-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PHXEBXwgFJW/cR7L5OOewR5X6f8qhCzU9XvQ1Rtpadst5RfZxdRJ6IFA/MHtOYK2 D20jz9xeVOI3CW4uX6zuVg== 0000062709-98-000004.txt : 19980817 0000062709-98-000004.hdr.sgml : 19980817 ACCESSION NUMBER: 0000062709-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARSH & MCLENNAN COMPANIES INC CENTRAL INDEX KEY: 0000062709 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 362668272 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05998 FILM NUMBER: 98688016 BUSINESS ADDRESS: STREET 1: 1166 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2123455000 MAIL ADDRESS: STREET 1: 1166 AVE OF THE AMERICAS STREET 2: 27TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MARLENNAN CORP DATE OF NAME CHANGE: 19760505 10-Q 1 MMC 1998 2ND 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For quarter ended June 30, 1998 Marsh & McLennan Companies, Inc. 1166 Avenue of the Americas New York, New York 10036 (212) 345-5000 Commission file number 1-5998 State of Incorporation: Delaware I.R.S. Employer Identification No. 36-2668272 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . NO . As of July 31, 1998, there were outstanding 255,663,848 shares of common stock, par value $1.00 per share, of the registrant. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements may include, without limitation, discussions concerning revenue and expense growth, cost savings and efficiencies expected from the integration of Johnson & Higgins, Year 2000 remediation and testing of computer systems, market and industry conditions, interest rates, foreign exchange rates, contingencies and matters relating to the operations and income taxes of Marsh & McLennan Companies, Inc. and subsidiaries (the "Company"). Such forward-looking statements are based on available current market and industry materials, experts' reports and opinions, as well as management's expectations concerning future events impacting the Company. Forward-looking statements by their very nature involve risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by any forward-looking statements contained herein include, in the case of the Company's risk and insurance services business, the failure to successfully integrate the insurance services business of Johnson & Higgins (including the achievement of synergies and cost reductions), changes in competitive conditions, a decrease in the premium rate levels in the global property and casualty insurance markets, the impact of changes in insurance markets and natural catastrophes; in the case of the Company's investment management business, changes in worldwide and national securities and fixed income markets and; with respect to all of the Company's activities, the failure of the Company and/or its significant business partners to be Year 2000 compliant on a timely basis, changes in general worldwide and national economic conditions, fluctuations in foreign currencies, actions of competitors or regulators, changes in interest rates, developments relating to claims and lawsuits, changes in the tax or accounting treatment of the Company's operations and the impact of tax and other legislation and regulation in the jurisdictions in which the Company operates. PART I, FINANCIAL INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share figures) (Unaudited) Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Revenue $1,750 $1,540 $3,526 $2,835 Expense 1,404 1,278 2,776 2,296 Operating Income 346 262 750 539 Interest Income 7 8 12 11 Interest Expense (33) (32) (61) (49) Income Before Income Taxes 320 238 701 501 Income Taxes 127 93 277 192 Net Income $ 193 $ 145 $ 424 $ 309 Basic Net Income Per Share (A) $.75 $.57 $1.65 $1.32 Diluted Net Income Per Share (A) $.72 $.56 $1.59 $1.29 Average Number of Shares Outstanding - Basic (A) 257 250 257 235 Average Number of Shares Outstanding - Diluted (A) 265 256 264 240 Dividends Declared (A) $.40 $.33 $.73 $.63 (A) Restated to reflect the three-for-two stock split in the form of a stock distribution issued on June 26, 1998. