-----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, H6+FRNUdawqSfupwTbkbA7uN4rKvenNx2eRK26zJZg+fPvba8yVbenR8kXRTEuuq 9Tp7FylmyteigaL2ZlyfvA== 0000912057-97-012126.txt : 19970409 0000912057-97-012126.hdr.sgml : 19970409 ACCESSION NUMBER: 0000912057-97-012126 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970327 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970407 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05998 FILM NUMBER: 97575782 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 CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MARLENNAN CORP DATE OF NAME CHANGE: 19760505 8-K 1 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 March 27, 1997 (Date of earliest event reported) Marsh & McLennan Companies, Inc. (Exact name of Registrant as specified in its charter) Delaware 1-5998 36-266-8272 (State of (Commission File No.) (IRS Employer Incorporation) Identification No.) 1166 Avenue of the Americas New York, New York (Address of principal executive offices) 10036 (zip code) (212) 345-5000 (Registrant's telephone number, including area code) Exhibit Index is located on Page 6 Item 2. Acquisition or Disposition of Assets On March 27, 1997, Marsh & McLennan Companies, Inc. (the "Registrant") consummated a strategic business combination with Johnson & Higgins ("J&H"), pursuant to a Stock Purchase Agreement, dated as of March 12, 1997 and amended as of March 27, 1997 (the "Stock Purchase Agreement"), among J&H, the stockholders of J&H, and the Registrant, whereby the Registrant purchased from the stockholders of J&H all outstanding shares of common stock of J&H (the "Transaction") and J&H became a wholly owned subsidiary of the Registrant. Pursuant to the terms of the Stock Purchase Agreement, the total Transaction payments to be made by the Registrant are approximately $1.8 billion, one-third payable in cash and two-thirds payable in the Registrant's common stock, par value $1.00 per share. The terms of the Transaction were determined as a result of arms' length negotiations. The Registrant obtained the funds necessary to finance the cash portion of the Transaction paid at the closing through a commercial paper facility and expects to refinance such borrowings with bank financings in the near future. The Registrant expects to finance any additional payments to be made in connection with the Transaction with commercial paper or bank financings. Established in New York in 1845, J&H is the leading privately held insurance services and employee benefit consulting firm in the world. In addition to brokerage services, the firm provides risk management and benefit consulting services to clients worldwide. The firm's global network of almost 9,000 employees includes 145 offices in major business centers around the world. The foregoing description is qualified in its entirety by reference to the Stock Purchase Agreement a copy of which is an exhibit hereto and is incorporated by reference herein in its entirety. Cautionary Statement Regarding Forward-Looking Information All statements contained in the pro forma financial information filed as an exhibit to this report, other than statements of historical facts, which address activities, events or developments that the Registrant expects or anticipates will or may occur in the future, including statements related to anticipated future savings, are forward-looking statements. For a description of certain important factors that could cause actual results to differ materially from those expressed in any forward-looking statements contained herein, reference is made to Item 5 of the Company's Current Report on Form 8-K, dated March 14, 1997, which has been filed with the Securities and Exchange Commission. 2 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of Businesses Acquired. The audited consolidated financial statements of J&H for the year ended December 31, 1996 is filed as an exhibit hereto. A copy of the manually signed accountant's report required to be filed herewith is filed as an exhibit hereto. (b) Pro Forma Financial Information. The pro forma financial data required to be filed herewith is filed as an exhibit hereto. (c) Exhibits 2(a) Stock Purchase Agreement, dated as of March 12, 1997, by and among the Registrant, J&H and the stockholders of J&H.(1) 2(b) First Amendment to the Stock Purchase Agreement, dated as of March 27, 1997, by and among the Registrant, J&H and the stockholders of J&H. 4(a) Registration Rights Agreement, dated as of March 12, 1997, by and among the Registrant and the stockholders of J&H.(2) 4(b) First Amendment to the Registration Rights Agreement, dated as of March 27, 1997, by and among the Registrant and the stockholders of J&H. 23(a) Consent of Arthur Andersen LLP. - -------- (1) Incorporated by reference to Exhibit 2(a) of the Registrant's Form 8-K, dated March 14, 1997 (File # 1-5998). (2) Incorporated by reference to Exhibit 4(a) of the Registrant's Form 8-K, dated March 14, 1997 (File # 1-5998). 3 99(a) Consolidated Financial Statements of J&H. -Report of Independent Public Accountants -Consolidated Balance Sheet as of December 31, 1996 -Consolidated Statements of Income, Changes in Stockholders' Equity and Cash Flows for the year ended December 31, 1996 -Notes to Consolidated Financial Statements 99(b) Unaudited Pro Forma Condensed Combined Financial Statements. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MARSH & McLENNAN COMPANIES, INC. By: /s/ Gregory Van Gundy --------------------- Name: Gregory Van Gundy Title: Secretary Date: April 7, 1997 5 EXHIBIT INDEX Exhibit No. - ----------- 2(a) Stock Purchase Agreement, dated as of March 12, 1997, by and among the Registrant, J&H and the stockholders of J&H.(1) 2(b) First Amendment to the Stock Purchase Agreement, dated as of March 27, 1997, by and among the Registrant, J&H and the stockholders of J&H. 4(a) Registration Rights Agreement, dated March 12, 1997, by and among the Registrant and the stockholders of J&H.(2) 4(b) First Amendment to the Registration Rights Agreement, dated as of March 27, 1997, by and among the Registrant and the stockholders of J&H. 23(a) Consent of Arthur Andersen LLP. 99(a) Consolidated Financial Statements of J&H. -Report of Independent Public Accountants -Consolidated Balance Sheet as of December 31, 1996 -Consolidated Statements of Income, Changes in Stockholders' Equity and Cash Flows for the year ended December 31, 1996 -Notes to Consolidated Financial Statements 99(b) Unaudited Pro Forma Condensed Combined Financial Statements. - -------- (1) Incorporated by reference to Exhibit 2(a) of the Registrant's Form 8-K, dated March 14, 1997 (File # 1-5998). (2) Incorporated by reference to Exhibit 4(a) of the Registrant's Form 8-K, dated March 14, 1997 (File # 1-5998). 6 EX-2.(B) 2 FIRST AMENDMENT TO THE STOCK PURCHASE AGREEMENT Exhibit 2(b) FIRST AMENDMENT TO THE STOCK PURCHASE AGREEMENT First Amendment, dated as of March 27, 1997 (the "First Amendment"), to the Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of March 12, 1997, between Johnson & Higgins, a New Jersey corporation (the "Company"), the stockholders of the Company listed on Annex A to the Stock Purchase Agreement (each such stockholder, a "Seller") and Marsh & McLennan Companies, Inc., a Delaware corporation ("Buyer," and together with the Company and Sellers, the "Parties"). WHEREAS, the Parties entered into the Stock Purchase Agreement, providing for the terms of the business combination of the Company and Buyer; and WHEREAS, the Parties, in accordance with Section 10.1 to the Stock Purchase Agreement, desire to amend the terms of such agreement; NOW, THEREFORE, in consideration of the premises and mutual representations, warranties and covenants contained in the Stock Purchase Agreement, and subject to and on the terms and conditions set forth therein, the Parties agree as follows: Section 1. Amendment of Delivery of Stock Consideration Requirement. The final sentence of Section 1.2(b) is amended to read as follows: "Notwithstanding the foregoing requirement of delivery of the Stock Consideration at the Closing, if Buyer is unable to deliver certificates representing the Stock Consideration at Closing, the Closing shall occur in any event, and Buyer shall deliver such certificates in accordance with the foregoing as soon as practicable thereafter, but not later than April 9, 1997 and no Seller shall have any right of action against