[LOGO]
MARSH & MCLENNAN COMPANIES
MARSH -- PUTNAM -- MERCER
ANNUAL REPORT 1999
[GRAPHIC: SUNRISE]
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, NY 10036
www.mmc.com
ANNUAL REPORT 1999
[GRAPHIC: MARSH]
MMC IS A GLOBAL PROFESSIONAL SERVICES FIRM
WITH ANNUAL REVENUES EXCEEDING $9 BILLION. IT IS THE PARENT
COMPANY OF MARSH, THE WORLD'S LEADING RISK AND INSURANCE SERVICES FIRM;
PUTNAM INVESTMENTS, ONE OF THE LARGEST
INVESTMENT MANAGEMENT COMPANIES IN THE UNITED STATES; AND
MERCER CONSULTING GROUP, A MAJOR GLOBAL PROVIDER OF
CONSULTING SERVICES. MORE THAN 50,000 EMPLOYEES PROVIDE ANALYSIS,
ADVICE AND TRANSACTIONAL CAPABILITIES TO CLIENTS
IN OVER 100 COUNTRIES.
FINANCIAL HIGHLIGHTS
For the Three Years Ended December 31,
(IN MILLIONS, EXCEPT PER SHARE FIGURES)
1999 1998 1997
---- ---- ----
Revenue $9,157 $7,190 $6,009
Income Before Income Taxes $1,247(a) $1,305 $ 715(b)
Net Income $ 726(a) $ 796 $ 434(b)
Stockholders' Equity $4,170 $3,659 $3,233
------ ------ ------
Diluted Net Income Per Share $ 2.62(a) $ 2.98 $ 1.73(b)
Dividends Paid Per Share $ 1.70 $ 1.46 $ 1.26
Year-end Stock Price1999(a) $95.69 $58.44 $49.71
------ ------ ------
(A) EXCLUDING SPECIAL CHARGES OF $337 IN 1999, INCOME BEFORE INCOME TAXES, NET
INCOME AND DILUTED NET INCOME PER SHARE ARE $1,584, $959 AND $3.48,
RESPECTIVELY.
(B) EXCLUDING SPECIAL CHARGES OF $244 IN 1997, INCOME BEFORE INCOME TAXES, NET
INCOME AND DILUTED NET INCOME PER SHARE ARE $959, $592 AND $2.36,
RESPECTIVELY.
[BAR CHART]
YEAR-END
SHARE PRICE
(in $)
COMPOUND
ANNUAL GROWTH 29%
-----------------
95 96 97 98 99
----- ----- ----- ----- -----
29.58 34.67 49.71 58.44 95.69
[BAR CHART]
YEAR-END MARKET
CAPITALIZATION
(IN $ BILLIONS)
COMPOUND
ANNUAL GROWTH 35%
-----------------
95 96 97 98 99
----- ----- ----- ----- -----
6.57 7.66 13.02 15.43 26.31
[BAR CHART]
REVENUE
(IN $ BILLIONS)
COMPOUND
ANNUAL GROWTH 21%
-----------------
95 96 97 98 99
----- ----- ----- ----- -----
$3.94 4.40 6.01 7.19 9.16
- ------------------------------ Dear Shareholder -------------------------------
MMC had another year of record results. Revenues rose 27 percent to $9.2
billion. Net income rose 20 percent to $959 million and earnings per share rose
17 percent to $3.48, before special charges related to the acquisition of
Sedgwick Group.
Our operating companies grew profitably. Marsh's revenues were $4.5 billion, up
from $3.4 billion in 1998, and operating income reached $806 million, an
increase of 31 percent. Putnam Investments' assets under management rose to $391
billion at year-end 1999 from $294 billion in 1998, revenues increased 17
percent and operating income grew 24 percent. Mercer Consulting Group reported
revenue gains of 26 percent and operating income growth of 29 percent. Marsh &
McLennan Capital, our private equity investment firm, attracted $1.4 billion in
capital commitments for investment in Trident II, the fund it organized in 1999
for investment in global insurance, reinsurance and related industries.
MMC has achieved these results in a world where change has proven to be our
ally: We have extended the range of our professional services; we have expanded
globally; we have grown internally and added new firms to enhance our
capabilities to solve our clients' increasingly complex problems. Consistency
has been our ally as well. So, as we complete our leadership transition in May,
we will be guided by the principles that have supported us thus far--maintaining
our role as trusted advisor to our clients, doing work that meets clients'
rigorous demands and our highest aspirations, attracting and retaining the most
talented people and encouraging collaboration among them. We will continue to
produce earnings of the quality that our shareholders expect.
During 1999, MMC's leadership was strengthened by the appointments of Mathis
Cabiallavetta and Charles A. Davis as vice chairmen. Mathis, who has been a
member of our International Advisory Board since its formation in 1993, brings
broad experience and perspective in global financial services, primarily in
banking. One of his principal objectives is MMC's expansion in Europe. Chuck,
who is also president and chief executive officer of Marsh & McLennan Capital,
is a valued advisor with many years of experience in investment banking. We also
welcomed Sandra S. Wijnberg this January as senior vice president and chief
financial officer in anticipation of Frank J. Borelli's retirement later this
year. Frank has played an important role for more than 15 years, including
overseeing the development of the financial systems and infrastructure that has
supported MMC's successful expansion.
Over the last three years, we have completed mergers with Johnson & Higgins and
Sedgwick with results that have exceeded our expectations. Johnson & Higgins
brought together two complementary cultures, strengthened our professional staff
and produced significant consolidation savings. Sedgwick promises to be a
similar success. When we
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2
"MMC is sought out for its independence of thought
and objective advice based on intense study of clients' needs,
its understanding of industries throughout the world
and its range of professional services."
[PHOTOGRAPH: J. W. Greenberg A.J.C. Smith AGAINST MOUNTAIN BACKDROP]
announced the merger in August 1998, we estimated net consolidation savings of
$110 million. Our integration efforts have gone well and we now expect net
savings to approach $160 million over three years, including $30 million
reflected in 1999 results. Although integration work remains to be done, we are
realizing substantial operating efficiencies and have a unified organization in
place. Sedgwick strengthened our position in Europe and Asia Pacific and
provided an important addition to our business in the United States.
By any measure, Putnam had an exceptional year--strong growth in assets under
management, increased profitability and superb investment performance. Putnam is
one of the fastest growing money managers in the United States. Its assets under
management rose 33 percent reflecting excellent gains in its mutual fund,
defined benefit, defined contribution and international businesses.
Award-winning investor service combined with outstanding marketing and sales
contributed to this growth. During the year, Putnam broadened its product range
through its venture with Thomas H. Lee Partners, a leading private equity firm.
Mercer strengthened its position as a global firm consulting on all aspects of
management and produced excellent results. With revenues approaching $2 billion
and earnings reaching $260 million, it achieved strong professional and
financial performance across its human resource and management consulting
practices. Mercer's international presence and reputation for innovative
thinking are driving these gains.
We would like to acknowledge the contributions of George Putnam, who retired
from our Board of Directors last May after having served as a director for 12
years. Saxon Riley retires in March and will continue to serve on our
International Advisory Board. Frank J. Tasco will leave the Board at our annual
meeting this May after a career of extraordinary contributions to the Company,
most notably as chairman and chief executive officer of MMC from 1986 to 1992
and, prior to that, as head of Guy Carpenter, our reinsurance business.
Looking to future changes--globalization, shifting demographics, the convergence
of industries, technological advances including, of course, e-commerce--we see
opportunities and risks that were unimaginable even a few years ago. Marsh,
Putnam and Mercer have gifted teams working throughout their organizations to
address these issues and these teams are enhanced by the talent and skills we
are bringing to the Company.
The characteristics that define MMC have never been more important for our
sustained growth. We are well-managed and capitalized, attentive to employees
and have a tradition of enterprise and innovation. We are sought out for our
independence of thought and objective advice based on our intense study of
clients' needs, our understanding of industries throughout the world and our
range of professional services.
Our expectations for the future are high. We are fortunate to have the people to
carry out our goals, and we appreciate our shareholders' continued confidence.
/s/ A.J.C. Smith
- -----------------------
A.J.C. Smith, CHAIRMAN
/s/ J.W. Greenberg
- -----------------------
J.W. Greenberg, PRESIDENT AND CHIEF EXECUTIVE OFFICER
March 3, 2000
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- ----------------------------- CONSTANCY OF CHANGE ------------------------------
"The ever-whirling wheel
Of Change; the which all mortal things doth sway."
EDMUND SPENSER
As the pace of change accelerates, our clients face a greater variety of complex
challenges. MMC's strength has been the ability to anticipate their needs and to
adapt our services and capabilities. We have a unique range of professional
services that addresses some of the most difficult aspects of our clients'
problems, and at the same time, allows us to identify the promising
opportunities that change inevitably creates.
In the pages that follow, the heads of our operating companies--Marsh, Putnam
and Mercer--discuss the performance of their businesses as well as challenges
and aspirations for the future.
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5
[GRAPHIC: AERIAL VIEW OF FOREST]
- ---------------------------------MMC WORLDWIDE---------------------------------
RISK AND INSURANCE SERVICES
MARSH INC. is the world leader in delivering risk and insurance services and
solutions to clients. Insurance broking is conducted under the MARSH name and
includes the total range of services to identify, value, control, transfer and
finance risk for business, public-entity and professional services
organizations. Worldwide reinsurance broking advice and services for insurance
and reinsurance companies are provided through GUY CARPENTER & COMPANY, INC. The
company structures and places reinsurance coverage and other risk-transfer
financing with reinsurance firms and capital markets worldwide. Insurance
program management services are provided through SEABURY & SMITH, INC., which
designs, markets and administraters specialized insurance programs for employees
of large corportations, small businesses, associations and their members, and
private clients. The company also provides wholesale broking services to the
U.S. and London markets, and underwriting management services to North America
and the United Kingdom to insurers, primarily for professional liability
coverages. MARSH & McLENNAN SECURITIES CORPORATION serves clients with
investment banking and capital markets solutions, transaction structuring and
execution services.
MARSH & McLENNAN CAPITAL, INC. is a global private equity firm with over $2.5
billion in assets under management that invests in industries where MMC
possesses specialized knowledge and proprietary deal flow.
[GRAPHIC: AERIAL VIEW OF FOREST]
INVESTMENT MANAGEMENT
PUTNAM INVESTMENTS, INC., one of the oldest and largest money management
organizations in the United States, offers a full range of both equity and fixed
income products, invested domestically and globally, for individual and
institutional investors. Putnam, which manages more than 110 mutual funds, has
over 600 institutional clients and 12 million individual shareholder accounts.
It had $391 billion in assets under management at year-end 1999.
CONSULTING
MERCER CONSULTING GROUP, INC., one of the world's largest consulting firms,
provides advice and services, primarily to business organizations. WILLIAM M.
MERCER COMPANIES LLC is the global leader in human resource, employee benefit
and compensation consulting. MERCER MANAGEMENT CONSULTING, INC., one of the
world's premier corporate strategy firms, helps clients achieve sustained
shareholder value growth through the development and implementation of
innovative business designs. NATIONAL ECONOMIC RESEARCH ASSOCIATES, INC. (NERA),
the leading firm of consulting economists, specializes in providing solutions to
problems involving competition, regulation, finance and public policy.
[GRAPHIC:SANDSTONE FORMATION]
- --------------------------RISK AND INSURANCE SERVICES-------------------------
A CONVERSATION WITH JOHN T. SINNOTT,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER, MARSH INC.
HOW IS MARSH ORGANIZED TO DELIVER PROFESSIONAL SERVICES TO CLIENTS?
The distribution of our $4.5 billion of revenues in 1999 demonstrates Marsh's
international scope and client service focus. About 60 percent is generated
in specific geographic regions such as the United States, Europe, Asia
Pacific and Latin America. We derive roughly 20 percent from practices that
operate globally and specialize in more than 20 industries ranging from
aviation to technology and finance. Insurance programs for individuals
through affinity groups, the workplace or our private client services
represent more than 10 percent of revenues. These activities are conducted
through several business units, the largest being Seabury & Smith. Global
reinsurance broking, provided by Guy Carpenter, accounts for 10 percent of
revenues.
Our services extend beyond traditional property-casualty risks to those in
e-business and the environment. In all, over 32,000 employees in more than 300
locations around the world deliver risk advice, services and solutions to
clients.
PLEASE DISCUSS THE RECENT FINANCIAL PERFORMANCE OF MARSH. Marsh's
revenues have more than doubled over the last five years to achieve a compound
annual growth rate of 19 percent. During the period, we acquired Johnson &
Higgins and Sedgwick, but organic growth has averaged about four percent since
1995, and we see significant opportunities to increase that growth rate going
forward. Operating income--$806 million in 1999--has also doubled in the last
five years for a compound annual growth rate of 15 percent. Acquisitions
contributed to this growth, but our per-formance also reflects strong operating
margins. We expect to be able to increase these margins as we continue to
realize consolidation savings from our recent business combinations.
[BAR CHART]
REVENUE
(IN $ BILLIONS)
COMPOUND
ANNUAL GROWTH 19%
95 96 97 98 99
-- -- -- -- --
1.96 1.91 2.79 3.35 4.52
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9
COULD YOU UPDATE US ON THE SEDGWICK MERGER. We merged with Sedgwick in
late 1998. This followed the positive experience we had with Johnson & Higgins,
which is now fully integrated and resulted in consolidation savings that doubled
its profitability.
Sedgwick expanded our presence in Europe, particularly the United Kingdom, as
well as Asia Pacific. In the United States, it enhanced our operations for
mid-size companies and small-enterprise clients, broadened our facultative
reinsurance business and financial modeling capabilities and benefited our
consumer business. We are realizing excellent results that should lead to
increased net consolidation savings approaching $160 million by 2001.
WHAT ARE THE PRINCIPAL DRIVERS FOR YOUR BUSINESS? The growing
complexity of the world continues to create new and expanded risks.
Consequently, our role as advisors and providers of solutions involving risk is
becoming more valuable--not only for our large base of global clients, but also
for mid-size and small enterprises, whose businesses are expanding rapidly.
Clients face a new generation of risks. Financial, environmental, employment and
professional liabilities, for instance, which have long been sources of major
exposure in the United States, are now arising in other parts of the world.
Corporate governance has become an important issue in virtually every developed
economy. New risks generated by e-commerce--assaults on major commercial Web
sites, intellectual property theft, copyright infringement--create exposures
that are unlike any we know from the past. Reinsurance clients are also
entertaining broader, more complex risks, which is creating growth opportunities
for Guy Carpenter. But the single most influential force creating new, more
challenging business risks is globalization.
WHAT ARE THE FACTORS DRIVING GLOBAL GROWTH? A number of developments
are benefiting our industry and Marsh in particular. Large organizations are
increasingly global, conducting more of their business outside their home
countries. Deregulation and the liberalization of markets are creating new
opportunities. More open markets have coincided with the continuing wave of
privatization and investments in major infrastructure projects. The fact that
global property-casualty insurance premium volume now totals $750 billion
illustrates the important role of commercial insurance in the worldwide economy.
Marsh is ideally positioned to benefit from these trends. An important
strategy for the past two decades has been to build a worldwide organization to
serve clients better and achieve strong long-term performance for MMC's
shareholders.
Europe holds particular promise, and we expect opportunities to become more
attractive as developments in the European Union continue to unfold. The need
for expanded solutions involving risk in the region is being driven by more
pervasive deregulation, less restrictive markets, the implementation of a common
currency and increased cross-border trade. Europe is also developing new capital
markets as corporations begin to use equities, instead of bonds and bank debt,
to finance their operations.
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[GRAPHIC:FOREST]
"If we would guide by the light of reason,
we must let our minds be bold."
LOUIS BRANDEIS
[GRAPHIC:OCEAN]
"The winds and waves
are always on the side of the ablest navigators."
EDWARD GIBBON
[GRAPHIC:OCEAN]
This shift to a shareholder base brings with it new liabilities. Finally, the
demand for our risk services and solutions is accelerating as countries in
Europe continue to reform their social and economic structures.
Asia Pacific is an important area of growth, especially Japan, the world's
second largest economy. Marsh has been active in Japan since 1955, but was
unable to conduct large-scale broking operations because the Japanese have
historically dealt directly with underwriters. Nonetheless, we have had an
important--and still growing--role handling risk management for Japanese
multinationals operating outside Japan. Increased competition, economic demands
and recent changes in Japan's insurance regulatory structure have now opened
this large marketplace to insurance brokers for the first time.
We expect increased need for our risk and insurance services in Latin
America--one of the world's fastest growing regions in terms of insurance
premiums written--based on continuing privatization, changes in the insurance
regulatory environment, large infrastructure projects, the growth in regional
economies and a continuing strong inflow of foreign investment.
COULD YOU COMMENT ON CURRENT CONDITIONS IN COMMERCIAL INSURANCE
MARKETS. Clients have benefited from lower prices, abundant capacity and
attractive terms for the transfer of commercial risk. These conditions have
prevailed in U.S. commercial property-casualty markets since 1987 and in
property-catastrophe reinsurance markets since 1993. A similar environment has
existed outside the United States in recent years. We have begun to see some
change in pricing trends, but the effect of these developments varies by line of
business, as well as the risk profile and loss experience of the client seeking
coverage. From the viewpoint of the overall marketplace, the broadly based,
steep price declines of the past decade are not occurring.
PLEASE DISCUSS THE POTENTIAL TO INCREASE BUSINESS AMONG MEDIUM-SIZE
CLIENTS. This is a huge market with great opportunity to expand. It is currently
fragmented, with no single risk and insurance services firm having a large share
of the business. The market comprises a large number of industrial, commercial
and public-sector enterprises. Some have international operations, but most are
single-country or are regional in scope.
We gained important resources from Johnson & Higgins and Sedgwick to strengthen
the services we offer medium-size clients and have dedicated a practice solely
to their needs. As these companies expand and diversify, they increasingly seek
the services and advice that are available throughout the Marsh organization.
Our ability to provide insurance and employee benefit services gives these
clients more time to do what they do best--run their core businesses.
WHAT NEW INITIATIVES IS MARSH & McLENNAN CAPITAL PURSUING? We organized
Marsh & McLennan Capital less than a decade ago to manage our insurance
market-making activities. The company has evolved into a private equity business
that invests in industries where MMC's specialized knowledge and deal-sourcing
capabilities give us a
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proprietary advantage. In the fall of 1999, Marsh & McLennan Capital closed
Trident II, a fund with $1.4 billion in capital commitments for investment in
global insurance, reinsurance and related industries. Trident II will continue
the successful investment strategy used for the $667 million Trident
Partnership, a fund formed in 1994.
Marsh & McLennan Capital launched a technology fund last year and plans a second
fund this year for investment in software and Internet companies, primarily in
the financial services industry. Our investments are keeping us at the forefront
of technology developments and opportunities. We are forging relationships with
major players in e-commerce and we expect these contacts to become increasingly
valuable to MMC and its businesses going forward.
Marsh & McLennan Capital is working jointly with Mercer to expand MMC's private
equity capability to industries where Mercer has particular expertise. The first
of these initiatives is a new fund focused on the communications and information
sectors.
WHAT OPPORTUNITIES DO THE INTERNET AND E-COMMERCE PRESENT? Since 1992,
when we began using technology in risk transfer and the ways we deliver
services, we have made large multiyear investments to give our clients and
employees unparalleled information access and communications. We have been able,
therefore, to integrate easily Internet-based tools, techniques and solutions
into each of our client segments.
For our risk management and mid-size client businesses, Web-based applications
complement and strengthen the relationship between brokers, clients and markets.
The Web provides improved access to proprietary risk information, facilitates
collaboration and promotes the delivery of timely, accurate information on a
cost-effective basis. Most important, the Web enhances our ability to provide
advice for our clients and to execute transactions efficiently. For our growing
consumer business, new technology will allow clients to apply for insurance
coverage electronically, obtain quotations and administer their accounts.