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars) (Unaudited) June 30, December 31, 1998 1997 ASSETS Current assets: Cash and cash equivalents (including interest-bearing amounts of $532 at June 30, 1998 and $378 at December 31, 1997) $ 598 $ 424 Receivables- Commissions and fees 1,463 1,296 Advanced premiums and claims 123 95 Other receivables 161 160 1,747 1,551 Less-allowance for doubtful accounts (61) (53) Net receivables 1,686 1,498 Other current assets 579 647 Total current assets 2,863 2,569 Long-term securities 893 720 Fixed assets, net 884 957 (net of accumulated depreciation and amortization of $827 at June 30, 1998 and $798 at December 31, 1997) Intangible assets 2,720 2,417 Other assets 1,239 1,251 $8,599 $7,914 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions of dollars) (Unaudited) June 30, December 31, 1998 1997 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 648 $ 237 Accrued compensation and employee benefits 541 564 Accounts payable and accrued liabilities 1,150 1,276 Accrued income taxes 228 218 Dividends payable 103 85 Total current liabilities 2,670 2,380 Fiduciary liabilities 2,475 2,282 Less - cash and investments held in a fiduciary capacity (2,475) (2,282) - - Long-term debt 1,294 1,240 Other liabilities 1,115 1,096 Commitments and contingencies - - Stockholders' equity: Preferred stock, $1 par value, authorized 6,000,000 shares, none issued - - Common stock, $1 par value, authorized 400,000,000 shares, issued 260,657,642 shares at June 30, 1998 and 258,586,766 at December 31, 1997 * 261 172 Additional paid-in capital 1,011 994 Retained earnings 2,211 1,975 Accumulated other comprehensive income 270 167 3,753 3,308 Less - treasury shares, at cost, 4,780,089 shares at June 30, 1998 and 3,661,256 shares at December 31, 1997 * (233) (110) Total stockholders' equity 3,520 3,198 $8,599 $7,914 * Restated to reflect the three-for-two stock split in the form of a stock distribution issued on June 26, 1998. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions of dollars) (Unaudited) Six Months Ended June 30, 1998 1997 Operating cash flows: Net income $424 $309 Gain on sale of business - (10) Depreciation and amortization 121 90 Deferred income taxes 90 (35) Other liabilities 19 10 Prepaid dealer commissions (77) (96) Other, net (7) (4) Net changes in operating working capital other than cash and cash equivalents - Receivables (188) (72) Other current assets 63 (7) Accrued compensation and employee benefits (23) (14) Accounts payable and accrued liabilities (126) (52) Accrued income taxes 13 10 Effect of exchange rate changes 25 3 Net cash generated from operations 334 132 Financing cash flows: Net increase in commercial paper 619 213 Other borrowings 21 1,080 Other repayments (164) (570) Purchase of treasury shares (109) - Issuance of common stock 63 114 Dividends paid (171) (137) Net cash provided by financing activities 259 700 Investing cash flows: Additions to fixed assets (134) (117) Proceeds from sale of business, net of cash sold - 29 Acquisitions (313) (550) Other, net 30 16 Net cash used for investing activities (417) (622) Effect of exchange rate changes on cash and cash equivalents (2) (10) Increase in cash & cash equivalents 174 200 Cash & cash equivalents at beginning of period 424 300 Cash & cash equivalents at end of period $598 $ 500 MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The financial information contained herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three and six month periods ended June 30, 1998 and 1997. 2. Fiduciary Cash and Liabilities In its capacity as an insurance broker or agent, the Company collects premiums from insureds and, after deducting its commissions, remits the premiums to the respective insurance underwriters; the Company also collects claims or refunds from underwriters on behalf of insureds. Unremitted insurance premiums and claims are held in a fiduciary capacity. Interest income on these fiduciary funds, included in revenue, amounted to $62 million and $52 million for the six months ended June 30, 1998 and 1997, respectively. Net uncollected premiums and claims and the related payables amounting to $6.3 billion at June 30, 1998 and $5.2 billion at December 31, 1997, are not included in the accompanying Consolidated Balance Sheets. 3. Per Share Data In 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which requires the Company to include basic and diluted per share figures on the face of the income statement. Basic net income per share is calculated by dividing net income by the average number of shares of the Company's common stock outstanding. Diluted net income per share is calculated by reducing net income for the potential minority interest associated with unvested shares granted under the Putnam Private Equity Plan. This result is then divided by the average common shares outstanding which have been adjusted for the dilutive effect of potential common shares. The following reconciles net income to net income for diluted earnings per share and basic weighted average common shares outstanding to diluted weighted average common shares outstanding for the three and six-month periods ended June 30, 1998 and 1997. Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Net Income 193 145 424 309 Less: Potential Minority Interest associated with Putnam Private Equity Plan (2) - (3) - Net Income for Diluted Earnings per Share 191 145 421 309 Basic Weighted Average Common Shares Outstanding 257 250 257 235 Stock Options 8 6 7 5 Diluted Weighted Average Common Shares Outstanding 265 256 264 240 4. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards for reporting and displaying comprehensive income and its components. Comprehensive income amounted to $527 million and $309 million for the six months ended June 30, 1998 and 1997. The difference between net income and comprehensive income for the six months ended June 30, 1998 was primarily due to net unrealized securities holding gains. 5. Supplemental Disclosure to the Consolidated Statements of Cash Flows The following schedule provides additional information concerning acquisitions: Six Months Ended June 30, (In millions of dollars) 1998 1997 Purchase acquisitions: Assets acquired, excluding cash $313 $ 2,659 Liabilities assumed - (1,103) Shares issued - (1,006) Net cash outflow for acquisitions $313 $ 550 Interest paid during the six months ended June 30, 1998 and 1997 was $70 million and $45 million, respectively. Income taxes paid during the six months ended June 30, 1998 and 1997 were $207 million and $194 million, respectively. 6. Income Taxes The Company has received a Notice of Proposed Adjustment from a field office of the Internal Revenue Service ("IRS") challenging its tax treatment related to 12b-1 fees paid by the Putnam Mutual Funds. The Company believes its tax treatment of these fees is consistent with current industry practice and applicable requirements of the Internal Revenue Code and previously issued IRS technical advice. The field office has referred the Notice to the national office of the IRS for technical advice. Taxing authorities periodically challenge positions taken by the Company on its tax returns. On the basis of present information and advice received from counsel, it is the opinion of the Company's management that any assessments resulting from current tax audits will not have a material adverse effect on the Company's consolidated results of operations or its consolidated financial position. 7. Acquisitions On June 30, 1998, the Company purchased Kirke-Van Orsdel, Inc., an administrator of insurance and health benefit programs in the U.S. On March 24, 1998, the Company purchased Brockman y Schuh Group, a risk and insurance services and employee benefit consulting firm in Mexico. On March 27, 1997, the Company consummated a business combination with Johnson & Higgins ("J&H"), a privately-held risk and insurance services and employee benefit consulting firm. The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the J&H business combination had occurred on January 1, 1997. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results which would have been reported if the business combination had occurred on the date indicated or which may occur in the future. (In millions of dollars, except per share figures) Six Months Ended June 30, 1997 Revenue $3,149 Net Income 324 Basic Net Income per share 1.29 Diluted Net Income per share 1.27 8. Claims, Lawsuits and Other Contingencies The Company and its subsidiaries are subject to various claims and lawsuits consisting principally of alleged errors and omissions in connection with the placement of insurance or reinsurance and in rendering investment and consulting services. Some of these claims and lawsuits seek damages, including punitive damages, in amounts which could, if assessed, be significant. On November 24, 1997, an action captioned "Aiena et al. vs. Olsen et al" was brought in the United States District Court for the Southern District of New York by certain former directors of J&H, which was acquired by the Company in March 1997, against twenty-four selling shareholders of J&H, as well as J&H itself and the Company. The action essentially challenges the allocation of the consideration paid in connection with the Company's combination with J&H as between the defendants who were directors and shareholders of J&H at the time of the transaction and the plaintiffs who were former directors and shareholders of J&H. The Complaint asserts, among others, claims for breach of fiduciary duty, federal securities law violations, breach of contract, and ERISA violations. Plaintiffs seek compensatory and punitive damages. On or about April 14, 1998, an action captioned "Sempier v. Olsen, et al" was brought in the United States District Court for the District of New Jersey by another former director of J&H against the same defendants named in the Aiena action, including J&H and the Company, in connection with the same transaction. The allegations and claims in the Sempier case are substantially similar to those in the Aiena action. Plaintiff seeks, among other relief, an unspecified amount