-----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, TZJ2tctaCF6BlCzJ+f4/oRLF5QDY6dG+IL9o4YX1Q+5XOBlgrPrVLtkCbgx3cn9v WMM7z0+E5WEPrQS3Jk7pUg== 0000950172-98-001374.txt : 19981228 0000950172-98-001374.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950172-98-001374 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981103 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19981223 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: SEC FILE NUMBER: 001-05998 FILM NUMBER: 98774544 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 8-K 1 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 November 3, 1998 --------------------------------------------------------------------------- (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 or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 1166 Avenue of the Americas, New York, New York 10036 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (212) 345-5000 ---------------------------------------------------- (Registrant's telephone number, including area code) Exhibit Index at page 4 ITEM 2. ACQUISITION AND DISPOSITION OF ASSETS. On November 12, 1998, Marsh & McLennan Companies, Inc. (the "Registrant") filed a Current Report on Form 8-K reporting its acquisition of ordinary shares and 7.25% Convertible Bonds 2008 of Sedgwick Group plc ("Sedgwick") and stated that it would file no later than January 15, 1999, historical financial statements for Sedgwick and pro forma financial information for the Registrant giving effect to the acquisition. Such financial information is being filed herewith. Information Concerning Forward-Looking Statements This report 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. Such statements may include, without limitation, discussions concerning revenue and expense growth, cost savings and efficiencies expected from the integration of Sedgwick. Please refer to the Registrant's 1997 Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q under "Information Concerning Forward-Looking Statements" for specific factors which would cause actual results to differ materially from such forward-looking statements. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Business Acquired. The audited financial statements of Sedgwick for the year ended December 31, 1997 and the unaudited financial statements for the nine-months ended September 30, 1998 are filed as Exhibits 99.1 and 99.2 hereto. (b) Pro Forma Financial Information. The pro forma financial data required to be filed herewith is filed as Exhibit 99.3 hereto. (c) Exhibits. 23.1 Consent of PricewaterhouseCoopers 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: December 23, 1998 EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 23.1 Consent of PricewaterhouseCoopers 99.1 Consolidated Year-End Audited Financial Statements of Sedgwick -Report of Independent Auditors -Consolidated Statement of Income for the year ended December 31, 1997 -Consolidated Balance Sheet as of December 31, 1997 -Consolidated Statement of Changes in Shareholders' Equity for the year ended December 31, 1997 -Consolidated Statement of Cash Flows for the year ended December 31, 1997 -Consolidated Statement of Total Recognized Gains and Losses for the year ended December 31, 1997 -Notes to Consolidated Financial Statements Financial Statement Schedule II - Valuation and Qualifying Accounts 99.2 Consolidated Nine-Month Unaudited Financial Statements of Sedgwick -Consolidated Statements of Income for the nine-months ended September 30, 1998 and 1997 -Consolidated Balance Sheet as of September 30, 1998 -Notes to Consolidated Financial Statements -Additional information for US investors 99.3 Unaudited Pro Forma Condensed Combined Financial Statements EX-23 2 EXHIBIT 23.1 - CONSENT EXHIBIT 23.1 Letter of Consent of Independent Auditors PricewaterhouseCoopers, as the successor firm of Coopers & Lybrand, consent to the inclusion in this Form 8-K, as amended, of Marsh & McLennan Companies, Inc. (Commission File No. 1-5998 ) of our report dated February 17, 1998, except for notes 24(c) and 35 dated May 7, 1998, on our December 31, 1997 audit of the consolidated financial statements and financial statement schedule of Sedgwick Group plc . We also consent to the incorporation by reference in the previously filed Registration Statements of Marsh & McLennan Companies, Inc. on Form S-8 (Registration File Nos. 2-58660, 2-65096, 33-32880, 33-48803, 33-48807, 33- 54349, 33-59603, 33-63389, 333-35741, 333-35739, 333-51141, and 333-29627) and, the previously filed Registration Statements on Form S-3 (Registration Nos. 333-25069, 333-28201, 333-41021, 333-48707 and 333-67543) of our report dated February 17, 1998, except for notes 24(c) and 35 dated May 7, 1998, on our December 31, 1997 audit of the consolidated financial statements and financial statement schedule of Sedgwick Group plc. PricewaterhouseCoopers Chartered Accountants London, England December 23, 1998 EX-99 3 EXHIBIT 99.1 - AUDITED FINANCIAL STATEMENTS OF SEDGWICK EXHIBIT 99.1 FINANCIAL INFORMATION ON SEDGWICK REPORT OF INDEPENDENT AUDITORS To the directors of Sedgwick Group plc We have audited the accompanying consolidated balance sheet of Sedgwick Group plc and subsidiary companies as of December 31, 1997, and the related consolidated statements of income, changes in shareholders' equity, cash flows, and total recognized gains and losses for the year ended December 31, 1997. Our audit also included Schedule II on page 46. These consolidated financial statements and the financial statement schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit. We conducted our audit in accordance with United Kingdom auditing standards which do not differ in any significant respect from United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sedgwick Group plc and subsidiary companies as of December 31, 1997, and the results of their operations and their cash flows for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United Kingdom, which differ in certain respects from generally accepted accounting principles in the United States (see note 32 to the consolidated financial statements, which provides the required reconciliations for the year ended December 31, 1997 and as of December 31, 1997). Also, in our opinion, the related financial statement schedule on page 46, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Coopers & Lybrand Chartered Accountants London, England February 17, 1998 except for notes 24(c) and 35 dated May 7, 1998. The audited financial information set out below should be read in conjunction with the unaudited results for the nine months ended September 30, 1998 of Sedgwick Group plc. These unaudited results include the effect of developments in the pension transfer review during the period subsequent to December 31, 1997. AUDITED FINANCIAL INFORMATION INTRODUCTION The financial information contained in this Exhibit 99.1 is extracted without material adjustment from the audited consolidated accounts of Sedgwick for the year ended 31 December 1997 as presented in the 1997 annual report on form 20-F (item 18) filed with the US Securities and Exchange Commission. The information contained in this Exhibit 99.1 has been extracted from previously published sources and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 (as amended) (refer to Note 36). Audited statutory accounts have been delivered to the Registrar of Companies for the year ended 31 December 1997. An unqualified audit report in accordance with the requirements of the Companies Act for the year ended 31 December 1997 has been given by Coopers & Lybrand, Chartered Accountants, being the auditors of Sedgwick for the relevant financial period. SEDGWICK GROUP PLC Consolidated statement of income YEAR ENDED DECEMBER 31, ------------------------------- 1997 1997 NOTES (pound)m US$m* - ----------------------------------------------------------------------------- REVENUE Brokerage and fees 931.6 1,527.8 Interest and investment income 43.6 71.5 ------- -------- 5 975.2 1,599.3 EXPENSES 6 869.4 1,425.8 ------- -------- OPERATING INCOME 105.8 173.5 Share of profits of associated undertakings 4.5 7.4 Interest payable 9 (10.2 (16.7) Cessation of insurance underwriting 6 1.1 1.8 ------- -------- INCOME BEFORE TAXATION 5,7 101.2 166.0 Taxation 10 28.3 46.4 ------- -------- INCOME AFTER TAXATION 72.9 119.6 Minority interests 2.5 4.1 ------- -------- NET INCOME 70.4 115.5 DIVIDEND 11 38.6 63.3 ------- -------- RETAINED EARNINGS FOR THE YEAR 31.8 52.2 ------- -------- EARNINGS PER SHARE 12 12.8p 21.0c UNDERLYING DIVIDEND PER SHARE 11 7.0p 11.5c Average number of shares outstanding (in millions) 549.5 549.5 The notes form an integral part of these consolidated financial statements. *For