LOOKING TO 2000 AND BEYOND, WHAT'S THE OUTLOOK FOR MARSH? Our prospects
are outstanding. We have the resources, people and expertise to expand our
business in large and growing markets around the world. We have a strong
position among large global enterprises, but can expand significantly by
providing entirely new services. We have excellent potential in the markets for
medium-size and small enterprises, as well as private clients. Finally, we can
join with our colleagues across MMC to address the increasingly complex
exposures our clients face. / /
[PIE CHART]
1999 REVENUE
$4.5 BILLION
United States 29%
Europe 19%
Asia Pacific 4%
Latin America, Middle East, Africa 4%
Canada 3%
Global Practices 19%
Global Consumer Programs 12%
Global Reinsurance 10%
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15
[GRAPHIC:MOUNTAIN PEAKS]
INVESTMENT MANAGEMENT
A CONVERSATION WITH LAWRENCE J. LASSER,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, PUTNAM INVESTMENTS
PUTNAM'S PERFORMANCE HAS BEEN EXCEPTIONAL. COULD YOU ELABORATE ON
ACHIEVEMENTS. 1999 was an outstanding year for our clients' and shareholders'
investments. Our equity mutual funds largely achieved returns that exceeded
those of the overall market as represented by the S&P 500. Our business grew
significantly and increased profitability. Assets under management, supported by
the continued strength in the U.S. equity markets, rose to $391 billion, up from
$294 billion in 1998. Mutual fund sales were strong and we added new
institutional clients with large defined benefit and defined contribution plans.
We increased distribution of our products across all businesses and introduced
important new capabilities in the United States. Our international business,
centered primarily in Japan and Italy, is thriving, and we are exploring new
ventures in other parts of the world.
Strong investment performance across all the asset classes is a crucial driver
of our growth. The other key drivers of Putnam's commercial results, and of all
money management firms, are securities markets and market expectations. Both
influence investor behavior and both have been extremely positive.
COULD YOU COMMENT ON THE OUTLOOK FOR THE INVESTMENT MANAGEMENT SECTOR.
The industry is strong and continues to rank as one of the most attractive in
terms of opportunities and inherent economics. Money management has benefited
from a bull market of historic dimension. Equity markets have grown dramatically
and so has demand for mutual funds. Economic, demographic and cultural changes
have turned savings and investments into front-burner issues for middle-income
as well as affluent investors.
Putnam has been a beneficiary of secular change and of powerful cyclical change.
Thanks to our people, we are positioned within our industry as among the most
successful firms in these most successful times. Putnam's increased market share
and competitive performance rankings show that our achievements result from
highly focused execution of our strategies.
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17
"The secret of success is constancy to purpose."
BENJAMIN DISRAELI
[GRAPHIC:CANYON]
WHAT IS KEY TO BUILDING A SUCCESSFUL MONEY MANAGEMENT FIRM? Getting
investment performance right and keeping it right is critical--it is Putnam's
first strategic goal and the lifeblood of its business. In a large firm such as
ours that offers a full range of investment choices--equity and fixed income,
value and growth, domestic, international and global--performance leadership in
every category is a goal we work continuously to achieve. We are committed to
delivering products that adhere to their stated objectives. Our global research
strength combined with our disciplined investment processes and strong teams of
investment professionals enables us to do so. Our expectations for excellence
extend throughout every single area of the firm. Importantly, we understand that
service is a key element we bring to our relationships with our clients and
shareholders.
In contrast to other firms, Putnam has never pursued an approach to growth that
says bigger is inevitably better. We have always maintained that a profitable
business is better than a bigger one. In the last five years, Putnam's assets
have more than quadrupled, making us one of the fastest growing asset managers
in the industry. At the same time, revenues have grown at a compound annual rate
of 29 percent and operating income at 32 percent. Excellent sales and marketing
ability, coupled with good product performance, have driven our strong net
flows.
Recruiting, retaining, motivating and managing the best investment staff in the
industry is a continuing priority and key to building and maintaining a
successful firm. Good companies attract the best people. Excellent people enable
us to achieve excellent performance. Sharing Putnam's success with these
talented professionals rewards them for their efforts and also allows us to
attract other gifted people to the firm. We now have more highly motivated
people and better systems and resources to support them than ever before.
[BAR CHART]
Operating Income
(in $ millions)
Compound
Annual Growth 32%
95 96 97 98 99
-- -- -- -- --
244 338 463 677 841
TELL US ABOUT PUTNAM'S STRATEGY FOR EXPANDING OUTSIDE THE UNITED
STATES. Delivering products profitably on a global basis is a challenge--one
that needs the right combination of skill, partners and distribution channels.
We have chosen joint venture strategic partnerships to distribute our products
in certain international markets and have grown rapidly, with assets under
management for non-U.S. clients surpassing $20 billion in 1999. A number of
factors point to our continued success overseas, including the size of potential
markets; heightened demand for money management expertise and investment
products; economic, market and pension reforms; deregulation of banking and
financial services; and the development of local stock exchanges.
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19
[GRAPHIC:THE ARCTIC]
"DISCOVERY CONSISTS OF SEEING WHAT EVERYBODY HAS SEEN AND
THINKING WHAT NOBODY HAS THOUGHT."
ALBERT VON SZENT-GYORGYI
[GRAPHIC:THE ARCTIC]
We have equity ownership in a highly profitable $9 billion mutual fund business
in Italy with Cisalpina Gestioni, which will help us to expand to other European
countries. We have a strong retail and institutional joint venture business in
Japan with Nippon Life Group, with assets in Japan totaling $8 billion, and a
growing institutional business in the United Kingdom. In 1999, we formed an
alliance with Rothschild Australia Asset Management to manage over $500 million
of its clients' global equity assets. We are pursuing similar partnerships in
other parts of the world, including Germany, France and New Zealand.
We are optimistic that Putnam will benefit from MMC's increasing globalization
efforts and expect that the continuing cross-fertilization among its various
business segments may provide us with opportunities to expand internationally.
LET'S DISCUSS HOW PUTNAM IS TAKING ADVANTAGE OF THE INTERNET AND IS
USING IT TO ENHANCE SERVICE CAPABILITIES. We are integrating the Internet into
the core functions of our existing businesses. We are doing this aggressively
and as a high priority for every part of Putnam.
The Internet has already become one of our most important communications tools.
Both our public Web site and our proprietary sites enable us to interact with
our customers in more effective ways.
Putnam was first in the industry to introduce personalization through the Web
for financial advisors. This site has been ranked among the industry's top sites
and the one most visited by financial advisors. It gives intermediaries access
to a wide array of information preselected by them as important, including
summary information on their major clients. Investors, advisors and Putnam
telephone representatives have the ability to view the same information
simultaneously so they can help clients navigate the site, review account
information and answer questions. We have also developed customized Web sites
for our defined contribution and defined benefit plan clients. The defined
contribution sites allow employees to view accounts, make changes or check
balances. Plan sponsors can track participation rates, follow plan demographics
and target programs to increase participation.
[PIE CHART]
- ------------------------
YEAR-END 1999
ASSETS UNDER MANAGEMENT
- ------------------------
$391 billion
Retail Mutual Funds 60%
Defined Benefit 19%
Defined Contribution 15%
International 6%
In many ways, the Internet is bringing our state-of-the-art investor service
capabilities to the next level. Our intermediaries, clients and mutual fund
customers are increasingly turning to our online tools. The speed of access to
information on their investments and research is a key benefit.
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WHAT IS THE POSITION OF PUTNAM'S DEFINED CONTRIBUTION AND DEFINED
BENEFIT BUSINESSES? Putnam has emerged as a leading manager in the defined
contribution business, which has quickly consolidated to include only a small
number of mainstream competitors. We now have about $58 billion of defined
contribution assets under management. This business has grown at a compound
annual rate of 70 percent for five years. Our 2,500 defined contribution clients
represent 1.7 million participants. We expect that our share of the market for
large 401(k)s and other defined contribution plans will grow because of our
unique ability to deliver customized solutions and high service levels.
Our defined benefit business has tripled over the last five years. Putnam's
strength is the ability to offer a depth of investment expertise across the full
range of asset classes. Much of our growth has come from working with existing
clients to add new asset classes to their investment programs. We have
customized our service approach so clients benefit from dedicated teams of
investment professionals and service specialists.
A PUTNAM HALLMARK IS ITS BREADTH OF INVESTMENT CHOICE. HOW IS THE
COMPANY BROADENING ITS CAPABILITIES? Institutional and high-net-worth clients
are seeking investments beyond publicly traded securities. In response, we
established a relationship last year with Boston-based Thomas H. Lee Partners, a
leading private equity firm. We formed a separate firm, TH Lee, Putnam Capital,
to create and manage alternative investments for institutions as well as
affluent individual investors. We added to the range of our variable annuity
product offerings through a new joint venture with Allstate Life, which has
exceeded expectations. A new insurance option we also developed with Allstate
will allow our mutual fund shareholders to protect themselves against a
prolonged decline by transferring market risk to the insurer.
WHAT ABOUT THE FUTURE? While financial markets have experienced
exceptional growth, they have been volatile. Declines in the equity markets
could occur at any time and are difficult to anticipate. For the long term, we
are pursuing our course in a growing industry and our prospects are excellent.
We have successful mutual fund and institutional businesses. Our international
business is strong, with enormous opportunities to grow given the economic
changes taking place around the world. We take the responsibility of managing
our investors' money very seriously and are committed to delivering consistent
and competitive returns through disciplined investment processes. Remember that
Putnam's commercial success is not determined only by assets under management,
but by our ability to earn profits on the strong-performing assets that we
manage. / /
-----------
23
[GRAPHIC:CAVERN]
CONSULTING
A CONVERSATION WITH PETER COSTER,
PRESIDENT, MERCER CONSULTING GROUP
WHAT WERE MERCER'S SIGNIFICANT ACCOMPLISHMENTS IN 1999? We had an
excellent year with solid growth across all of our consulting practices,
accompanied by improved operating efficiency and increasing profitability.
Operating income grew 29 percent on revenue growth of 26 percent. Over the past
five years, our compound earnings growth rate has been 22 percent.
We completed a number of acquisitions. We successfully integrated Sedgwick Noble
Lowndes, which had been one of our largest competitors in human resource
consulting in Europe and Australia. We also added KPMG's U.S. executive
compensation practice; Corporate Resources Group, a compensation consulting and
human resource data firm with particular strength in Europe and Asia; and Dr.
Seebauer & Partner, one of Germany's leading management consulting firms with
strong expertise in the financial services industry.
Most gratifying has been Mercer's growing reputation for innovation and the
continued strengthening of our international presence generally.
TELL US ABOUT INNOVATION AT MERCER. This is key to our success. We
continue to generate a lot of fresh thinking, which is yielding huge benefits
for our clients--and driving our growth.
One of our highly visible innovations centers on an approach to
business strategy we call Value Growth--TM. We deliver a business design
engineered to achieve a superior increase in shareholder value in the face
of rapidly changing markets and competitive demands. Our intellectual capital
in this area is unsurpassed.
In human resource consulting, we continue to emphasize programs that align
employee behaviors with clients' business strategies. We are helping clients who
operate internationally understand the kinds of employee behaviors that support
cross-national organization and are appropriate for their
-------------
25
stage of development and their aspirations. A new offering helps clients
identify and change the less productive aspects of their current human resource
practices and measure the return on their investments in their people. We
continue to be successful in helping clients design programs to attract and
retain key talent for their businesses.
We are working closely with our colleagues at Marsh to design services
specifically directed at the needs of venture capital firms. At the same time,
we are helping our clients realize greater value by accessing venture capital.
One example is work for a major technology company in which we identified an
undervalued technology; we applied our Value Growth tools to recommend
modifications and positioning to increase its value to potential buyers, and
brought the idea to venture capitalists. This yielded a large return for the
seller and a healthy investment for the buyers.
In the e-business arena, a large and growing portion of our revenues comes from
assisting our current clients and start-up dot-coms with business design and
with human resource programs tailored to the needs of e-business. On the
management consulting side, we have created a discrete business to capitalize on
the power of our Value Growth approaches for e-businesses. In human resource
consulting, we have growing businesses designing employee benefit Web sites and
selling Mercer software and human resource data over the Internet.
ARE COLLABORATIVE EFFORTS BETWEEN MERCER'S CONSULTING UNITS ON THE
RISE? There is increasing collaboration across the group, particularly linking
business strategy with human resources. For example, one new service helps
companies address issues of integration following a merger or acquisition.
Research shows that the most critical element of an acquisition's success is the
support of the combined entity's employees for the organization's strategic
goals. Mercer's approach combines our strengths in business strategy and human
resources to address these issues head-on. Another new service helps clients
deliver a superior customer experience by aligning employee and customer
interests. Mercer's proprietary approaches help clients identify key "moments of
truth" that are critical to customer satisfaction. We then design human resource
programs and rewards to drive appropriate employee behavior at these important
junctures, yielding major bottom-line benefits.
[BAR CHART]
- ------------------------
Operating Income
(in $ millions)
- ------------------------
COMPOUND
ANNUAL GROWTH 22%
95 96 97 98 99
109 119 148 202 260
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26
[GRAPHIC:MOUNTAIN RANGE]
"ALL EXPERIENCE IS AN ARCH, TO BUILD UPON."
HENRY BROOKS ADAMS
[GRAPHIC:DESERT]
[GRAPHIC:DESERT]
"CURIOSITY IS ONE OF THE PERMANENT
AND CERTAIN CHARACTERISTICS OF A VIGOROUS MIND."
SAMUEL JOHNSON
WHAT PROGRESS HAS MERCER MADE IN ADVANCING ITS INTERNATIONAL POSITION?
Our international growth was exceptionally strong this year. The additions of
Sedgwick Noble Lowndes and Corporate Resources Group, on top of excellent
baseline performance, doubled the size of our human resource consulting
practices in Europe and Asia. Latin America also grew strongly and we added
operations in Colombia, Venezuela, Poland, Israel, India, the Philippines and
Thailand. Our management consulting business in Europe is enjoying strong
organic growth, which we boosted through the Seebauer acquisition. Our economic
consulting business is also expanding rapidly outside the United States.
Mercer's global growth is best viewed from the perspective of what we have
achieved over time. Twenty years ago, just five percent of our business was
outside North America. In 1999, the figure was 40 percent.
WHY IS HAVING A STRONG INTERNATIONAL NETWORK IMPORTANT? Three reasons
stand out: the global nature of many of our clients; the rapid development and
convergence of the consulting markets; and growing opportunities stemming from
changes in local market practices and government programs.
The world's companies are finding that competition can come from anywhere, and
even relatively young companies are rushing to develop internationally. We find
that global businesses want to understand their core issues from an
international perspective and they look to advisors with a strong network around
the world to help them.
The convergence of economic models and the speed at which ideas travel are
driving less developed consulting markets in the direction of more developed
ones. Consequently, demand for Mercer's advice is growing. Japanese companies,
for instance, are radically changing how they reward their employees, which is
driving strong growth for our Tokyo office.
Governments continue to adopt private solutions for social services they have
traditionally supplied. The steps are often highly politicized and change tends
to come in fits and starts, but the trend is clear. Japan is legislating to
increase substantially the private component of how its citizens provide for
retirement. Latin America is undergoing major retirement and health care
reforms. And in Europe, pension reform is high on most government agendas.
------------
30
DOES MERCER PLAN FURTHER ACQUISITIONS? Acquisitions remain an important
part of our growth strategy. That said, Mercer has never made acquisitions
merely to increase market share. Rather we seek to achieve market position, to
fill geographic or service gaps where there is client need and where we can
identify synergies with our existing operations that will generate an attractive
return.
One reason acquisitions tend to work out well for us is that we carefully
evaluate potential new partners to ensure that they understand and support our
strategy and that our cultures are compatible and that synergies are real. We
also want to make sure that the pricing is economically attractive to MMC
shareholders. This takes time and limits the number of opportunities that
convert to acquisitions.
HOW ARE YOU HANDLING THE CHALLENGE OF HIRING AND RETAINING TOP
EMPLOYEES? This is one of our biggest issues. Demographics, the booming economy
and the proliferation of dot-com companies are making it more difficult for all
consulting companies to attract and retain top-quality people. Fortunately, as
the world's leading human resource consulting firm, we have a lot of experience
in this area. We have introduced a number of initiatives to address work/life
issues, to increase financial incentives for our employees and give them more
control over their career paths.
LOOKING FORWARD, WHAT ARE MERCER'S TOP PRIORITIES? The key to
delivering high value growth for our shareholders is the continued generation of
leading-edge thinking for our clients. To do this we must continue to attract,
retain and develop the very best talent available. This has always been our top
priority, and it is true even more today than historically. / /
[PIE CHART]
- -------------------------------
1999 REVENUE BY GEOGRAPHIC AREA
- -------------------------------
$2.0 BILLION
United States 53%
Europe 33%
Canada 7%
Asia Pacific, Latin America 7%
-----------
31
[GRAPHIC:RAIN FOREST]
FINANCIAL CONTENTS
33
Management's Discussion and Analysis
of Financial Condition and Results of Operations
41
Consolidated Statements of Income
42
Consolidated Balance Sheets
43
Consolidated Statements of Cash Flows
44
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
45
Notes to Consolidated Financial Statements
61
Report of Management
61
Report of Independent Auditors
62
Selected Quarterly Financial Data
and Supplemental Information (Unaudited)
63
Five-Year Statistical Summary of Operations
----------
32
MARSH & MCLENNAN COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh, the world's leading risk and
insurance services firm; Putnam Investments, one of the largest investment
management companies in the United States; and Mercer Consulting Group, a major
global provider of consulting services. More than 50,000 employees worldwide
provide analysis, advice and transactional capabilities to clients in over 100
countries.
MMC 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 but before special charges. The
accounting policies of the segments are identical to those used for the
consolidated financial statements, described in Note 1 to the consolidated
financial statements.
This management's discussion and analysis of financial condition and results of
operations contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Cautionary Language Regarding
Forward-Looking Information" on the inside back cover page of this annual
report.
The consolidated results of operations follow:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(In millions, except per share figures) 1999 1998 1997
- --------------------------------------------------------------------------------
REVENUE:
Risk and Insurance Services $ 4,523 $ 3,351 $ 2,789
Investment Management 2,684 2,296 1,882
Consulting 1,950 1,543 1,338
- --------------------------------------------------------------------------------
9,157 7,190 6,009
- --------------------------------------------------------------------------------
EXPENSE:
Compensation and Benefits 4,574 3,565 3,044
Amortization of Intangibles 156 82 50
Other Operating Expenses 2,631 2,127 1,873
Special Charges/(Credit) 337 (4) 244
- --------------------------------------------------------------------------------
7,698 5,770 5,211
- --------------------------------------------------------------------------------
OPERATING INCOME $ 1,459 $ 1,420 $ 798
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET INCOME $ 726 $ 796 $ 434
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET INCOME PER SHARE:
BASIC $ 2.76 $ 3.11 $ 1.77
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DILUTED $ 2.62 $ 2.98 $ 1.73
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE NUMBER OF
SHARES OUTSTANDING:
BASIC 263 256 245
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DILUTED 272 264 251
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The consolidated results of operations for the three years ended December 31,
1999 have been affected by two large acquisitions and special charges primarily
related to those transactions. In 1999, the full-year results of operations
reflect MMC's business combination with Sedgwick Group plc ("Sedgwick"), a
London-based holding company of one of the world's leading insurance and
reinsurance broking and consulting groups, concluded in November 1998. Also
during 1999, MMC recorded special charges of $337 million related to the
acquisition and integration of Sedgwick. In 1998, the full-year results of
operations reflect the impact of the business combination with Johnson & Higgins
("J&H"), completed on March 27, 1997, which was not reflected in the results of
operations in the first quarter of 1997. During 1997, MMC recorded special
charges of $244 million related to the J&H integration, London real estate and
the disposal of certain assets. These special charges are explained, in more
detail, under the caption, Special Charges/(Credit) in this Management's
Discussion and Analysis.
Excluding the effects of these and other smaller acquisitions and dispositions
in each of the three years, consolidated revenues increased approximately 9% and
11% in 1999 and 1998, respectively. Consolidated expenses increased
approximately 7% and 8% in 1999 and 1998, respectively, excluding the effects of
special charges, acquisitions and dispositions.
In 1999, revenue, derived mainly from commissions and fees, rose 27%. This
increase primarily was due to the Sedgwick transaction, which was not reflected
in MMC's consolidated results of operations for the first ten months of 1998.
Excluding the impact of acquisitions, dispositions and foreign exchange,
consolidated revenue grew approximately 9% over 1998. Revenue increased 17% in
the investment management segment, as average assets under management increased
significantly in 1999. Consulting revenue grew 9% for the year reflecting a
higher volume of business in all practice lines. Also, the risk and insurance
services segment experienced revenue growth of approximately 4% primarily due to
net new business development and higher levels of placement services revenue.