of compensatory and punitive damages. This action will be heard together with the Aiena action in the District Court for the Southern District of New York. In 1993, several years prior to the acquisition of J&H, the Equal Employment Opportunity Commission ("EEOC") commenced a lawsuit against J&H in the United States District Court for the Southern District of New York. The action alleges that a mandatory retirement policy for directors then in effect at J&H violated the federal Age Discrimination in Employment Act ("ADEA"). In 1995, the District Court ruled in the EEOC's favor that the J&H mandatory retirement policy violated the ADEA. The Court of Appeals for the Second Circuit affirmed that ruling in 1996. The EEOC seeks to recover damages on behalf of certain former directors and a trial on the matter of damages is scheduled for October 5, 1998. Pursuant to the Stock Purchase Agreement between the Company and J&H and the stockholders of J&H, the Company will bear one-half of all damages and expenses in this action. Certain present and former English subsidiaries of the Company are required by their regulatory body, the Personal Investment Authority, to review transactions with, and advice to, clients in relation to the sale of certain investments. The disclosure and advice in connection with such sales has been called into question by clients or by the Personal Investment Authority on their behalf. Where the review discloses an inappropriate sale, compensation is required to be paid to the client. While the amount of compensation which has been and may be paid, the liability of present subsidiaries of the Company in connection therewith and the extent to which any such liability is covered by insurance remains uncertain, the aggregate amount claimed could be significant. On the basis of present information, available insurance coverage and advice received from counsel, it is the opinion of the Company's management that the disposition or ultimate determination of these claims and lawsuits will not have a material adverse effect on the Company's consolidated results of operations or its consolidated financial position. 9. Common Stock On May 20, 1998, the Company's Board of Directors authorized a three-for-two stock distribution of $1 par value common stock, which was issued on June 26, 1998 to shareholders of record on June 5, 1998. Upon issuance of the shares, paid-in capital was reduced and the common stock account increased by $87 million, the par value of the additional common shares issued. All references to per share amounts have been restated for this stock distribution. 10. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," and in February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." Both statements are effective for fiscal years beginning after December 15, 1997. The Company will adopt the provisions of these standards in conjunction with the preparation of the 1998 Annual Report. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard, which establishes new accounting and reporting requirements for derivative instruments, must be adopted in the fiscal year beginning after June 15, 1999. The Company does not expect the adoption of this standard to have a material impact on its operating results or financial position. Marsh & McLennan Companies, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Second Quarter and Six Months Ended June 30, 1998 General Marsh & McLennan Companies, Inc. and Subsidiaries (the "Company") is a professional services firm providing risk and insurance services, investment management and consulting. More than 36,000 employees worldwide provide analysis, advice and transactional capabilities to clients in over 100 countries. This management's discussion and analysis of financial condition and results of operations contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" on page one of this filing. This form 10-Q should be read in conjunction with the Company's latest annual report on Form 10-K. The consolidated results of operations follow: Second Quarter Six Months (In millions of dollars) 1998 1997 1998 1997 Revenue: Risk and Insurance Services $ 784 $ 747 $1,654 $1,310 Investment Management 587 446 1,145 873 Consulting 379 347 727 652 1,750 1,540 3,526 2,835 Expense: Compensation and Benefits 866 798 1,717 1,425 Other Operating Expenses 538 480 1,059 871 1,404 1,278 2,776 2,296 Operating Income $ 346 $ 262 $ 750 $ 539 Operating Income Margin 19.8% 17.0% 21.3% 19.0% Revenue, derived mainly from commissions and fees, rose 14% from the second quarter of 1997 and grew by 24% for the six months. The second quarter increase was driven principally by increased revenue from the Investment Management segment as average assets