Buyer with respect to such delivery occurring after the Closing if made as provided herein." The following sentence is added at the end of Section 1.2(b): "Notwithstanding anything in this Section 1.2(b) and the Retiree Agreements, Buyer shall wire transfer the Cash Consideration payable to the Sellers and Retirees, respectively, at the Closing, net of any amounts payable by the Company with respect to Taxes (including withholding, unemployment, social security, and other Taxes) in amounts agreed upon by the Company and Buyer before the Closing (which amounts Buyer would be responsible for paying to the relevant authorities), to an account designated by the Sellers' Committee, and the Sellers' Committee shall be responsible for paying to each such Seller or Retiree, the amount due to such Seller or Retiree. Section 2. Amendment of Appointment of Directors and Officers of Insurance Brokerage Holding Company. The second, third and fourth sentences of Section 6.5(b)(iii) are amended to read as follows: "Buyer shall cause the board of directors and executive officers of the Insurance Brokerage Holding Company to consist of Persons whose identity and positions shall be determined, in accordance with this Section 6.5(b)(iii), by Buyer and the Sellers' Committee in consultation and cooperation with one another. Such directors and executive officers shall be employees of the Company or Buyer at the Closing Time. Such directors and executive officers and their positions shall be set forth on Annex B hereto, which Annex shall be prepared before April 30, 1997 and be subject to the approval of the Executive Committee of the Board of Directors of Buyer (which Buyer shall seek to obtain promptly following the preparation of such schedules) and such Annex will be initialled by Buyer, the Company and the Sellers' Committee." Section 3. Amendment of Employee Award Agreements. The fourth, fifth, sixth and seventh sentences of Section 6.5(c)(ii) are amended to read as follows: 2 "The Company and Buyer will use their respective best efforts to reach a good faith agreement as to the names and other items to be specified in Annex C as soon as practicable after the Closing but not later than May 31, 1997. A completed version of Annex C setting forth all such agreed upon items shall be added to and made a part of this Agreement not later than such specified date. Any Buyer Common Stock to be specified for an employee in such version of Annex C shall be expressed as a dollar amount, and the number of shares issuable under such employee's Employee Award Agreement shall be determined prior to such specified date by dividing such specified dollar amount by the Closing Stock Price, with any resulting fractional share being Rounded. The number of shares of Buyer Common Stock issuable under each Employee Award Agreement shall be set forth in the amended version of Annex C, which shall be added to and made a part of this Agreement prior to such specified date." The following Section 6.5(c)(v) is added to the Stock Purchase Agreement: "(v) All actions to be taken by the Company with respect to Section 6.5(c) shall be taken by the Sellers' Committee." Section 4. Amendment to Escrow Agreements. Section 6.14(a) is amended to read as follows: "(a) At the Closing, Buyer, Sellers, the Escrow Agent and each Retiree with an effective Retiree Agreement at the Closing shall enter into an escrow agreement substantially in the form of Exhibit D hereto (the "Indemnity Escrow Agreement"). Buyer shall designate the Escrow Agent subject to the Company's approval which shall not be unreasonably withheld. On April 9, 1997, Buyer will deliver an amount equal to ten percent of the Total Purchase Price, consisting of shares of Buyer Common Stock to be funded by Sellers and Retirees with effective Retiree Agreements as of April 2, 1997 or such other date not later than April 8, 1997 as the Sellers' Committee may request (the "Effective Date") as provided below 3 (the "Escrow Fund"), to the Escrow Agent in accordance with the terms of the Indemnity Escrow Agreement to secure certain obligations of the Sellers pursuant to this Agreement. Pursuant to the Indemnity Escrow Agreement, the Escrow Agent shall hold the Escrow Fund for a period of two years following the Closing subject to asserted claims for indemnification. Each Retiree executing a Retiree Agreement shall have appointed the Seller's Committee to act as his or her attorney-in-fact with respect to the matters set forth in the Indemnity Escrow Agreement. Notwithstanding the foregoing, on the first anniversary of the Closing Date, the Escrow Agent shall release to the Sellers' Committee an amount equal to one-half of the Escrow Fund, reduced by any amounts paid to Buyer prior to such anniversary date and any amounts then reserved with respect to any unresolved asserted claims for Damages made by the Buyer Group all as is provided in the Indemnity Escrow Agreement. The Escrow Fund initially will consist of a number of shares of Buyer Common Stock to be contributed ratably by each Seller and each Retiree with an effective Retiree Agreement as of the Effective Date in an amount equal to such Person's proportionate interest (based on the amount to be received by such Person for their Shares or under their Retiree Agreements, as the case may be) in the amount equal to the sum of (x) the Total Purchase Price and (y) the aggregate payments to be received by the Retirees with effective Retiree Agreements as of the Effective Date under such Retiree Agreements. The Sellers' Committee and Buyer will discuss in good faith the appropriateness of including as part of the Escrow Fund a portion of the shares of Buyer Common Stock to be issued to Retirees executing Retiree Agreements after the Effective Date. In respect of the shares placed in the Escrow Fund, the number of shares of Buyer Common Stock deliverable hereunder to each such Seller and Retiree will be reduced by the amount to be delivered to the Escrow Agent as part of the Escrow Fund; provided, that the shares to be delivered into the Escrow Fund on behalf of each such Seller and Retiree shall be drawn first from the shares of such Person that are subject to transfer restrictions under Section 7(a) of the 4 Registration Rights Agreement until the second anniversary of the Closing Date and thereafter, as necessary from the shares of such Person that are subject to such resale restrictions until the first anniversary of the Closing Date (with any resulting fractional share being Rounded)." Section 5. Amendment to Closing Company Financial Information. The following Section 6.16(d) is added to the Stock Purchase Agreement: "(d) For purposes of this Section 6.16, the 'Closing Date' shall be deemed to mean March 31, 1997. For the purposes of this Section 6.16 and Section 6.17, the 'Pre-Closing Period' shall be deemed to mean the period commencing on January 1, 1997 and ending on March 31, 1997." Section 6. Amendment to Definition of "Closing Stock Price." The definition of "Closing Stock Price" in Section 11.1 is amended to read as follows: "'Closing Stock Price' shall mean the average of the per share closing prices of Buyer Common Stock as reported on the NYSE composite transactions reporting system (as reported in the New York City edition of The Wall Street Journal or, if not reported thereby, another authoritative source) for the five consecutive trading days in such market ending on the first trading day immediately preceding the Closing Date, provided that (i) if such average price shall be more than $129, the Closing Stock Price shall be deemed to be $129, and (ii) if such average price shall be less than $111, the Closing Stock Price shall be deemed to be $111." Section 7. Amendment of Share Numbers. Annex A to the Stock Purchase Agreement is amended to read as set forth in Annex A to this Amendment. Section 6.1(b)(v)(A) is amended to read as follows: "(A) in the case of the Company, repurchases of up to 33,000 shares of Company Common Stock for cash in an amount not in excess of $10 per share (it being understood that the Company will repur- 5 chase, to the extent available in the case of each Seller from whom the Company elects to repurchase shares, shares which are presently non-dividend bearing, prior to repurchasing shares which are presently dividend bearing) and". The second and third sentences of Section 2.4(a) are amended as follows: "Immediately prior to the Closing, 22,335 shares of Company Common Stock will be issued and outstanding and all such outstanding shares have been duly authorized and are validly issued, fully paid and nonassessable. At the Closing, the Sellers' Shares, in the aggregate, will constitute all the issued and outstanding shares of capital stock of the Company." The first parenthetical clause in Section 2.6 is amended to read as follows: "(including the payment of any dividend, distribution or other amount contemplated by Section 6.17 and any repurchase of shares contemplated by Section 6.1(b)(v)(A))". Section 8. Stock Purchase Agreement as Amended. The term "Agreement" as used in the Stock Purchase Agreement shall be deemed to refer to the Stock Purchase Agreement as amended hereby. The foregoing amendments shall be effective as of the date hereof and, except as set forth herein, the Stock Purchase Agreement shall remain in full force and effect and shall be otherwise unaffected hereby. Section 9. Execution in Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 10. GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. 