In 1998, revenue rose 20% from 1997 due, in part, to the impact of the business
combination with J&H, completed on March 27, 1997, which was not reflected in
the results of operations in the first quarter of 1997, as well as the
acquisition of Sedgwick in November 1998. Excluding acquisitions and
dispositions, revenue grew approximately 11% over 1997. This growth was driven
by a 22% increase in revenue in the investment management segment as average
assets under management in 1998 were substantially higher than 1997. Risk and
insurance services revenue grew 5% for the year reflecting net new business
development partially offset by premium rate declines. Also, the consulting
segment experienced 12% growth in revenue due to an increased level of services
provided in all lines of business.
Operating expenses rose 33% in 1999 primarily reflecting the acquisition of
Sedgwick and special charges of $337 million. Excluding the effect of
acquisitions, dispositions, foreign exchange and special charges, expenses grew
approximately 7% in 1999 primarily reflecting staff growth in the consulting
segment and higher incentive compensation within the investment management and
consulting segments commensurate with strong operating performance. Partially
offsetting these increases was approximately $30 million of net consolidation
savings associated with the Sedgwick integration and $40 million of net
incremental savings relating to the J&H transaction. Of the $70 million of net
consolidation savings, approximately $60 million was realized by risk and
insurance services, approximately $5 million by consulting and approximately $5
million by corporate.
----------
33
In 1998, expenses increased 11% over 1997 primarily reflecting higher
compensation and client service-related costs in the investment management and
consulting segments to support a higher volume of business. Expense growth in
1998 also reflected one additional quarter of J&H operating expenses in 1998 as
compared with 1997, as well as the acquisition of Sedgwick in November 1998.
These increases were offset, in part, by approximately $75 million of net
integration savings associated with the combination with J&H and the impact of
the $244 million of special charges recorded in 1997. Of the $75 million net
integration savings achieved in 1998, approximately $55 million was realized by
risk and insurance services, approximately $15 million by consulting and
approximately $5 million by corporate. The special charges for 1997 were related
predominantly to the combination with J&H. The charges are explained in more
detail under the caption, Special Charges/(Credit) in this Management's
Discussion and Analysis.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard, which establishes new
accounting and reporting requirements for derivative instruments, is effective
(as amended by SFAS No. 137) for fiscal years beginning after June 15, 2000. MMC
does not expect the adoption of this standard to have a material impact on its
results of operations or consolidated financial condition.
RISK AND INSURANCE SERVICES
The operations within this segment provide risk and insurance services as
broker, agent or consultant for insureds, insurance underwriters and other
brokers. Risk management and insurance broking services are provided primarily
under the Marsh name. Reinsurance broking services to insurance and reinsurance
risk takers worldwide are provided under the Guy Carpenter name while insurance
and program services to consumers and emerging businesses are provided primarily
under the Seabury & Smith or Marsh names. In addition, Marsh & McLennan Capital
("MMCAP"), provides services principally in connection with originating,
structuring and managing insurance and related industry investments.
Insurance broking services are provided to clients primarily in connection with
risk management and the insurance placement process and involve analyzing
various types of property and liability loss exposures including large and
complex risks that require access to world insurance markets as well as loss
exposures other than property and liability. Services provided to clients
include insurance broking and risk transfer activities and professional
counseling services on risk management issues, including risk analysis, coverage
requirements, self insurance (in which the insured retains a portion of its
insurance risk) and alternative insurance and risk financing methods, as well as
claims collection, injury management, loss prevention and other insurance
related services. Services also include organization and administrative services
for special purpose insurance companies and other risk assumption alternatives
and for loss exposures other than property and liability. Insurance placement
services include the placement of insurance coverages with insurers worldwide,
sometimes involving other intermediaries.
Reinsurance broking services primarily involve acting as an intermediary for
insurance and reinsurance organizations on all classes of reinsurance, including
specialty lines such as professional liability, medical malpractice, life and
health. The intermediary assists the insurer by providing advice, placing
reinsurance coverage with reinsurance organizations located around the world,
placing risk transfer financing with capital markets and furnishing related
services such as actuarial, financial and regulatory consulting, portfolio
analysis and catastrophe modeling. An insurance company may seek reinsurance or
other risk-transfer financing on all or a portion of the risks it insures.
Intermediary services are also provided to reinsurance companies, which may also
seek reinsurance on the risks they have reinsured.
The insurance and program services operation for consumers and emerging
businesses primarily designs, markets and administers life, health, accident,
disability, automobile, homeowners, professional liability and other insurance
and related products, on both a group and singular marketing basis, to
individuals, businesses and their employees, and organizations, associations and
other affinity groups and their members, largely in North America. In addition,
it provides underwriting management services to insurers in the United States,
Canada and the United Kingdom, primarily for professional liability coverages,
as well as wholesale broking services in the United States and the United
Kingdom for a broad range of products on behalf of both affiliated and
unaffiliated retail brokers.
MMCAP is a private equity investment firm. It is an advisor to the Trident
Partnership L.P., an independent private investment partnership, and Trident II,
L.P. formed in 1999 with $1.4 billion in capital commitments for investments in
insurance and related industries. MMCAP is also advisor to a technology fund
with capital commitments from MMC and certain other investors. MMCAP and its
predecessor operations were instrumental in the formation of several substantial
insurance and reinsurance entities.
Revenue attributable to the risk and insurance services segment consists
primarily of fees paid by clients; commissions and fees paid by insurance and
reinsurance companies; placement services revenues or contingent fees earned
from insurers; interest income on funds held in a fiduciary capacity for others,
such as premiums and claims proceeds and compensation for services provided in
connection with the organization, structuring and management of insurance and
related industry investments, including fees and dividends, as well as
appreciation that has been realized on sales of holdings in such entities.
Revenue generated by the risk and insurance services segment is fundamentally
derived from the value of the services provided to clients and markets. It is
affected by premium rate levels in the property and casualty insurance markets
and available insurance capacity because compensation is frequently related to
the premiums paid by insureds. In many cases compensation may be negotiated in
advance based upon the estimated value of the services to be performed. Revenue
is also affected by fluctuations in the amount of risk retained by insurance and
reinsurance clients themselves and by insured values, the development of new
products, markets and services, new and lost business, merging of clients and
the volume of business from new and existing clients, as well as by interest
rates for fiduciary funds. Placement services revenue and contingent fees
include payments or allowances by insurance companies based upon such factors as
the overall volume of business placed by the broker with that insurer and the
aggregate commissions paid by the insurer for that business during specific
periods or the loss performance to the insurer of that business.
Revenues vary from quarter to quarter as a result of the timing of policy
renewals, the net effect of new and lost business and the realization of
investments, whereas expenses tend to be more uniform throughout the year.
---------
34
The results of operations for the risk and insurance services segment are
presented below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(In millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
Revenue $4,523 $3,351 $2,789
Expense(a) 3,717 2,738 2,293
- --------------------------------------------------------------------------------
OPERATING INCOME $ 806 $ 613 $ 496
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPERATING INCOME MARGIN 17.8% 18.3% 17.8%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) Excluding special charges, which are detailed below.
REVENUE
Revenue for the risk and insurance services segment increased 35% over 1998
primarily due to the Sedgwick acquisition. Excluding acquisitions, dispositions
and the effect of foreign exchange, revenue for risk and insurance services
operations rose approximately 4%. Insurance broking revenue, which represented
75% of risk and insurance services, grew approximately 4% primarily reflecting
the effect of net new business development and higher levels of placement
service revenue. Overall, the rate of decline in commercial premium rates
lessened towards the end of 1999 compared with 1998. Revenue from reinsurance
broking and insurance and program services increased by 4% and 2%, respectively,
in 1999. Revenue growth in the first half of 2000 is expected to remain in the
low single digits reflecting net new business, partially offset by continued
rationalization of identified portions of Sedgwick's operations.
In 1998, risk and insurance services revenue grew 20% over 1997 primarily due to
the fact that 1998 was the first full year of combined operations after the
merger with J&H, whereas 1997 had only three quarters. Furthermore, the Sedgwick
acquisition was completed late in the fourth quarter of 1998, adding somewhat to
revenue growth in 1998. Excluding acquisitions and dispositions, risk and
insurance services revenue rose approximately 5%. Insurance broking revenue,
which represented 74% of risk and insurance services, grew 5% reflecting net new
business development partially offset by continued premium rate declines in
virtually all lines of coverage. The increased level of net new business
development was concentrated primarily in the United States and the United
Kingdom. Revenues from reinsurance broking and insurance and program services
increased by 5% and 6%, respectively, in 1998.
EXPENSE
Risk and insurance services expenses increased 36% in 1999, attributable largely
to the acquisition of Sedgwick. Excluding acquisitions, dispositions and the
effect of foreign exchange, expenses increased approximately 2% from 1998
primarily reflecting higher technology spending, which was partially offset by
the realization of $60 million in net integration savings related to the
Sedgwick and J&H transactions, as well as the impact of certain discretionary
expense reductions.
In 1998, risk and insurance services expenses increased 19%. This growth was
attributable largely to the business combination with J&H, which was effective
as of the end of the first quarter of 1997 resulting in 1998 having one
additional quarter of expense, and the acquisition of Sedgwick in November 1998.
Excluding acquisitions and dispositions, expenses increased approximately 2%
from 1997 reflecting salary progressions for continuing staff and higher
technology and systems spending. The increases in spending were offset by the
realization of approximately $55 million of net integration savings related to
the J&H transaction.
INVESTMENT MANAGEMENT
The operations within the investment management segment provide services
primarily under the "Putnam" name. The services, which are performed principally
in the United States, include securities investment advisory and management
services consisting of investment research and management, and accounting and
related services for a group of publicly held investment companies (the "Putnam
Funds"). A number of the open-end funds serve as funding vehicles for variable
insurance contracts. Investment management services are also provided to
corporate profit-sharing and pension funds, state and other governmental and
public employee retirement funds, university endowment funds, charitable
foundations, collective investment vehicles (both U.S. and non-U.S.) and other
domestic and foreign institutional accounts. Putnam serves as transfer agent,
dividend disbursing agent, registrar and custodian for the Putnam Funds and
provides custody services to several external clients. In addition, Putnam
provides administrative and trustee (or custodial) services for employee benefit
plans (in particular 401(k) plans), IRAs and other clients for which it receives
compensation pursuant to service and trust or custodian contracts. Putnam also
acts as principal underwriter of the shares of the open-end Putnam Funds,
selling primarily through independent broker/dealers, financial planners and
financial institutions, including banks, and directly to certain large 401(k)
plans and other institutional accounts. Shares of open-end funds are generally
sold at their respective net asset value per share plus a sales charge, which
varies depending on the individual fund and the amount purchased. Essentially
all Putnam Funds are available with a contingent deferred sales charge in lieu
of a front-end load. The related prepaid dealer commissions initially paid by
Putnam to broker/dealers for distributing such funds can be recovered through
charges and fees received over a number of years.
Putnam's revenue is derived primarily from investment management and 12b-1 fees
received from the Putnam Funds and institutional accounts. The investment
management services provided by Putnam are performed pursuant to advisory
contracts. The amount of the fees varies depending on the individual mutual fund
or account and is usually based upon a sliding scale in relation to the level of
assets under management and, in certain instances, is also based on investment
performance. The management of Putnam and the trustees of the Putnam Funds
regularly review the fund fee structure in light of fund performance, the level
and range of services provided, industry conditions and other relevant factors.
Putnam also receives compensation for providing certain shareholder and custody
services.
In July 1999, Putnam acquired a minority ownership interest in Thomas H. Lee
Partners ("THL"), a private equity investment firm. In addition, Putnam and THL
formed a joint venture entity, TH Lee, Putnam Capital ("THLPC") of which Putnam
owns 25%. THL and THLPC offer private equity and alternative investment funds
for institutional and high-net-worth investors.
The results of operations for the investment management segment are presented
below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(In millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
REVENUE $2,684 $2,296 $1,882
EXPENSE 1,843 1,619 1,419
- --------------------------------------------------------------------------------
OPERATING INCOME $ 841 $ 677 $ 463
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OPERATING INCOME MARGIN 31.3% 29.5% 24.6%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
---------
35
REVENUE
Putnam's revenue increased 17% in 1999 reflecting a strong increase in the level
of assets under management on which management fees are earned. Assets under
management aggregated $391 billion at December 31, 1999 compared with $294
billion at December 31, 1998, reflecting $14 billion of mutual fund net new
sales and additional investments by institutional accounts, $2 billion of
reinvested dividends and an $81 billion increase resulting from both higher
securities market levels and strong portfolio performance.
Putnam's revenue increased 22% in 1998 reflecting significant growth in the
level of average assets under management on which management fees are earned.
Assets under management aggregated $294 billion at December 31, 1998 compared
with $235 billion at December 31, 1997 reflecting $28 billion of net new sales
of mutual funds and net additional investments by institutional accounts, as
well as a $31 billion growth in market value related to an increase in
securities market levels during the year.
EXPENSE
Putnam's expenses rose 14% in 1999 reflecting an increase in incentive
compensation commensurate with operating performance, increased amortization of
deferred commissions from both increased sales and redemptions, as well as
goodwill amortization arising from the July 1999 investment with THL. Putnam's
expenses increased 14% in 1998 primarily reflecting increased client
service-related costs, including the amortization of deferred commissions,
resulting from both the higher level of business activity and increased
incentive compensation.
Year-end and average assets under management are presented below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(IN BILLIONS OF DOLLARS) 1999 1998 1997
- --------------------------------------------------------------------------------
MUTUAL FUNDS:
Domestic Equity $207 $153 $119
Taxable Bond 36 38 36
International Equity 32 14 11
Tax-Free Income 14 16 16
- --------------------------------------------------------------------------------
289 221 182
- --------------------------------------------------------------------------------
INSTITUTIONAL ACCOUNTS:
Domestic Equity 47 32 21
International Equity 35 16 10
Fixed Income 20 25 22
- --------------------------------------------------------------------------------
102 73 53
- --------------------------------------------------------------------------------
YEAR-END ASSETS $391 $294 $235
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ASSETS $322 $264 $206
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international bond and stock market prices and by
the level of investments and withdrawals for current and new fund shareholders
and clients. In recent years U.S. equity markets have risen substantially, in
many cases to historical highs. This increase has contributed significantly to
the assets under management and, accordingly, to increases in revenue. A
substantial slowdown in the rise of markets or an actual decrease in general
market levels will reduce revenue growth or, in some circumstances, could lead
to a decline in revenue. Revenues are also affected by investment performance,
service to clients, the development and marketing of new investment products,
the relative attractiveness of the investment style under prevailing market
conditions and changes in the investment patterns of clients. Revenue levels are
sensitive to all of the factors above, but in particular, to significant changes
in bond and stock market valuations.
Putnam provides individual and institutional investors with a broad range of
equity and fixed income investment products and services designed to meet
varying investment objectives and which affords its clients the opportunity to
allocate their investment resources among various alternative investment
products as changing worldwide economic and market conditions warrant.
At the end of 1999, assets held in equity securities represented 82% of assets
under management, compared with 73% in 1998 and 69% in 1997, while investments
in fixed income products represented 18%, compared with 27% last year and 31% in
1997.
CONSULTING
Through Mercer Consulting Group, Inc., the operations within this segment
provide consulting services to a predominantly corporate clientele from
locations around the world, in the areas of human resources and employee benefit
programs, including retirement, health care and compensation; and general
management consulting, which comprises strategy, operations and marketing.
Economic consulting and analysis services are also provided.
William M. Mercer provides professional advice and services to corporate,
government and institutional clients worldwide. Consultants help organizations
design, implement, administer and communicate employee benefit, compensation and
other human resource programs and strategies, and provide other types of
actuarial advice.
Mercer Management Consulting, Inc. provides advice and assistance on issues of
business strategy, primarily to large corporations in North America, Europe and
Asia. Consultants help senior executives more fully understand the behavior of
their customers, optimize the economics of their business, and structure their
organizations, processes and systems to achieve their strategic goals and
maximize shareholder value.
National Economic Research Associates, Inc. ("NERA"), a firm of consulting
economists, serves law firms, corporations, trade associations and governmental
agencies. NERA provides research and analysis of economic and financial issues
arising in litigation, regulation, public policy and management.
The major component of Mercer Consulting Group's revenue is fees paid by clients
for advice and services. In addition, commission revenue is received from
insurance companies for the placement of individual and group insurance
contracts, primarily life, health and accident coverages.
Revenue in the consulting business is affected by changes in clients' industries
including government regulation, as well as new products and services, the stage
of the economic cycle and broad trends in employee demographics and in the
management of large organizations.
The results of operations for the consulting segment are presented below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(In millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
Revenue $1,950 $1,543 $1,338
Expense(a) 1,690 1,341 1,190
- --------------------------------------------------------------------------------
Operating Income $ 260 $ 202 $ 148
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Operating Income Margin 13.3% 13.1% 11.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(a) Excluding special charges, which are detailed below.
----------
36
REVENUE
Consulting services revenue increased 26% in 1999 reflecting an increase in the
level of services provided as well as the impact of the Sedgwick acquisition.
Excluding acquisitions and the effect of foreign exchange, consulting revenue
increased approximately 9% in 1999. Retirement consulting revenue, which
represented 43% of the consulting segment, grew 9% over 1998 primarily due to a
higher amount of services provided. In addition, revenue rose 14% in
compensation consulting, 9% in general management consulting and 16% in the
economic consulting practice due to a higher volume of business in these
practice lines. Health care consulting revenues grew by 2% over 1998.
In 1998, consulting services revenue increased 15% reflecting an increase in the
level of services provided as well as the impact of the combination with J&H,
the Sedgwick acquisition and several small acquisitions. Partially offsetting
these increases was the impact of a transfer of certain business lines to
Automatic Data Processing ("ADP"), as part of a strategic alliance, in October
1997. Excluding acquisitions and dispositions, consulting's revenue increased
approximately 12% in 1998. Retirement consulting revenue, which represented 41%
of the consulting segment, grew 11% over 1997 principally due to a higher level
of services provided. In addition, revenue rose 22% in the economic consulting
practice, 18% in global compensation consulting, 8% in health care consulting
and 6% in general management consulting due to a higher volume of business in
these practice lines in 1998.
EXPENSE
Consulting services expenses increased 26% in 1999. Excluding acquisitions and
the effect of foreign exchange, expenses increased 7% in 1999 primarily
reflecting the effect of staff growth to support new business and higher
incentive compensation commensurate with strong operating performance. These
increases were partially offset by approximately $5 million of realized
consolidation savings related to the Sedgwick transaction.
Consulting services expenses increased 13% in 1998. Excluding acquisitions and
dispositions, expenses increased approximately 9% reflecting the effect of staff
growth to support new business, higher incentive compensation commensurate with
strong operating performance along with compensation expense increases. These
increases were partially offset by approximately $15 million of realized net
integration savings related to the J&H transaction.
CORPORATE EXPENSES
Corporate expenses increased to $103 million in 1999 from $76 million in 1998
due, in part, to the full year effect of the Sedgwick acquisition and a new
corporate advertising program in 1999. These increases were partially offset by
integration savings of $5 million.
Corporate expenses increased from $65 million in 1997 to $76 million in
1998 primarily due to the inclusion of Sedgwick-related expenses for
November and December of 1998.
SPECIAL CHARGES/(CREDIT)
The $337 million of special charges for 1999 included $266 million of
merger-related costs associated with the combination with Sedgwick and a charge
of $71 million primarily for acquisition- related awards pertaining to the
Sedgwick transaction. Of the total $337 million of special charges, $292 million
was applicable to risk and insurance services, $36 million related to consulting
and $9 million was related to corporate. The net impact of the special charges
was $233 million after tax, or $.86 per diluted share.
The $266 million of merger-related costs, associated with employees and offices
of MMC, included personnel-related expenses principally involving severance and
related benefits associated with the reduction of approximately 2,100 positions
worldwide ($194 million), costs related to the planned consolidations of
approximately 50 offices ($47 million) and other integration costs ($25
million). In addition, $285 million of costs for planned reductions of
approximately 2,400 positions and consolidations of approximately 125 offices of
Sedgwick are included in the cost of the acquisition. The utilization of these
charges is summarized in Note 4 to the consolidated financial statements. At
year-end 1999, the actions contemplated by the integration plan were in progress
and the remaining actions are expected to be completed by the end of 2000.
Of the combined merger-related costs totaling $551 million, cash payments of
approximately $220 million were made in 1999. Estimated cash payments of
approximately $200 million are expected to be made in 2000. Some accruals,
primarily representing future rent under noncancelable leases (net of
anticipated sublease income) are expected to be paid out over several years.
