SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For quarter ended September 30, 1998
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X . NO .
As of October 31, 1998, there were outstanding 257,302,775
shares of common stock, par value $1.00 per share, of the
registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995.
Such statements may include, without limitation, discussions
concerning revenue and expense growth, cost savings and
efficiencies expected from the integration of Johnson & Higgins and
Sedgwick Group plc, Year 2000 remediation and testing of computer
systems, market and industry conditions, interest rates, foreign
exchange rates, contingencies and matters relating to the
operations and income taxes of Marsh & McLennan Companies, Inc. and
subsidiaries (the "Company"). Such forward-looking statements are
based on available current market and industry materials, experts'
reports and opinions, as well as management's expectations
concerning future events impacting the Company. Forward-looking
statements by their very nature involve risks and uncertainties.
Factors that may cause actual results to differ materially from
those contemplated by any forward-looking statements contained
herein include, in the case of the Company's risk and insurance
services business, the failure to successfully integrate the
insurance services business of Johnson & Higgins and Sedgwick Group
plc (including the achievement of synergies and cost reductions),
changes in competitive conditions, a decrease in the premium rate
levels in the global property and casualty insurance markets, the
impact of changes in insurance markets and natural catastrophes; in
the case of the Company's investment management business, changes
in worldwide and national securities and fixed income markets and;
with respect to all of the Company's activities, the failure of the
Company and/or its significant business partners to be Year 2000
compliant on a timely basis, changes in general worldwide and
national economic conditions, fluctuations in foreign currencies,
actions of competitors or regulators, changes in interest rates,
developments relating to claims and lawsuits, changes in the tax or
accounting treatment of the Company's operations and the impact of
tax and other legislation and regulation in the jurisdictions in
which the Company operates.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share figures)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenue $1,719 $1,548 $5,245 $4,383
Expense 1,384 1,299 4,160 3,595
Operating Income 335 249 1,085 788
Interest Income 5 6 17 17
Interest Expense (33) (28) (94) (77)
Income Before Income Taxes 307 227 1,008 728
Income Taxes 121 87 398 279
Net Income $ 186 $ 140 $ 610 $ 449
Basic Net Income
Per Share (A) (B) $.73 $.55 $2.38 $1.86
Diluted Net Income
Per Share (A) (B) $.69 $.54 $2.28 $1.82
Average Number of Shares
Outstanding - Basic (A) 256 253 256 241
Average Number of Shares
Outstanding - Diluted (A) 263 260 264 247
Dividends Declared (A) $.40 $.33 $1.13 $.96
(A) Amounts in 1997 were restated to reflect the three-for-two
stock split in the form of a stock distribution issued on
June 26, 1998.
(B) Net income per share is computed independently for each of the
periods presented. Accordingly, the sum of the quarterly net
income per share amounts may not equal the total for the year.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents
(including interest-bearing amounts
of $597 at September 30, 1998 and
$378 at December 31, 1997) $ 667 $ 424
Receivables-
Commissions and fees 1,418 1,296
Advanced premiums and claims 125 95
Other receivables 161 160
1,704 1,551
Less-allowance for doubtful accounts (68) (53)
Net receivables 1,636 1,498
Other current assets 543 647
Total current assets 2,846 2,569
Long-term securities 752 720
Fixed assets, net 934 957
(net of accumulated depreciation and
amortization of $842 at September 30,
1998 and $798 at December 31, 1997)
Intangible assets 2,822 2,417
Other assets 1,374 1,251
$8,728 $7,914
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions of dollars)
(Unaudited)
September 30, December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 480 $ 237
Accrued compensation and employee benefits 650 564
Accounts payable and accrued liabilities 1,130 1,276