6 IN WITNESS WHEREOF, this Amendment has been signed on behalf of each of the parties hereto as of the date first written above. JOHNSON & HIGGINS By:/s/ Gardner M. Mundy ---------------------------------- Name: Gardner M. Mundy Title: General Counsel SELLERS' DESIGNEE By:/s/ Gardner M. Mundy ---------------------------------- Name: Gardner M. Mundy MARSH & MCLENNAN COMPANIES, INC. By:/s/ Barry W. Furst ---------------------------------- Name: Barry W. Furst Title: Vice President 7 EX-4.(B) 3 FIRST AMENDEMNT TO THE REGISTRATION RIGHTS AGRMNT Exhibit 4(b) FIRST AMENDMENT TO THE REGISTRATION RIGHTS AGREEMENT First Amendment, dated as of March 27, 1997 (the "First Amendment"), to the Registration Rights Agreement (the "Registration Rights Agreement"), dated as of March 12, 1997, between Marsh & McLennan Companies, Inc., a Delaware corporation (the "Company"), and the other persons signatories thereto (each such person, a "Stockholders"). WHEREAS, the Company and Stockholders have entered into the Registration Rights Agreement pursuant to the terms of the Stock Purchase Agreement, dated as of March 12, 1997, between Johnson & Higgins, a New Jersey corporation ("Johnson & Higgins"), the Sellers (as defined in the Registration Rights Agreement) and the Company; and WHEREAS, the Company and Sellers' Designee, in accordance with Section 8(b) of the Registration Rights Agreement, desire to amend the terms of such agreement; NOW, THEREFORE, for their own benefit and the benefit of holders (as defined in the Registration Rights Agreement) from time to time of the Registrable Securities (as defined in the Registration Rights Agreement), the Company and Sellers' Designee agree as follows: Section 1. Amendment of Shelf Registration. The first sentence of Section 2(a)(1) is amended to read as follows: "The Company shall, as soon as practicable after the date hereof and in any case within 21 calendar days following the Closing Date (as defined in the Stock Purchase Agreement), subject to extension if the Sellers' Designee or Sellers' Committee so requests, file with the Commission a Shelf Registration Statement relating to the offer and sale of the Registrable Securities." Section 2. Registration Rights Agreement as Amended. The term "Agreement" as used in the Registration Rights Agreement shall be deemed to refer to the Registration Rights Agreement as amended hereby. The foregoing amendments shall be effective as of the date hereof and, except as set forth herein, the Registration Rights Agreement shall remain in full force and effect and shall be otherwise unaffected hereby. Section 3. Execution in Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 2 IN WITNESS WHEREOF, this Amendment has been signed on behalf of each of the parties hereto as of the date first written above. MARSH & McLENNAN COMPANIES, INC. By: /s/ Gregory Van Gundy ------------------------- Name: Gregory Van Gundy Title: Secretary SELLERS' DESIGNEE By: /s/ Gardner M. Mundy ------------------------- Name: Gardner M. Mundy 3 EX-23.(A) 4 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23(a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Form 8-K of our report to the Board of Directors of Johnson & Higgins dated March 11, 1997. It should be noted that we have not audited any financial statements of Johnson & Higgins subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP ------------------------ ARTHUR ANDERSEN LLP April 4, 1997 New York, New York EX-99.(A) 5 JOHNSON & HIGGINS AND SUBSIDIARIES Exhibit 99(a) JOHNSON & HIGGINS AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 TOGETHER WITH AUDITORS' REPORT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Johnson & Higgins: We have audited the accompanying consolidated balance sheet of Johnson & Higgins (a New Jersey corporation) and subsidiaries as of December 31, 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Johnson & Higgins and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP New York, New York March 11, 1997 JOHNSON & HIGGINS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 (In thousands) ASSETS 1996 - ------ ------ CURRENT ASSETS: Cash and cash equivalents Operating funds $250,288 Premium funds 462,112 Trustee accounts 5,911 ---------- 718,311 Marketable securities Operating funds 8,000 Premium funds 50,063 ---------- 58,063 Commissions, insurance premiums, reinsurance balances and consulting fees receivable 966,119 Other current assets 68,869 ---------- Total Current Assets 1,811,362 Investments segregated to fund non-qualified retirement plans 76,914 Investments in affiliates 38,280 Loan receivable 13,020 Deferred Income Tax asset 54,902 Fixed Assets, net 168,430 Intangible Assets, net 246,768 ---------- Total Assets $2,409,676 ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Insurance premiums and reinsurance balances payable $1,301,063 Funds held for insureds 5,911 Accrued expenses 132,687 Income and other taxes payable 28,204 Notes payable 3,926 Other current liabilities 91,508 ---------- Total Current Liabilities 1,563,299 Long-term debt 130,813 Accrued Retirement Benefits 141,474 Postretirement Benefits Other than Pensions 44,383 Other Long-term Liabilities 40,473 Minority Interests 27,048 Total Stockholders' Equity 462,186 ---------- Total Liabilities & Stockholders' Equity $2,409,676 ========== The accompanying notes are an integral part of these consolidated financial statements. JOHNSON & HIGGINS AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (In thousands) 1996 ------ REVENUES: Commissions and fees $1,106,535 Investment Income Operating Funds 18,258 Premium Funds 28,603 Other 9,381 ---------- 1,162,777 ---------- EXPENSES: Compensation and Benefits 685,730 Selling, General and Administrative 341,133 Interest Expense 12,370 ---------- 1,039,233 ---------- Income Before Taxes 123,544 PROVISION FOR INCOME TAXES (46,728) MINORITY INTEREST IN INCOME OF SUBSIDIARIES (5,811) EQUITY IN INCOME OF AFFILIATES 3,190 ---------- NET INCOME $74,195 ========== The accompanying notes are an integral part of these consolidated financial statements. JOHNSON & HIGGINS AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996 (In thousands, except share information) 1996 ------ CAPITAL STOCK/ADDITIONAL PAID-IN CAPITAL ($1 par value, 100,000 shares authorized, 83,240 shares issued, including 28,275 shares in treasury) Balance, beginning of year $31,965 Issuance of Capital Stock, net of repurchases 11 Tax Effect of Distributions 5,884 -------- Balance, end of year $37,860 ======== RETAINED EARNINGS Balance, beginning of year $378,714 Net Income 74,195 Cash Distributions (16,939) -------- Balance, end of year $435,970 ======== CUMULATIVE TRANSLATION ADJUSTMENTS Balance, beginning of year $(14,852) Translation Adjustments (5,693) -------- Balance, end of year $(20,545) ======== NET UNREALIZED INVESTMENT GAIN Balance, beginning of year $14,500 Realized Gain (5,352) Net Unrealized Loss (247) -------- Balance, end of year $8,901 ======== TOTAL STOCKHOLDERS' EQUITY $462,186 ======== The accompanying notes are an integral part of these consolidated financial statements. JOHNSON & HIGGINS AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (In thousands) 1996 ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $74,195 Adjustments to reconcile net income to net cash