Cash outlays are expected to be funded through operating cash flows.
Management believes the net annual savings associated with the Sedgwick
integration should approach $160 million when it is completed. Most of the gross
savings will result from reduced compensation and benefits expense reflecting
the elimination of approximately 4,500 positions and lower facilities costs
reflecting the consolidation of approximately 175 offices. Offsetting these
reductions are additional expenses for goodwill amortization and improvements to
information technology systems and employee benefit, compensation and retirement
plans. Of the $160 million of net savings, approximately $30 million was
realized in 1999. Approximately two-thirds of the remaining estimated annual
savings is expected to be realized in 2000, with the remainder expected to be
realized in 2001. Anticipated savings in 2000 are expected to increase as the
year progresses.
During 1998, MMC recorded a special charge of $11 million representing
acquisition-related stock unit awards issued to certain senior employees of
Sedgwick. In addition, a reserve related to a 1996 provision for restructuring
of approximately $15 million was reversed. The resulting net credit of $4
million increased diluted net income per share by $.01 for the year.
The $244 million of special charges for 1997 included $168 million of
merger-related costs predominantly related to the combination with J&H, a charge
of $61 million related to lease abandonment costs associated with the
consolidation of various London operations along with costs to abandon and
redevelop MMC's London building and $15 million for the disposal of certain EDP
assets, which were written off in 1997. Of the total $244 million of special
charges, $224 million was applicable to risk and insurance services, $17 million
related to consulting and $3 million was recorded in general corporate. The net
impact of the special charges was $158 million after tax, or $.63 per diluted
share.
-----------
37
The $168 million of merger-related costs, associated with employees and offices
of MMC, included personnel-related expenses principally involving severance and
related benefits associated with the reduction of approximately 1,300 positions
worldwide ($117 million), costs related to the planned consolidations of
approximately 30 offices ($38 million) and other integration costs ($13
million). In addition, $143 million of costs for planned reductions of over 900
positions and consolidations of approximately 50 offices of J&H were included in
the cost of the acquisition. The utilization of these charges is summarized in
Note 4 to the consolidated financial statements. The actions contemplated by the
integration plan were substantially completed in 1998 and the remaining actions
were completed in early 1999.
Of the combined merger-related costs totaling $311 million, cash payments of
approximately $255 million have been made through December 31, 1999. Payments of
$47 million, $122 million and $86 million were made in 1999, 1998 and 1997,
respectively. The remaining $56 million of accruals, representing future rent
under noncancelable leases (net of anticipated sublease income), and salary
continuance arrangements, primarily in Canada and the Netherlands, are expected
to be paid out over several years. Cash outlays have been funded through
operating cash flows. MMC also expects to fund the remaining payments through
operating cash flows.
The gross annual savings associated with the completed J&H integration
approximated $200 million by the end of 1999, most of which resulted from
reduced compensation and benefits expense reflecting the elimination of
approximately 2,200 positions and lower facilities costs reflecting the
consolidation of approximately 80 offices, primarily in the United States. Net
annual savings realized related to the J&H integration were approximately $125
million after giving effect to incremental goodwill amortization. Net savings of
approximately $75 million were realized in 1998 after giving effect to both
incremental goodwill amortization and near-term higher integration-related
spending on technology and systems.
The above actions did not result in any meaningful disruptions of MMC's
operations.
INTEREST
Interest income earned on corporate funds decreased to $21 million in 1999
compared with $25 million in 1998. The decrease in interest income primarily
reflected the use of excess cash to pay down debt during 1999. Interest expense
increased to $233 million in 1999 from $140 million in 1998. This increase was
primarily due to incremental debt incurred in November 1998 to finance the
Sedgwick acquisition as well as incremental debt incurred in 1999 to support
approximately $460 million of initiatives, including Putnam's joint venture
investment with THL, the purchase of an additional condominium interest at MMC's
worldwide headquarters in New York City and several MMCAP-initiated investments.
Interest income earned on corporate funds increased to $25 million in 1998 from
$24 million in 1997. Interest expense increased to $140 million in 1998 from
$107 million in 1997 primarily due to interest expense associated with the
incremental debt incurred in November 1998 to finance the Sedgwick acquisition,
as well as the additional quarter of interest expense in 1998 related to
increased bank borrowings associated with the J&H transaction.
INCOME TAXES
MMC's consolidated tax rate was 41.8% of income before income taxes in 1999.
Excluding the tax effect of the special charges, the underlying tax rate in 1999
was 39.5% compared with 39.0% in 1998 and 38.3% in 1997. The increase in the
1999 tax rate was largely attributable to the non-deductibility of goodwill
associated with recent acquisitions. The increase in the tax rate in 1998
compared with the underlying 1997 rate was attributable largely to the
non-deductibility of goodwill associated with the J&H acquisition and other
acquisitions. The overall tax rates are higher than the U.S. federal statutory
rate primarily because of the non-deductibility of goodwill and provisions for
state and local income taxes. In 1997, MMC's consolidated tax rate including the
tax effect of the special charge was 39.3%.
LIQUIDITY AND CAPITAL RESOURCES
MMC's cash and cash equivalents aggregated $428 million at the end of 1999, a
decrease of $182 million from the end of 1998.
OPERATING CASH FLOWS
MMC generated $1.0 billion of cash from operations in 1999 compared with $1.1
billion in 1998. These amounts reflect the net income earned by MMC in those
years adjusted for non-cash charges and working capital changes.
Included in the cash flows from operations are the net cash requirements related
to the 1999 and 1997 special charges of $337 million and $244 million,
respectively. Cash outlays of $134 million, $66 million and $62 million were
made in 1999, 1998 and 1997, respectively.
Cash flows from operations also include the net cash flows associated with
Putnam's prepaid dealer commissions, which amounted to a $28 million cash inflow
in 1999 compared with a $75 million outflow in 1998 as prepaid dealer
commissions have stabilized at approximately $1.1 billion.
As further explained in Note 15 to the consolidated financial statements, the
disclosure and advice given to clients regarding certain personal pension
transactions by certain present and former subsidiaries in the United Kingdom
are under review by the U.K. Personal Investment Authority. The contingent
exposure for pension redress and related cost is presently estimated to be
approximately $500 million of which $300 million is expected to be recovered
from insurers. Approximately two-thirds of the contingent exposure is associated
with the Sedgwick acquisition while the balance is associated with other current
and former subsidiaries of MMC. Such amounts in excess of anticipated insurance
recoveries have been provided for in the accompanying financial statements. The
timing of payments relating to the pension review process cannot be predicted
with certainty; however, it is anticipated that approximately $175 million will
be paid in 2000. MMC may fund future payments by temporarily drawing upon its
existing credit lines.
MMC anticipates that internally generated funds will be sufficient to meet its
foreseeable recurring operating cash requirements, as well as dividends,
capital expenditures and scheduled repayments of long-term debt.
----------
38
Financing Cash Flows
Net cash used for financing activities reduced cash by $334 million in 1999
compared with $366 million in 1998.
During 1999, cash used to reduce commercial paper borrowings amounted to
$809 million. The proceeds of a common stock offering in April and a
senior note offering in June were used to repay a portion of the
commercial paper borrowings that were used to initially finance the
Sedgwick acquisition. MMC acquired Sedgwick in November 1998 for total cash
consideration of [pound] 1.25 billion or approximately $2.2 billion.
In April 1999, MMC completed the sale of 4.1 million common shares
realizing approximately $300 million of net proceeds. In June 1999, MMC sold
$600 million of 6 5/8% Senior Notes due in 2004 and $400 million of 7 1/8%
Senior Notes due in 2009. Also during 1999, MMC completed investments
totaling approximately $460 million relating to Putnam's joint venture
with THL, the purchase of an additional condominium interest at its
worldwide headquarters in New York City and several MMCAP-initiated
investments.
Other debt repayments amounted to $734 million in 1999 and $411 million in 1998,
funded through operating cash flows.
Dividends paid by MMC amounted to $447 million in 1999 ($1.70 per share) and
$375 million in 1998 ($1.46 per share). MMC periodically purchases shares of its
common stock to meet requirements of the various stock compensation and benefit
programs. MMC purchased approximately 200,000 shares in 1999 and 4.1 million
shares in 1998.
In June 1999, MMC arranged a new $1.4 billion revolving credit facility for the
use of its subsidiary, Marsh USA, Inc. Borrowings under the facility, which
expires in 2000, are guaranteed by MMC and support Marsh USA, Inc.'s commercial
paper borrowings. This facility was amended in January 2000 to reduce the
aggregate commitment from $1.4 billion to $1.2 billion. No amounts were
outstanding under this facility at December 31, 1999.
During 1997, MMC executed a revolving credit facility with several banks to
support its commercial paper borrowings and to fund other general corporate
requirements. This noncancelable facility, which expires in June 2002, provided
that MMC may borrow up to $1.2 billion at market rates of interest which may
vary depending upon the level of usage of the facility and MMC's credit ratings.
The facility was amended in January 2000 to reduce the aggregate commitment from
$1.2 billion to $1.0 billion. No amounts were outstanding under this facility at
December 31, 1999 and $583 million was outstanding at December 1998. Borrowings
under this facility at December 31, 1998 have been classified as long-term debt
based on MMC's intent and ability to maintain or refinance these obligations on
a long-term basis. MMC also maintains other credit facilities with various
banks, primarily related to operations located outside the United States,
aggregating $196 million as of December 31, 1999. MMC has borrowed $88 million
under these facilities at December 31, 1999 and has included these borrowings in
short-term debt in the Consolidated Balance Sheet.
During 1998, in connection with the Sedgwick transaction, MMC assumed, among
other debt, 7.68% Senior Loan Notes due 2006, which had an outstanding balance
of $63 million at December 31, 1999.
MMC has a fixed rate non-recourse mortgage note agreement due in 2009 amounting
to $200 million, at an interest rate of 9.8%, in connection with its interest in
its worldwide headquarters building.
During 1997, in connection with the J&H transaction, MMC assumed a note payable
due 2012 which has an outstanding balance of $83 million at December 31, 1999.
Interest on this debt is fixed at 8.62%.
MMC has committed to potential future investments of approximately $700 million
in connection with the formation of MMCAP's Trident II Fund and THL. MMC expects
to fund these commitments, in part, with sales proceeds from existing
investments. These commitments will be funded over the next several years if
certain investment levels and performance targets are met.
Investing Cash Flows
Investing activities for MMC reduced cash by $845 million in 1999 and by $587
million in 1998. In 1999, cash used for acquisition activity, primarily related
to the THL transaction, as well as several insurance and consulting businesses,
was $357 million. In 1998, cash used for acquisition activity, related to
several insurance and consulting businesses, was $302 million. MMC's capital
expenditures, which amounted to $358 million in 1999 and $297 million in 1998
have primarily related to computer equipment purchases, the refurbishing and
modernizing of office facilities and, in 1999, the purchase of an additional
condominium interest at MMC's worldwide headquarters in New York City. Other,
net cash outlays of $215 million in 1999 primarily relate to investments in the
portfolio managed by MMCAP, including Trident II, as well as other MMC equity
investments and capitalized software expenditures.
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. 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 very limited basis and are with counterparties
of high creditworthiness. MMC does not enter into foreign currency or interest
rate transactions for trading or other speculative purposes.
MMC had the following investments and debt instruments subject to variable
interest rates:
Year Ended December 31,
(IN MILLIONS OF DOLLARS) 1999
- ------------------------ ----
Cash and cash equivalents invested in certificates of
deposit and time deposits (Note 1) $ 347
Fiduciary cash and investments (Note 1) $3,333
Variable rate debt outstanding (Notes 9 and 10) $2,027
Interest rate swaps--notional net payable (Note 11) $ 309
These investments and debt instruments are discussed more fully in the above
indicated notes to the consolidated financial statements.
MMC's results of operations are affected by changes in short-term interest rates
and their impact on the above-noted items. Based on the above balances, if
short-term interest rates increase by 25 basis points, annual interest income
would increase by approximately $9 million; however, this would be partially
offset by a $6 million increase in interest expense resulting in a net increase
to income before income taxes of $3 million.
The translated values of revenue and expense from MMC's international risk and
insurance services and consulting operations are subject to fluctuations due to
changes in currency exchange rates. However, the net impact of these
fluctuations on MMC's results of operations or cash flows has not been material.
---------
39
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. At
December 31, 1999, MMC had open forward exchange contracts to sell U.S. dollars
for sterling for an underlying principal amount of $24 million. In addition, MMC
had open forward exchange contracts to purchase other foreign currencies for
underlying principal amounts totaling $12 million. These contracts were entered
into principally to hedge firm commitments. The fair value of these contracts at
December 31, 1999 was not significant. If the applicable exchange rates were to
change by 25%, the fair value of these contracts would increase or decrease by
$9 million.
MMC also had option contracts to hedge its interest rate exposures related to
pension redress in the United Kingdom. At December 31, 1999, the notional
amounts of these contracts totaled $580 million, with amounts expiring annually
over the next three years. MMC has additional option contracts used to hedge the
volatility of MMC's pension redress liabilities attributable to equity markets.
The notional amounts of these contracts was $30 million at December 31, 1999,
with all amounts expiring in 2000. All option contracts at December 31, 1999
were out of the money and as such the fair market value of these contracts was
zero. There is no potential for a future loss associated with these options.
YEAR 2000 ISSUE
MMC had completed remediating its systems in preparation for the Year 2000 prior
to January 1, 2000 and experienced no meaningful system problems during the
roll-over period. MMC will continue to monitor its systems for Year 2000 errors
at least through the first quarter of 2000. For this purpose, the term "systems"
includes computer equipment and software that are commonly thought of as
information technology ("IT") systems including accounting, data processing,
telephone and other miscellaneous systems, as well as non-information technology
("non-IT") systems, such as embedded technology in MMC's facilities and
equipment.
The total cost of the Year 2000 project was approximately $60 million, of which
approximately $17 million was incurred in 1999, $26 million was expensed during
1998 and $17 million was spent prior to 1998. Such costs did not include
expenses incurred in replacing systems and applications in the ordinary course
which had 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 were charged to expense as
they were incurred and were funded from operating cash flows. No significant
projects were deferred or canceled as a result of Year 2000 efforts. In 1999,
Year 2000 expenses represented approximately 3% of MMC's overall information
technology budget and approximately 5% in 1998. Future costs associated with
continuing to monitor this issue are expected to be insignificant.
OTHER
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 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.
MMC's policy for funding its tax qualified U.S. defined benefit retirement plan
is to contribute amounts at least sufficient to meet the funding requirements
set forth in U.S. employee benefit and tax laws. As illustrated more fully in
Note 6 to the consolidated financial statements, the plan has been and continues
to be well funded; consequently, MMC has not been required to make a
contribution since 1986. The well-funded status of the plan combined with recent
high investment returns has generated pension credits, rather than pension
expenses, for each of the last three years. This credit is expected to continue
in 2000 and, therefore, a cash contribution is currently not anticipated.
There are three defined benefit plans in the U.K. Overall, these plans were
well-funded in 1999 and a pension credit was recorded during the year. The
return achieved by the U.K. pension plan assets exceeded expectations in 1999
and an overall pension credit is expected to continue in 2000.
MMC contributes to certain health care and life insurance benefits provided to
its retired employees. The cost of these postretirement benefits for employees
in the United States is accrued during the period up to the date employees are
eligible to retire, but is funded by MMC as incurred. This postretirement
liability is included in other liabilities in the Consolidated Balance Sheets.
In 1997, Putnam adopted the Putnam Investments, Inc. Equity Partnership Plan
("Plan") pursuant to which Putnam is authorized to grant or sell to certain key
employees of Putnam or its subsidiaries restricted shares of a new class of
common stock of Putnam ("Class B Common Stock") and options to acquire the Class
B Common Stock. Such awards or options generally vest over a four-year period.
Holders of Putnam Class B shares are not entitled to vote and have no rights to
convert their shares into any other securities of Putnam. In certain
circumstances, Class B shares will be converted into Class A Common Stock.
Awards of restricted stock and/or options may be made under the Plan up to a
maximum of 12,000,000 shares of Class B Common Stock, as adjusted for certain
issuances of Putnam Class A shares, which would represent approximately 12% of
the outstanding shares on a fully diluted basis. Through December 31, 1999,
Putnam has made awards pursuant to the Plan with respect to 10,760,200 shares of
Class B Common Stock, consisting of 5,380,100 shares of restricted stock and
5,380,100 shares subject to options. The purpose of the Plan is to foster and
promote the long-term success of Putnam and to increase shareholder value by
enabling Putnam to attract and retain the services of an outstanding management
team and professional staff. In addition, pursuant to an executive compensation
agreement, Putnam has also awarded 405,000 restricted stock units and 430,000
options related to Class B Common Stock to a key executive of Putnam. These
shares are incremental to the shares issued under the Plan.
------------
40
Marsh & McLennan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Three Years Ended December 31,
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE FIGURES) 1999 1998 1997
Revenue $ 9,157 $ 7,190 $ 6,009
Expense 7,698 5,770 5,211
- --------------------------------------------------------------------------------------
Operating income 1,459 1,420 798
Interest income 21 25 24
Interest expense (233) (140) (107)
- --------------------------------------------------------------------------------------
Income before income taxes 1,247 1,305 715
Income taxes 521 509 281
- --------------------------------------------------------------------------------------
Net income $ 726 $ 796 $ 434
- --------------------------------------------------------------------------------------
Basic net income per share $ 2.76 $ 3.11 $ 1.77
- --------------------------------------------------------------------------------------
Diluted net income per share $ 2.62 $ 2.98 $ 1.73
- --------------------------------------------------------------------------------------
Average number of shares outstanding--Basic 263 256 245
- --------------------------------------------------------------------------------------
Average number of shares outstanding--Diluted 272 264 251
The accompanying notes are an integral part of these consolidated statements.