illustration only, the results for the year ended December 31, 1997 shown above in US dollars have been translated at the year-end rate of 1 = US$1.64. A summary of the significant adjustments that would be required to restate net income for the year ended December 31, 1997 in accordance with US GAAP is presented in note 32. SEDGWICK GROUP PLC Consolidated balance sheet AT DECEMBER 31, -------------------------------- 1997 1997 NOTES (pound)m US$m* - ------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and short-term deposits 14 538.8 883.6 Investments 13, 14 96.2 157.7 Reinsurers' share of technical provisions 22 177.8 291.6 Receivables: due within one year Insurance broking receivables 14 2,643.5 4,335.4 Taxation recoverable 19.1 31.3 Prepayments and accrued income 23.1 37.9 Other receivables 72.2 118.4 --------- --------- 2,757.9 4,523.0 Receivables: due after more than one year Advance Corporation Tax recoverable 12.6 20.7 Deferred taxation 22.2 36.4 Other receivables 49.1 80.5 --------- --------- 83.9 137.6 --------- --------- Total current assets 3,654.6 5,993.5 FIXED ASSETS Tangible assets, net 15 212.5 348.5 Associated undertakings 16 15.2 24.9 Assets backing retirement contracts 17 353.5 579.8 Investments 18 154.1 252.7 --------- --------- Total fixed assets 735.3 1,205.9 --------- --------- TOTAL ASSETS 4,389.9 7,199.4 --------- --------- The notes form an integral part of these consolidated financial statements. *For illustration only, the consolidated balance sheet at December 31, 1997 shown above in US dollars has been translated at the year-end rate of (pound)1 = US$1.64. A summary of the significant adjustments that would be required to restate shareholders' equity at December 31, 1997 in accordance with US GAAP is presented in note 32. SEDGWICK GROUP PLC Consolidated balance sheet AT DECEMBER 31, ----------------------------- 1997 1997 NOTES (pound)m US$m* - ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Insurance broking payables 14 3,052.8 5,006.5 Corporate tax 44.3 72.7 Accruals and deferred income 81.9 134.3 Bank loans and overdrafts 20 0.9 1.5 Dividends payable 22.2 36.4 Capital lease obligations 21 0.8 1.3 Other payables 53.4 87.6 -------- -------- Total current liabilities 3,256.3 5,340.3 NON-CURRENT LIABILITIES Long-term borrowings 20 105.4 172.9 Capital lease obligations 21 9.5 15.6 Other payables 14.9 24.4 -------- -------- Total non-current liabilities 129.8 212.9 PROVISIONS FOR LIABILITIES AND CHARGES Liabilities linked to retirement contracts 17 352.9 578.7 Insurance technical provisions 22 307.9 505.0 Other provisions 23 142.9 234.3 -------- -------- 803.7 1,318.0 MINORITY INTERESTS 0.3 0.5 COMMITMENTS AND CONTINGENT LIABILITIES 24, 25 SHAREHOLDERS' EQUITY Share capital (554 million ordinary shares of 10p each) 29 55.4 90.9 Share premium 8.1 13.3 Retained earnings 136.3 223.5 -------- -------- Total shareholders' equity 199.8 327.7 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,389.9 7,199.4 -------- -------- The notes form an integral part of these consolidated financial statements. *For illustration only, the consolidated balance sheet at December 31, 1997 shown above in US dollars has been translated at the year-end rate of (pound)1 = US$1.64. A summary of the significant adjustments that would be required to restate shareholders' equity at December 31, 1997 in accordance with US GAAP is presented in note 32. SEDGWICK GROUP PLC Consolidated statement of changes in shareholders' equity
ISSUED SHARE CAPITAL (i) -------------------------------------- NOMINAL SHARE RETAINED NUMBER VALUE PREMIUM(iii) EARNINGS TOTAL MILLIONS (pound)m (pound)m (pound)m (pound)m - ----------------------------------------------------------------------------------------- At January 1, 1997 548.0 54.8 3.9 132.7 191.4 Year ended December 31, 1997 Shares issued(ii) 5.7 0.6 4.2 0.3 5.1 Goodwill on acquisitions(iv) -- -- -- (30.9) (30.9) Retained earnings for the year -- -- -- 31.8 31.8 Translation differences(v) -- -- -- 2.4 2.4 --------- --------- ---------- -------- -------- At December 31, 1997 553.7 55.4 8.1 136.3 199.8 --------- --------- ---------- -------- --------
The notes form an integral part of these consolidated financial statements. (i) The authorized share capital of the company throughout the period covered by the above statements was (pound)81.0m comprising 810 million ordinary shares of 10p each. At December 31, 1997, the authorized but unissued share capital amounted to 256.3 million shares of which 25.1 million shares were reserved to meet options granted under the company's employee share option plans described in note 29. (ii) Shares issued during the period covered by the above statements were either in lieu of dividends or in connection with the exercise of options held under employee share option plans. (iii) The share premium account is non-distributable. (iv) The cumulative amount of goodwill written off at December 31, 1997, net of goodwill relating to subsidiary and associated undertakings sold, amounted to (pound)617.9m. An analysis of goodwill written off during the period covered by the above statements is set out in note 3. (v) At December 31, 1997, cumulative translation losses of (pound)19.3m had been transferred directly to retained earnings. SEDGWICK GROUP PLC Consolidated statement of cash flows
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1997 NOTES (pound)m US$m* - -------------------------------------------------------------------------------------------- NET CASH INFLOW FROM OPERATING ACTIVITIES 27(a) 97.9 160.6 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest paid (7.9) (13.0) Interest element of finance lease rental payments (1.1) (1.8) Dividends received from associates 5.3 8.7 ---------- --------- (3.7) (6.1) TAXATION UK taxation paid (0.9) (1.5) Overseas taxation paid (20.3) (33.3) ---------- --------- (21.2) (34.8) CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Purchase of tangible fixed assets (24.7) (40.5) Proceeds on disposal of tangible fixed assets 24.1 39.5 Purchase of investments (125.4) (205.6) Disposal of investments 67.2 110.2 ---------- --------- (58.8) (96.4) ACQUISITIONS AND DISPOSALS Acquisition of businesses, net of cash acquired 3 (31.8) (52.2) Disposal of businesses, net of cash disposed 4 4.4 7.2 ---------- --------- (27.4) (45.0) DIVIDENDS PAID (35.3) (57.9) MANAGEMENT OF LIQUID RESOURCES Cash withdrawn from deposits 16.0 26.2 Purchase of investments (141.5) (232.0) Disposal of investments 167.1 274.0 ---------- --------- 41.6 68.2 FINANCING Issue of shares 4.8 7.9 Increase in borrowings 14.7 24.1 Decrease in borrowings (40.7) (66.7) Capital element of finance lease rental payments (0.6) (1.0) ---------- --------- (21.8) (35.7) ---------- --------- DECREASE IN CASH IN THE PERIOD 27(b),(c) (28.7) (47.1) ---------- ---------
The notes form an integral part of these consolidated financial statements. *For illustration only, the cash flows for the year ended December 31, 1997 shown above in US dollars have been translated at the year-end rate of (pound)1 = US$1.64. Summary statement of cash flows for the year ended December 31, 1997 presented in accordance with US GAAP are set out in note 32. SEDGWICK GROUP PLC Consolidated statement of total recognized gains and losses YEAR ENDED DECEMBER 31, ------------------------ 1997 1997 (pound)m US$m* Net income 70.4 115.5 Translation differences on overseas undertakings 2.4 3.9 ------- -------- Recognized gain for the year 72.8 119.4 ======= ======== The notes form an integral part of these consolidated financial statements. *For illustration only, the gains and losses for the year ended December 31, 1997 shown above in US dollars have been translated at the year-end rate of (pound)1 = US$1.64. SEDGWICK GROUP PLC Notes to the consolidated financial statements 1 ACCOUNTING POLICIES The financial statements have been prepared under the historical cost convention, except for the revaluation of certain assets backing retirement contracts, and in accordance with accounting standards applicable in the UK. PRESENTATIONAL CHANGES For the reasons set out below, certain changes have been made to the presentation of the financial statements. CASH FLOW STATEMENT During 1997, the group adopted FRS No. 1 (Revised) Cash flow statements. Under the revised standard, the cash flow statement shows the movement in "pure cash" which comprises cash in hand, deposits repayable on demand less overdrafts. In addition, to comply with the revised standard, changes have been made to the analysis of cash flows and the related disclosures. RETIREMENT-RELATED INVESTMENT BUSINESS SuperFlex Limited, a subsidiary undertaking based in South Africa which provides retirement-related investment products, has grown