provided from operating activities - Depreciation and amortization 40,697 Minority interest in income of subsidiaries 5,811 Equity in income of affiliates (3,190) Deferred income taxes (4,579) Gain on sales of fixed assets (135) Gain on sale of investment in affiliates (7,064) -------- 105,735 Changes in Assets and Liabilities (see Note 14) 47,339 -------- Net cash provided from operating activities 153,074 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of investments 17,291 Purchase of investments in affiliates (19,900) Investments segregated to fund certain retirement benefits (5,387) Purchases of fixed assets (43,741) Proceeds from sales of fixed assets 2,212 Purchases of marketable securities (12,735) Sales of marketable securities 10,798 Other, net (6,442) -------- Net cash used in investing activities (57,904) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends (16,939) Repayments of debt (3,587) Payments received on Note Receivable 784 Issuance of stock, net of repurchases 11 -------- Net cash used in financing activities (19,731) Net increase in cash and cash equivalents 75,439 OPERATING CASH, beginning of year 174,849 -------- OPERATING CASH, end of year $250,288 ======== The accompanying notes are an integral part of these consolidated financial statements. JOHNSON & HIGGINS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. NATURE OF OPERATIONS Johnson & Higgins (the "Company") is a global leader in insurance brokerage and risk management services. The Company operates in over 70 countries, predominantly in the U.S., working with leading insurers to provide all lines of commercial property and casualty insurance coverage. The Company derives most of its revenues from insurance brokerage but services also include reinsurance brokerage, risk and loss control, claims management, actuarial and employee benefit services, strategic risk analysis, and captive management. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and majority-owned subsidiaries. Investments in affiliated companies, in which the Company has significant influence or ownership of 20% to 50%, are accounted for under the equity method. Investments with ownership of less than 20% are accounted for under the cost method. Various subsidiaries and affiliates have transactions with each other in the ordinary course of business. All significant intercompany accounts and transactions have been eliminated. Use of 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 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. Revenue Recognition Commissions, together with the related insurance premiums receivable from clients and premiums payable to underwriters, are recognized on the later of the effective or billing date of the related insurance policies. Commissions billed prior to the effective date of the related insurance policies are deferred and are included in "Other current liabilities" in the accompanying consolidated balance sheet. Commissions on insurance policies billed and collected directly by insurance companies are recognized upon notification by the insurance companies. Contingent commissions are recognized when received. Premium adjustments, including policy cancellations, are recognized as they occur. Reinsurance commissions and fees, and the related receivable and payable balances, are generally recognized when billed. Losses receivable and payable, included in the respective reinsurance balances, are recorded upon notification of loss by insureds. -2- Fees for employee benefit plan, actuarial and other consulting services rendered are recognized when billed, which generally coincides with the performance of such services. Cash and Cash Equivalents The Company considers as cash equivalents all short-term, highly liquid investments with original maturities of less than 90 days made as part of its cash management activities. Operating funds' cash equivalents consist of money market mutual funds and money market instruments, U.S. Treasury, U.S. Government Agencies and foreign government notes, variable rate demand notes, banker's acceptances and commercial paper. Premium funds' cash equivalents consist primarily of certificates of deposit, U.S. Treasury bills and notes, Securities of U.S. Government Agencies, Foreign Certificates of Deposit, Foreign Time Deposits, and repurchase agreements, which are fully collateralized by U.S. government securities held by the Company's custodian bank. Marketable Securities At December 31, 1996, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, marketable securities classified as held-to-maturity were carried at amortized cost with no effect on income or stockholders' equity. Available-for-sale securities were carried at fair market value with unrealized gains and losses excluded from income and recorded, net of income tax, as a separate component of stockholders' equity. The Company had no securities classified as trading. Fixed Assets Fixed assets are recorded at cost less accumulated depreciation and amortization. Major improvements are capitalized while maintenance and repairs are expensed currently. Software costs are expensed as incurred. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in income. Depreciation expense is computed using the double declining balance method for furniture, fixtures and equipment and the straight-line method for buildings based upon the estimated useful lives of the related assets, as follows: Furniture, fixtures and equipment 5 to 8 years Buildings 25 to 50 years Leasehold improvements are depreciated using the straight-line method over the shorter of their estimated useful lives or the terms of the related leases. Depreciation expense for 1996 totaled $32.9 million. Intangible Assets, Net Intangible assets, net includes the excess of cost over the fair value of tangible net assets of purchased businesses, less accumulated amortization provided by using the straight-line method over periods not exceeding 40 years. As of December 31, 1996, accumulated amortization was $38.6 million. -3- Intangible assets, net also includes a prepaid lease obligation, which is being amortized over the useful life of the related building, recorded in conjunction with the purchase of a condominium interest in 1995. See Note 8 for further discussion. Income Taxes Income taxes are provided in the year transactions affect financial income, regardless of when those transactions are reported for tax purposes. The Company and its subsidiaries file separate foreign, state and local income tax returns and, accordingly, provide for such income taxes on a separate company basis. The Company does not provide income taxes on undistributed earnings of equity subsidiaries. Translation of Foreign Currencies Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect at the end of the year. Results of operations are translated using a weighted average exchange rate for the year. Translation adjustments that arise from translating the net assets of these subsidiaries from local currency to U.S. dollars are accumulated in the Cumulative Translation Adjustments account in Stockholders' Equity. Other foreign currency transaction gains and losses are included in determining net income. For foreign subsidiaries operating in highly inflationary economies, net non-monetary assets are translated using historical rates, while net monetary assets are translated at current rates, with the U.S. dollar effects of rate changes included in net income. At December 31, 1996, none of the Company's subsidiaries were determined to be operating in highly inflationary economies. Fair Values of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the fair values of most on and off balance sheet financial instruments for which it is practicable to estimate that value. The estimated fair value of the Company's cash and cash equivalents, marketable securities, receivables and payables approximates their carrying value. Refer to Notes 7 and 8 for fair values of other financial instruments. Recently Issued Accounting Standards Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement establishes financial accounting and reporting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The Company analyzes its long-lived assets, including goodwill, for potential impairment losses. In determining the need for recognition of impairment, the Company analyzes future cash flows, on an undiscounted basis, and compares such total to the carrying value. The adoption of SFAS No. 121 had an immaterial effect on the Company's financial position or results of operations. -4- 3. INVESTMENTS The following is a summary of investments included in the Consolidated Balance Sheet: (In thousands) Dec. 31, 1996 ------------- Available-for-sale $97,038 Held-to-maturity $58,063 Available-for-sale securities include the Company's investment in GCR (see Note 7) and Investments Segregated to Fund Certain Retirement Benefits which consist primarily of money market instruments, corporate convertible and equity securities, tax-exempt debt securities, and corporate bonds. Held-to-maturity securities are operating and premium funds' marketable securities. Operating funds marketable securities consist primarily of certificates of deposit and municipal bonds. Premium funds marketable securities consist primarily of certificates of deposit, U.S. Treasury bills and notes, variable rate notes, foreign certificates of deposit and commercial paper. 