----------
41
Marsh & McLennan Companies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
=========================================================================================================================
December 31, 1999 and 1998
(IN MILLIONS OF DOLLARS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 428 $ 610
- -------------------------------------------------------------------------------------------------------------------------
Receivables--
Commissions and fees 1,928 1,562
Advanced premiums and claims 246 181
Other 281 294
- -------------------------------------------------------------------------------------------------------------------------
2,455 2,037
Less--allowance for doubtful accounts (132) (128)
- -------------------------------------------------------------------------------------------------------------------------
Net receivables 2,323 1,909
- -------------------------------------------------------------------------------------------------------------------------
Prepaid dealer commissions--current portion 326 315
Other current assets 206 411
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 3,283 3,245
Intangible assets 5,542 4,826
Fixed assets, net 1,314 1,287
Prepaid dealer commissions 760 799
Long-term securities 687 828
Other assets 1,435 886
- -------------------------------------------------------------------------------------------------------------------------
$ 13,021 $ 11,871
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,131 $ 2,234
Accounts payable and accrued liabilities 1,721 1,338
Accrued compensation and employee benefits 1,157 841
Accrued income taxes 188 385
Dividends payable 121 104
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,318 4,902
- -------------------------------------------------------------------------------------------------------------------------
Fiduciary liabilities 3,333 3,257
Less--cash and investments held in a fiduciary capacity (3,333) (3,257)
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt 2,357 1,590
- -------------------------------------------------------------------------------------------------------------------------
Other liabilities 2,176 1,720
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies -- --
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value, authorized 6,000,000 shares, none issued -- --
Common stock, $1 par value, authorized 800,000,000 shares,
issued 268,695,790 shares in 1999 and 258,867,125 shares in 1998 269 259
Additional paid-in capital 1,411 889
Retained earnings 2,674 2,412
Accumulated other comprehensive income (75) 206
- -------------------------------------------------------------------------------------------------------------------------
4,279 3,766
Less--treasury shares, at cost 1,669,993 shares in 1999 and 1,956,825 shares in 1998 (109) (107)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,170 3,659
- -------------------------------------------------------------------------------------------------------------------------
$ 13,021 $ 11,871
=========================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
----------
42
Marsh & McLennan Companies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
For the Three Years Ended December 31,
(IN MILLIONS OF DOLLARS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Operating cash flows:
Net income $ 726 $ 796 $ 434
Gain on sale of businesses -- -- (13)
Special charges (credit) 337 (4) 244
Payment of special charges (134) (66) (62)
Depreciation of fixed assets 244 169 149
Amortization of intangible assets 156 82 50
Provision (benefit) for deferred income taxes 32 79 (139)
Prepaid dealer commissions 28 (75) (140)
Other liabilities 8 18 22
Other, net (17) (23) (1)
Net changes in operating working capital other than cash and cash equivalents--
Receivables (465) (171) (155)
Other current assets 166 63 (3)
Accounts payable and accrued liabilities (305) (55) (49)
Accrued compensation and employee benefits 316 175 160
Accrued income taxes (36) 147 (79)
Effect of exchange rate changes (56) (2) (3)
- --------------------------------------------------------------------------------------------------------------------------
Net cash generated from operations 1,000 1,133 415
- --------------------------------------------------------------------------------------------------------------------------
Financing cash flows:
Net increase (decrease) in commercial paper (809) 425 (161)
Other borrowings 1,180 52 2,358
Repayments of other borrowings (734) (411) (1,702)
Purchase of treasury shares (13) (242) --
Issuance of common stock 489 185 210
Dividends paid (447) (375) (306)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (334) (366) 399
- --------------------------------------------------------------------------------------------------------------------------
Investing cash flows:
Additions to fixed assets (358) (297) (202)
Net cash proceeds from sale of businesses 85 -- 54
Acquisitions (357) (302) (473)
Other, net (215) 12 (55)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (845) (587) (676)
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (3) 6 (14)
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (182) 186 124
Cash and cash equivalents at beginning of year 610 424 300
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 428 $ 610 $ 424
- --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
--------
43
Marsh & McLennan Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
and Comprehensive Income
=====================================================================================================
For the Three Years Ended December 31,
(In millions of dollars, except per share figures) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of year $ 259 $ 172 $ 77
Common stock issuance 4 -- --
Acquisitions -- -- 9
Common stock split -- 87 86
Exercise of stock options and related tax benefits 2 -- --
Issuance of shares under compensation plans and employee stock
purchase plans and related tax benefits 4 -- --
- -----------------------------------------------------------------------------------------------------
Balance, end of year $ 269 $ 259 $ 172
- -----------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year $ 889 $ 994 $ 148
Common stock issuance 305 -- --
Acquisitions -- -- 908
Common stock split -- (87) (86)
Exercise of stock options and related tax benefits 61 (11) 15
Issuance of shares under compensation plans and employee stock
purchase plans and related tax benefits 156 (7) 9
- -----------------------------------------------------------------------------------------------------
Balance, end of year $ 1,411 $ 889 $ 994
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year $ 2,412 $ 2,010 $ 1,902
Net income(a) 726 796 434
Cash dividends declared--(per share amounts:
$1.75 in 1999, $1.53 in 1998 and $1.29 in 1997) (464) (394) (326)
- -----------------------------------------------------------------------------------------------------
Balance, end of year $ 2,674 $ 2,412 $ 2,010
- -----------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year $ 206 $ 167 $ 145
Foreign currency translation adjustments(b) (138) 18 (66)
Unrealized securities holding gains (losses),
net of reclassification adjustments(c) (140) 45 88
Minimum pension liability adjustment(d) (3) (24) --
- -----------------------------------------------------------------------------------------------------
Balance, end of year $ (75) $ 206 $ 167
- -----------------------------------------------------------------------------------------------------
TREASURY SHARES
Balance, beginning of year $ (107) $ (110) $ (383)
Acquisitions (39) -- 47
Purchase of treasury shares (13) (242) --
Exercise of stock options 39 97 147
Issuance of shares under compensation plans and employee
stock purchase plans 11 148 79
- -----------------------------------------------------------------------------------------------------
Balance, end of year $ (109) $ (107) $ (110)
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 4,170 $ 3,659 $ 3,233
- -----------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (a+b+c+d) $ 445 $ 835 $ 456
=====================================================================================================
The accompanying notes are an integral part of these consolidated statements.
-----------
44
Marsh & McLennan Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of Marsh & McLennan Companies, Inc. and all its
subsidiaries ("MMC"). Various subsidiaries and affiliates have transactions with
each other in the ordinary course of business. All significant intercompany
accounts and transactions have been eliminated.
FIDUCIARY ASSETS AND LIABILITIES: In its capacity as an insurance broker or
agent, MMC collects premiums from insureds and, after deducting its commissions,
remits the premiums to the respective insurance underwriters; MMC also collects
claims or refunds from underwriters on behalf of insureds. Unremitted insurance
premiums and claims are held in a fiduciary capacity. Interest income on these
fiduciary funds, included in revenue, amounted to $167 million in 1999, $137
million in 1998 and $111 million in 1997.
Net uncollected premiums and claims and the related payables, amounting to $11.5
billion at December 31, 1999 and $10.0 billion at December 31, 1998, are not
included in the accompanying Consolidated Balance Sheets.
In certain instances, MMC advances premiums, refunds or claims to insurance
underwriters or insureds prior to collection. These advances are made from
corporate funds and are reflected in the accompanying Consolidated Balance
Sheets as receivables.
REVENUE: Revenue includes insurance commissions, fees for services rendered,
placement services revenue earned from insurance carriers, compensation for
services provided in connection with the formation or capitalization of various
insurers and reinsurers and related firms, including gains from sales of
interests in such entities, commissions on the sale of mutual fund shares and
interest income on fiduciary funds. Insurance commissions generally are recorded
as of the effective date of the applicable policies or, in certain cases
(primarily in MMC's reinsurance and London market operations), as of the
effective date or billing date, whichever is later. Fees for services rendered
are recorded as earned. Sales of mutual fund shares are recorded on a settlement
date basis and commissions thereon are recorded on a trade date basis, in
accordance with industry practice.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents primarily consist of
certificates of deposit and time deposits, generally with original maturities of
three months or less.
FIXED ASSETS, DEPRECIATION AND AMORTIZATION: Fixed assets are stated at cost
less accumulated depreciation and amortization. Expenditures for improvements
are capitalized. Upon sale or retirement, the cost and related accumulated
depreciation and amortization are removed from the accounts and the resulting
gain or loss, if any, is reflected in income. Expenditures for maintenance and
repairs are charged to operations as incurred.
Depreciation of buildings, building improvements, furniture and equipment is
provided on a straight-line basis over the estimated useful lives of these
assets. Leasehold improvements are amortized on a straight-line basis over the
periods covered by the applicable leases or the estimated useful life of the
improvement, whichever is less.
The components of fixed assets are as follows:
- ------------------------------------------------------------
December 31, 1999 and 1998
(IN MILLIONS OF DOLLARS) 1999 1998
- ------------------------------------------------------------
Furniture and equipment $ 1,046 $ 1,011
Land and buildings 613 614
Leasehold and building improvements 553 482
- ------------------------------------------------------------
2,212 2,107
Less--accumulated depreciation
and amortization (898) (820
- ------------------------------------------------------------)
$ 1,314 $ 1,287
- ------------------------------------------------------------
INTANGIBLE ASSETS: Acquisition costs in excess of the fair value of net assets
acquired are amortized on a straight-line basis over periods up to 40 years.
Other intangible assets are amortized on a straight-line basis over their
estimated lives. MMC periodically assesses the recoverability of intangible
assets by comparing expected undiscounted future cash flows from the underlying
business operation with recorded intangible asset balances. If such assessments
indicate that the undiscounted future cash flows are not sufficient to recover
the related carrying value, the assets are adjusted to fair values.
PREPAID DEALER COMMISSIONS: Essentially all of the mutual funds marketed by
MMC's investment management segment are made available with a contingent
deferred sales charge in lieu of a front end load. The related prepaid dealer
commissions, initially paid by MMC to broker/dealers for distributing such
funds, can be recovered through charges and fees received over a number of
years. The prepaid dealer commissions are generally amortized over a six-year
period.
CAPITALIZED SOFTWARE COSTS: MMC capitalizes certain costs to develop, purchase
or modify software for the internal use of MMC. These costs are amortized on a
straight-line basis not to exceed five years. Unamortized computer software
costs amounting to $157 million and $110 million at December 31, 1999 and 1998,
respectively, are included in other assets in the Consolidated Balance Sheets.
INCOME TAXES: Income taxes provided reflect the current and deferred tax
consequences of events that have been recognized in MMC's financial statements
or tax returns. U.S. Federal income taxes are provided on unremitted foreign
earnings except those that are considered permanently reinvested, which at
December 31, 1999 amounted to approximately $500 million. However, if these
earnings were not considered permanently reinvested, the incremental tax
liability which otherwise might be due upon distribution, net of foreign tax
credits, would be approximately $70 million.
----------
45
RISK MANAGEMENT INSTRUMENTS: Net amounts received or paid under interest rate
swaps and foreign exchange contracts are included in the Consolidated Statements
of Income as incurred. These amounts are not significant.
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject
MMC to concentrations of credit risk consist primarily of cash and cash
equivalents and commissions receivable. MMC maintains a policy providing for the
diversification of cash and cash equivalent investments and places its
investments in an extensive number of high quality financial institutions to
limit the amount of credit risk exposure. Concentrations of credit risk with
respect to receivables are limited due to the large number of clients and
markets in which MMC does business, as well as the dispersion across many
geographic areas.
PER SHARE DATA: Basic net income per share is calculated by dividing net income
by the average number of shares of MMC's common stock outstanding. Diluted net
income per share is calculated by reducing net income for the potential minority
interest associated with unvested shares under the Putnam Equity Partnership
Plan as discussed further in Note 7. This result is then divided by the 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 Years Ended December 31,
(IN MILLIONS) 1999 1998 1997
- ----------------------------------------------------------------------------------
Net income $ 726 $ 796 $ 434
Less: Potential minority interest associated with
Putnam Equity Partnership Plan (14) (10) --
- ----------------------------------------------------------------------------------
Net income for diluted earnings per share $ 712 $ 786 $ 434
- ----------------------------------------------------------------------------------
Basic weighted average common shares outstanding 263 256 245
Dilutive effect of stock options 9 8 6
- ----------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 272 264 251
- ----------------------------------------------------------------------------------
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This standard, which establishes new accounting and reporting requirements
for derivative instruments, is effective (as amended by SFAS No. 137) for
fiscal years beginning after June 15, 2000. MMC does not expect the
adoption of this standard to have a material impact on its results of
operations or consolidated financial condition.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior year
amounts to conform to the current year presentation.
2 Supplemental Disclosure to the Consolidated Statements of Cash Flows
The following schedule provides additional information concerning acquisitions
and interest and income taxes paid:
===============================================================================
For the Three Years Ended December 31,
(IN MILLIONS OF DOLLARS) 1999 1998 1997
- -------------------------------------------------------------------------------
Purchase acquisitions:
Assets acquired, excluding cash $ 357 $ 3,345 $ 2,832
Liabilities assumed -- (852) (1,165)
Issuance of debt and other obligations -- (2,191) (221)
Shares issued -- -- (973)
- -------------------------------------------------------------------------------
Net cash outflow for acquisitions $ 357 $ 302 $ 473
- -------------------------------------------------------------------------------
Interest paid $ 211 $ 164 $ 92
Income taxes paid $ 506 $ 305 $ 471
===============================================================================
-----------
46
3 Comprehensive Income
The components of other comprehensive income are as follows:
- -------------------------------------------------------------------------------------
For the Three Years Ended December 31,
(IN MILLIONS OF DOLLARS) 1999 1998 1997
- -------------------------------------------------------------------------------------
Foreign currency translation adjustments $(138) $ 18 $ (66)
Unrealized securities holding gains (losses),
net of income tax (benefit) liability
of $(55), $39 and $60 in 1999, 1998 and 1997 (106) 71 111
Less: Reclassification adjustment for realized gains
included in net income, net of income taxes
of $19, $14 and $13 in 1999, 1998 and 1997 (34) (26) (23)
Minimum pension liability adjustment, net of income
taxes of $2 and $16 in 1999 and 1998 (3) (24) --
- -------------------------------------------------------------------------------------
$(281) $ 39 $ 22
- -------------------------------------------------------------------------------------
The components of accumulated other comprehensive income are as follows:
- -------------------------------------------------------------------------------------
December 31, 1999 and 1998
(In millions of dollars) 1999 1998
- -------------------------------------------------------------------------------------
Foreign currency translation adjustments $(262) $(124)
Unrealized securities holding gains 214 354
Minimum pension liability adjustment (27) (24)
- -------------------------------------------------------------------------------------
$ (75) $ 206
- -------------------------------------------------------------------------------------
4 Acquisitions and Dispositions
ACQUISITIONS: During 1999, MMC acquired a minority ownership interest in Thomas
H. Lee Partners, a private equity business, and acquired or increased its
interest in several other insurance and reinsurance broking, insurance and
program services and consulting businesses in transactions accounted for as
purchases for a total cost of $357 million. The cost of these transactions
exceeded the fair value of net assets acquired by $318 million.
In the fourth quarter of 1998, MMC consummated a business combination with
Sedgwick Group plc ("Sedgwick"), a London-based holding company of one of the
world's leading insurance and reinsurance broking and consulting groups, for
total cash consideration of approximately $2.2 billion, which was initially
funded with commercial paper borrowings. In April 1999, MMC completed the sale
of 4.1 million common shares, realizing approximately $300 million of net
proceeds. In June 1999, MMC sold $600 million of 6.625% Senior Notes due 2004
and $400 million of 7.125% Senior Notes due 2009. The proceeds of these sales
were used to repay a portion of the commercial paper borrowings. The business
combination is being accounted for using the purchase method of accounting.
Accordingly, goodwill of approximately $2.8 billion resulting from the purchase
price allocation is being amortized over 40 years. Assets acquired and
liabilities assumed have been recorded at their estimated fair values. No
intangible assets, other than goodwill, were acquired as part of the business
combination with Sedgwick.
In March 1997, MMC consummated a business combination with Johnson & Higgins
("J&H"), a privately held risk and insurance services and employee benefit
consulting firm. MMC agreed to pay total consideration of approximately $1.8
billion consisting of $600 million in cash and approximately $1.2 billion or
29.4 million shares (adjusted to reflect subsequent stock splits) of MMC's
common stock. Approximately $1.3 billion was paid at closing or shortly
thereafter and approximately $500 million is being paid in annual installments
over the four years following the closing. The business combination is being
accounted for using the purchase method of accounting. Accordingly, goodwill of
approximately $1.7 billion, which resulted from the purchase price allocation,
is being amortized over 40 years. In arriving at fair value, MMC discounted the
market value of the $1.2 billion stock issuance by $120 million reflecting
certain transfer restrictions associated with the shares issued. MMC allocated
the cost of the acquisition to assets acquired and liabilities assumed based on
its estimate of fair values. No intangible assets, other than goodwill, were
acquired as part of the business combination with J&H.
An agreed number of shares issued in connection with the J&H transaction carried
restrictions and, consequently, could not be sold in the first and second years
following the closing. In addition, approximately 2.4 million of the 29.4
million shares of common stock were placed in escrow in order to secure
indemnification obligations with respect to representations and warranties. As
settlement for certain of such issues, .7 million of these shares have been
returned to MMC as of December 31, 1999 and the acquisition price has been
reduced accordingly.
The following unaudited pro forma summary presents the consolidated results of
operations of MMC as if the Sedgwick and J&H business combinations 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 combinations had occurred on the dates indicated or
which may occur in the future. The pro forma information reflected below
----------
47
includes the impact of pretax special charges in 1998 of $201 million recorded
by Sedgwick prior to its being acquired by MMC, primarily related to pension
redress issues discussed in Note 15, and pretax special charges recorded by MMC
of $244 million in 1997 discussed in Note 12.
Year Ended December 31,
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE FIGURES)
1998 1997
Revenue $ 8,646 $ 7,902
Net Income 514 427
Basic net income per share 1.94 1.63
Diluted net income per share 1.85 1.60
During 1998, MMC also acquired or increased its interest in several other
insurance and reinsurance broking, insurance and program services and consulting
businesses for a total cost of $413 million in transactions accounted for as
purchases. The cost of these acquisitions exceeded the fair value of net assets
acquired by $422 million.
During 1997, MMC also acquired or increased its interest in several other
insurance and reinsurance broking and consulting businesses for a total cost of
$285 million in transactions accounted for as purchases. The cost of these
acquisitions exceeded the fair value of net assets acquired by $317 million. In
addition, MMC issued approximately 1.4 million shares of common stock (adjusted
to reflect subsequent stock splits) in connection with the acquisition of an
insurance and program services business accounted for as a pooling of interests.
Dispositions: As part of the combination with Sedgwick, MMC acquired several
businesses that it intended to sell, including insurance underwriting operations
already in run-off and consulting businesses not compatible with its existing
operations. In 1999, results of operations of these businesses and interest
expense associated with their acquisition have been included in the cost of the
Sedgwick acquisition. During 1999, MMC sold certain of these businesses for $85
million and the after tax gain from these sales of $16 million has been
subtracted from the cost of the Sedgwick acquisition. The net assets
(liabilities) of businesses to be disposed are reflected at their estimated
realizable value of $(101) million at December 31, 1999 included in accounts
payable and accrued liabilities and $84 million at December 31, 1998 included in
other current assets in the Consolidated Balance Sheet.
During 1997, MMC sold an insurance and program services business and a
consulting operation for $54 million and recognized pretax gains of $13 million.
INTEGRATION COSTS: In 1999, as part of the integration of Sedgwick, MMC adopted
a plan to reduce staff and consolidate duplicative offices. The estimated cost
of this plan relating to employees and offices of Sedgwick ("1999 Sedgwick
Plan") amounted to $285 million and was included in the cost of the acquisition.
Merger-related costs for employees and offices of MMC ("1999 MMC Plan") amounted
to $266 million and were recorded as part of the 1999 special charge.
The utilization of the 1999 charges is summarized as follows:
- ------------------------------------------------------------------------
Balance
Initial Utilized Dec. 31,
(IN MILLIONS OF DOLLARS) Balance in 1999 1999
- ------------------------------------------------------------------------
1999 Sedgwick Plan:
Termination payments to
employees $ 183 $ (93) $ 90
Other employee-related costs 5 (2) 3
Future rent under
noncancelable leases 48 (8) 40
Leasehold termination costs 49 (10) 39
- ------------------------------------------------------------------------
$ 285 $ (113) $ 172
- ------------------------------------------------------------------------
Number of employee
terminations 2,400 (1,700) 700
Number of office
consolidations 125 (50) 75
- ------------------------------------------------------------------------
1999 MMC PLAN:
Termination payments to
employees $ 194 $ (74) $ 120
Future rent under
noncancelable leases 31 (5) 26
Leasehold termination costs 16 (3) 13
Other integration related costs 25 (25) --
- ------------------------------------------------------------------------
$ 266 $ (107) $ 159
- ------------------------------------------------------------------------
Number of employee
terminations 2,100 (1,300) 800
Number of office
consolidations 50 (20) 30
- ------------------------------------------------------------------------
The other integration costs primarily consist of consulting fees and system
conversion costs incurred in 1999 as a result of the restructuring and merging
of MMC and Sedgwick operations.
At year-end 1999, the actions contemplated by this plan were in progress and the
remaining actions are expected to be completed by the end of 2000. Some
accruals, primarily representing future rent under noncancelable leases (net of
anticipated sublease income), are expected to be paid over several years.
In 1997, as part of the integration of J&H, MMC adopted plans to consolidate
duplicative offices and reduce staff. The estimated cost of the plans relating
to employees and offices of J&H ("1997 J&H Plan") amounted to $143 million and
was included in the cost of the acquisition. Merger-related costs for employees
and offices of MMC ("1997 MMC Plan") amounted to $168 million and were recorded
as part of a special charge in 1997.
------------
48
The utilization of the 1997 charges is summarized as follows:
- -------------------------------------------------------------------------------------------------------
Balance
Initial Utilized Utilized Utilized Dec. 31
(IN MILLIONS OF DOLLARS) Balance in 1997 in 1998 in 1999 1999
- -------------------------------------------------------------------------------------------------------
1997 J&H PLAN:
Termination payments to employees $ 70 $ (17) $ (37) $ (10) $ 6
Other employee-related costs 4 (2) (1) (1) --
Future rent under noncancelable leases 45 (1) (5) (2) 37
Leasehold termination costs 24 (4) (13) (7)
- -------------------------------------------------------------------------------------------------------
$ 143 $ (24) $ (56) $ (20) $ 43
- -------------------------------------------------------------------------------------------------------
Number of employee terminations 900 (600) (250) (50) --
Number of office consolidations 50 (10) (35) (5) --
- -------------------------------------------------------------------------------------------------------
1997 MMC PLAN:
Termination payments to employees $ 117 $ (44) $ (58) $ (14) $ 1
Future rent under noncancelable leases 21 (2) (4) (3) 12
Leasehold termination costs 17 (10) (2) (5) --
Other integration related costs 13 (6) (2) (5) --
- -------------------------------------------------------------------------------------------------------
$ 168 $ (62) $ (66) $ (27) $ 13
- -------------------------------------------------------------------------------------------------------
Number of employee terminations 1,300 (800) (450) (50) --
Number of office consolidations 30 (10) (17) (3) --
- -------------------------------------------------------------------------------------------------------
The remaining balances, primarily representing future rent under noncancelable
leases (net of anticipated sublease income), and salary continuance
arrangements, primarily in Canada and the Netherlands, are expected to be paid
out over several years.