significantly during 1997. It is now appropriate to disclose the investments which it holds in relation to such retirement contracts and its linked liabilities to policyholders which were previously included within insurance broking receivables and payables. INSURANCE TECHNICAL PROVISIONS During 1997, River Thames Insurance Company Limited became a subsidiary undertaking (see note 3). As a result, insurance technical provisions have become more significant to the group and are now shown separately from other provisions for liabilities and charges. In addition, amounts recoverable from reinsurers, which were previously offset in arriving at insurance technical provisions, are now shown as current assets. BASIS OF CONSOLIDATION The group financial statements include those of the company, its subsidiary undertakings and the group's interest in associated undertakings. Associated undertakings are accounted for under the equity method. An undertaking is regarded as a subsidiary undertaking if the group has control over its operating and financial policies. An undertaking is regarded as an associated undertaking if the group has significant influence but not control over its operating and financial policies, which will generally be the case where the group controls more than 20% and less than 50% of the shareholders' voting rights in the undertaking. Unless stated otherwise, business combinations are accounted for by the acquisition method of accounting. When a business is acquired, fair values are attributed to its separable assets and liabilities at the date of acquisition. Goodwill arising on acquisitions, which represents the difference between the fair value of the purchase consideration and the fair value of the separable net assets acquired, is written off to reserves on consolidation. Where it can be identified, goodwill not previously recorded within operations is taken into account in calculating the profit or loss on disposal or termination of acquired businesses. FOREIGN CURRENCY TRANSLATION Group companies record transactions in foreign currencies at the rate of exchange ruling at the date of the transaction or, if hedged forward, at the rate of exchange under the related forward currency contract. Foreign currency monetary assets and liabilities, other than those hedged forward, are translated into local currency at the rate ruling at the balance sheet date. Exchange differences are recorded within operations. On consolidation, the results of overseas group companies are translated into sterling at the average exchange rates for the period and their assets and liabilities are translated into sterling at the exchange rates ruling at the balance sheet date. Exchange differences on translating the net assets or liabilities of overseas businesses, together with the differences on translating any foreign currency borrowings financing investments in overseas businesses, are taken directly to reserves. In the cash flow statement, cash flows denominated in foreign currency are translated at the average exchange rates for the period. REVENUE Brokerage and fees derived from insurance and reinsurance services are recognized when the counterparty is debited, except for certain business in the US on which income is recognized on the later of the effective date of the policy and the billing date. Brokerage and fees are stated after allowing for commissions to other directly-involved parties. Contingent commissions and certain life assurance and pension commissions and fees are recognized in the period to which they relate, provided they can be determined with reasonable accuracy. Where this is not possible, such commissions and fees are recognized on a cash basis. Profit commissions earned by the group's Lloyd's underwriting agency are brought into account when they are able to be determined. Interest on deposits and interest-bearing investments is credited as it is earned. PENSIONS AND SIMILAR BENEFITS Defined contribution pension costs recorded within operations represent contributions payable in respect of the period. Defined benefit pension costs and the costs of providing other post-retirement benefits are recorded within operations on a systematic basis over the service lives of the eligible employees in accordance with the advice of qualified actuaries. TANGIBLE FIXED ASSETS Tangible fixed assets are stated at historical cost. Freehold land is not depreciated. Freehold and long-leasehold properties are depreciated on a straight-line basis such that they are written down to their residual values over their useful economic lives, which are generally estimated to be 50 years. Other tangible fixed assets are depreciated on a straight-line basis over their useful economic lives as follows: Short-leasehold properties -- Lease term Office fixtures and equipment -- 5-10 years Motor vehicles -- 5 years Any permanent diminution in the value of the group's tangible fixed assets is recorded within operations. RETIREMENT-RELATED INVESTMENT BUSINESS Assets backing retirement contracts principally comprise investments which are stated at their current values at the balance sheet date. Liabilities linked to retirement contracts represent the benefits payable to policyholders at the balance sheet date and are determined by reference to the values of the related assets. Realized and unrealized gains and losses on assets backing retirement contracts are attributable to policyholders and are not, therefore, reflected in operations. INVESTMENTS Fixed asset investments are stated at cost less provision for any permanent diminution in value. Current asset investments are stated at the lower of cost and net realizable value. The cost of redeemable interest-bearing securities is adjusted to allow for the amortization of any premium or discount to redemption value on a straight-line basis over the period to maturity. LEASED ASSETS Assets acquired under capital leases are capitalized as tangible fixed assets. Interest on such lease obligations is recorded within operations over the term of the lease based on the capital element of future lease rentals. All other leases are regarded as operating leases and rentals are recorded within operations on a straight-line basis over the term of the lease. When a leasehold property becomes surplus to the group's foreseeable business requirements, provision is made for the expected future net cost of the property. INSURANCE BROKING RECEIVABLES AND PAYABLES Certain group companies act as agents in placing the insurable risks of their clients with insurers, either directly or through other insurance intermediaries. Generally, these companies are not liable as principals either for premiums due to insurers or for claims payable to their clients. Notwithstanding the companies' legal relationships with clients and insurers and since, in practice, premium and claim monies are ordinarily accounted for by insurance intermediaries as if they were principals in the insurance contract, fiduciary cash, receivables and payables relating to insurance broking business are treated for accounting purposes as the group's assets and liabilities. DEFERRED TAXATION Deferred taxation is provided using the liability method. Except for pensions and other post-retirement benefits, in respect of which deferred taxation is recognized on the full provision basis, deferred taxation is recognized on timing differences to the extent that it is probable that a liability or asset will crystallize. Deferred tax net debit balances are recognized to the extent that they are expected to be recoverable without replacement by equivalent debit balances. INSURANCE UNDERWRITING (IN RUN OFF) Insurance technical provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling expenses. Insurance technical provisions are stated gross of recoveries to be made on reinsurance contracts in recognition of the fact that they are separate liabilities and assets. The adequacy of the insurance technical provisions is assessed by reference to actuarial and other studies of the ultimate cost of liabilities, which use exposure-based and statistical techniques. Significant delays occur in the notification and settlement of certain claims, and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the balance sheet date. Insurance technical provisions and the related reinsurance recoveries are determined on the basis of information currently available. It is inherent in the nature of the business written that the ultimate liabilities will vary as a result of subsequent developments. DERIVATIVES Derivatives are entered into for the purpose of mitigating risks from potential movements in foreign exchange rates and interest rates which are inherent in the group's assets and