4. LOAN RECEIVABLE During 1995, the Company loaned $15 million to KVI, a third-party who is part owner in the J&H/KVI joint venture, in which the Company has a 51% interest. The loan bears interest at a rate of Prime + 1% and matures on March 31, 1998. In conjunction with the foregoing note receivable, the Company entered into an agreement with KVI whereby the Company can exercise options to purchase the remaining 49% of J&H/KVI at any time up until March 31, 1999. 5. FIXED ASSETS The components of Fixed Assets, net are as follows: (In thousands) Dec. 31, 1996 ------------- Furniture, fixtures and equipment $242,242 Leasehold Improvements 44,269 Buildings 77,152 -------- 363,663 Less: accumulated depreciation and amortization (195,233) -------- $168,430 ======== 6. INCOME TAXES Consolidated income before taxes consists of the following: (In thousands) 1996 ------ U.S. $ 66,829 Foreign 56,715 -------- $123,544 ======== -5- The provision for income taxes consists of the following: (In thousands) 1996 ------ Current: Federal $27,451 State and Local 9,500 Foreign 14,356 ------- 51,307 Deferred: Federal (2,823) State and Local (2,000) Foreign 244 ------- (4,579) ------- Total provision for income taxes $46,728 ======= The deferred income tax benefit relates primarily to the excess of book over tax expense for pension and other postretirement benefit plans. The components of deferred tax assets and liabilities resulting from temporary differences in the timing of deductions or income for book and tax purposes at December 31, 1996 are as follows: (In thousands) Deferred Tax Assets 1996 - ------------------- ------ Pensions & Other Postretirement Benefits $ 74,045 Accrued Liabilities 9,197 State & Local Taxes 2,673 Amortization of Leasehold Improvements 3,391 Other Deferred Tax Assets 8,351 --------- 97,657 --------- Deferred Tax Liabilities - ------------------------ Unremitted Earnings of Foreign Subsidiaries ( 15,972) Investment Losses ( 2,553) Depreciation & Amortization ( 4,070) Unrealized Gain on Investments ( 4,793) Other Deferred Tax Liabilities ( 6,812) --------- ( 34,200) --------- Deferred Tax Assets, net $ 63,457 ======== -6- Through 1990, the Company provided income taxes on the unremitted earnings of certain foreign subsidiaries. However, since that period, the Company has not provided for federal income taxes on the unremitted earnings of its international operations that have been, or are intended to be, reinvested indefinitely. At December 31, 1996, the unrecognized deferred tax liability on unremitted foreign earnings is $26.0 million. Net long-term deferred tax assets at December 31, 1996 totaled $54.9 million. The current portion of net deferred tax assets is included in "Other current assets" in the accompanying consolidated balance sheet. The Company's effective income tax rate was 37.8% in 1996. A reconciliation of this rate to the U.S. Federal statutory income tax rate is as follows: 1996 ------ U.S. Federal statutory rate 35.0% U.S. state and local income taxes, net of U.S. Federal income tax benefit 3.0 Amortization of goodwill 1.4 Non-deductible portion of meals and entertainment 2.1 Tax-exempt interest income (0.8) Losses on non-U.S. operations with no related tax benefit 0.2 Non-U.S. operations taxed at rates lower than U.S. Federal statutory rate (3.6) Other, net 0.5 ---- Effective tax rate 37.8% ==== The Company's consolidated Federal income tax returns for the years ended December 31, 1992 through 1994 are presently under examination by the Internal Revenue Service. Based on the results of the examinations completed for prior years, it is the opinion of management that any assessment which may result will not have a material effect on the financial position of the Company. 7. ACQUISITIONS AND DIVESTITURES During 1996, the Company acquired several brokers located in the U.K., the Netherlands, and the U.S. for a total cost of $27 million. The cost of these acquisitions exceeded the fair value of net assets acquired by $25 million. The effect of these acquisitions was not material to the Company's results of operations. During 1993, the Company and Goldman, Sachs & Co. promoted and co-sponsored the offering of equity interests in Global Capital Reinsurance, Ltd. ("GCR"). GCR was capitalized through a private placement in October 1993, and specializes in worldwide property catastrophe reinsurance written on an excess of loss basis. The Company purchased 4.4% of the shares offered. -7- During 1995, the Company exercised its option to buy additional shares which brought its ownership up to 7.5%. Subsequently, GCR completed an initial public offering (IPO) whereby it sold 26% of its shares to the public. As part of the IPO, the Company sold some of its shares, reducing its ownership to 6.4%. During 1996, GCR completed a secondary public offering whereby the Company sold more of its shares, reducing its ownership to 3.7%. Gains related to the partial disposition of GCR shares of $7.1 million in 1996 are included in Revenues (primarily "Commissions and fees") in the accompanying consolidated income statement. The Company's investment in GCR is carried at fair value based on a quoted market price of $20 million at December 31, 1996, and is included in "Investments in affiliates" in the accompanying consolidated balance sheet. 8. LONG-TERM DEBT Long-term debt consists of: (In thousands) Dec. 31, 1996 ------------- Notes Payable $134,739 Less: Current Portion 3,926 -------- $130,813 ======== In 1995, the Company entered into two long-term debt transactions. The Company borrowed $21.3 million and issued a mortgage obligation, with an expiration date of January 5, 2012, to purchase a condominium interest in its headquarters located at 125 Broad Street, New York, New York. The rate on this debt is determined periodically at a margin of 1/2 of 1% above the LIBOR rate (5.99% at December 31, 1996). The Company issued a note for $120 million to enter into an arrangement whereby a third party will pay the rent under a noncancellable long-term lease obligation. This note has an original term of 17 years (the remaining term of the lease). Interest on $95 million of this debt is fixed at 8.62%. The rate on the remaining portion is determined periodically at a margin of 1/2 of 1% above the LIBOR rate (5.99% at December 31, 1996). In 1996, the Company entered into an amortizing interest swap with an initial notional amount of $44 million to effectively fix the floating rate on these obligations at a rate of 6.30%. At December 31, 1996, the interest rate swap had a fair value of $1.7 million. The cost of the condominium interest is reflected in buildings with the cost of the lease arrangement included in Intangible assets, net. The Company's debt of $135 million at December 31, 1996 has a fair value of approximately $142 million, based on discounted future cash flows using interest rates available for debt with similar terms and remaining maturities. Scheduled maturities of long-term debt are as follows: 1997 - $3.9 million; 1998 - $4.2 million; 1999 - $4.6 million; 2000 - $4.9 million, 2001 - $5.3 million. -8- In 1995, the Company entered into a $60 million Revolving Credit Agreement with several banks. The facility, which expires in 1998, provides that the Company may borrow up to $60 million at a variable interest rate per annum equal to the greater of the (a) Prime Rate or (b) Federal Funds Effective Rate plus 1/2 of 1%. The Company pays a facility fee of 1/8 of 1% per annum on the total (used or unused) commitment. The Company has not utilized the facility in 1996. In conjunction with the debt and credit agreements, the Company is required to maintain certain ratios and to comply with other financial covenants. As of December 31, 1996, the Company is in compliance with all such ratios and covenants. 