5 Income Taxes
Income before income taxes shown below is based on the geographic location to
which such income is attributable. Although income taxes related to such income
may be assessed in more than one jurisdiction, the income tax provision
corresponds to the geographic location of the income.
- ----------------------------------------------------------------------
For the Three Years Ended December 31,
(IN MILLIONS OF DOLLARS) 1999 1998 1997
- ----------------------------------------------------------------------
Income before income taxes:
U.S $ 996 $ 897 $ 510
Other 251 408 205
- ----------------------------------------------------------------------
$ 1,247 $ 1,305 $ 715
- ----------------------------------------------------------------------
Income taxes:
Current--
U.S. Federal $ 359 $ 284 $ 218
Other national governments 74 89 141
U.S. state and local 56 57 61
- ----------------------------------------------------------------------
489 430 420
- ----------------------------------------------------------------------
Deferred--
U.S. Federal 2 30 (55)
Other national governments 40 49 (71)
U.S. state and local (10) -- (13)
- ----------------------------------------------------------------------
32 79 (139)
- ----------------------------------------------------------------------
Total income taxes $ 521 $ 509 $ 281
- ----------------------------------------------------------------------
The significant components of deferred income tax assets and liabilities and
their balance sheet classifications are as follows:
- ---------------------------------------------------------------------
December 31, 1999 and 1998
(IN MILLIONS OF DOLLARS) 1999 1998
- ---------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accrued expenses not currently deductible $ 776 $ 752
Differences related to non-U.S. operations 356 215
Accrued retirement benefits 124 137
Other 19 18
- ---------------------------------------------------------------------
$ 1,275 $ 1,122
- ---------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Prepaid dealer commissions $ 381 $ 401
Unrealized securities holding gains 117 192
Differences related to non-U.S. operations 78 71
Depreciation and amortization 58 43
Other 52 80
- ---------------------------------------------------------------------
$ 686 $ 787
- ---------------------------------------------------------------------
BALANCE SHEET CLASSIFICATIONS:
Current assets $ 71 $ 76
Other assets 518 359
Accrued income taxes -- (100)
- ---------------------------------------------------------------------
------------
49
A reconciliation from the U.S. Federal statutory income tax rate to MMC's
effective income tax rate is as follows:
- -------------------------------------------------------------------
For the Three Years Ended
December 31, 1999 1998 1997
- -------------------------------------------------------------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
U.S. state and local income taxes--
net of U.S. Federal income
tax benefit 2.4 2.9 4.4
Differences related to non-U.S
operations 2.1 (.4) (.2)
Other 2.3 1.5 .1
- -------------------------------------------------------------------
Effective tax rate 41.8% 39.0% 39.3%
- -------------------------------------------------------------------
In 1997, MMC received a Notice of Proposed Adjustment from a local field office
of the Internal Revenue Service ("IRS") challenging its tax treatment related to
12b-1 fees paid by Putnam. The notice reflected the preliminary thinking of the
IRS field office and did not constitute a formal assertion of liability by the
IRS. The notice in question asserts a position contrary to the position
enunciated in an IRS 1993 Technical Advice Memorandum. The IRS field office
withdrew the Notice of Proposed Adjustment and continues to have the matter
under consideration. MMC believes its tax treatment of these fees is consistent
with current industry practice and applicable requirements of the Internal
Revenue Code and previously issued IRS technical advice.
Taxing authorities periodically challenge positions taken by MMC on its tax
returns. On the basis of present information and advice received from counsel,
it is the opinion of MMC's management that any assessments resulting from
current tax audits will not have a material adverse effect on MMC's consolidated
results of operations or its consolidated financial position.
6 Retirement Benefits
The following schedules provide information concerning MMC's U.S. defined
benefit pension plans and postretirement benefit plans:
- -------------------------------------------------------------------------------------------
U.S. Pension U.S. Postretirement
December 31, 1999 and 1998 Benefits Benefits
(IN MILLIONS OF DOLLARS) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,956 $ 1,434 $ 165 $ 175
Service cost 63 46 3 3
Interest cost 134 104 11 10
Actuarial (gain) loss (106) 87 (30) (6)
Acquisitions -- 365 -- 6
Benefits paid (101) (82) (10) (5)
Dispositions (6) -- -- --
Plan amendments -- 2 11 (18)
- -------------------------------------------------------------------------------------------
Benefit obligation at end of year 1,940 1,956 150 165
- -------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,236 1,651 -- --
Actual return on plan assets 466 256 -- --
Acquisitions -- 392 -- --
Employer contributions 18 19 10 5
Dispositions (5) -- -- --
Benefits paid (101) (82) (10) (5)
- -------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 2,614 2,236 -- --
- -------------------------------------------------------------------------------------------
Funded status 674 280 (150) (165)
Unrecognized net actuarial gain (614) (245) (36) (7)
Unrecognized prior service cost (credit) 5 10 (3) (14)
Unrecognized transition asset (23) (28) -- --
- -------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 42 $ 17 $ (189) $ (186)
- -------------------------------------------------------------------------------------------
Amounts recognized in Balance Sheet consist of:
Prepaid benefit cost $ 184 $ 144 $ -- $ --
Accrued benefit liability (175) (161) (189) (186)
Intangible asset 6 10 -- --
Accumulated other comprehensive income 27 24 -- --
- -------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 42 $ 17 $ (189) $ (186)
- -------------------------------------------------------------------------------------------
----------
50
The weighted average actuarial assumptions utilized in determining the above
amounts for the U.S. defined benefit and other postretirement benefit plans as
of the end of the year were as follows:
=========================================================================
U.S. Pension U.S. Postretirement
Benefits Benefits
----------- ------------
1999 1998 1999 1998
- -------------------------------------------------------------------------
Weighted average assumptions:
Discount rate 8.0% 7.0% 8.0% 7.0%
Expected return on plan assets 10.0% 10.0% -- --
Rate of compensation increase 4.75% 4.0% -- --
=========================================================================
In 1999, the discount rate used to value the liabilities of the U.S. defined
benefit pension plans and postretirement benefit plans was increased to reflect
current interest rates of high quality fixed income debt securities. Projected
compensation increases and potential cost of living adjustments for retirees
were also revised to reflect current expectations as to future levels of
inflation. The increases in benefit obligation and plan assets in 1998 relating
to acquisitions pertain to MMC's acquisition of Sedgwick.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the U.S. pension plans with accumulated benefit obligations
in excess of plan assets were $298 million, $249 million and $109 million,
respectively, as of December 31, 1999 and $279 million, $247 million and $114
million, respectively as of December 31, 1998.
The components of the net periodic benefit cost for the U.S. defined benefit and
other postretirement benefit plans are as follows:
=================================================================================================
U.S. Pension Benefits U.S. Postretirement Benefits
For the Three Years Ended December 31, ---------------------------------------------------
(IN MILLIONS OF DOLLARS) 1999 1998 1997 1999 1998 1997
Service cost $ 63 $ 46 $ 39 $ 3 $ 3 $ 4
Interest cost 134 104 90 11 10 10
Expected return on plan assets (199) (146) (115) -- -- --
Amortization of prior service cost (credit) 4 7 7 (1) (2) --
Amortization of transition asset (4) (4) (4) -- -- --
Recognized actuarial (gain) loss 7 5 (5) (1) -- (1)
- -------------------------------------------------------------------------------------------------
$5 $ 12 $ 12 $ 12 $ 11 $ 13
=================================================================================================
The assumed health care cost trend rate was approximately 9% in 1999, gradually
declining to 4% in the year 2041. Assumed health care cost trend rates have a
significant effect on the amounts reported for the U.S. health care plans. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects (in millions of dollars):
1-Percentage- 1-Percentage-
Point Increase Point Decrease
===============================================================================================
Effect on total of service and interest cost components $2 $(2)
Effect on postretirement benefit obligation $19 $(15)
===============================================================================================
-----------
51
The following schedules provide information concerning MMC's significant
non-U.S. defined benefit pension plans and postretirement benefit plans:
=======================================================================================================
Non-U.S. Pension Non-U.S. Postretirement
Benefits Benefits
December 31, 1999 and 1998 -------------------------------------------------
(IN MILLIONS OF DOLLARS) 1999 1998 1999 1998
- ------------------------ ---- ---- ---- ----
- -------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,680 $ 900 $ 17 $ 17
Service cost 96 48 1 --
Interest cost 156 66 2 1
Employee contributions 17 10 -- --
Actuarial (gain) loss (137) 209 (2) --
Acquisitions 120 1,503 24 --
Benefits paid (105) (48) (1) --
Foreign currency changes (101) (9) -- (1)
Plan amendments 3 1 1 --
- -------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 2,729 2,680 42 17
- -------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 2,721 1,202 -- --
Actual return on plan assets 591 172 -- --
Acquisitions 131 1,385 -- --
Company contributions 57 15 1 --
Employee contributions 17 10 -- --
Benefits paid (105) (48) (1) --
Foreign currency changes (101) (15) -- --
- -------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 3,311 2,721 -- --
- -------------------------------------------------------------------------------------------------------
Funded status 582 41 (42) (17)
Unrecognized net actuarial loss (gain) (523) (35) 2 4
Unrecognized prior service cost (credit) 10 8 -- (1)
Unrecognized transition asset (5) (12) -- --
- -------------------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 64 $ 2 $ (40) $ (14)
=======================================================================================================
Amounts recognized in Balance Sheet consist of:
Prepaid benefit cost $ 176 $ 143 $ -- $ --
Accrued benefit liability (112) (141) (40) (14)
- -------------------------------------------------------------------------------------------------------
Net asset (liability) recognized $ 64 $ 2 $ (40) $ (14)
=======================================================================================================
Weighted average assumptions:
Discount rate 6.0% 5.9% 6.3% 6.0%
Expected return on plan assets 8.9% 8.9% -- --
Rate of compensation increase 4.2% 4.2% 4.2% 3.9%
=======================================================================================================
The increase in benefit obligation and plan assets in 1998 relating to
acquisitions pertains primarily to MMC's acquisition of Sedgwick.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the non-U.S. pension plans with accumulated benefit
obligations in excess of plan assets were $64 million, $52 million and $31
million, respectively, as of December 31, 1999 and $1.55 billion, $1.52 billion
and $1.40 billion, respectively, as of December 31, 1998.
The components of the net periodic benefit cost for the non-U.S. defined benefit
and other postretirement benefit plans are as follows:
=======================================================================================================
For the Three Years Ended December 31, Non-U.S. Pension Benefits Non-U.S. Postretirement Benefits
------------------------- --------------------------------
(IN MILLIONS OF DOLLARS) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Service cost $ 96 $ 48 $ 41 $ 1 $-- $--
Interest cost 156 66 62 2 1 1
Expected return on plan assets (238) (98) (90) -- -- --
Amortization of prior service cost -- 1 -- -- -- --
Amortization of transition asset (6) (6) (6) -- -- --
Recognized actuarial loss 1 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------
$ 9 $ 11 $ 7 $ 3 $ 1 $ 1
=======================================================================================================
----------
52
The assumed health care cost trend rate was approximately 7.4% in 1999,
gradually declining to 4.5% in the year 2006. Assumed health care cost trend
rates have a significant effect on the amounts reported for the non-U.S. health
care plans. A one-percentage-point change in assumed health care cost trend
rates would have the following effects (in millions of dollars):
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service and interest cost components $1 $ --
Effect on postretirement benefit obligation $6 $ (5)
Contribution Plans: MMC maintains certain defined contribution plans for its
employees, including the Marsh & McLennan Companies Stock Investment Plan
("SIP"), the Putnam Investments, Inc. Profit Sharing Retirement Plan (the
"Putnam Plan") and the Sedgwick Savings and Investment Plan ("Sedgwick SIP").
Under these plans, eligible employees may contribute a percentage of their base
salary, subject to certain limitations. For the SIP and Sedgwick SIP, MMC
matches a portion of the employees' contributions, while under the Putnam Plan
the contributions are at the discretion of MMC subject to IRS limitations. The
cost of these defined contribution plans was $74 million, $62 million and $55
million for 1999, 1998 and 1997, respectively.
7 Stock Benefit Plans
As provided under SFAS No. 123, "Accounting for Stock-Based Compensation," 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.
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, Inc. Equity Partnership Plan. Had compensation cost for
MMC's stock-based compensation plans been determined consistent with the fair
value method prescribed by SFAS No. 123, MMC's net income and net income per
share for 1999, 1998 and 1997 would have been reduced to the pro forma amounts
indicated in the table below.
The fair value of each of MMC's option grants included in pro forma net income
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1999, 1998
and 1997, respectively: dividend yield of 3.0% for 1999, 1998 and 1997; expected
volatility of 22.7% in 1999, 18.9% in 1998 and 17.5% in 1997; risk-free interest
rate of 5.2% in 1999, 5.6% in 1998 and 6.5% in 1997; and an expected life of
five years. The compensation cost as generated by the Black-Scholes model may
not be indicative of the future benefit, if any, that may be received by the
option holder. The weighted average fair value of options granted during the
years ended December 31, 1999, 1998 and 1997 was $16.09, $11.65 and $8.47 per
share, respectively.
(In millions of dollars,
except per share figures) 1999 1998 1997
Net Income:
As reported $ 726 $ 796 $ 434
Pro forma $ 673 $ 762 $ 414
Net Income Per Share:
Basic:
As reported $ 2.76 $ 3.11 $ 1.77
Pro forma $ 2.56 $ 2.98 $ 1.69
Diluted:
As reported $ 2.62 $ 2.98 $ 1.73
Pro forma $ 2.42 $ 2.85 $ 1.65
The pro forma information reflected above may not be representative of the
amounts to be expected in future years as the fair value method of accounting
contained in SFAS No. 123 has not been applied to options granted prior to
January 1995.
INCENTIVE AND STOCK AWARD PLANS: In 1997, MMC adopted the Marsh & McLennan
Companies, Inc. 1997 Employee Incentive and Stock Award Plan (the "Employee
Plan") and the Marsh & McLennan Companies, Inc. 1997 Senior Executive Incentive
and Stock Award Plan (the "Executive Plan"). The Employee and Executive Plans
(the "1997 Plans") replaced the 1992 Incentive and Stock Award Plan. The types
of awards permitted under these Plans include stock options, restricted stock,
stock bonus units, restricted and deferred stock units payable in MMC common
stock or cash, and other stock-based and performance-based awards. The
Compensation Committee of the Board of Directors (the "Com pensation Committee")
determines, at its discretion, which affiliates may participate in the plans,
which eligible employees will receive awards, the types of awards to be received
and the terms and conditions thereof. The right of an employee to receive an
award may be subject to performance conditions as specified by the Compensation
Committee. The 1997 Plans contain provisions which, in the event of a change in
control of MMC, may accelerate the vesting of the awards. Awards relating to not
more than 18,000,000 shares of common stock may be made over the life of the
Employee Plan plus shares remaining unused under pre-existing approved stock
plans. Awards relating to not more than 7,500,000 shares of common stock may be
made over the life of the Executive Plan plus shares remaining unused under
pre-existing approved stock plans. There were 15,671,576, 24,506,619 and
31,203,936 shares available for awards under the 1997 Plans and prior plans at
December 31, 1999, 1998 and 1997, respectively.
Stock Options: Options granted under the 1997 Plans may be designated as
incentive stock options or as non-qualified stock options. The Compensation
Committee shall determine the terms and conditions of the option, including the
time or times at which an option may be exercised, the methods by which such
exercise price may be paid and the form of such payment. Except under certain
limited circumstances, no stock option may be granted with an exercise price of
less than the fair market value of the stock at the time the stock option is
granted.
--------
53
Stock option transactions under the 1997 Plans and prior plans are as follows:
1999 1998 1997
------------------------ ------------------------ --------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Balance at beginning of period 26,492,820 $ 38.27 24,332,522 $ 31.18 25,666,431 $ 28.11
Granted 7,992,425 $ 75.86 6,115,165 $ 60.19 5,166,120 $ 41.39
Exercised (3,809,839) $ 29.95 (3,427,830) $ 26.63 (5,865,160) $ 26.59
Forfeited (656,970) $ 57.61 (527,037) $ 38.76 (634,869) $ 31.99
Balance at end of period 30,018,436 $ 48.91 26,492,820 $ 38.27 24,332,522 $ 31.18
Options exercisable at year-end 15,231,609 $ 34.25 14,587,332 $ 30.01 14,706,623 $ 28.17
========== =========== ========== ========= ========== =========
The following table summarizes information about stock options at December 31,
1999:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted Average
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------- ------------------------------- ----------- --------------
$23.81-29.44 4,763,296 3.3 years $ 26.32 4,763,296 $ 26.32
$31.18-59.35 12,011,009 5.3 years $ 35.32 8,937,094 $ 33.90
$60.25-84.85 13,244,131 8.8 years $ 69.35 1,531,219 $ 60.98
---------- --------- ------ ---------- ------
$23.81-84.85 30,018,436 6.5 years $ 48.91 15,231,609 $ 34.25
RESTRICTED STOCK: Restricted shares of MMC's common stock may be awarded and
shall be subject to such restrictions on transferability and other restrictions,
if any, as the Compensation Committee may impose. The Compensation Committee may
also determine when and under what circumstances the restrictions may lapse and
whether the participant shall have the rights of a stockholder, including,
without limitation, the right to vote and receive dividends. Unless the
Compensation Committee determines otherwise, restricted stock that is still
subject to restrictions shall be forfeited upon termination of employment.
There were 100,700, 162,600 and 135,000 restricted shares granted in 1999, 1998
and 1997, respectively. MMC recorded compensation expense of $8 million in 1999,
$10 million in 1998 and $6 million in 1997, related to these shares. Shares that
have been granted generally become unrestricted at the earlier of: (1) January 1
of the eleventh year following the grant or (2) the later of the recipient's
normal or actual retirement date.
RESTRICTED STOCK UNITS: Restricted stock units, payable in stock or cash, may be
awarded under the Plans. The Compensation Committee shall determine the
restrictions on such units, when the restrictions shall lapse, when the units
shall vest and be paid, and upon what terms the units shall be forfeited.
There were 167,845, 128,255 and 260,871 restricted stock units awarded during
1999, 1998 and 1997, respectively. The total value of the restricted stock units
at the time of the award was $12 million, $7 million and $11 million in 1999,
1998 and 1997, respectively. The cost of the awards is amortized over the
vesting period, which is generally three years.
DEFERRED STOCK UNITS: Deferred stock units, payable in stock or cash, may be
awarded under the Plans. The Compensation Committee shall determine the
restrictions on such units, when the restrictions shall lapse, when the units
shall vest and be paid, and upon what terms the units shall be forfeited.
There were 1,618,064, 566,315 and 1,299,986 deferred stock units awarded during
1999, 1998 and 1997, respectively. The total value of the deferred stock unit
awards was $99 million, $33 million and $62 million in 1999, 1998 and 1997,
respectively. The cost of the awards is amortized over the vesting period, which
is generally three years, however, 1999 and 1998 operating expenses reflect $71
million and $11 million of charges, respectively, relating to
acquisition-related stock unit awards issued to certain senior employees of
Sedgwick (see Note 12).
PUTNAM INVESTMENTS, INC. EQUITY PARTNERSHIP PLAN: In 1997, Putnam adopted the
Putnam Investments, Inc. Equity Partnership Plan (the "Equity Plan") pursuant to
which Putnam is authorized to grant or sell to certain key employees of Putnam
or its subsidiaries restricted shares of a new class of common stock of Putnam
("Class B Common Stock") and options to acquire the Class B Common Stock. Such
awards or options generally vest over a four-year period. Holders of Putnam
Class B shares are not entitled to vote and have no rights to convert their
shares into any other securities of Putnam. In certain circumstances, Class B
shares will be converted into Class A Common Stock. Awards of restricted stock
and/or options may be made under the Equity Plan with respect to a maximum of
12,000,000 shares of Class B Common Stock, as adjusted for certain issuances of
Putnam Class A shares, which would represent approximately 12% of the
outstanding shares on a fully diluted basis. Putnam made awards pursuant to the
Equity Plan with respect to 3,100,200, 3,660,000 and 4,000,000 shares of Class B
Common Stock in 1999, 1998 and 1997, respectively. These awards included
1,550,100, 1,830,000 and 2,000,000 shares of restricted stock with a value of
$120 million, $94 million and $83 million in 1999, 1998 and 1997, respectively.