Accrued income taxes 354 218
Dividends payable 100 85
Total current liabilities 2,714 2,380
Fiduciary liabilities 2,570 2,282
Less - cash and investments held in
a fiduciary capacity (2,570) (2,282)
- -
Long-term debt 1,280 1,240
Other liabilities 1,157 1,096
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
400,000,000 shares, issued 260,662,839
shares at September 30, 1998 and
258,586,766 at December 31, 1997 * 261 172
Additional paid-in capital 980 994
Retained earnings 2,294 1,975
Accumulated other comprehensive income 216 167
3,751 3,308
Less - treasury shares, at cost,
3,457,056 shares at September 30,
1998 and 3,661,256 shares at
December 31, 1997 * (174) (110)
Total stockholders' equity 3,577 3,198
$8,728 $7,914
* Restated to reflect the three-for-two stock split in the form of
a stock distribution issued on June 26, 1998.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
Operating cash flows:
Net income $610 $ 449
Gain on sale of business - (10)
Depreciation and amortization 181 147
Deferred income taxes 83 (1)
Other liabilities 61 12
Prepaid dealer commissions (95) (125)
Other, net (10) 1
Net changes in operating working capital
other than cash and cash equivalents -
Receivables (138) (77)
Other current assets 82 (12)
Accrued compensation and employee benefits 86 47
Accounts payable and accrued liabilities (146) (39)
Accrued income taxes 114 (79)
Effect of exchange rate changes 39 (12)
Net cash generated from operations 867 301
Financing cash flows:
Net increase (decrease) in commercial paper 453 (100)
Other borrowings 32 2,175
Other repayments (204) (1,507)
Purchase of treasury shares (195) -
Issuance of common stock 171 195
Dividends paid (276) (221)
Net cash (used for) provided by
financing activities (19) 542
Investing cash flows:
Additions to fixed assets (216) (159)
Proceeds from sale of business,
net of cash sold - 29
Acquisitions (373) (568)
Other, net (21) -
Net cash used for investing activities (610) (698)
Effect of exchange rate changes on cash
and cash equivalents 5 (10)
Increase in cash & cash equivalents 243 135
Cash & cash equivalents at beginning of period 424 300
Cash & cash equivalents at end of period $667 $ 435
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to
such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements
should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual
report on Form 10-K.
The financial information contained herein reflects all
adjustments which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the
three and nine-month periods ended September 30, 1998 and
1997.
2. Fiduciary Cash and Liabilities
In its capacity as an insurance broker or agent, the Company
collects premiums from insureds and, after deducting its
commissions, remits the premiums to the respective insurance
underwriters; the Company also collects claims or refunds from
underwriters on behalf of insureds. Unremitted insurance
premiums and claims are held in a fiduciary capacity.
Interest income on these fiduciary funds, included in revenue,
amounted to $98 million and $84 million for the nine months
ended September 30, 1998 and 1997, respectively.
Net uncollected premiums and claims and the related payables
amounting to $6.1 billion at September 30, 1998 and
$5.2 billion at December 31, 1997, are not included in the
accompanying Consolidated Balance Sheets.
3. Per Share Data
In 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" which
requires the Company to include basic and diluted per share
figures on the face of the income statement.
Basic net income per share is calculated by dividing net
income by the average number of shares of the Company's common
stock outstanding. Diluted net income per share is calculated
by reducing net income for the potential minority interest
associated with unvested shares granted under the Putnam
Private Equity Plan. This result is then divided by the
average common shares outstanding which have been adjusted for
the dilutive effect of potential common shares.
The following reconciles net income to net income for diluted
earnings per share and basic weighted average common shares
outstanding to diluted weighted average common shares
outstanding for the three and nine-month periods ended
September 30, 1998 and 1997.