9. BENEFIT PLANS Pension Plans Domestic The Company has a qualified defined benefit retirement income plan covering substantially all domestic employees. The plan provides pension benefits that are based on the employee's years of service and compensation prior to retirement. Pension costs are calculated using an accepted actuarial cost method. The Company presently plans to make the maximum contribution allowed under income tax regulations. The Company also has non-qualified retirement plans covering certain key executives. The Company has segregated funds to cover these benefits which are included in "Investments segregated to fund non-qualified retirement plans" in the accompanying consolidated balance sheet. Foreign The Company also has various defined benefit plans in foreign subsidiaries, largely in the United Kingdom, Canada and Netherlands. Pension expense for 1996 included the following components: (In thousands) 1996 ---------------------------------------------- Domestic Foreign ---------------------------------- ------- Qualified Non-qualified Total --------- ------------- ----- Service cost $ 12,974 $ 6,134 $ 19,108 $ 7,485 Interest cost 20,890 9,158 30,048 8,282 Actual return on plan assets (57,752) -- (57,752) (8,926) Net amortization and deferral 25,648 2,363 28,011 324 -------- ------- -------- ------- $ 1,760 $17,655 $ 19,415 $ 7,165 ======== ======= ======== ======= -9- The following table presents a reconciliation of the status of the plans at December 31, 1996:
(In thousands) December 31, 1996 ---------------------------------------------- Domestic Foreign ---------------------------------- ------- Qualified Non-qualified Total --------- ------------- ----- Actuarial present value of benefit obligations: Vested $ 243,022 $ 115,394 $ 358,416 $ 106,913 Nonvested 8,174 444 8,618 7,029 --------- --------- --------- --------- Accumulated benefit obligation 251,196 115,838 367,034 113,942 Effects of salary progression 48,983 16,515 65,498 27,275 --------- --------- --------- --------- Projected benefit obligation 300,179 132,353 432,532 141,217 Plan assets at fair value 396,347 -- 396,347 125,056 --------- --------- --------- --------- Plan assets over (under) projected benefit obligation 96,168 (132,353) (36,185) (16,161) Unrecognized net (gain) loss (129,990) (2,416) (132,406) 4,829 Unrecognized net (asset) liability (6,115) 13,543 7,428 1,576 Unrecognized prior service cost 11,756 15,368 27,124 2,321 --------- --------- --------- --------- Accrued pension cost $ (28,181) $(105,858) $(134,039) $ (7,435) ========= ========= ========= =========
The assumptions used in determining the funded status at December 31, 1996 and the following year's pension expense were as follows: 1996 ------------------------------------ Domestic Foreign ------------------------- ------- Qualified Non-qualified --------- ------------- Weighted average discount rate 7.75% 7.75% 5-12% Rate of salary progression 5.0% 5.0% 2-10% Expected long-term rate of 9.0% - 5-13% return on assets At December 31, 1996, approximately 60% of domestic qualified plan assets were invested in equity securities and 40% in cash equivalents, debt securities and annuity contracts. Cash Accumulation Plan The Company's qualified defined contribution plan covers substantially all of its domestic employees. Company contributions to the plan are made at the discretion of the Company's Board of Directors. In addition, employees may contribute to the plan with such contributions matched by the Company up to a maximum of 6% of the employee's salary. Company contributions, including the matching amount, for 1996 were $16.9 million. -10- Other Postretirement Benefits Substantially all of the Company's U.S. employees may become eligible for certain postretirement health care and life insurance benefits if they reach normal retirement age while working for the Company. The cost of postretirement benefits are accrued during the service lives of employees. The Company funds medical and life insurance benefit costs principally on a pay-as-you-go basis. Net periodic postretirement benefit cost included the following components: (In thousands) 1996 ------ Service cost-benefits attributed to service during the period $1,180 Interest cost on accumulated postretirement benefit obligation 2,501 Amortization of unrecognized gain on accumulated postretirement obligation ( 367) ------ Net periodic postretirement benefit cost $3,314 ====== The amounts recognized in the accompanying consolidated balance sheet at December 31, 1996 were as follows: (In thousands) Accumulated postretirement benefit obligation: 1996 ---- Retirees $20,287 Fully eligible active plan participants 2,510 Other active plan participants 12,171 ------- 34,968 Unrecognized net gain 7,008 Prior unrecognized service cost 2,407 ------- Accrued postretirement benefit cost $44,383 ======= For measurement purposes, a 12.00% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996; the rate was assumed to decrease gradually to 5.5% for 2007 and remain at that level thereafter. The Company has limited its commitment to absorbing future medical cost increases by announcing its intentions to continue providing retiree medical coverage under the current cost-sharing arrangement through 1997. After 1997, medical cost increases will be the retirees' responsibility, unless the Company elects at that time to change its commitment. A change in the health care cost trend rate assumption ordinarily would have a significant effect on the amounts reported if it were not for the Company's announced limitation in absorbing future medical cost increases beyond 1997. Because of this limitation, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $0.8 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $0.1 million. -11- At December 31, 1996, the weighted-average discount rate and rate of increase in future compensation levels used in determining the accumulated postretirement benefit obligation were 7.75% and 5.0%, respectively. As part of its long-range financing plans, the Company, in 1992, implemented a corporate-owned life insurance program covering most of its domestic employees. After paying employee death benefits, proceeds from this program are available for general corporate purposes and also could be used to offset future employee benefit costs, including retiree medical benefits. The Company's investment in a corporate-owned life insurance policy is recorded net of policy loans and the amount at December 31, 1996 of $1.6 million is included in "Other current assets" in the accompanying consolidated balance sheet. 10. LEASE OBLIGATIONS The Company and certain of its subsidiaries lease office facilities and equipment under noncancelable operating leases, expiring through 2008. Certain of the office space leases include subleases and renewal options and are subject to increases for cost of living, additional assessment of tax and other adjustments. At December 31, 1996, the future minimum rental commitments under all noncancellable operating lease agreements were as follows: (In thousands) 1997 $ 47,394 1998 42,765 1999 36,341 2000 32,866 2001 27,958 Thereafter 104,429 --------- Total $ 291,753 ========= Consolidated rent expense for 1996 was $67.6 million. In addition, a domestic subsidiary has lease agreements for office space and computer equipment which are classified as capital leases. Future minimum lease payment obligations at December 31, 1996 were as follows: 1996 ---- (In thousands) 1997 $1,191 1998 1,209 1999 1,453 2000 551 2001 - ------ Total minimum lease payments 4,404 Less: Amount representing interest ( 854) ------ Present value of net minimum lease payments $3,550 ====== The above liability is included in the balance sheet captions "Other current liabilities" and "Other Long-term liabilities". -12- 11. COMMITMENTS AND CONTINGENCIES Payments to Former Stockholders If dividends are paid to current stockholders, the Company is obligated to make equivalent payments to certain retired former