These awards also included 1,550,100, 1,830,000 and 2,000,000 shares subject to
options in 1999, 1998 and 1997, respectively. There were 2,534,815 shares
available for grant related to the Equity Plan at December 31, 1999.
In 1997, pursuant to an executive compensation agreement, Putnam also awarded
300,000 restricted stock units with a value of $14 million and 325,000 options
related to Class B Common Stock to a key executive of Putnam. An additional
award of 105,000 restricted stock units with a value of $8 million and 105,000
options was also made in 1998. These shares are incremental to the shares issued
under the Plan.
The fair value of each option grant included in the pro forma net income is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions
--------
54
used for grants in 1999, 1998 and 1997: dividend yield of 5.0% for 1999, 1998
and 1997; expected volatility of 33.2% in 1999, 28.3% in 1998 and 26.4% in 1997;
risk-free interest rate of 5.2% in 1999, 5.6% in 1998 and 6.1% in 1997; and an
expected life of five years. The compensation cost as generated by the
Black-Scholes model may not be indicative of the future benefit, if any, that
may be received by the option holder. The weighted average fair value of each
Class B option was $17.64 in 1999, $10.42 in 1998 and $8.30 in 1997.
STOCK PURCHASE PLANS: In May 1999, MMC's stockholders approved an employee stock
purchase plan (the "1999 Plan") to replace the 1994 Employee Stock Purchase Plan
(the "1994 Plan") which terminated on September 30, 1999 following its fifth
annual offering. Under these plans, eligible employees may purchase shares of
MMC's common stock, subject to certain limitations, at prices not less than 85%
of the lesser of the fair market value of the stock at the beginning or end of
any offering period. Under the 1999 Plan, no more than 20,000,000 shares of
MMC's common stock plus the remaining unissued shares in the 1994 Plan may be
sold. Employees purchased 2,368,734, 1,932,060 and 1,855,500 shares in 1999,
1998 and 1997, respectively. At December 31, 1999, 23,131,706 shares were
available for issuance under the 1999 Plan. In 1995, MMC's Board of Directors
approved the Marsh & McLennan Companies Stock Purchase Plan for International
Employees (the "International Plan") which is similar to the 1999 Plan. Under
the International Plan, no more than 1,500,000 shares of MMC's common stock may
be sold. Employees purchased 339,594, 238,854 and 211,500 shares in 1999, 1998
and 1997, respectively. At December 31, 1999, 695,052 shares were available for
issuance under the International Plan. The fair value of each employee purchase
right granted under these Stock Purchase Plans is included in the pro forma net
income for 1999, 1998 and 1997 and was estimated using the Black-Scholes model
with the following assumptions: dividend yield of 3.0% for 1999, 1998 and 1997;
expected life of one year; expected volatility of 22.7% for 1999, 18.9% for 1998
and 17.5% for 1997; and risk-free interest rate of 5.5% for 1999, 4.4% for 1998
and 5.5% for 1997. The weighted average fair value of each purchase right
granted in 1999, 1998 and 1997 was $16.15, $10.61 and $10.96, respectively.
8 LONG-TERM OBLIGATIONS
MMC leases office facilities, equipment and automobiles under noncancelable
operating leases. These leases expire on varying dates; in some instances
contain renewal and expansion options; do not restrict the payment of
dividends or the incurrence of debt or additional lease obligations; and
contain no significant purchase options. In addition to the base rental
costs, occupancy lease agreements generally provide for rent escalations
resulting from increased assessments for real estate taxes and other charges.
Approximately 96% of MMC's lease obligations are for the use of office space.
The accompanying Consolidated Statements of Income include net rental costs
of $363 million, $313 million and $265 million for 1999, 1998 and 1997,
respectively, after deducting rentals from subleases ($7 million in 1999,
1998 and 1997).
At December 31, 1999, the aggregate future minimum rental commitments under
all noncancelable operating lease agreements are as follows:
For the Years Ending Gross Rentals Net
December 31, Rental from Rental
(IN MILLIONS OF DOLLARS) Commitments Subleases Commitments
2000 $307 $ 13 $294
2001 263 11 252
2002 220 6 214
2003 185 4 181
2004 157 3 154
Subsequent years 743 6 737
------ --- ------
$1,875 $43 $1,832
====== === ======
MMC has entered into agreements with various service companies to outsource
certain information systems activities and responsibilities. Under these
agreements, MMC is required to pay minimum annual service charges. Additional
fees may be payable depending upon the volume of transactions processed with all
future payments subject to increases for inflation. At December 31, 1999, the
aggregate fixed future minimum commitments under these agreements are as
follows:
Future
For the Years Ending December 31, Minimum
(IN MILLIONS OF DOLLARS) Commitments
2000 $32
2001 25
2002 18
2003 13
2004 11
Subsequent years 1
-----
$ 100
=====
-----------
55
9 SHORT-TERM DEBT
MMC's outstanding short-term debt is as follows:
December 31, 1999 and 1998
(IN MILLIONS OF DOLLARS) 1999 1998
Commercial paper $1,027 $2,213
Bank loans 88 10
Current portion of long-term debt 16 11
------ ------
$1,131 $2,234
====== ======
The weighted average interest rates on outstanding commercial paper borrowings
at December 31, 1999 and 1998 are 5.8% and 5.3%, respectively.
In 1999, MMC refinanced $1 billion of commercial paper borrowings through the
sale of Senior Notes (see Note 10).
During 1999, MMC executed a new revolving credit facility for the use of its
subsidiary, Marsh USA, Inc. This noncancelable facility, which expires in 2000,
provided that Marsh USA, Inc. may borrow up to $1.4 billion at market rates of
interest which may vary depending upon the level of usage of the facility and
MMC's credit ratings. Commitment fees of 5 basis points are payable on any
unused portion. The facility requires MMC to maintain consolidated net worth of
at least $2.5 billion and contains other restrictions relating to
consolidations, mergers and the sale or pledging of assets. This facility was
amended in January 2000 to reduce the aggregate commitment from $1.4 billion to
$1.2 billion. No amounts were outstanding under this revolving credit facility
at December 31, 1999.
During 1998, MMC executed a $2.25 billion revolving credit facility with several
banks to support its commercial paper borrowings made to initially finance its
acquisition of Sedgwick. This facility expired in August 1999.
MMC maintains credit facilities with various banks, primarily related to
operations located outside the United States, aggregating $196 million at
December 31, 1999. MMC has borrowed $88 million under these facilities, which is
included in short-term debt.
10 LONG-TERM DEBT
MMC's outstanding long-term debt is as follows:
December 31, 1999 and 1998
(IN MILLIONS OF DOLLARS) 1999 1998
Commercial paper $1,000 $ 600
Senior notes--6.625% due 2004 594 --
Senior notes--7.125% due 2009 398 --
Mortgage--9.8% due 2009 200 200
Notes payable--8.62% due 2012 83 86
Notes payable--7.68% due 2006 63 60
Revolving credit facility -- 583
Other 35 72
------ ------
2,373 1,601
Less current portion 16 11
------ ------
$2,357 $1,590
====== ======
Commercial paper borrowings of $1.0 billion at December 31, 1999 and $600
million at December 31, 1998, have been classified as long-term debt based on
MMC's intent and ability to maintain or refinance these obligations on a
long-term basis.
During 1997, MMC executed a revolving credit facility with several banks to
support its commercial paper borrowings and to fund other general corporate
requirements. This noncancelable facility, which expires in June 2002, provided
that MMC may borrow up to $1.2 billion at market rates of interest which may
vary depending upon the level of usage of the facility and MMC's credit ratings.
Commitment fees of 7 basis points are payable on any unused portion. The
facility requires MMC to maintain consolidated net worth of at least $1.7
billion and contains other restrictions relating to consolidations, mergers and
the sale or pledging of assets. This facility was amended in January 2000 to
reduce the aggre gate commitment from $1.2 billion to $1.0 billion. No amounts
were outstanding under this revolving credit facility at December 31, 1999. A
total of $583 million was outstanding at December 31, 1998.
In June 1999, MMC sold $600 million of 6.625% Senior Notes due 2004 and $400
million of 7.125% Senior Notes due 2009, the proceeds of which were used to
repay a portion of the commercial paper borrowings that were used initially to
finance the Sedgwick acquisition.
MMC has a fixed rate non-recourse mortgage note agreement due in 2009 amounting
to $200 million, bearing an interest rate of 9.8%, in connection with its
interest in its worldwide headquarters building. In the event the mortgage is
foreclosed following a default, MMC would be entitled to remain in the space and
would be obligated to pay rent sufficient to cover interest on the notes or at
fair market value if greater.
MMC entered into an interest rate swap as part of the acquisition and renovation
of MMC's worldwide headquarters, which fixed the interest rate at approximately
9.5% on $100 million of variable rate borrowings. This swap expired in February
1999. The weighted average interest rate received on this swap at December 31,
1998 and 1997 was 5.7% and 5.8%, respectively. The difference between the fixed
rate and the weighted average rate was included in interest expense in the
Consolidated Statements of Income.
MMC has a note payable due 2012, the outstanding balance of which was $83
million and $86 million at December 31, 1999 and 1998, respectively.
In connection with the Sedgwick transaction, MMC assumed 7.68% Senior Loan Notes
due 2006, the outstanding balance of which was $63 million and $60 million at
December 31, 1999 and 1998, respectively.
Scheduled repayments of long-term debt in 2000 and in the four succeeding years
are $16 million, $8 million, $1.0 billion, $8 million and $605 million,
respectively.
-----------
56
11 FINANCIAL INSTRUMENTS
The estimated fair value of MMC's significant financial instruments is provided
below. Certain estimates and judgments were required to develop the fair value
amounts. The fair value amounts shown below are not necessarily indicative of
the amounts that MMC would realize upon disposition nor do they indicate MMC's
intent or ability to dispose of the financial instrument.
1999 1998
---- ----
December 31, 1999 and 1998 Carrying Fair Carrying Fair
(In millions of dollars) Amount Value Amount Value
- ------------------------ ------ ----- ------ -----
Nonderivatives:
Cash and cash equivalents $ 428 $ 428 $ 610 $ 610
Long-term securities 687 687 828 828
Short-term debt 1,131 1,131 2,234 2,234
Long-term debt 2,357 2,374 1,590 1,665
Derivatives:
Other assets:
Interest rate swaps -- 3 -- 4
Forward exchange contracts -- -- -- 1
CASH AND CASH EQUIVALENTS: The estimated fair value of MMC's cash and cash
equivalents approximates their carrying value.
LONG-TERM SECURITIES: Long-term securities primarily consist of available for
sale securities recorded at quoted market prices. MMC also has certain
additional long-term securities, for which there are no readily available market
prices, amounting to $193 million and $82 million at December 31, 1999 and 1998,
respectively, which are carried on a cost basis. Based on present information,
MMC believes that the cost of these investments approximates their fair value.
SHORT-TERM AND LONG-TERM DEBT: The fair value of MMC's short-term debt, which
consists primarily of commercial paper borrowings, approximates its carrying
value. The estimated fair value of MMC's long-term debt is based on discounted
future cash flows using current interest rates available for debt with similar
terms and remaining maturities. The estimated fair value of borrowings under the
revolving credit facility approximates the carrying value.
INTEREST RATE SWAPS: Historically, MMC has managed its net exposure to interest
rate changes by employing a mixture of variable and fixed rate borrowings to
finance MMC's asset base. MMC has utilized interest rate swaps to manage its
exposure to interest rate movements on its cash and investments as well as its
interest expense on borrowings. MMC does not utilize financial instruments for
trading or other speculative purposes. The counterparties to these contracts are
major financial institutions. Management believes that risk of loss is remote
and in any event would be immaterial.
The fair values of these interest rate swaps are the estimated amounts that MMC
would receive to terminate the agreements at the reporting date, taking into
account the current interest rate environment. Amounts currently due to or from
interest rate swap counterparties are recorded in interest expense in the period
in which they accrue.
A summary of MMC's interest rate swaps as of December 31, 1999 and 1998 is as
follows:
Weighted Average
Notional Termination Interest Rates
(In millions of dollars) Amount Dates Receive Pay
1999 --
Receive fixed--
pay variable $348 2000-2003 6.5% 5.8%
Receive variable--
pay fixed $ 39 2005 6.1% 5.8%
1998--
Receive fixed--
pay variable $599 1999-2003 6.8% 5.9%
Receive variable--
pay fixed $140 1999-2005 5.7% 8.4%
FORWARD EXCHANGE CONTRACTS: At December 31, 1999, MMC had open forward exchange
contracts to sell U.S. dollars for sterling for an underlying principal amount
of $24 million. In addition, MMC had open forward exchange contracts to purchase
other foreign currencies for underlying principal amounts totaling $12 million.
These contracts were entered into principally to hedge firm commitments.
OPTION CONTRACTS: MMC has entered into option contracts to hedge its interest
rate exposures related to pension redress liabilities in the U.K., discussed
further in Note 15. At December 31, 1999, the notional amounts of these option
contracts totaled $580 million, with amounts expiring annually over the next
three years. MMC has additional option contracts used to hedge the volatility of
MMC's pension redress liability attributable to equity markets. The notional
amounts of these contracts was $30 million at December 31, 1999 with all amounts
expiring in 2000. All option contracts at December 31, 1999 were out of the
money and as such the fair market value of these contracts was zero. There is no
potential for a future loss associated with these options.
UNREALIZED SECURITIES HOLDING GAINS: MMC has classified as available for sale
primarily equity securities having an aggregate fair value of $494 million and
$746 million at December 31, 1999 and 1998, respectively. Gross unrealized
gains, amounting to $331 million and $546 million at December 31, 1999 and 1998,
respectively, have been excluded from earnings and reported as accumulated other
comprehensive income which is a component of stockholders' equity, net of
deferred income taxes.
Proceeds from the sale of available for sale securities for the years ended
December 31, 1999, 1998 and 1997 were $105 million, $62 million and $69 million,
respectively. Gross realized gains on available for sale securities sold during
1999, 1998 and 1997 amounted to $53 million, $40 million and $36 million,
respectively. The cost of securities sold is determined using the average cost
method for equity securities.
A portion of insurance fiduciary funds which MMC holds to satisfy fiduciary
obligations are invested in high quality debt securities which are generally
held to maturity. The difference between cost and fair value of these
investments is not material.
-------
57
12 SPECIAL CHARGES/CREDITS
During 1999, MMC recorded special charges totaling $337 million representing
$266 million of merger-related costs associated with the combination with
Sedgwick and $71 million primarily for acquisition-related awards pertaining to
the Sedgwick transaction. The merger-related costs are discussed in detail in
Note 4. The net impact of the special charges was $233 million, after tax, or
$.86 per diluted share.
During 1998, MMC recorded a special charge of $11 million representing
acquisition-related stock unit awards issued to certain senior employees of
Sedgwick. In addition, a reserve of approximately $15 million related to a 1996
provision for restructuring was reversed in 1998. The resulting net special
credit of $4 million increased diluted net income per share by $.01 for the
year.
During 1997, MMC recorded special charges totaling $244 million. The net impact
of the special charges on diluted net income per share was $.63 for the year.
These charges included $168 million of merger-related costs predominantly
related to the combination with J&H, a charge of $61 million related to London
real estate, and $15 million for the disposal of certain EDP assets which were
written off in 1997. The merger-related costs are discussed in detail in Note 4.
The $61 million charge for London real estate included $35 million associated
with a plan to abandon and demolish a company-owned building and $26 million of
lease abandonment costs (net of anticipated sublease income) relating to
vacating several leased locations. Payments and write-offs associated with this
reserve began in 1998 and are expected to continue for several years. The
remaining lease abandonment reserve is $23 million at December 31, 1999.
13 COMMON STOCK
In April 1999, MMC completed the sale of 4.1 million common shares realizing
approximately $300 million of net proceeds.
On May 20, 1998, the Board of Directors authorized a three-for-two stock
distribution of MMC's common stock, which was issued as a stock dividend on June
26, 1998.
All references to per share amounts have been restated for this stock
distribution.
14 STOCKHOLDER RIGHTS PLAN
On September 18, 1997, MMC's Board of Directors approved the extension of the
benefits afforded by MMC's previously existing rights plan by adopting a new
stockholder rights plan, which was amended and restated as of January 20, 2000.
Under the current plan, Rights to purchase stock, at a rate of one Right for
each common share held, were distributed to shareholders of record on September
29, 1997 and automatically attach to shares issued thereafter. Under the plan,
the Rights generally become exercisable after a person or group (i) acquires 15%
or more of MMC's outstanding common stock or (ii) commences a tender offer that
would result in such a person or group owning 15% or more of MMC's common stock.
When the Rights first become exercisable, a holder will be entitled to buy from
MMC a unit consisting of one three-hundredth of a share of Series A Junior
Participating Preferred Stock of MMC at a purchase price of $400. If any person
acquires 15% or more of MMC's common stock or if a 15% holder acquires MMC by
means of a reverse merger in which MMC and its stock survive, each Right not
owned by a 15% or more shareholder would become exercisable for common stock of
MMC (or in certain circumstances, other consideration) having a market value
equal to twice the exercise price of the Right. The Rights expire on September
29, 2007, except as otherwise provided in the plan.
15 CLAIMS, LAWSUITS AND OTHER CONTINGENCIES
MMC and its subsidiaries are subject to various claims, lawsuits and
proceedings consisting principally of alleged errors and omissions in
connection with the placement of insurance or reinsurance and in rendering
investment and consulting services. Some of these matters seek damages,
including punitive damages, in amounts which could, if assessed, be
significant.
An action captioned "Aiena et al. vs. Olsen et al." is pending in the United
States District Court for the Southern District of New York by certain former
directors of Johnson & Higgins ("J&H"), which was acquired by MMC in 1997,
against twenty-four selling shareholders of J&H, as well as J&H itself and
MMC. The action essentially challenges the allocation of the consideration
paid in connection with
-------
58
MMC's combination with J&H as between the defendants who were directors and
shareholders of J&H at the time of the transaction and the plaintiffs who
were former directors and shareholders of J&H. The complaint asserts, among
others, claims for breach of fiduciary duty, federal securities law
violations, breach of contract, and ERISA actions. Plaintiffs seek
compensatory and punitive damages. Two former directors of J&H brought
similar actions (Sempier v. Olsen et al.; and Clemens v. Olsen et al.), which
are also pending before the United States District Court for the Southern
District of New York. On October 12, 1999, the Court dismissed MMC entirely
from these three cases and dismissed certain (but not all) of the claims
brought against J&H. The principal surviving claims asserted against J&H in
these cases include a claim under the federal securities laws and a claim for
breach of ERISA. In December 1999, two additional cases were filed by two
former directors of J&H (Valentine v. Olsen et al.; and Bianchi v. Olsen et
al.), and have been assigned to the judge hearing the Aiena, Sempier and
Clemens matters. Although the Valentine and Bianchi cases raise substantially
similar issues as the Aiena, Sempier and Clemens actions, they also raise
certain additional claims under ERISA and state law relating to the
plaintiffs' departure as J&H employees. All these actions are in their
initial stages.
Sedgwick Group plc, since prior to its acquisition, has been engaged in a review
of previously undertaken personal pension plan business as required by United
Kingdom regulators to determine whether redress should be made to customers. As
of December 31, 1999, settlements and related costs previously paid amount to
approximately $125 million of which approximately $30 million is due from or has
been paid by insurers. The contingent exposure of Sedgwick for pension redress
and related costs is estimated to be $350 million. Sedgwick has recorded $190
million of reserves and recognized approximately $160 million of insurance
recoveries related to this exposure.
Other present and former subsidiaries of MMC are engaged in a comparable
review of their personal pension plan businesses, although the extent of
their activity in this area, and consequently their financial exposure, was
proportionally much less than Sedgwick. The contingent exposure of the
present and former non-Sedgwick subsidiaries of MMC for pension redress and
related costs is estimated to be approximately $150 million. Approximately
$140 million of this amount is expected to be recovered from insurers and
accounting reserves have been provided for the remaining balance. As of
December 31, 1999, settlements and related costs previously paid total
approximately $35 million.