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
Net Income $186 $140 $610 $449
Less: Potential Minority
Interest associated
with Putnam Private
Equity Plan (5) - (8) -
Net Income for Diluted
Earnings per Share $181 $140 $602 $449
Basic Weighted Average
Common Shares Outstanding 256 253 256 241
Stock Options 7 7 8 6
Diluted Weighted Average
Common Shares Outstanding 263 260 264 247
4. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No.130,
"Reporting Comprehensive Income" which establishes standards
for reporting and displaying comprehensive income and its
components. Comprehensive income amounted to $659 million and
$477 million for the nine months ended September 30, 1998 and
1997, respectively. The difference between net income and
comprehensive income for the nine months ended September 30,
1998 was primarily due to foreign currency translation
adjustments while the difference for the period ended
September 30, 1997 was due to net unrealized securities
holding gains, partially offset by foreign currency
translation adjustments.
5. Supplemental Disclosure to the Consolidated Statements
of Cash Flows
The following schedule provides additional information
concerning acquisitions:
Nine Months Ended
September 30,
(In millions of dollars) 1998 1997
Purchase acquisitions:
Assets acquired, excluding cash $373 $ 2,659
Liabilities assumed - (1,115)
Shares issued - (975)
Net cash outflow for acquisitions 373 569
Cash acquired in pooling of
interests acquisition - (1)
$373 $ 568
Interest paid during the nine months ended September 30, 1998
and 1997 was $107 million and $66 million, respectively.
Income taxes paid during the nine months ended September 30,
1998 and 1997 were $230 million and $339 million,
respectively.
6. Income Taxes
The Company has received a Notice of Proposed Adjustment from
a field office of the Internal Revenue Service ("IRS")
challenging its tax treatment related to 12b-1 fees paid by
the Putnam Mutual Funds. The Company believes its tax
treatment of these fees is consistent with current industry
practice and applicable requirements of the Internal Revenue
Code and previously issued IRS technical advice. The field
office has referred the Notice to the national office of the
IRS for technical advice.
Taxing authorities periodically challenge positions taken by
the Company on its tax returns. On the basis of present
information and advice received from counsel, it is the
opinion of the Company's management that any assessments
resulting from current tax audits will not have a material
adverse effect on the Company's consolidated results of
operations or its consolidated financial position.
7. Acquisitions
During the third quarter, the Company announced its offer to
acquire Sedgwick Group plc ("Sedgwick"), a London-based
holding company of one of the world's leading insurance and
reinsurance broking and consulting groups, for total cash
consideration of pounds sterling 1.25 billion or approximately
$2.1 billion. On November 3, 1998, the Company announced that
it had received the necessary acceptances of its offer and
that all remaining conditions of the merger had been
satisfied. Accordingly, on November 3, 1998, this offer
became wholly unconditional and the Company became the
beneficial owner of approximately 88% of Sedgwick's issued
share capital. The offer remains open and the Company intends
to acquire the remaining issued share capital pursuant to the
offer and/or other applicable statutory procedures under the
laws of the United Kingdom.
Except to the extent specifically identified herein, the
information contained in this Form 10-Q reflects the business
and operations of the Company without giving effect to the
consummation of the Sedgwick offer. For the year ended
December 31, 1997, Sedgwick reported net income amounting to
pounds sterling 52.1 million ($85 million) on a U.S. GAAP
basis. At December 31, 1997, Sedgwick and its subsidiaries
employed approximately 16,000 employees.
On June 30, 1998, the Company purchased Kirke-Van Orsdel,
Inc., an administrator of insurance and health benefit
programs in the U.S.
On March 24, 1998, the Company purchased Brockman y Schuh
Group, a risk and insurance services and employee benefit
consulting firm in Mexico.
On March 27, 1997, the Company consummated a business
combination with Johnson & Higgins ("J&H"), a privately-held
risk and insurance services and employee benefit consulting
firm. The following unaudited pro forma summary presents the
consolidated results of operations of the Company as if the
J&H business combination had occurred on January 1, 1997. The
pro forma results are shown for illustrative purposes only and
do not purport to be indicative of the results which would
have been reported if the business combination had occurred on
the date indicated or which may occur in the future.