stockholders each year for up to ten years after retirement. Such payments to former stockholders are based on the number of shares held at the date of retirement which were exchanged for ten year certificates, as provided by the Shareholders Purchase Agreement and By-Laws. For financial statement purposes, such amounts are reflected as distributions and the related tax effects of these distributions increase Additional Paid-in Capital. Claims and Lawsuits The Company and certain of its subsidiaries are subject to claims and lawsuits which arise in the ordinary course of business consisting principally of alleged errors and omissions in the placement of insurance or reinsurance. In connection with any potential litigation costs, including costs of defense and settlement, the Company has various levels of self and third party insurance coverage. Such coverage includes premium payments for indemnification and restricted amounts on deposit with carriers. On the basis of information presently available, insurance policies in place, and advice received from counsel representing the Company and its subsidiaries, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits against the Company will not have a material adverse effect on the Company's financial position or results of operations. Although a minor part of its business, the Company also derives revenues from reinsurance activities. The Company reinsures its risk with a non-related insurance entity. Reinsurance does not relieve the Company of its liabilities under the original policies; however, in the opinion of management, the Company's reinsurer is sound and any potential exposure from non-payment is minimal. 12. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The Company invests its operating and fiduciary premium cash and marketable securities, with a large number of banks and other institutions, in certificates of deposit, time deposits, U.S. Treasury, U.S. Government Agencies and foreign government notes, variable rate demand notes, banker's acceptances, commercial paper, money market funds and repurchase agreements, which are fully collateralized by U.S. Treasury bills, notes or bonds. Similarly, in the ordinary course of business, credit is extended to clients in the form of accounts receivable for commissions and fees for brokerage and consulting services. The Company believes that due to the diversification of its portfolio and its large number of clients, there is no unusual concentration of credit risk in either case. The Company operates in a global marketplace and generally receives U.S. dollar revenues. To serve this global market, the Company has established a number of subsidiaries in foreign countries which incur local currency denominated costs, the largest of which is in the United Kingdom. To minimize the impact of foreign exchange movements between the U.S. dollar and the U.K. Sterling, the Company may enter into forward exchange contracts periodically during each year to hedge anticipated U.K. Sterling denominated costs. From time to time, the Company may also enter into forward exchange contracts to hedge anticipated dividend flows from foreign subsidiaries and equity affiliates. During 1995, the Company entered into a forward exchange contract to hedge an intercompany loan denominated in Dutch Guilders. -13- At December 31, 1996, there were forward exchange contracts outstanding of $24.3 million, expiring through December 1997, to hedge the U.K. Sterling, and $17.4 million, expiring through November 2000, to hedge the Dutch Guilder loan. At December 31, 1996, the U.K. Sterling and Dutch Guilder contracts had fair values of $1.4 million and $(1.6) million, respectively. 13. SEGMENTATION BY GEOGRAPHIC AREA The following table presents information about the Company's operations by geographic area: For the year ended December 31, 1996: (In thousands) Income Revenue Before Taxes Total Assets ------- ------------ ------------ 1996 - ----- North America $ 906,385 $ 78,135 $1,538,476 Europe 190,406 29,239 712,273 All Other 65,986 16,170 158,927 ---------- ---------- ---------- $1,162,777 $ 123,544 $2,409,676 ========== ========== ========== 14. SUPPLEMENTAL CASH FLOW INFORMATION Changes in Assets and Liabilities in the Consolidated Statement of Cash Flows, excluding the impact of acquisitions, is comprised of: (In thousands) 1996 --------- Premium related balances: Cash - premium funds $(126,787) Marketable securities - premium funds (11,192) Insurance premiums and reinsurance balances receivable 99,874 Insurance premiums and reinsurance balances payable 38,105 --------- -- --------- Commissions and consulting fees receivable (6,638) Other current assets 1,034 Accrued expenses and other current liabilities 17,570 Income and other taxes payable 19,452 Accrued retirement benefits 13,736 Other long-term liabilities 2,185 --------- $ 47,339 --------- -14- The impact of exchange rate changes on cash was not material at December 31, 1996. Supplemental disclosures of cash flow information: Cash paid during the year for: 1996 ------ Income taxes $28,484 Interest 12,364 Non-cash activity: Assets acquired through assumed debt $ 7,400 15. SUBSEQUENT EVENTS In 1997, the Company continued to explore various ways to enhance shareholder value. The Company has or may give consideration to a partial or outright sale of the business, joint ventures with others, or investing in majority or minority positions of direct and indirect competitors. On March 11, 1997, the Company's shareholders approved the sale of all of the stock of the Company for cash and securities. In anticipation of the closing of this transaction, the Company intends to remit approximately $75 million from its Bermuda operations. U.S. Federal taxes associated with remitting such funds approximate $26 million, of which $16 million have previously been provided. The accompanying financial statements do not reflect any adjustments or reclassifications which may arise as a result of the above-mentioned transaction. EX-99.(B) 6 UNAUDITED PRO FORMA CONDENSED COMBINED FIN STMTS Exhibit 99(b) UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined statement of income for the year ended December 31, 1996 and the unaudited pro forma condensed combined balance sheet as of December 31, 1996 give effect to the Transaction with J&H. The purchase method of accounting has been applied to the Transaction. Accordingly, assets acquired and liabilities assumed have been reflected at their current estimated fair values which, ultimately, will be subject to further refinement. The pro forma statement of income assumes the Transaction occurred on January 1, 1996 and the pro forma balance sheet assumes the Transaction occurred on December 31, 1996. The unaudited pro forma statement of income does not include any potential cost savings that may be realized as a result of the Transaction, except as specifically described in Note (b) to the unaudited pro forma combined financial statements. The Registrant has indicated that it anticipates ultimately achieving pretax cost savings in the range of $150 million per year, over a period of years. The unaudited pro forma condensed combined financial statements have been prepared by the Registrant based upon the assumptions disclosed in the notes to the pro forma condensed combined financial statements. The unaudited pro forma financial statements presented herein are shown for illustrative purposes only and do not purport to be indicative of the results which would have been reported if the Transaction had occurred on the dates indicated or which may occur in the future. The unaudited pro forma condensed combined financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and the J&H financial statements included in Exhibit 99(a) of this Form 8-K. MARSH & McLENNAN COMPANIES, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (In millions, except per share figures)
Historical ------------------------------------- Marsh & Johnson & McLennan Higgins, as Pro Forma Pro Forma Companies, Inc. adjusted (a) Adjustments Combined (f) ---------------- ---------------- ---------------- --------------- Revenue $4,149.0 $1,147.7 $5,296.7 Expense 3,433.7 1,032.7 $15.3(b) 4,481.7 ---------------- ---------------- ---------------- --------------- Operating Income 715.3 115.0 (15.3) 815.0 Interest, net (47.3) 5.9 (45.6)(c) (87.0) ---------------- ---------------- ---------------- --------------- Income Before Income Taxes 668.0 120.9 (60.9) 728.0 Income Taxes 208.7 46.7 (9.6)(d) 245.8 ---------------- ---------------- ---------------- --------------- Net Income $459.3 $74.2 ($51.3) $482.2 ================ ================ ================ =============== Net Income Per Share $6.34 $5.87 ================ =============== Average Number of Shares Outstanding 72.4 9.8(e) 82.2 ================ ================ ===============