under management were substantially higher than the comparable figures in the previous year. For the six months, the increase in the Investment Management segment was supplemented by an increase in Risk and Insurance Services as the Company's business combination with Johnson & Higgins ("J&H"), which closed on March 27, 1997, was not reflected in the consolidated results of operations for the first quarter of 1997. Excluding acquisitions and dispositions, revenue grew approximately 14% for the first six months of 1998. Operating expenses rose 10% in the second quarter of 1998 primarily due to costs associated with staff growth and higher incentive compensation levels in the Investment Management segment commensurate with strong operating performance. Service related costs in this segment also increased due to the higher level of business activity. For the six months, the increase in operating expenses of 21% is also due to the impact of the J&H transaction. Excluding acquisitions and dispositions, operating expenses rose approximately 9% for the first six months of 1998. The translated values of revenue and expense from the Company's international operations are affected by fluctuations in currency exchange rates. However, the net impact of these fluctuations on the Company's results of operations has not been material. Risk and Insurance Services Second Quarter Six Months (In millions of dollars) 1998 1997 1998 1997 Revenue $784 $747 $1,654 $1,310 Expense 639 617 1,276 1,022 Operating Income $145 $130 $ 378 $ 288 Operating Income Margin 18.5% 17.5% 22.8% 22.0% Revenue Revenue for the Risk and Insurance Services segment increased 5% from the second quarter of 1997. Insurance broking revenue, which represented 76% of Risk and Insurance Services, grew 5% in the second quarter of 1998 as net new business development was partially offset by continued premium rate declines in virtually all lines of coverage. The increased level of net new business development was primarily concentrated in the United States. Revenue for reinsurance broking grew 5% over the second quarter of 1997 and program management rose 7%. For the six months, revenue for Risk and Insurance Services increased 26% over the same period last year primarily due to the J&H transaction at the end of the first quarter of 1997. Excluding acquisitions and dispositions, Risk and Insurance Services revenue rose approximately 5% during the first half of 1998. Expense Risk and Insurance Services expense increased 3% from the second quarter of 1997 reflecting the realization of substantial integration related savings offset, in part, by higher technology and systems spending. During the quarter, the Company realized additional integration savings associated with the elimination of redundant personnel and the consolidation of offices, primarily in the United States. For the six months, expense increased 25%, largely attributable to the business combination with J&H. Investment Management Second Quarter Six Months (In millions of dollars) 1998 1997 1998 1997 Revenue $587 $446 $1,145 $873 Expense 423 334 829 657 Operating Income $164 $112 $ 316 $216 Operating Income Margin 28.0% 25.1% 27.6% 24.7% Revenue Putnam's revenue increased 32% compared with the second quarter of 1997 and 31% for the six months reflecting excellent growth in the level of assets under management on which management fees are earned. Net new sales of mutual funds and additional investments by institutional accounts contributed $34 billion of the growth in the level of assets under management since June 1997, while market performance represented the remaining $37 billion of the increase. During the second quarter of 1998, net new sales and additional investments resulted in a $9 billion increase in the level of assets under management since March 31, 1998 while market performance contributed an additional $2 billion to the increase. The $43 billion increase in assets under management during the first half of 1998 was due to net new investments of $19 billion and market performance of $24 billion. Expense Putnam's expenses rose 27% in the second quarter of 1998 and 26% for the six months reflecting the effect of staff growth to support new business and incentive compensation levels commensurate with strong operating performance along with increased service related costs resulting from the higher level of business activity. Quarter-end and average assets under management for the second quarter are presented below: (In billions of dollars) 1998 1997 Mutual Funds: Domestic Equity $143 $101 Taxable Bond 38 32 Tax-Free Income 16 16 International Equity 14 11 211 160 Institutional Accounts: Fixed Income 24 20 Domestic Equity 29 18 International Equity 14 9 