(In millions of dollars, except per share figures)
Nine Months Ended
September 30, 1997
Revenue $4,688
Net Income 460
Basic Net Income per share 1.84
Diluted Net Income per share 1.79
8. Claims, Lawsuits and Other Contingencies
The Company and its subsidiaries are subject to various claims
and lawsuits consisting principally of alleged errors and
omissions in connection with the placement of insurance or
reinsurance and in rendering investment and consulting
services. Some of these claims and lawsuits seek damages,
including punitive damages, in amounts which could, if
assessed, be significant.
On November 24, 1997, an action captioned "Aiena et al. vs.
Olsen et al" was brought in the United States District Court
for the Southern District of New York by certain former
directors of J&H, which was acquired by the Company in March
1997, against twenty-four selling shareholders of J&H, as well
as J&H itself and the Company. The action essentially
challenges the allocation of the consideration paid in
connection with the Company's combination with J&H as between
the defendants who were directors and shareholders of J&H at
the time of the transaction and the plaintiffs who were former
directors and shareholders of J&H. The Complaint asserts,
among others, claims for breach of fiduciary duty, federal
securities law violations, breach of contract, and ERISA
violations. Plaintiffs seek compensatory and punitive
damages.
On or about April 14, 1998, an action captioned "Sempier v.
Olsen, et al" was brought in the United States District Court
for the District of New Jersey by another former director of
J&H against the same defendants named in the Aiena action,
including J&H and the Company, in connection with the same
transaction. The allegations and claims in the Sempier case
are substantially similar to those in the Aiena action.
Plaintiff seeks, among other relief, an unspecified amount of
compensatory and punitive damages. This action was
transferred to the District Court for the Southern District of
New York to be heard together with the Aiena action. The
defendants made motions to dismiss both the Sempier and Aiena
actions. These motions are currently under consideration by
the District Court.
In 1993, several years prior to the acquisition of J&H, the
Equal Employment Opportunity Commission ("EEOC") commenced a
lawsuit against J&H in the United States District Court for
the Southern District of New York. The action alleges that a
mandatory retirement policy for directors then in effect at
J&H violated the federal Age Discrimination in Employment Act
("ADEA"). In 1995, the District Court ruled in the EEOC's
favor that the J&H mandatory retirement policy violated the
ADEA. The Court of Appeals for the Second Circuit affirmed
that ruling in 1996. The EEOC seeks to recover damages on
behalf of certain former directors and a trial on the matter
of damages is presently scheduled for February, 1999.
Pursuant to the Stock Purchase Agreement between the Company
and J&H and the stockholders of J&H, the Company will bear
one-half of all damages and expenses in this action.
Certain present and former English subsidiaries of the Company
are required by their regulatory body, the Personal Investment
Authority, to review transactions with, and advice to, clients
in relation to the sale of certain investments. The
disclosure and advice in connection with such sales has been
called into question by clients or by the Personal Investment
Authority on their behalf. Where the review discloses an
inappropriate sale, compensation is required to be paid to the
client. While the amount of compensation which has been and
may be paid, the liability of present subsidiaries of the
Company in connection therewith and the extent to which any
such liability is covered by insurance remains uncertain, the
aggregate amount claimed could be significant.
On the basis of present information, available insurance
coverage and advice received from counsel, it is the opinion
of the Company's management that the disposition or ultimate
determination of these claims and lawsuits will not have a
material adverse effect on the Company's consolidated results
of operations or its consolidated financial position.
9. Common Stock
On May 20, 1998, the Company's Board of Directors authorized
a three-for-two stock distribution of $1 par value common
stock, which was issued on June 26, 1998 to shareholders of
record on June 5, 1998. Upon issuance of the shares, paid-in
capital was reduced and the common stock account increased by
$87 million, the par value of the additional common shares
issued. All references to per share amounts have been
restated for this stock distribution.
10. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," and in February 1998,
the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." Both statements
are effective for fiscal years beginning after December 15,
1997. The Company will adopt the provisions of these
standards in conjunction with the preparation of the 1998
Annual Report.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This
standard, which establishes new accounting and reporting
requirements for derivative instruments, must be adopted in
the fiscal year beginning after June 15, 1999. The Company
does not expect the adoption of this standard to have a
material impact on its operating results or financial
position.
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Third Quarter and Nine Months Ended September 30, 1998
General
Marsh & McLennan Companies, Inc. and Subsidiaries (the "Company")
is a professional services firm providing risk and insurance
services, investment management and consulting. More than 39,000
employees worldwide provide analysis, advice and transactional
capabilities to clients in over 100 countries.
This management's discussion and analysis of financial condition
and results of operations contains certain statements relating to
future results which are forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995.
See "Information Concerning Forward-Looking Statements" on page one
of this filing. This form 10-Q should be read in conjunction with
the Company's latest annual report on Form 10-K.
The consolidated results of operations follow:
Third Quarter Nine Months
(In millions of dollars) 1998 1997 1998 1997
Revenue:
Risk and Insurance
Services $ 764 $ 707 $2,418 $2,017
Investment Management 568 494 1,713 1,367
Consulting 387 347 1,114 999
1,719 1,548 5,245 4,383
Expense:
Compensation and Benefits 860 811 2,577 2,236
Other Operating Expenses 524 488 1,583 1,359
1,384 1,299 4,160 3,595
Operating Income $ 335 $ 249 $1,085 $ 788
Operating Income Margin 19.5% 16.1% 20.7% 18.0%
Revenue, derived mainly from commissions and fees, rose 11% from
the third quarter of 1997 and grew by 20% for the nine months. This
growth was driven principally by increased revenue from the
Investment Management segment as average assets under management
were substantially higher than the comparable figures in the
previous year. Also, the Consulting segment experienced strong
revenue growth due to a higher level of services provided in the
retirement, global compensation, health care and economic
consulting areas. For the nine months, the increases in the
Investment Management and Consulting segments were supplemented by
an increase in Risk and Insurance Services as the Company's
business combination with Johnson & Higgins ("J&H"), which closed
on March 27, 1997, was not reflected in the consolidated results of
operations for the first quarter of 1997. Excluding acquisitions
and dispositions, revenue grew approximately 13% for the first nine
months of 1998.
Expenses rose 7% in the third quarter of 1998 due, in part, to
costs associated with staff growth in the Investment Management and
Consulting segments to support a higher volume of business in 1998.
For the nine months, the increase in expenses of 16% is partially
due to the impact of the J&H transaction. Excluding acquisitions
and dispositions, expenses rose 8% for the first nine months of
1998 primarily reflecting costs associated with staff growth and
higher incentive compensation levels in the Investment Management
segment commensurate with strong operating performance.
The translated values of revenue and expense from the Company's
international operations are affected by fluctuations in currency
exchange rates. However, the net impact of these fluctuations on
the Company's results of operations has not been material.
Risk and Insurance Services
Third Quarter Nine Months
(In millions of dollars) 1998 1997 1998 1997
Revenue $764 $707 $2,418 $2,017
Expense 648 606 1,924 1,628
Operating Income $116 $101 $ 494 $ 389
Operating Income Margin 15.2% 14.2% 20.4% 19.3%
Revenue
Revenue for the Risk and Insurance Services segment increased 8%
from the third quarter of 1997. Excluding the impact of the
acquisition of Kirke-Van Orsdel, Inc. ("KVI"), a U.S.-based
administrator of insurance and health benefit programs, and the net
effect of several smaller acquisitions and dispositions, revenue
grew 5% in the quarter. Insurance broking revenue, which
represented 70% of Risk and Insurance Services, grew 5% in the
third quarter of 1998 as net new business development was partially
offset by continued premium rate declines in virtually all lines of
coverage. The increased level of net new business development was
primarily concentrated in the United States and the United Kingdom.
