately $658
million in connection with various MMC Capital private equity funds and
other MMC investments. Commitments of $276 million relate to Trident III, a
private equity fund managed by MMC Capital, which was formed in 2003. The
remaining commitments relate to other funds managed by MMC Capital
(approximately $90 million) and by Putnam through T.H. Lee (approximately
$292 million). Trident III closed in December 2003, and has an investment
period of six years. While it is unknown when the actual capital calls will
occur, typically, the investment period for funds of this type has been
closer to four years, which would indicate an expected capital call of
approximately $50-$75 million per year but actual capital calls may occur
more quickly. The timing of capital calls is not controlled by MMC. The
majority of the other investment commitments for funds managed by MMC
Capital related to Trident II. The investment period for Trident II is
closed for new investments. Any remaining capital calls would relate to
follow on investments in existing portfolio companies or for management
fees or other partnership expenses. Significant capital calls related to
Trident II are not expected at this time. Although it is anticipated that
Trident II will be harvesting its portfolio in 2005 and thereafter, the
timing of any portfolio company sales and capital distributions is unknown
and not controlled by MMC.
Putnam has investment commitments of $105 million for three active T.H. Lee
funds, of which approximately $50 million is not expected to be called and
funded. Putnam is authorized to commit to invest up to $187 million in
future T.H. Lee investment funds, but is not required to do so. At
September 30, 2004 none of the $187 million is committed.
Approximately $47 million was invested in the first nine months of 2004
related to all of the commitments discussed above.
Market Risk
Certain of MMC's revenues, expenses, assets and liabilities are exposed to
the impact of interest rate changes and fluctuations in foreign currency
exchange rates and equity markets.
Interest Rate Risk
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 used on a limited basis to manage MMC's exposure to
interest rate movements on its cash and investments, as well as interest
expense on borrowings, and are only executed with counterparties of high
creditworthiness.
Foreign Currency Risk
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. Forward contracts
and options are periodically utilized by MMC to limit foreign currency
exchange rate exposure on net income and cash flows for specific, clearly
defined transactions arising in the ordinary course of its business.
Equity Price Risk
MMC holds investments in both public and private companies as well as
certain private equity funds managed by MMC Capital, including Trident II.
Publicly traded investments of $386 million are classified as available for
sale under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Non-publicly traded investments of $84 million and $338
million are accounted for under APB Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock", using the cost method and the
equity method, respectively. Changes in value of trading securities are
recognized in income when they occur. The investments that are classified
as available for sale or that are not publicly traded are subject to risk
of changes in market value, which if determined to be other than temporary,
could result in realized impairment losses. MMC periodically reviews the
carrying value of such investments to determine if any valuation
adjustments are appropriate under the applicable accounting pronouncements.
Other
On October 14, 2004, the New York Attorney General's Office filed a Civil
Complaint (the "Civil Complaint") in state court against MMC and Marsh,
Inc. ("Marsh") asserting claims under New York State law for fraudulent
business practices, antitrust violations, securities fraud, unjust
enrichment and common law fraud. The Civil Complaint is discussed more
fully in Note 13 to the consolidated financial statements.
On November 1, 2004, Marsh announced it is taking steps to collect all
amounts owed to it by insurance companies under market services agreements
that were in effect prior to October 15, 2004. Amounts collected will be
placed into a segregated account to be used in connection with any
agreement to compensate Marsh clients it may reach with the Attorney
General of the State of New York.
MMC recorded a $232 million charge in the third quarter of 2004, which
equals the recorded net accounts receivable related to market services
agreements at September 30, 2004. MMC believes that in light of existing
facts and circumstances, $232 million is the appropriate amount to reserve
as the minimum potential liability in connection with these matters. The
ultimate settlement may vary significantly from that amount. The liability
will be reviewed at each quarterly reporting date, based on the facts and
circumstances at that time as additional information becomes available and
settlement negotiations progress. In the future, the amount accrued will
not necessarily be equal to the amount of market services agreement revenue
collected and/or accrued.
Putnam has reached an agreement in principle with the staff of the
Philadelphia office of the SEC to enter into a settlement concerning
Putnam's alleged failure to make adequate disclosures regarding certain
brokerage allocation practices prior to 2004. These practices involved the
relationship between the direction of brokerage commissions to
broker-dealers on portfolio transactions and the sales by those
broker-dealers of shares of Putnam mutual funds. Under the agreement in
principle, Putnam would pay a non-deductible civil penalty in the amount of
$40 million and disgorgement in the amount of $1 which was recorded as a
charge to earnings in the third quarter of 2004. The total amount of the
payment would go to certain Putnam funds. Putnam would neither admit nor
deny wrongdoing as part of the settlement. The settlement remains subject
to the negotiation of final documentation and approval by the Commissioners
of the SEC.