67 47 Quarter-end Assets $278 $207 Average Assets $271 $193 Assets under management are affected by fluctuations in domestic and international bond and stock market prices and by the level of investments and withdrawals for current and new fund shareholders and clients. They are also affected by investment performance, service to clients, the development and marketing of new investment products, the relative attractiveness of the investment style under prevailing market conditions and changes in the investment patterns of clients. Revenue levels are sensitive to all of the factors above, but in particular, to significant changes in bond and stock market valuations. Putnam provides individual and institutional investors with a broad range of equity and fixed income investment products and services designed to meet varying investment objectives and which affords its clients the opportunity to allocate their investment resources among various alternative investment products as changing worldwide economic and market conditions warrant. At the end of the second quarter, assets held in equity securities represented 72% of assets under management, compared with 67% in 1997, while investments in fixed income products represented 28%, compared with 33% last year. Consulting Second Quarter Six Months (In millions of dollars) 1998 1997 1998 1997 Revenue $379 $347 $727 $652 Expense 326 306 641 583 Operating Income $ 53 $ 41 $ 86 $ 69 Operating Income Margin 13.9% 11.7% 11.9% 10.6% Revenue Consulting revenue increased 9% in 1998 compared with the second quarter of 1997 reflecting net new business and the impact of several small acquisitions partially offset by the transfer of certain business lines as part of a strategic alliance with Automatic Data Processing. Adjusting for the impact of acquisitions and dispositions, revenue increased approximately 10% in the second quarter of 1998. Retirement consulting revenue, which represented 41% of the Consulting segment, grew 12% in the second quarter while revenue rose 16% in the global compensation practice and 7% in general management consulting due to a higher volume of business in these practice lines during the second quarter of 1998. Economic consulting and health care consulting grew 12% and 9%, respectively. For the six months, consulting revenue increased 12% over the same period of 1997. A portion of this increase reflects business acquired as part of the J&H transaction. Excluding acquisitions and dispositions, revenue increased 10% for the six months. Expense Consulting expenses increased 6% for the second quarter of 1998 and 10% for the six months. Excluding acquisitions and dispositions, expenses increased 10% for the second quarter and six months primarily reflecting normal salary and related benefit expense increases. Interest Interest income earned on corporate funds was $7 million in the second quarter of 1998 compared with $8 million in 1997. Interest expense increased to $33 million in the second quarter of 1998 from $32 million in 1997. Interest expense increased to $61 million for the six months ended June 30, 1998 from $49 million in 1997 as a result of increased bank borrowings used to finance a portion of the acquisition of J&H as well as the assumption of J&H's long-term debt. Income Taxes The Company's consolidated tax rate was 39.5% of income before income taxes in the second quarter and first six months of 1998 compared with 39.1% and 38.25%, respectively, for the comparable periods of 1997. The increase in the 1998 tax rate is largely attributable to the nondeductibility of the goodwill amortization associated with the J&H transaction. The overall tax rates are higher than the U.S. statutory rates primarily because of state and local income taxes. Liquidity and Capital Resources The Company's cash and cash equivalents aggregated $598 million on June 30, 1998, compared with $424 million on December 31, 1997. Cash flow from operations includes the net cash requirements of Putnam's prepaid dealer commissions, which amounted to $77 million for the six months compared with $96 million during the same period of 1997. The Company's capital expenditures, which amounted to $134 million in the first six months of 1998 and $117 million in the second quarter of 1997, were primarily related to computer equipment purchases and the refurbishing and modernizing of office facilities. The Company is in the process of updating its computer systems in preparation for the year 2000. As part of this process, the Company has completed an assessment of major technical areas that could be subject to year 2000 issues on its risk and insurance services, investment management and consulting operating segments. Remediation and testing is