Revenue for reinsurance broking grew 5% over the third quarter of
1997 and program management revenue, excluding KVI, rose 8%.
For the nine months, revenue for Risk and Insurance Services
increased 20% over the same period last year primarily due to the
effect of the J&H transaction at the end of the first quarter of
1997. Excluding acquisitions and dispositions, Risk and Insurance
Services revenue rose approximately 5% for the nine months, as
revenue grew 5% in insurance broking while reinsurance broking rose
6% and program management increased 7%.
Expense
Risk and Insurance Services expenses increased 7% from the third
quarter of 1997. Excluding acquisitions and dispositions, expenses
grew 2% reflecting normal salary progressions for continuing staff
and higher technology and systems spending offset by the
realization of integration related savings. For the nine months,
expenses increased 18%, largely attributable to the business
combination with J&H, which, as previously noted, was effective as
of the end of the first quarter of 1997 resulting in 1998 having
one additional quarter of J&H expenses. Excluding acquisitions and
dispositions, expenses grew 2% compared with the first nine months
of 1997.
Investment Management
Third Quarter Nine Months
(In millions of dollars) 1998 1997 1998 1997
Revenue $568 $494 $1,713 $1,367
Expense 389 368 1,218 1,025
Operating Income $179 $126 $ 495 $ 342
Operating Income Margin 31.5% 25.4% 28.9% 25.0%
Revenue
Putnam's revenue increased 15% compared with the third quarter of
1997 and 25% for the nine months reflecting excellent growth in the
level of assets under management on which management fees are
earned. Assets under management aggregated $253 billion at
September 30, 1998 compared with $227 billion at September 30, 1997
reflecting $32 billion of mutual fund net new sales and additional
investments by institutional accounts offset, in part, by a $6
billion decline resulting from lower equity market levels.
Compared with June 30, 1998, assets under management declined $25
billion as a $5 billion cash inflow from net new fund sales and
additional institutional investments was more than offset by a $30
billion decline in market value related to a significant drop in
equity market levels during the quarter.
Expense
Putnam's expenses rose 5% in the third quarter of 1998 reflecting
the effect of staff growth to support higher volume partially
offset by a reduction in variable incentive compensation that
fluctuates with overall performance levels. For the nine months,
expenses grew 19% due to the effect of staff growth and higher
incentive compensation levels commensurate with strong operating
performance along with increased service-related costs resulting
from the higher level of business activity.
Quarter-end and average assets under management for the third
quarter are presented below:
(In billions of dollars) 1998 1997
Mutual Funds:
Domestic Equity $125 $115
Taxable Bond 37 33
Tax-Free Income 17 16
International Equity 12 12
191 176
Institutional Accounts:
Fixed Income 25 21
Domestic Equity 25 20
International Equity 12 10
62 51
Quarter-end Assets $253 $227
Average Assets $268 $218
Assets under management are affected by fluctuations in domestic
and international stock and bond market prices and by the level of
investments and withdrawals for current and new fund shareholders
and institutional clients. They are also affected by investment
performance, service to clients, the development and marketing of
new investment products, the relative attractiveness of the
investment style under prevailing market conditions and changes in
the investment patterns of clients. Revenue levels are sensitive
to all of the factors above, but in particular, to significant
changes in stock and bond market valuations.
Putnam provides individual and institutional investors with a broad
range of equity and fixed income investment products and services,
designed to meet varying investment objectives and which affords
its clients the opportunity to allocate their investment resources
among various alternative investment products as changing worldwide
economic and market conditions warrant. At the end of the third
quarter in 1998 and 1997, assets held in equity securities
represented 69% of assets under management, while investments in
fixed income products represented 31% for both periods.