liabilities. Derivatives entered into by the group are reviewed regularly for their effectiveness as hedges. A derivative is designated as a hedge where there is an offset between the effects of potential movements in the value of the derivative and the value of the asset or liability in respect of which it is held. It is the group's policy that derivatives may not be held or issued for trading purposes. Contract or underlying principal amounts of financial instruments used for hedging purposes are not reflected in the consolidated financial statements. Details of the group's hedging activities are set out in note 33. FORWARD EXCHANGE CONTRACTS The group's principal foreign exchange exposures relate to foreign currency income earned in the UK and to the translation into sterling of the profits and net assets of its overseas businesses. Foreign currency income earned in the UK, which is principally denominated in US dollars, is hedged mainly through the use of forward exchange contracts. The group hedges both firm commitments and anticipated transactions looking forward over a period of up to three years. As described under foreign currency translation above, gains or losses arising on these arrangements are deferred and recognized in operations as adjustments to carrying amounts only when the hedged transaction has itself been reflected in the consolidated financial statements. It has not been the group's policy to hedge the profits and net assets of overseas businesses because the translation of overseas profits at average exchange rates mitigates exchange rate volatility and foreign currency borrowings have provided a natural hedge against assets held overseas. INTEREST RATE AGREEMENTS The group manages its exposure to interest rate movements on its cash and investment balances, which include amounts held in a fiduciary capacity, through the use of fixed rate instruments and deposits, interest rate swaps and forward rate agreements (FRAs). Interest rate swaps and FRAs are also used by the group to manage interest payable on its borrowings. Interest rate swaps and FRAs are based on agreements approved by the relevant regulatory bodies. Such arrangements are generally used to manage interest rates looking forward over a period of two to three years. Interest rate differential under interest rate swaps and FRAs are recognized in operations by adjustment of the underlying interest receivable or payable over the term of the agreement. 2 FOREIGN CURRENCIES The principal exchange rates used to translate overseas group companies' financial information were: AVERAGE RATE YEAR ENDED RATE --------------- ----------------- 1997 1997 - ------------------------------ --------------- -------------------- Australian dollar 2.22 2.53 Belgian franc 58.46 60.93 Canadian dollar 2.28 2.35 French franc 9.54 9.90 German mark 2.83 2.96 Italian lire 2,790.00 2,908.00 Netherlands guilder 3.19 3.33 South African rand 7.60 8.00 US dollar 1.64 1.64 --------------- ----------------- 3 ACQUISITIONS YEAR ENDED DECEMBER 31, 1997 During 1997, the following acquisitions were completed by the group:
OTHER RTI NSBV BUSINESSES TOTAL (pound)m (pound)m (pound)m (pound)m - ------------------------------------------------------------------------------------------- Cost of acquisition: Cash consideration 12.0 7.3 11.7 31.0 Share of net liabilities of businesses contributed -- (0.9) -- (0.9) Contingent consideration -- 0.4 5.1 5.5 Sundry expenses 0.3 2.3 0.3 2.9 --------- --------- --------- --------- 12.3 9.1 17.1 38.5 Share of net (assets)/liabilities of businesses acquired (20.8) 5.2 (0.5) (16.1) --------- --------- --------- --------- Goodwill on acquisitions (8.5) 14.3 16.6 22.4 --------- --------- --------- --------- Add: Negative goodwill on RTI (note 6) 8.5 --------- Goodwill written off to reserves 30.9 ---------
RIVER THAMES INSURANCE COMPANY LIMITED (RTI) In April 1997, the group completed the acquisition from Transamerica Corporation of 35.7 million "A" ordinary shares in RTI. With effect from completion, the group's interest in RTI increased from 48.8 percent to 98.7 percent and it became a subsidiary undertaking. As shown in the summary table above, the purchase consideration was at a significant discount to the fair value of the additional share of the net assets of the company acquired, i.e. negative goodwill was recognized on the acquisition. NIKOLS SEDGWICK B.V. (NSBV) With effect from November 1, 1997, Sedgwick entered into a joint venture with the Moratti Group which involved the transfer of our respective businesses in Italy, Spain, Portugal and Latin America to a newly-formed holding company, NSBV. Details of the joint venture were set out in the circular to shareholders dated October 10, 1997. NSBV is treated as a subsidiary undertaking in these financial statements. Assets and liabilities of businesses acquired by the group during 1997:
BOOK VALUE ADJUSTMENTS FAIR VALUE (pound)m (pound)m (pound)m - -------------------------------------------------------------------------------------- Tangible fixed assets 3.2 -- 3.2 Investments in associated undertakings (26.4) -- (26.4) Fixed asset investments 74.4 (0.7) 73.7 Current assets - --Reinsurers' share of technical provisions 170.6 -- 170.6 - --Other assets 164.0 4.8 168.8 Creditors due within one year (69.3) (1.4) (70.7) Creditors due after more than one year (0.2) -- (0.2) Provisions for liabilities and charges - --Insurance technical provisions (295.5) (8.4) (303.9) - --Other provisions (2.9) -- (2.9) ------------ ------------ ------------ 17.9 (5.7) 12.2 Minority interests 6.3 (2.4) 3.9 ------------ ------------ ------------ 24.2 (8.1) 16.1 ============ ============ ============
Adjustments to the book values of the assets and liabilities acquired principally reflected the strengthening of insurance technical provisions held in relation to RTI and alignment with the group's accounting policies. Cash flow effect of acquisition of businesses: 1997 (pound)m - ----------------------------------------------------------------------------- Cash consideration: - --Acquisitions completed during the year 32.9 - --Acquisitions completed in previous years 3.0 Net cash of subsidiaries acquired (4.2) Effect of movement in exchange rates 0.1 ----------- Net outflow of cash on acquisitions 31.8 =========== 4 DISPOSALS Profits recognized on the disposal of business, none of which were individually significant, were as follows: (pound)m - ------------------------------------------------------------------------------ Year ended December 31, 1997 2.7 Cash flow effect of disposal of businesses: 1997 (pound)m - ------------------------------------------------------------------------------ Cash proceeds: - -- Disposals completed during the year 0.6 - -- Disposals completed in previous years 3.8 ---------- Net inflow of cash on disposals 4.4 ========== 5 SEGMENTAL INFORMATION 1997 (pound)m - --------------------------------------------------------------------------- REVENUE GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION United Kingdom 334.8 Continental Europe 132.2 North America 414.0 Asia Pacific 69.6 Rest of the world 24.6 ---------- 975.2 ---------- ANALYSIS BY BUSINESS Insurance and reinsurance services 741.9 Employee benefits consulting 233.3 Insurance underwriting (in run off) -- ---------- 975.2 ---------- GEOGRAPHIC ANALYSIS BY CLIENT LOCATION United Kingdom 275.1 Continental Europe 138.5 North America 438.2 Asia Pacific 86.3 Rest of the world 37.1 ---------- 975.2 ========== 1997 (pound)m - --------------------------------------------------------------------------- INCOME BEFORE TAXATION GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION United Kingdom 45.5 Continental Europe 10.2 North America 43.1 Asia Pacific 4.5 Rest of the world 7.0 ---------- 110.3 Less: Interest payable (10.2) ---------- 100.1 Exceptional items (note 6) 1.1 ---------- 101.2 ---------- ANALYSIS BY BUSINESS Insurance and reinsurance services 86.7 Employee benefits consulting 23.6 Insurance underwriting (in run off) -- ---------- 110.3 Less: Interest payable (10.2) ---------- 100.1 Exceptional items (note 6) 1.1 ---------- 101.2 ---------- Segmental information is shown before taking account of inter-segmental borrowings and interest charges in order to present fairly the performance of individual segments. 