currently underway and the Company expects that all of its critical systems will be year 2000 compliant in the first half of 1999. The ongoing costs associated with addressing this issue have not been nor are they expected to have a material adverse impact on the Company's financial position or results of operations. The Company is also in the process of inquiring as to the state of readiness of its clients and vendors. If these third parties are unable to resolve year 2000 processing issues in a timely manner, a material operating and financial risk could result. The other liabilities in the Consolidated Balance Sheets, which totaled $1.1 billion on June 30, 1998 and December 31, 1997, include the Company's long-term pension liability, reserves related to the Company's professional liability insurance program, and the postretirement liability for certain health care and life insurance benefits. Other Comprehensive income amounted to $527 million and $309 million for the six months ended June 30, 1998 and 1997. The difference between net income and comprehensive income for the six months ended June 30, 1998 was primarily due to net unrealized securities holding gains. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," and in February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." Both statements are effective for fiscal years beginning after December 15, 1997. The Company will adopt the provisions of these standards in conjunction with the preparation of the 1998 Annual Report. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard, which establishes new accounting and reporting requirements for derivative instruments, must be adopted in the fiscal year beginning after June 15, 1999. The Company does not expect the adoption of this standard to have a material impact on its operating results or financial position. PART II, OTHER INFORMATION MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT JUNE 30, 1998 Item 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Stockholders of the Registrant was held on May 20, 1998. Represented at the Meeting, at which stockholders took the following actions, were 139,696,526 shares or 82.2 percent of the Registrant's 170,004,267 shares of common stock outstanding and entitled to vote: 1. Each of the eight nominees for election as directors received at least 134,501,187 or 96.3 percent of the shares represented at the meeting. They are Norman Barham, Lewis W. Bernard, Richard H. Blum, Frank J. Borelli, Robert F. Erburu, Ray J. Groves, George Putnam and John D. Ong. The remaining directors continuing in office are: Jeffrey W. Greenberg, Lord Lang, Adele Smith Simmons, A.J.C. Smith, Peter Coster, Lawrence J. Lasser, David A. Olsen, John T. Sinnott and Frank J. Tasco. John D. Ong was elected to the board of directors of Marsh & McLennan Companies, Inc. Mr. Ong is chairman emeritus of the BFGoodrich Company. He retired as chairman of its board of directors in 1997 after more than 36 years of service to the company. Richard S. Hickok and Richard M. Morrow retired from the board of Marsh & McLennan Companies, having served as directors since 1983 and 1991, respectively. 2. Shareholders approved an amendment to the Company's Stock Investment Plan for employees providing for an increase in the Company's matching contribution to the plan for certain categories of participants, with a vote of 137,024,052 or 98.1 percent of the shares represented (2,145,166 opposing and 527,308 abstaining). 3. Deloitte & Touche LLP was ratified as the Company's independent public accountants for the year ending December 31, 1998, with a vote of 139,003,824 or 99.5 percent of the shares represented (360,657 opposing and 332,045 abstaining). Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 27. Financial Data Schedule (b) Reports on Form 8-K. None. MARSH & McLENNAN COMPANIES, INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed this 14th day of August, 1998 on its behalf by the undersigned, thereunto duly authorized and in the capacity indicated. MARSH & McLENNAN COMPANIES, INC. /s/ Frank J. Borelli Senior Vice President and Chief Financial Officer EX-27 2 ARTICLE 5
5 This schedule contains summary financial information extracted from the consolidated Marsh & McLennan Companies, Inc. and subsidiaries June 30, 1998 financial statements and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-1998 JUN-30-1998 598,000,000 0 1,747,000,000 61,000,000 0 2,863,000,000 1,711,000,000 827,000,000 8,599,000,000 2,670,000,000 1,294,000,000 0 0 261,000,000 3,259,000,000 8,599,000,000 0 3,526,000,000 0 2,776,000,000 0 10,000,000 61,000,000 701,000,000 277,000,000 424,000,000 0 0 0 424,000,000 1.65 1.59
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