Consulting
Third Quarter Nine Months
(In millions of dollars) 1998 1997 1998 1997
Revenue $387 $347 $1,114 $999
Expense 332 305 973 888
Operating Income $ 55 $ 42 $ 141 $111
Operating Income Margin 14.1% 12.2% 12.7% 11.2%
Revenue
Consulting revenue increased 12% in 1998 compared with the third
quarter of 1997 reflecting net new business and the impact of
several small acquisitions partially offset by the transfer of
certain business lines as part of a strategic alliance with
Automatic Data Processing. Adjusting for the impact of
acquisitions and dispositions, revenue increased approximately 14%
in the third quarter of 1998. Retirement consulting revenue, which
represented 40% of the Consulting segment, grew 12% in the third
quarter while revenue rose 25% in the global compensation practice,
35% for economic consulting and 14% in health care consulting due
to a higher volume of business in these practice lines.
For the first nine months of 1998, Consulting revenue increased
11%. Excluding acquisitions and dispositions, revenue increased
approximately 12% for the nine months as retirement consulting grew
11% while revenue increased 21% in the global compensation practice
and 19% in economic consulting. Health care consulting and general
management consulting grew 8% and 7%, respectively.
Expense
Consulting expenses increased 9% for the third quarter of 1998 and
10% for the nine months. Excluding acquisitions and dispositions,
expenses increased 12% for the third quarter and 10% for the nine
months primarily reflecting the effect of staff growth to support
new business, higher incentive compensation commensurate with
strong operating performance along with normal compensation expense
increases.
Interest
Interest income earned on corporate funds was $5 million in the
third quarter of 1998 compared with $6 million in 1997. Interest
expense increased to $33 million in the third quarter of 1998 from
$28 million in 1997 partially due to incremental debt incurred in
connection with the acquisition of KVI at the end of the second
quarter of 1998. Interest expense increased to $94 million for the
nine months ended September 30, 1998 from $77 million in 1997 as a
result of increased bank borrowings used to finance a portion of
the acquisition of J&H as well as the assumption of J&H's long-term
debt and the acquisition of KVI.
Income Taxes
The Company's consolidated tax rate was 39.5% of income before
income taxes in the third quarter and first nine months of 1998
compared with 38.25% for the comparable periods of 1997. The
increase in the 1998 tax rate is largely attributable to the
nondeductibility of the goodwill amortization associated with the
J&H transaction. The overall tax rates are higher than the U.S.
statutory rates primarily because of state and local income taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents aggregated $667 million on
September 30, 1998, compared with $424 million on December 31,
1997.
Cash flow from operations includes the net cash requirements of
Putnam's prepaid dealer commissions, which amounted to $95 million
for the nine months compared with $125 million during the same
period of 1997.
The Company's capital expenditures, which amounted to $216 million
in the first nine months of 1998 and $159 million during the same
period of 1997, were primarily related to computer equipment
purchases and the refurbishing and modernizing of office
facilities.
The other liabilities in the Consolidated Balance Sheets, which
totaled $1.2 billion on September 30, 1998 and $1.1 billion on
December 31, 1997, include the Company's long-term pension
liability, reserves related to the Company's professional liability
insurance program, and the postretirement liability for certain
health care and life insurance benefits.
During the third quarter, the Company announced its offer to
acquire Sedgwick Group plc ("Sedgwick"), a London-based holding
company of one of the world's leading insurance and reinsurance
broking and consulting groups, for total cash consideration of
pounds sterling 1.25 billion or approximately $2.1 billion. On
November 3, 1998, the Company announced that it had received the
necessary acceptances of its offer and that all remaining
conditions of the merger had been satisfied. Accordingly, on
November 3, 1998, this offer became wholly unconditional and the
Company became the beneficial owner of approximately 88% of
Sedgwick's issued share capital. The offer remains open and the
Company intends to acquire the remaining issued share capital
pursuant to the offer and/or other applicable statutory procedures
under the laws of the United Kingdom. The Company will initially
finance the transaction with commercial paper that will be
supported by a committed bank facility comprising 19 banks and led
by J. P. Morgan.