MMC's ultimate exposure from the United Kingdom Personal Investment Authority
review, as presently calculated and including Sedgwick, is subject to a
number of variable factors including, among others, the interest rate
established quarterly by the U.K. Personal Investment Authority for
calculating compensation, equity markets, and the precise scope, duration,
and methodology of the review as required by that Authority.
As part of the combination with Sedgwick, MMC acquired several insurance
underwriting businesses that were already in run-off. Sedgwick had issued
guarantees with respect to certain liabilities of these operations.
On the basis of present information, anticipated insurance coverage and
advice received from counsel, it is the opinion of MMC's management that the
disposition or ultimate determination of these claims, lawsuits, proceedings
or guarantees will not have a material adverse effect on MMC's consolidated
results of operations or its consolidated financial position.
16 SEGMENT INFORMATION
MMC, a professional services firm, is organized based on the different services
that it offers. Under this organizational structure, MMC operates in three
principal business segments: risk and insurance services, investment management
and consulting. The risk and insurance services segment provides insurance
broking, reinsurance broking and insurance and program services for business,
professional, institutional and public-entity clients. It also provides services
principally in connection with originating, structuring and managing insurance
and related industry investments. The investment management segment primarily
provides securities investment advisory and management services and
administrative services for a group of publicly held investment companies. The
consulting segment provides advice and services to the managements of
organizations primarily in the areas of human resources and employee benefit
programs, general management consulting and economic consulting and analysis.
MMC evaluates segment performance based on operating income, which is after
deductions for directly related expenses but before special charges. The
accounting policies of the segments are the same as those used for the
consolidated financial statements described in Note 1. Revenues are attributed
to geographic areas on the basis of where the services are performed.
---------
59
Selected information about MMC's operating segments and geographic areas of
operation follow:
- ------------------------------------------------------------------------------------------------------------------------------------
For the Three Years Ended Revenue Segment
December 31, 1999 from External Operating Total Depreciation and Capital
(In millions of dollars) Customers Income Assets Amortization Expenditures
- ------------------------------------------------------------------------------------------------------------------------------------
1999 --
Risk and Insurance Services $ 4,523(a) $ 806 $ 8,016 $ 268 $ 208
Investment Management 2,684 841 2,235 60 29
Consulting 1,950 260 1,511 48 39
- ------------------------------------------------------------------------------------------------------------------------------------
$ 9,157 $ 1,907 $11,762 $ 376 $ 276
- ------------------------------------------------------------------------------------------------------------------------------------
1998--
Risk and Insurance Services $ 3,351(a) $ 613 $ 8,084 $ 163 $ 216
Investment Management 2,296 677 1,437 45 38
Consulting 1,543 202 1,490 38 40
- ------------------------------------------------------------------------------------------------------------------------------------
$ 7,190 $ 1,492 $11,011 $ 246 $ 294
- ------------------------------------------------------------------------------------------------------------------------------------
1997--
Risk and Insurance Services $ 2,789(a) $ 496 $ 5,231 $ 126 $ 87
Investment Management 1,882 463 1,163 37 81
Consulting 1,338 148 909 32 32
- ------------------------------------------------------------------------------------------------------------------------------------
$ 6,009 $ 1,107 $ 7,303 $ 195 $ 200
- ------------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the totals for the operating segments to the applicable line
items in the consolidated financial statements is as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Income Before Income Taxes:
Total segment operating income $ 1,907 $ 1,492 $ 1,107
Special (charges) credits
(see Note 12) (337) 4 (244)
Corporate expense (103) (76) (65)
Minority interest associated with the
Putnam Equity Partnership Plan (8) -- --
- --------------------------------------------------------------------------------
Operating income 1,459 1,420 798
Interest income 21 25 24
Interest expense (233) (140) (107)
- --------------------------------------------------------------------------------
Total income before income taxes $ 1,247 $ 1,305 $ 715
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total
Operating Corporate/ Total
Segments Eliminations Consolidated
- --------------------------------------------------------------------------------
Other Significant Items:
1999 --
Total assets $11,762 $ 1,259(b) $13,021
Depreciation and
amortization 376 24 400
Capital expenditures 276 82 358
1998--
Total assets 11,011 860(b) 11,871
Depreciation and
amortization 246 5 251
Capital expenditures 294 3 297
1997--
Total assets 7,303 609(b) 7,912
Depreciation and
amortization 195 4 199
Capital expenditures 200 2 202
- --------------------------------------------------------------------------------
(a) Includes interest income on fiduciary funds ($167 million in 1999, $137
million in 1998, and $111 million in 1997).
(b) Corporate assets primarily include unallocated goodwill, insurance
recoverables and a portion of MMC's headquarters building.
Information by geographic area is as follows:
- --------------------------------------------------------------------------------
Revenue
from External Fixed
Customers Assets
- --------------------------------------------------------------------------------
Geographic Area:
1999 --
United States $6,375 $ 822
United Kingdom 1,251 344
Continental Europe 748 66
Other 783 82
- --------------------------------------------------------------------------------
$9,157 $1,314
- --------------------------------------------------------------------------------
1998--
United States $5,235 $ 720
United Kingdom 820 413
Continental Europe 551 85
Other 584 69
- --------------------------------------------------------------------------------
$7,190 $1,287
- --------------------------------------------------------------------------------
1997--
United States $4,316 $ 702
United Kingdom 657 136
Continental Europe 564 56
Other 472 63
- --------------------------------------------------------------------------------
$6,009 $ 957
- --------------------------------------------------------------------------------
(a) Includes interest income on fiduciary funds ($167 million in 1999, $137
million in 1998, and $111 million in 1997).
(b) Corporate assets primarily include unallocated goodwill, insurance
recoverables and portion of MMC's headquarters building.
60
REPORT OF MANAGEMENT
The management of Marsh & McLennan Companies, Inc. has prepared and is
responsible for the accompanying financial statements and other related
financial information contained in this annual report. MMC's financial
statements were prepared in accordance with generally accepted accounting
principles, applying certain estimates and informed judgments as required.
Deloitte & Touche LLP, independent auditors, have audited the financial
statements and have issued their report thereon.
MMC maintains a system of internal accounting controls designed to provide
reasonable assurance that transactions are executed in accordance with
management's authorization, that assets are safeguarded and that proper
financial records are maintained. Key elements of MMC's internal controls
include securing the services of qualified personnel and proper segregation of
duties. Internal auditors monitor the control system by examining financial
reports, by testing the accuracy of transactions and by otherwise obtaining
assurance that the system is operating in accordance with MMC's objectives.
The Audit Committee of the Board of Directors is composed entirely of outside
directors and is responsible for recommending to the Board the independent
auditors to be engaged to audit MMC's financial statements, subject to
stockholder ratification. In addition, the Audit Committee meets periodically
with internal auditors and the independent auditors, both with and without
management, to discuss MMC's internal accounting controls, financial reporting
and other related matters. The internal auditors and independent auditors have
full and unrestricted access to the Audit Committee.
/s/ Sandra S. Wijnberg
Sandra S. Wijnberg
Senior Vice President and
Chief Financial Officer
March 3, 2000
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Marsh & McLennan Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Marsh & McLennan
Companies, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Marsh & McLennan Companies, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE
DELOITTE & TOUCHE LLP
New York, New York
March 3, 2000
61
MARSH & MCLENNAN COMPANIES, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA AND
SUPPLEMENTAL INFORMATION (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
Net Per Share(a) Dividends Stock
(In millions of dollars, Operating Income ----------------- Paid Per Price Range
except per share figures) Revenue Income (Loss) Basic Diluted Share High-Low
- ------------------------------------------------------------------------------------------------------------------------------------
1999:
First quarter $2,351 $ 519 $ 279 $ 1.08 $ 1.03 $ .40 $79.38-57.13
Second quarter 2,245 347(b) 177(b) .68 .63(b) .40 $81.13-68.13
Third quarter 2,227 425 223 .84 .81 .45 $81.50-61.75
Fourth quarter 2,334 168(c) 47(c) .17 .16(c) .45 $96.75-64.38
- ------------------------------------------------------------------------------------------------------------------------------------
$9,157 $1,459(d) $ 726(d) $ 2.76 $ 2.62(d) $ 1.70 $96.75-57.13
- ------------------------------------------------------------------------------------------------------------------------------------
1998:
First quarter $1,776 $ 404 $ 231 $ .90 $ .87 $ .33 $61.67-46.38
Second quarter 1,750 346 193 .75 .72 .33 $63.25-54.83
Third quarter 1,719 335 186 .73 .69 .40 $64.31-46.13
Fourth quarter 1,945 335 186 .73 .70 .40 $61.94-43.38
- ------------------------------------------------------------------------------------------------------------------------------------
$7,190 $1,420 $ 796 $ 3.11 $ 2.98 $ 1.46 $64.31-43.38
- ------------------------------------------------------------------------------------------------------------------------------------
1997:
First quarter $1,295 $ 277 $ 164 $ .75 $ .73 $ .30 $43.21-34.21
Second quarter 1,540 262 145 .57 .56 .30 $50.17-37.71
Third quarter 1,548 249 140 .55 .54 .33 $53.17-45.50
Fourth quarter 1,626 10(e) (15)(e) (.05) (.05)(e) .33 $53.33-44.00
- ------------------------------------------------------------------------------------------------------------------------------------
$6,009 $ 798(f) $ 434(f) $ 1.77 $ 1.73(f) $ 1.26 $53.33-34.21
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Net income per share is computed independently for each of the periods
presented. Accordingly, the sum of the quarterly net income per share amounts
exceeds the total for the year in 1999 and 1997.
(b) Excluding special charges of $84 for the second quarter of 1999, operating
income, net income and diluted net income per share are $431, $228 and $.82,
respectively.
(c) Excluding special charges of $253 for the fourth quarter of 1999, operating
income, net income and diluted net income per share are $421, $229 and $.82,
respectively.
(d) Excluding special charges of $337 for the full year 1999, operating income,
net income and diluted net income per share are $1,796, $959 and $3.48,
respectively.
(e) Excluding special charges of $244 for the fourth quarter of 1997, operating
income, net income and diluted net income per share are $254, $143 and $.55,
respectively.
(f) Excluding special charges of $244 for the full year 1997, operating income,
net income and diluted net income per share are $1,042, $592 and $2.36,
respectively.
All per share amounts have been restated for a three-for-two stock distribution
of MMC's common stock, which was issued as a stock dividend on June 26, 1998.
MMC's common stock (ticker symbol:MMC) is traded on the New York, Chicago,
Pacific and London stock exchanges. As of February 29, 2000, there were 29,100
stockholders of record.
62
MARSH & MCLENNAN COMPANIES, INC. AND SUBSIDIARIES
FIVE-YEAR STATISTICAL SUMMARY
OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Compound
For the Five Years Ended December 31, 1999 Growth Rate
(In millions of dollars, except per share figures) 1999(a) 1998 1997(d) 1996(f) 1995 1994-1999
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue:
Risk and Insurance Services $ 4,523 $ 3,351 $ 2,789 $ 1,907 $ 1,964 19%
Investment Management 2,684 2,296 1,882 1,338 917 29%
Consulting 1,950 1,543 1,338 1,159 1,056 16%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenue 9,157 7,190 6,009 4,404 3,937 21%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 4,574 3,561 3,044 2,204 1,949 21%
Other operating expenses 3,124 2,209 2,167 1,485 1,293 22%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expenses 7,698 5,770 5,211 3,689 3,242 22%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income 1,459(b) 1,420 798(e) 715(g) 695 17%
Interest Income 21 25 24 14 18
Interest Expense (233) (140) (107) (61) (63)
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,247 1,305 715 668 650 15%
Income Taxes 521 509 281 209(h) 247
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 726 $ 796 $ 434 $ 459 $ 403 14%
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Net Income Per Share Information:
Net Income Per Share $ 2.76 $ 3.11 $ 1.77 $ 2.11 $ 1.84 10%
Average Number of Shares Outstanding 263 256 245 217 219
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted Net Income Per Share Information:
Net Income Per Share $ 2.62 $ 2.98 $ 1.73 $ 2.08 $ 1.82 9%
Average Number of Shares Outstanding 272 264 251 221 221
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends Paid Per Share $ 1.70 $ 1.46 $ 1.26 $ 1.11 $ .99 13%
Return on Average Stockholders' Equity 19% 23% 17% 26% 26%
Year-end Financial Position:
Working capital $ (1,035) $ (1,657)(c) $ 224 $ 192 $ 110
Total assets $ 13,021 $ 11,871 $ 7,912 $ 4,545 $ 4,330
Long-term debt $ 2,357 $ 1,590 $ 1,240 $ 458 $ 411
Stockholders' equity $ 4,170 $ 3,659 $ 3,233 $ 1,889 $ 1,666
Total shares outstanding 267 257 255 217 218
(excluding treasury shares)
Other Information:
Number of employees 52,900 54,300 36,400 27,000 27,200
Stock price ranges--
U.S. exchanges--High $ 96.75 $ 64.31 $ 53.33 $ 38.29 $ 30.04
--Low $ 57.13 $ 43.38 $ 34.21 $ 28.08 $ 25.37
Price/earnings multiple 36.5 19.6 28.7 16.7 16.3
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes full year results for Sedgwick, which was acquired in November
1998.
(b) Includes a special charge of $337 million.
(c) Includes $2.2 billion of commercial paper borrowings made to initially
finance the acquisition of Sedgwick.
(d) Includes the operating results of Johnson & Higgins, an insurance broking
and consulting services firm, acquired in March 1997 and CECAR, a French
insurance services firm.
(e) Includes a special charge of $244 million.
(f) The Frizzell Group Limited was sold in June 1996.
(g) Includes net special charges of $93 million partially offset by a $33
million gain on the sale of Frizzell.
(h) Includes a tax adjustment that reduced income taxes by $40 million.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for discussion of significant items affecting the results of
operations in 1999 and 1998.
63
BOARD OF DIRECTORS AND CORPORATE OFFICERS
BOARD OF DIRECTORS
A.J.C. SMITH DAVID A. OLSEN
Chairman Former Chairman, Johnson & Higgins
J.W. GREENBERG JOHN D. ONG
President and Chief Executive Officer Chairman Emeritus,
The BFGoodrich Company
NORMAN BARHAM
Vice Chairman, Marsh Inc. ADELE SIMMONS
Vice Chair and Senior Executive,
LEWIS W. BERNARD Chicago Metropolis 2020
Chairman, Classroom, Inc. Former President,
Former Chief Administrative John D. and Catherine T. MacArthur
and Financial Officer, Foundation
Morgan Stanley & Co., Inc.
JOHN T. SINNOTT
FRANK J. BORELLI Chairman and Chief Executive Officer,
Senior Vice President Marsh Inc.
PETER COSTER FRANK J. TASCO
President, Mercer Consulting Group, Inc. Former Chairman, MMC
ROBERT F. ERBURU W.R.P. WHITE-COOPER
Former Chairman, MMC Business in Combination
The Times Mirror Company
ADVISORY DIRECTORS
RAY J. GROVES
Chairman, RICHARD E. HECKERT
Legg Mason Merchant Banking, Inc. Former Chairman,
Former Chairman, Ernst & Young E.I. du Pont de Nemours and Company
STEPHEN R. HARDIS RICHARD S. HICKOK
Chairman, Eaton Corporation Former Chairman, KMG Main Hurdman
GWENDOLYN S. KING DEAN R. McKAY
Former Senior Vice President, Former Senior Vice President,
PECO Energy IBM Corporation
THE RT. HON. LORD LANG OF MONKTON RICHARD M. MORROW
Former British Secretary of State Former Chairman, Amoco Corporation
for Trade & Industry
GEORGE PUTNAM
LAWRENCE J. LASSER Chairman, The Putnam Funds
President and Chief Executive Officer,
Putnam Investments, Inc. JOHN M. REGAN, JR.
Former Chairman, MMC
R.J. VENTRES
Former Chairman, Borden, Inc.
COMMITTEES OF THE BOARD
AUDIT
The Rt. Hon. Lord Lang of Monkton,
Chairman
Stephen R. Hardis
Gwendolyn S. King
John D. Ong
Adele Simmons
Frank J. Tasco
COMPENSATION
Lewis W. Bernard, Chairman
Robert F. Erburu
Ray J. Groves
EXECUTIVE
J.W. Greenberg, Chairman
Lewis W. Bernard
Ray J. Groves
Adele Simmons
A.J.C. Smith
Frank J. Tasco
OTHER CORPORATE OFFICERS
MATHIS CABIALLAVETTA
Vice Chairman, MMC
Chairman, MMC Europe
CHARLES A. DAVIS
Vice Chairman, MMC
President and Chief Executive Officer,
Marsh & McLennan Capital, Inc.
SANDRA S. WIJNBERG
Senior Vice President and
Chief Financial Officer
GREGORY F. VAN GUNDY
General Counsel and Secretary
FRANCIS N. BONSIGNORE
Senior Vice President,
Human Resources and Administration
INTERNATIONAL ADVISORY BOARD
A.J.C. SMITH PAUL F. OREFFICE (United States)
International Advisory Board Chairman Former Chairman and
Chairman, MMC Chief Executive Officer,
The Dow Chemical Company
ABDLATIF Y. AL-HAMAD (Middle East)
Chairman, Arab Fund for Economic SAXON RILEY (United Kingdom)
and Social Development Former Chairman, Sedgwick Group
RAYMOND BARRE (France) JESUS SILVA-HERZOG (Mexico)
Mayor, Lyon Institute for Monetary Affairs
Former Prime Minister Former Ambassador of Mexico
to the United States
MATHIS CABIALLAVETTA (Switzerland)
Vice Chairman, MMC WEI MING YI (China)
Chairman, MMC Europe Chairman, International Advisory Council
China International Trust and
JOHN R. EVANS (Canada) Investment Corporation
Chairman, Torstar Corporation
OSCAR FANJUL (Spain)
Honorary Chairman, Repsol
TOYOO GYOHTEN (Japan)
President, Institute for
International Monetary Affairs
Former Chairman, The Bank of Tokyo
ERNO KEMENES (Eastern Europe)
Former Minister of Economics, Hungary
MARCILIO MARQUES MOREIRA (Brazil)
Senior International Advisor,
Merrill Lynch
Former Ambassador of Brazil
to the United States
64
[GRAPHIC: MARSH]
SHAREHOLDER INFORMATION
Annual Meeting
The 2000 annual meeting of shareholders will be held at 10 a.m., Thursday, May
18, in the 2nd floor auditorium of the McGraw-Hill Building, 1221 Avenue of the
Americas, New York City. At the time of the mailing of this annual report, the
notice of the annual meeting and proxy statement, together with a proxy card, is
scheduled to be sent to each shareholder.
Anticipated 2000 Dividend Payment Dates
February 14 (paid), May 15, August 15, November 15
Financial and Investor Information
Shareholders and prospective investors inquiring about reinvestment and payment
of dividends, consolidation of accounts, changes of registration and stock
certificate holdings should contact:
The Bank of New York
Shareholder Relations Department 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
Telephone: (800) 457-8968
(610) 312-5238
Certificates for transfer and address changes
should be sent to:
The Bank of New York
Receive and Deliver Department 11W
P.O. Box 11002
Church Street Station
New York, NY 10286
The Bank of New York
c/o Computershare Services
Registrar's Department
P.O. Box 82, Caxton House
Redcliffe Way, Bristol BS99 7NH
England>
Telephone: 117-9306666
The Bank of New York's Web site: stock.bankofny.com
E-mail Inquiries: Shareowner-svcs@bankofny.com
Copies of our annual reports and Forms 10-K and 10-Q
may be requested through our Web site or by contacting:
Corporate Development
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, NY 10036
Telephone: (212) 345-5475
MMC's Web site: www.mmc.com
Stock Listings
MMC's common stock (ticker symbol: MMC) is listed on the New
York, Chicago, Pacific and London stock exchanges.
Cautionary Language Regarding Forward-Looking Statements
This annual report to shareholders contains forward-looking statements, which by
their nature involve risks and uncertainties. Please refer to Marsh & McLennan
Companies' 1999 Annual Report on Form 10-K for "Information Concerning
Forward-Looking Statements" and a description of certain factors that may cause
actual results to differ from goals referred to herein or contemplated by such
statements.>