On June 9, 2004, MMC reached a final settlement of the previously disclosed
arbitration proceeding with Lawrence J. Lasser, former president and chief
executive officer of Putnam. The settlement represents approximately $25
million less than the company had accrued for compensation expense for Mr.
Lasser in prior years. In addition, as further discussed in Note 13 to the
consolidated financial statements, administrative proceedings and a number
of lawsuits have commenced against Putnam and MMC.
The insurance coverage for potential liability resulting from alleged
errors and omissions in the professional services provided by MMC, includes
elements of both risk retention and risk transfer. MMC believes it has
adequately reserved for the self-insurance portion of the contingencies.
Payments related to the respective self-insured layers are made as legal
fees are incurred and claims are resolved and generally extend over a
considerable number of years. The amounts paid in that regard vary in
relation to the severity of the claims and the number of claims active in
any particular year. The long-term portion of this liability is included in
Other liabilities in the consolidated balance sheets.
Part I - Item 4. Controls & Procedures
a. Evaluation of Disclosure Controls and Procedures
Based on their evaluation, as of a date within 90 days of the filing of
this Form 10-Q, the Company's Chief Executive Officer and Chief Financial
Officer have concluded the Company's disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of
1934) are effective in timely alerting them to material information
relating to the Company required to be included in our reports filed under
the Exchange Act.
b. Changes in Internal Controls
There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
September 30, 2004
Item 1. Legal Proceedings.
The information set forth in Note 13 to the financial statements provided
in Part I, Item 1 of this Report, is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table sets forth information regarding MMC's purchases of
its common stock on a monthly basis during the third quarter of 2004. Share
repurchases are recorded on a trade date basis.
Issuer Repurchases of Equity Securities
(a) (b) (c) (d)
Total Number of Maximum Number of
Total Number of Average Price Shares Purchased as Shares that May Yet
Shares Purchased Paid per Share Part of Publicly Be Purchased Under
Announced Plans or the Plans or
Period Programs (1) Programs
- -----------------------------------------------------------------------------------------------------------
July 1, 2004 - 0 -- 0 50,309,636
July 31, 2004
August 1, 2004 - 0 -- 0 50,309,636
August 31, 2004
September 1, 2004 - 0 -- 0 50,309,636
September 30, 2004
- ------------------------------------------ ------------------- ----------------------- ---------------------
Total 0 -- 0 50,309,636
- ------------------------------------------------------------------------------------------------------------
(1) As set forth in its public filings, MMC has engaged in an ongoing share
repurchase program. On March 18, 1999, MMC's board of directors authorized
the repurchase of up to 40 million shares of MMC's common stock and on May
18, 2000 the board further authorized the repurchase of up to an additional
88 million shares. There is no expiration date specified under either of
these authorizations and MMC may repurchase its shares under each of these
authorizations in the future. MMC periodically purchases shares of its
common stock, in the open market or otherwise, subject to market
conditions, for treasury as well as to meet requirements for issuance of
shares for its various stock compensation and benefit programs.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of MMC was held on May 20, 2004.
Represented at the Meeting, at which stockholders took the following actions,
were 444,596,374 shares or 85.82% of MMC's 518,157,649 shares of common stock
outstanding and entitled to vote:
1. MMC's stockholders elected the six (6) director nominees named below,
with each receiving the following votes:
Number of Shares Number of Shares
Voted For Voted to be Withheld
Lewis W. Bernard 412,328,078 32,268,296
Mathis Cabiallavetta 426,415,222 18,181,152
Zachary W. Carter 432,052,720 12,543,654
Robert F. Erburu 413,644,232 30,952,142
Oscar Fanjul 409,114,104 35,482,270
Ray J. Groves 423,002,664 21,593,710
2. Deloitte & Touche LLP was ratified as MMC's independent auditors for the
year ending December 31, 2004 with a favorable vote of 429,716,651 of the
shares represented (11,560,387 against and 3,319,335 abstaining).
Item 5. Other Information. [ Add current Form 8-K information to be
reported, if any]
Item 6. Exhibits.
3. MMC By-Laws, as amended on October 25, 2004.
10.1 Form of Awards under the 2000 Employee Incentive and Stock
Award Plan
10.2 Form of Awards under the 2000 Senior Executive Incentive
and Stock Award Plan
12. Statement Re: Computation of Ratio of Earnings to Fixed
Charges.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32. Section 1350 Certifications.
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 November 9, 2004 on
its behalf by the undersigned, thereunto duly authorized and in the
capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Sandra S. Wijnberg
Senior Vice President and
Chief Financial Officer