1997 (pound)m - ---------------------------------------------------------------------------- DEPRECIATION ANALYSIS BY BUSINESS Insurance and reinsurance services 20.1 Employee benefits consulting 1.8 ------------ 21.9 Add: Properties 1.1 ------------ 23.0 ------------ 1997 (pound)m - ---------------------------------------------------------------------------- CAPITAL EXPENDITURE ANALYSIS BY BUSINESS Insurance and reinsurance services 22.4 Employee benefits consulting 1.4 ------------ 23.8 Add: Properties 0.4 ------------ 24.2 ------------ 1997 (pound)m - ---------------------------------------------------------------------------- TOTAL ASSETS GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION United Kingdom 2,921.5 Continental Europe 278.3 North America 673.4 Asia Pacific 105.9 Rest of the world 410.8 ------------ 4,389.9 ------------ ANALYSIS BY BUSINESS Insurance and reinsurance services 3,443.9 Employee benefits consulting 468.3 Insurance underwriting (in run off) 342.4 ------------ 4,254.6 Add: Properties 135.3 ------------ 4,389.9 ------------ 1997 (pound)m - --------------------------------------------------------------------------- NET CAPITAL EMPLOYED GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION United Kingdom 151.6 Continental Europe 27.8 North America 75.7 Asia Pacific 18.2 Rest of the world 33.1 ----------- 306.4 Less: Borrowings (106.3) ----------- 200.1 ----------- ANALYSIS BY BUSINESS Insurance and reinsurance services 89.5 Employee benefits consulting 42.2 Insurance underwriting (in run off) 39.4 ----------- 171.1 Add: Properties 135.3 Less: Borrowings (106.3) ----------- 200.1 ----------- Net capital employed represents shareholders' equity and minority interests. 6 EXCEPTIONAL ITEMS Year ended December 31, 1997 Cessation of insurance underwriting In April 1997, the group increased its shareholding in River Thames Insurance Company Limited (RTI) (note 3). Since the company is in run off, the negative goodwill arising on the acquisition has been taken to operations. Following completion, provisions amounting to (pound)8.4m were established in respect of the strengthening of insurance technical provisions, property and other closure costs. (pound)m - ---------------------------------------------------------------------------- Insurance underwriting subsidiaries in run off: Closure provisions (8.4) Other movements on insurance technical provisions 1.0 ----------- (7.4) Negative goodwill (note 3) 8.5 ----------- 1.1 =========== Insurance technical provisions are dealt with in note 22. SEGMENTAL ANALYSIS OF EXCEPTIONAL ITEMS 1997 (pound)m - ----------------------------------------------------------------------------- INCOME BEFORE TAXATION GEOGRAPHIC ANALYSIS BY BUSINESS LOCATION United Kingdom (0.1) North America 1.2 ----------- 1.1 =========== ANALYSIS BY BUSINESS Insurance underwriting (in run off) 1.1 ----------- 1.1 =========== 7 INCOME BEFORE TAXATION Income before taxation is determined after charging/(crediting) the following items: 1997 (pound)m - ----------------------------------------------------------------------------- Depreciation of tangible fixed assets (note 15) 23.0 Operating lease rentals 54.7 Operating sub-lease rentals (5.8) Foreign exchange gains (4.8) Auditors' remuneration - --For audit services 2.2 - --For other services provided in the UK 0.9 - --For other services provided outside the UK 0.2 ----------- In addition to the amounts stated above, in 1997 the auditors received (pound)0.6m in connection with acquisitions which was capitalized; (pound)0.5m for services provided in the UK and (pound)0.1m for services provided outside the UK. 8 EMPLOYEE INFORMATION 1997 (pound)m - ---------------------------------------------------------------------------- SALARIES AND ASSOCIATED EXPENSES Salaries 512.9 Social security costs 36.4 Pension costs - --Defined contribution plans 1.6 - --Defined benefit plans (note 26) 17.5 ----------- 568.4 ----------- AVERAGE FOR THE YEAR YEAR END 1997 1997 - ---------------------------------------------------------------------------- NUMBER OF EMPLOYEES BY GEOGRAPHIC REGION United Kingdom 5,192 5,174 Continental Europe 2,132 2,478 North America 6,212 6,156 Asia Pacific 1,305 1,311 Rest of the world 720 866 ---------------- ------------- 15,561 15,985 ================ ============= NUMBER OF EMPLOYEES BY BUSINESS Insurance and reinsurance services 11,311 11,683 Employee benefits consulting 4,239 4,291 Insurance underwriting (in run off) 11 11 ---------------- ------------- 15,561 15,985 ================ ============= 9 INTEREST PAYABLE 1997 (pound)m - ---------------------------------------------------------------------------- Interest on bank loans and overdrafts 8.8 Interest on other borrowings 0.3 Interest on finance leases 1.1 ------------ 10.2 ============ 10 TAXATION 1997 (pound)m - ---------------------------------------------------------------------------- Current taxation: UK corporation tax at 31.5% 28.4 UK relief for overseas taxation (19.6) Advance Corporation Tax recoverable (4.8) Overseas taxation 22.8 ------------ 26.8 Deferred taxation (note 19) 1.1 ------------ 27.9 Share of taxation of associated undertakings 0.4 ------------ 28.3 ============ As a consequence of the group's foreign income dividend programme the tax charge was reduced by (pound)7.4m. Reconciliation of UK statutory rate to effective rate: 1997 % - --------------------------------------------------------------------------- UK statutory rate 31.5 Overseas profits taxed at other than UK statutory rate 5.7 Advance Corporation Tax recovered (4.8) Tax relief in respect of intangibles (4.3) ------- Effective rate 28.1 ------- At December 31, 1997 certain group companies had tax losses of some (pound)50.6m available for carry forward against future taxable profits of which approximately (pound)6.8m will expire in varying amounts in the years 1998 to 2008. Subject to certain restrictions, the balance of (pound)43.8m is available for carry forward indefinitely. Current overseas taxation is reduced by reason of overseas taxation relief in respect of the amortization of intangible assets recognized in the accounts of certain of the group's overseas subsidiaries. In accordance with the group's accounting policies, these intangible assets were written off to reserves on consolidation. Further such overseas taxation relief amounting to (pound)22.9m is expected to be available over the period to 2012. 11 DIVIDEND TOTAL ------------------ PER SHARE (pound)m ------- ------- Year ended December 31, 1997 Interim dividend - --Paid October 20, 1997 3.0p 16.4 Proposed final dividend - --Payable April 29, 1998 4.0p 22.2 ------- ------- 7.0p 38.6 ======= ======= Both the interim and final dividends for 1997 have been designated foreign income dividends (FIDS). It is currently planned that dividends for 1998 will be declared as FIDs. 12 EARNINGS PER SHARE Earnings per share is calculated by apportioning the net income for the year over the weighted average number of shares in issue during the year. In calculating earnings per share on the nil distribution basis, net income is adjusted for those elements of the tax charge which arise from the payment of dividends. 1997 - ------------------------------------------------------------------------ Net income (pound)70.4m Weighted average number of shares in issue 549.5m Earnings per share 12.8p Advance Corporation Tax recoverable (pound) 4.8m Earnings per share -- nil distribution basis 11.9p --------- 13 CURRENT ASSETS: INVESTMENTS 1997 (pound)m - ------------------------------------------------------------------------ Listed securities 60.1 Unlisted securities 36.1 ----------- 96.2 =========== The market value of listed securities was (pound)60.4m. 14 FIDUCIARY ASSETS AND LIABILITIES Fiduciary balances comprise uncollected net premiums (i.e. after deduction of brokerage and fees) and cash and investments representing net premiums and claims which have been collected but not remitted to the relevant client, insurer or other insurance intermediary. Fiduciary assets and liabilities included under the respective balance sheet headings were as follows: 1997 (pound)m - --------------------------------------------------------------------------- CURRENT ASSETS Cash and short-term deposits 436.5 Investments 47.8 Insurance broking receivables 2,568.5 ----------- 3,052.8 =========== CURRENT LIABILITIES Insurance broking payables 3,052.8 =========== Cash, short-term deposits and investments held in a fiduciary capacity are generally subject to regulatory controls prescribed by the relevant authorities in the various countries in which the group operates. Accordingly, such fiduciary assets are regarded as restricted. Certain subsidiary companies in the UK have entered into a trust deed with the Corporation of Lloyd's under which insurance transaction assets are subject to a floating charge in favor of the trustee of Lloyd's for the benefit of insurance transaction creditors. Insurance transaction payables amounting to (pound)2,361.3m were secured through this arrangement. The assets of subsidiary companies subject to this charge were insurance broking receivables amounting to (pound)2,106.1m and cash and deposits amounting to (pound)265.6m. A floating charge is a charge which does not relate to a specific asset but to a group of assets the composition of which may change from time to time (in this case, insurance broking assets held by the group in relation to business conducted at Lloyd's). 15 FIXED ASSETS: TANGIBLE ASSETS