Other
Comprehensive income amounted to $659 million and $477 million for
the nine months ended September 30, 1998 and 1997. The difference
between net income and comprehensive income for the nine months
ended September 30, 1998 was primarily due to foreign currency
translation adjustments.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," and in February 1998, the FASB issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits." Both statements
are effective for fiscal years beginning after December 15, 1997.
The Company will adopt the provisions of these standards in
conjunction with the preparation of the 1998 Annual Report.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This standard, which establishes new
accounting and reporting requirements for derivative instruments,
must be adopted in the fiscal year beginning after June 15, 1999.
The Company does not expect the adoption of this standard to have
a material impact on its operating results or financial position.
Year 2000 Issue
The Company is in the process of updating its computer systems in
preparation for the Year 2000. The project, which began in early
1996, is well under way. Steering committees have been established
comprising executive level management in each operating segment.
The Audit Committee of the Company's Board of Directors is
regularly updated on the status of its Year 2000 efforts.
In connection with this project, each of the Company's operating
segments will complete a four-step process consisting of (1) taking
inventory of all technical areas, including hardware, software
(application and system), data, third-party services and
infrastructure that could potentially be affected by the Year 2000
issue, (2) assessing the scope and severity of the issue, (3)
performing necessary remediation and (4) testing/implementation.
Each operating segment has already enhanced or replaced a number of
systems to handle dates beyond January 1, 2000. At this time, all
of the Company's operating segments are in the process of
remediation or in the testing/implementation phase of the process
for mission critical systems.
At Putnam Investments, testing of third party dependencies with
sub-custodians, pricing services and other vendors has been
identified as a critical component of the Year 2000 evaluation
process. In July 1998, Putnam participated in the "Street-wide
Test" carried out under the auspices of the Securities Industry
Association. Putnam will participate in all future testing, which
will include the simulation of a trading cycle from order entry to
settlement in a Year 2000 environment.
On a cumulative basis, the cost to the Company of achieving Year
2000 compliance has amounted to approximately $35 million through
September 30, 1998, of which $17 million was incurred during 1996
and 1997. Such costs do not include expenses incurred in replacing
systems and applications in the ordinary course which have the
effect of making such systems and applications Year 2000 compliant
but which were not incurred for that specific purpose. Costs of
modifying computer software for Year 2000 conversion are being
charged to expense as they are incurred. Future costs associated
with addressing this issue are not expected to have a material
adverse impact on the Company's financial position or results of
operations.
The Company expects that all of its mission critical systems will
be Year 2000 compliant by mid-1999. In addition, the Company is
continuing its inquiries as to the state of readiness of its
clients and vendors. If these third parties are unable to resolve
Year 2000 processing issues in a timely manner, a material
operating and financial risk could result. A further review of the
Year 2000 issues associated with Sedgwick will be performed.
Sedgwick has advised the Company that its progress is in line with
the Company on this issue.
The individual operating units of the Company are currently in the
process of developing their contingency plans to address certain
exposures relating to the Year 2000 issue. It is anticipated that
these plans will be completed during 1999.
PART II, OTHER INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
September 30, 1998
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Credit Agreement dated as of August 24,
1998 among Marsh & McLennan Companies,
Inc., the lenders party thereto and
Morgan Guaranty Trust Company of New
York, as Administrative Agent.
10.2 First Amendment dated as of September 2,
1998 to the Credit Agreement dated as of
August 24, 1998 among Marsh & McLennan
Companies, Inc., the lenders party
thereto and Morgan Guaranty Trust Company
of New York, as Administrative Agent.
27 Financial Data Schedule
(b) Reports on Form 8-K.
Two reports on Form 8-K dated August 25,
1998 and November 12, 1998 were filed by
the registrant in connection with its
offer to acquire the entire issued and
unissued share capital of Sedgwick Group
plc.
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed this
13th day of November, 1998 on its behalf by the undersigned,
thereunto duly authorized and in the capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Frank J. Borelli
Senior Vice President and
Chief Financial Officer