See accompanying notes to pro forma condensed combined financial statements. MARSH & McLENNAN COMPANIES, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (UNAUDITED) (In millions of dollars)
Historical ------------------------------------------- Marsh & Johnson & McLennan Higgins, as Pro Forma Pro Forma Companies, Inc. adjusted (g) Adjustments Combined (f) -------------------- ----------------- -------------------- ------------------ ASSETS - ------ Current Assets: Cash and cash equivalents $299.6 $258.3 ($175.0)(h) $382.9 -------------------- ----------------- -------------------- ------------------ Receivables 1,129.1 177.2 1,306.3 Less-allowance for doubtful accounts (43.3) - (43.3) -------------------- ----------------- -------------------- ------------------ Net receivables 1,085.8 177.2 - 1,263.0 -------------------- ----------------- -------------------- ------------------ Other current assets 363.2 68.9 432.1 -------------------- ----------------- -------------------- ------------------ Total current assets 1,748.6 504.4 (175.0) 2,078.0 -------------------- ----------------- -------------------- ------------------ Long-term securities 573.3 - 573.3 Fixed assets, net 770.1 168.4 - 938.5 Intangible assets 545.3 246.8 1,414.5(i) 2,206.6 Other assets 907.9 183.1 - 1,091.0 -------------------- ----------------- -------------------- ------------------ $4,545.2 $1,102.7 $1,239.5 $6,887.4 ==================== ================= ==================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------- Current liabilities: Short-term debt $392.4 $3.9 $144.0(j) $540.3 Accounts payable and accrued liabilities 904.3 224.2 31.2(k) 1,159.7 Accrued income taxes 259.6 28.2 - 287.8 -------------------- ----------------- -------------------- ------------------ Total current liabilities 1,556.3 256.3 175.2 1,987.8 -------------------- ----------------- -------------------- ------------------ Fiduciary liabilities 1,685.9 518.1 - 2,204.0 Less - cash and investments held in a fiduciary capacity (1,685.9) (518.1) - (2,204.0) -------------------- ----------------- -------------------- ------------------ - - - - -------------------- ----------------- -------------------- ------------------ Long-term debt 458.2 130.8 289.0(j) 878.0 -------------------- ----------------- -------------------- ------------------ Other liabilities 642.1 253.4 62.5(k) 167.0(j) 1,125.0 -------------------- ----------------- -------------------- ------------------ Commitments and contingencies - - - - -------------------- ----------------- -------------------- ------------------ Stockholders' equity: Preferred stock - - - Common stock 76.8 - 9.8(l) 86.6 Other stockholders' equity 2,195.2 462.2 (462.2)(l) 998.2(l) 3,193.4 -------------------- ----------------- -------------------- ------------------ 2,272.0 462.2 545.8 3,280.0 Less - treasury shares (383.4) - - (383.4) -------------------- ----------------- -------------------- ------------------ Total stockholders' equity 1,888.6 462.2 545.8 2,896.6 -------------------- ----------------- -------------------- ------------------ $4,545.2 $1,102.7 $1,239.5 $6,887.4 ==================== ================= ==================== ==================
See accompanying notes to pro forma condensed combined financial statements. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS A description of the adjustments reflected in the pro forma condensed combined financial statements follows: (a) Certain amounts included in the Johnson & Higgins ("J&H") consolidated statement of income (interest income, interest expense, equity in income of affiliates and minority interest in income of subsidiaries) have been reclassified to conform with the Registrant's financial statement presentation. (b) To reflect the additional goodwill amortization expense of $35.4 million to be incurred as a result of the Transaction partially offset by $20.1 million of contractually provided adjustments to ongoing compensation and benefits expenses, which are a direct result of J&H no longer being a private company. Goodwill is being amortized over a forty year period. (c) To record: (1) additional interest expense of $28.1 million associated with the incremental $433 million of borrowings that was incurred by the Registrant to finance the cash portion of the Transaction consideration which was paid at closing at an assumed interest rate of 6.5% and $8.4 million associated with $167 million of the Transaction consideration which will be issued in installments at a contractual interest rate of 5.0%, and; (2) a reduction in interest income of $9.1 million on the $175 million of permitted distributions by J&H at an assumed interest rate of 5.2%. (d) To record the tax effect of the pro forma adjustments (exclusive of the goodwill amortization) at an assumed tax rate of 37.50%. (e) To reflect the issuance of approximately 9.8 million shares of the Registrant's common stock in connection with the Transaction. (f) The pro forma condensed combined statement of income and the pro forma condensed combined balance sheet do not include the effects of the Registrant's January 1997 acquisition of Compagnie Europeenne De Courtage d'Assurances et de Reassurances ("CECAR"), an insurance broker headquartered in France, for approximately $200 million. (g) Certain amounts included in the J&H consolidated balance sheet have been reclassified to conform with the Registrant's financial statement presentation. In particular, fiduciary cash and investments of $518.1 million have been offset against the related liabilities and presented in the liability section of the balance sheet. In addition, the receivables and payables for uncollected premiums and claims amounting to $788.9 million have been excluded from the asset and liability sections of the consolidated balance sheet as they are presented in footnote disclosures in the Registrant's financial statements. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (h) To reflect the $175 million of permitted distributions by J&H. (i) Represents the net of the $1.8 billion Transaction consideration adjusted for the items described in Notes (h), (k), (l)(2) and (l)(3). The preliminary allocation of the Transaction consideration to the underlying assets and liabilities of J&H, including goodwill, is subject to further refinement as the Registrant's management continues to review the estimated fair values of the assets acquired and the liabilities assumed. (j) To reflect the debt being incurred to finance the $433 million cash portion of the Transaction consideration which was paid at closing and the additional obligation of $167 million for the cash portion of the Transaction consideration which will be issued in installments. The cash portion of the Transaction consideration paid at closing was initially financed through commercial paper borrowings. The Registrant has classified $289 million as long-term debt based upon the Registrant's intent and ability to maintain or refinance these borrowings on a long-term basis. (k) To reflect the impact of the $150 million in purchase related liabilities which are principally related to severance, real estate and transaction costs net of the related income tax impact of $56.3 million. The short-term portion of $31.2 million has been included as an increase in accounts payable and accrued liabilities and the long-term portion of $62.5 million has been reflected as an increase in other liabilities. (l) To record the net adjustment required in stockholders' equity to reflect (1) the issuance of $1.2 billion of the Registrant's $1 par value common stock; (2) the elimination of the $462.2 million of J&H net assets, and; (3) the $192 million discount on the Registrant's common stock which is being issued in the Transaction. This discount relates to a contractual restriction that limits the amount of stock which can be sold by the recipients during the two years following the closing date of the Transaction. -----END PRIVACY-ENHANCED MESSAGE-----