PROPERTIES -------------------------------- OFFICE LONG SHORT FIXTURES & MOTOR FREEHOLD LEASEHOLD LEASEHOLD EQUIPMENT VEHICLES TOTAL (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m -------- -------- -------- ---------- -------- -------- COST At January 1, 1997 115.7 10.1 22.5 208.9 23.9 381.1 Year ended December 31, 1997 Acquisition of subsidiaries -- -- 0.2 6.9 0.8 7.9 Additions -- -- 0.2 19.7 4.3 24.2 Disposals -- -- -- (16.8) (5.8) (22.6) Translation differences (1.8) -- (0.6) (2.3) (0.6) (5.3) -------- -------- -------- -------- -------- -------- At December 31, 1997 113.9 10.1 22.3 216.4 22.6 385.3 ======== ======== ======== ======== ======== ======== DEPRECIATION At January 1, 1997 -- -- 10.3 145.0 9.8 165.1 Year ended December 31, 1997 Acquisition of subsidiaries -- -- 0.1 4.3 0.3 4.7 Provided in the year -- -- 1.0 17.9 4.1 23.0 Disposals -- -- -- (14.4) (3.6) (18.0) Translation differences -- -- (0.4 ) (1.2) (0.4) (2.0) -------- -------- -------- -------- -------- -------- At December 31, 1997 -- -- 11.0 151.6 10.2 172.8 ======== ======== ======== ======== ======== ======== NET BOOK VALUE At December 31, 1997 113.9 10.1 11.3 64.8 12.4 212.5 ======== ======== ======== ======== ======== ========
The directors have reviewed the current market values of the group's freehold and long-leasehold properties and are of the opinion that there is no substantial difference between their costs and market values. At each accounting date, the directors reassess the useful lives and residual values of these properties based on prices prevailing at the date of acquisition. Based on their assessments at December 31, 1997, the directors consider that the depreciation charge for the year then ended would not have been significant. Consequently, no depreciation charge has been made in respect of these properties. Freehold properties include an overseas asset held under a capital lease which has a net book value of (pound)15.7m. During 1997, proceeds amounting to (pound)19.5m were received on the disposal in 1996 of the group's long-leasehold interest in Aldgate House, London. 16 FIXED ASSETS: ASSOCIATED UNDERTAKINGS SHARE OF RETAINED SHARES EARNINGS LOANS TOTAL (pound)m (pound)m (pound)m (pound)m -------- -------- -------- -------- At January 1, 1997 36.7 4.7 0.1 41.5 Year ended December 31, 1997 Additions 1.1 (1.0) 0.1 0.2 Disposals and other movements (35.0) 8.1 -- (26.9) Translation differences -- 0.4 -- 0.4 -------- -------- -------- -------- At December 31, 1997 2.8 12.2 0.2 15.2 ======== ======== ======== ======== - ----------------------------------------------------------------------------- Shares held in associated undertakings are unlisted. Shares are stated at cost less amounts written off in respect of permanent diminution in value. At December 31, 1997, the group's only significant associated undertaking was ACE Holding Inc (ACE), an insurance broking business which is incorporated in the British Virgin Islands and operates in the Middle East. Sedgwick Group plc has an indirect interest in ACE comprising 100,000 ordinary shares of no par value representing 32.63% of its equity share capital. Disposals and other movements includes (pound)26.4m in respect of RTI, which became a subsidiary undertaking in April 1997. 17 RETIREMENT-RELATED INVESTMENT BUSINESS The group provides retirement-related investment products through SuperFlex Limited, a subsidiary undertaking based in South Africa, the net assets of which comprise: 1997 (pound)m - ---------------------------------------------------------------------------- Listed investments at current value (cost(pound)128.0m) 112.3 Unlisted investments at current value (cost(pound)190.0m) 192.3 Current assets 49.1 Current liabilities (0.2) ----------- Assets backing retirement contracts 353.5 Less: Attributable to shareholders 0.6 ----------- Liabilities linked to retirement contracts 352.9 =========== 18 FIXED ASSETS: INVESTMENTS LISTED UNLISTED SECURITIES SECURITIES TOTAL (pound)m (pound)m (pound)m ---------- ----------- ----------- At January 1, 1997 23.4 2.6 26.0 Year ended December 31, 1997 Acquisition of subsidiaries 34.1 39.6 73.7 Additions 97.6 26.1 123.7 Disposals and other movements (39.4) (30.4) (69.8) Translation differences 0.5 -- 0.5 ---------- ----------- ----------- At December 31, 1997 116.2 37.9 154.1 ========== =========== =========== The market value of listed securities was (pound)116.2m. 19 DEFERRED TAXATION Deferred taxation assets/(liabilities): PROVIDED UNPROVIDED ------------ ------------ 1997 1997 (pound)m (pound)m - -------------------------------------------------------------------------- Accelerated tax depreciation 0.5 -- Short-term timing differences 2.7 1.3 Potential remittance of retained earnings of overseas companies (8.0) -- Pensions and similar obligations 17.8 -- Restructuring provisions 6.0 -- Advance Corporation Tax recoverable -- 0.6 Overseas intangibles (note 10) 3.2 22.9 ------------ ------------ 22.2 24.8 ============ ============ Movements on the deferred taxation account: 1997 (pound)m - ------------------------------------------------------------------------- At January 1, 18.8 Acquisition of subsidiaries 4.9 Translation differences 0.7 Transfer from income (note 10) (1.1) Other movements (1.1) ------------ At December 31, 22.2 ============ 20 BORROWINGS a) BANK LOANS AND OVERDRAFTS At December 31, 1997, the group had committed borrowing facilities amounting to (pound)43.3m which expire within one year, all of which were undrawn. The weighted average interest rate payable on short-term loans and overdrafts outstanding at December 31, 1997, amounting to (pound)0.9m, was 6.9%. b) LONG-TERM BORROWINGS 1997 (pound)m - --------------------------------------------------------------------------- Bank loans 20.0 7.68% Senior Loan Notes 2006 36.2 Other borrowings 7.7 ------------ 63.9 7.25% Convertible Bonds 2008 41.5 ------------ 105.4 ------------ Falling due: Between one and two years 7.7 Between two and three years 10.3 Between three and four years 9.5 Between four and five years -- Over five years 77.9 ------------ 105.4 ============ Short-term borrowings under committed long-term facilities are classified as non-current liabilities. At December 31, 1997 the group had committed long-term facilities amounting to (pound)123.4m which expire between January 1999 and January 2002 of which (pound)27.6m had been drawn down. The weighted average interest rate payable on these borrowings was 6.0%. The 7.68% Senior Loan Notes 2006 were issued by Sedgwick Group, Inc., the group's US holding company, and mature on April 1, 2006 at their par value of US$60m unless previously repaid by Sedgwick Group, Inc. in accordance with the terms of the note purchase agreement. Sedgwick Group plc has guaranteed the principal amount, interest payments and any other monies which may be owed under the related note purchase agreement. Holders of the 7.25% Convertible Bonds 2008 have the option to convert the bonds into ordinary shares in the company at 183p per share at any time prior to May 24, 2008. The company has the option to redeem the bonds after December 14, 1998 or, if 15% or less of the initial (pound)41.5m principal amount remains outstanding, on or prior to that date. Unless previously repurchased by the company or any of its subsidiaries, redeemed or converted, the bonds will be redeemed at par on May 31, 2008. C) ANALYSIS BY CURRENCY The group's borrowings were denominated in the following currencies: 1997 (pound)m - ---------------------------------------------------------------------------- Sterling 41.8 US dollar 36.3 Norwegian krone 0.2 Irish punt 10.3 Netherlands guilder 3.3 Canadian dollar 7.7 Other currencies 6.7 ------------ 106.3 ============ All borrowings are unsecured. 21 CAPITAL LEASE OBLIGATIONS Capital lease obligations fall due as follows: 1997 (pound)m - ---------------------------------------------------------------------------- Within one year 1.2 Between one and two years 2.2 Between two and three years 2.0 Between three and four years 2.1 Between four and five years 2.1 Over five years 3.3 ----------- 12.9 Less: Imputed interest payable (2.6) ----------- 10.3 =========== 22 PROVISIONS FOR LIABILITIES AND CHARGES: INSURANCE TECHNICAL PROVISIONS 1997 (pound)m - ---------------------------------------------------------------------------- At January 1, 67.7 Acquisition of subsidiaries 303.9 Transfers from income 7.4 Utilization (73.5) Transfers to creditors and other movements (0.5) Translation differences 2.9 ----------- At December 31, 307.9 =========== At December 31, 1997, amounts recoverable from reinsurers in relation to insurance technical provisions amounted to (pound)177.8m. 23 PROVISIONS FOR LIABILITIES AND CHARGES: OTHER PROVISIONS
PENSIONS CLAIMS AND AND LAWSUITS SIMILAR RESTRUC- (NOTE OBLIGATIONS TURING 24(A)) OTHER TOTAL (pound)m (pound)m (pound)m (pound)m (pound)m ------------- ------------ ----------- ---------- --------- At January 1, 1997 42.3 19.0 43.6 24.5 129.4 Year ended December 31, 1997 Acquisition of subsidiaries -- -- 2.9 -- 2.9 Transfers from income 5.7 7.2 14.8 8.8 36.5 Utilization (6.0) (6.5) (11.7) (3.8) (28.0) Transfers (to)/from payables (1.3) 0.4 2.2 1.9 3.2 Translation differences 0.2 0.2 (0.1) (1.4) (1.1) ------------- ------------ ----------- ---------- --------- At December 31, 1997 40.9 20.3 51.7 30.0 142.9 ------------- ------------ ----------- ---------- ---------
Provisions for pensions and similar obligations are in respect of defined benefit pension costs, deferred compensation and other post-retirement benefits. Restructuring provisions comprise the following: (i) Provision for the future net costs of leasehold properties which are surplus to the group's foreseeable business requirements. At December 31, 1997, the provision amounted to (pound)11.0m and will be utilized over the unexpired periods of the relevant leases. (ii) Provision for costs to be incurred in relation to ongoing initiatives aimed at improving the group's efficiency and the integration of newly-acquired businesses. At December 31, 1997, the remaining provision amounted to (pound)9.3m which is expected to be utilized during 1998. Claims and lawsuits provisions are described in note 24(a) Other provisions principally comprise personnel-related costs (including performance-related bonuses), contingent consideration and sundry items. 24 CONTINGENT LIABILITIES a) CLAIMS AND LAWSUITS The group is subject to claims and lawsuits in the course of its business, resulting principally from alleged errors and omissions in connection with the group's insurance and consulting businesses. Claims may arise several years after the original events which could be the subject to the dispute. Although all claims are strenuously defended, provision is made, after taking account of the group's insurance arrangements, for potential liabilities including expenses that may arise in respect of these claims and lawsuits. Provision is based on current information and legal advice and provisions are adjusted from time to time according to developments. While there is always uncertainty as to the outcome of any claim or litigation, the directors do not expect such claims existing at the balance sheet date, either individually or in aggregate, to have a material adverse effect on the group's future results or financial position. b) OTHER CONTINGENCIES A group company has guaranteed undertakings totaling (pound)0.5m given by banks in relation to the underwriting membership of Lloyd's of certain directors and employees of fellow subsidiary undertakings. In no case does the contingent liability under any single guarantee exceed (pound)50,000. Certain group companies have opened letters of credit in favor of clients on behalf of insurance markets and have given other guarantees and indemnities in the ordinary course of their business. The company has given guarantees in respect of certain liabilities of other group companies. No material unprovided liabilities are expected to arise either to the company or the group as a result of these guarantees and indemnities. c) SUBSEQUENT EVENT On March 12, 1998 the Financial Services Authority (FSA) and the Personal Investment Authority (PIA) issued a consultation document which proposes an extension of the review of pension transfers and opt outs, specified by the Securities and Investments Board in October 1994, to individuals not considered to be priority cases. As explained in note 35, the potential exists for the additional potential liabilities arising from the review to have a material adverse effect on the group's future results and financial position. 25 COMMITMENTS a) OPERATING LEASES Certain group companies have entered into operating lease arrangements in respect of properties and equipment. Annual rental commitments under these leases are analyzed below: 1997 --------------------------- PROPERTIES OTHER (pound)m (pound)m ------------ ------------ Expiry of leases: Within one year 3.9 3.6 Between one and two years 4.9 3.1 Between two and three years 5.0 2.7 Between three and four years 8.5 0.7 Between four and five years 3.3 0.4 Over five years 20.9 -- ------------ ------------ 46.5 10.5 Less: Recoveries from operating sub-leases (5.0) -- ------------ ------------ 41.5 10.5 ============ ============ Future rentals arising under these leases are as follows: RENT SUB-LEASE NET RENT PAYABLE INCOME PAYABLE (pound)m (pound)m (pound)m -------------- --------------- -------------- Within one year 57.0 (5.0) 52.0 Between one and two years 47.6 (4.9) 42.7 Between two and three years 35.7 (3.5) 32.2 Between three and four years 25.1 (2.2) 22.9 Between four and five years 18.5 (1.3) 17.2 Over five years 133.8 (5.5) 128.3 -------------- --------------- -------------- 317.7 (22.4) 295.3 ============== =============== ============== b) CAPITAL EXPENDITURE At December 31, 1997, the group had commitments for contracted capital expenditure amounting to (pound)1.8m. 26 PENSIONS AND SIMILAR BENEFITS a) PENSIONS The group's principal defined benefit pension plans are in the UK and the US. These plans cover eligible current and retired employees and are funded on the basis of local actuarial advice. For the purposes of determining the group's pension cost, these plans are valued annually at January 1, using the projected unit method, by qualified actuaries who are the group's employees. At January 1, 1997, the date of the latest valuations, the market value of the assets of these plans was (pound)837.0m. In assessing the value of the assets held by the UK plan, allowance was made for the abolition during 1997 of tax credits on UK dividend income paid to pension plans. The actuarial value of the assets of these plans represented 115% of the liabilities for pension benefits that had accrued to members at that date, after allowing for expected future salary increases. Under the relevant accounting standard, this surplus is being recognized over the average remaining service lives of eligible employees. The group's contributions to its defined benefit pension plans during the year amounted to (pound)16.5m. The group's defined benefit pension cost was (pound)17.5m. At December 31, 1997, a prepayment of (pound)10.0m is included within other receivables falling due after more than one year which represents the cumulative amount by which the group's contributions to its pension plans have exceeded the pension costs charged to its profit and loss account. The principal assumptions made in the actuarial assessment of the group's defined benefit pension costs were: PER ANNUM - ------------------------------------------------------------------------ Investment return 8.75% to 9% Salary inflation (including the salary scale) 6.25% to 8% Dividend growth 5% Pension increase 4% to 5% b) OTHER POST-RETIREMENT BENEFITS Post-retirement benefits other than pensions were withdrawn from the group's existing employees in the UK in 1989 and in the US in 1993, but the group continues to provide certain of its pensioners with healthcare and life assurance benefits. Participation is restricted to employees who had retired and met eligibility requirements before January 1, 1994. At December 31, 1997 there were approximately 1,500 pensioners eligible for such benefits. The principal assumptions made in the actuarial assessment of the cost of other post-retirement benefits were as follows: PER ANNUM - --------------------------------------------------------------------- Medical cost inflation 7% to 10% Discount rate 8% 27 CASH FLOWS a) RECONCILIATION OF OPERATING INCOME TO NET CASH INFLOW FROM OPERATING ACTIVITIES 1997 (pound)m - ---------------------------------------------------------------------------- Operating income 105.8 Depreciation and other non-cash items 20.5 Increase in net fiduciary payables 1.4 Decrease in reinsurers' share of technical provisions 47.4 Decrease in other receivables and prepayments 20.6 Decrease in other payables and accruals (43.0) Decrease in insurance technical provisions (66.8) Increase in long-term payables and provisions 12.0 ----------- Net cash inflow from operating activities 97.9 =========== b) ANALYSIS OF THE MOVEMENT IN NET FUNDS
CASH AND OVERDRAFTS BORROWINGS -------------------------- ----------------- LIQUID FINANCE CASH OVERDRAFTS TOTAL RESOURCES LOANS LEASES NET FUNDS (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m ------- ---------- --------- --------- -------- -------- -------- At January 1, 1997 206.6 (0.5) 206.1 412.4 (131.8) (12.2) 474.5 Year ended December 31, 1997 Cash flows (17.7) 16.4 (1.3) (41.6) 26.0 0.6 (16.3) Acquisitions and disposals (10.9) (16.5) (27.4) 78.7 -- -- 51.3 Translation differences (7.5) 0.1 (7.4) 3.0 -- 1.3 (3.1) ------- ---------- --------- --------- -------- -------- -------- At December 31, 1997 170.5 (0.5) 170.0 452.5 (105.8) (10.3) 506.4 ======= ========== ========= ========= ======== ======== ========
c) RECONCILIATION OF CASH AND LIQUID RESOURCES TO AMOUNTS SHOWN IN THE BALANCE SHEET 1997 (pound)m - ---------------------------------------------------------------------------- CASH Cash and deposits 538.8 Less: Deposits classified as liquid resources (356.3) Less: Deposits classified as financial investment (12.0) ----------- 170.5 =========== LIQUID RESOURCES Current asset investments 96.2 Add: Deposits classified as liquid resources 356.3 ----------- 452.5 =========== 28 DIRECTORS' REMUNERATION 1997 (pound)000 - --------------------------------------------------------------------------- Aggregate emoluments: Salary and fees 1,497 Annual bonus 514 Benefits in kind 92 ----------- 2,103 =========== Deferred bonus 439 ----------- Notional gains made on the exercise of share options 40 ----------- Deferred bonus figures stated above represent amounts accrued in respect of directors who were in office during the period. At December 31, 1997, the accumulated provision for deferred bonus attributable to directors in office at that date was (pound)873,000. During 1997, no amounts were paid to directors in respect of their accumulated deferred bonus entitlements. 29 EMPLOYEE SHARE OPTION PLANS For many years, the company has offered participation in its share option plans to certain of the group's employees. The company's existing share option plans expired during 1994. At the 1995 Annual General Meeting, the shareholders approved the renewal of both plans for a further ten years. No further options may be granted under the expired plans but outstanding options remain exercisable. An explanation of the terms of the company's share option plans is given below. SHARESAVE Sharesave is a savings-related share option plan which has been available to all permanent members of staff based in the UK since 1984. In 1995, the plan was extended to employees based in the Republic of Ireland and, in 1996, to employees in the Isle of Man and the Channel Islands. Participants enter into a three or five-year savings contract to which they may contribute up to (pound)250 per month. Within the six months following the maturity of the savings contract, participants may use the proceeds to purchase the company's shares at the exercise price which is determined at the time they are invited to apply for options under the plan. EXECUTIVE PLAN The Executive plan is available to executive directors and senior management throughout the world. Options granted under this plan are normally exercisable within the period commencing on the third anniversary and ending on the tenth anniversary of the date on which they were granted. With the renewal of the plan in 1995, the group introduced a performance condition. Options granted under the replacement plan may not be exercised unless earnings per share growth exceeds that of the UK Retail Prices Index by at least 2% per annum averaged over the number of years completed since the date on which they were granted. Information relating to the options outstanding under the company's share option plans is given below.
WEIGHTED EXECUTIVE SHARESAVE AVERAGE PLAN PLAN TOTAL EXERCISE MILLIONS MILLIONS MILLIONS PRICE ----------- ---------- ----------- ---------- Outstanding at January 1, 1997 21.7 11.8 33.5 163p Year ended December 31, 1997 Exercised -- (5.5) (5.5) 88p Cancelled (1.7) (1.2) (2.9) 228p ----------- ---------- ----------- ---------- Outstanding at December 31, 1997 20.0 5.1 25.1 172p ----------- ---------- ----------- ---------- Exercisable at December 31, 1997 15.8 0.5 16.3 193p ----------- ---------- ----------- ----------
No options were granted during 1997. Options outstanding at December 31, 1997:
OUTSTANDING EXERCISABLE --------------------------------- --------------------- WEIGHTED AVERAGE ---------------------- WEIGHTED AVERAGE NUMBER EXERCISE PERIOD TO NUMBER EXERCISE RANGE OF EXERCISE PRICES MILLIONS PRICE EXPIRY MILLIONS PRICE - ------------------------------------ --------- ---------- ---------- -------- ----------- 88p-100p 3.9 97p 37 months 0.5 88p 100p-200p 12.7 160p 70 months 7.3 170p 200p-300p 8.5 224p 42 months 8.5 224p --------- ---------- ---------- -------- ---------- 25.1 16.3 --------- --------
The market price of the company's shares at the close of business on December 31, 1997 was 141p per share and, during the year, fluctuated in the range 116p to 151.5p per share. The number of shares which may be issued or issuable under the company's employee share plans is limited such that in any ten-year period not more than 10% of the issued ordinary share capital may be issued or issuable under such plans. Options which have been cancelled are ignored for the purpose of this calculation. 30 TRANSACTIONS WITH RELATED PARTIES Mrs. L.M.B.A. Moratti, who was appointed a director of the Company on December 17, 1997, together with certain family members, controls Securfin S.p.A. and Securfin Altrida B.V. Those companies are parties to the joint-venture agreement and related documentation in respect of the creation of Nikols Sedgwick B.V., to which Sedgwick Group plc and certain of its subsidiaries are also parties. Full details of the transaction were contained in the circular to shareholders dated October 10, 1997, including exit mechanisms involving Securfin S.p.A. and Securfin Altrida B.V. Agreements subsisted during the year under which Lloyd's underwriting agency services were provided by Sedgwick Oakwood to Q.O. Healey, S. Riley, R.J.W. Titley and W.R.P. White-Cooper. There are no special terms in the agreements under which Sedgwick Oakwood acts for the directors or persons connected with them. During the period under review, there were no other transactions or balances with related parties reportable under FRS 8, Related Party Disclosures. 31 POST-BALANCE SHEET EVENT On January 16, 1998, the group sold its managing agencies based in The Netherlands for NLG 37 million ((pound)11.2 million) in cash, of which 80 percent was paid on completion and 20 percent will be paid in July 1998. It is expected that the proceeds will be used largely to fund the reorganisation of the group's operations in The Netherlands and elsewhere during 1998. 32 DIFFERENCES BETWEEN UK AND US GAAP The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the UK (UK GAAP), which differ in certain respects from those applicable in the US (US GAAP). An explanation of the differences which have a significant effect on the group is given below. USE OF ESTIMATES Preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for an accounting period. Such estimates and assumptions could change in the future as more information becomes known or circumstances alter, such that the group's actual results may differ from the amounts reported and disclosed in the financial statements. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS Under UK GAAP, goodwill and identifiable intangible assets arising from the purchase of businesses are written off on acquisition against retained earnings or other reserves. Under US GAAP, goodwill and identifiable intangible assets are capitalized and amortized over their estimated useful lives. For the purposes of the tabular reconciliations set out below, such assets are amortized over periods of 5 to 40 years. IMPAIRMENT OF LONG-LIVED ASSETS Under UK GAAP, provision is made against the carrying value of a long-lived asset to the extent that there is believed to be permanent diminution in its value. Provisions are not made for temporary diminutions in value. Under UK GAAP there is no prescriptive guidance on impairment assessment. Under US GAAP, SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of requires long-lived assets and any related goodwill (so-called impairment test goodwill) to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Impairment is assessed by comparison of the cash flows expected to be derived from an asset against the carrying values of the asset and any related goodwill. If such cash flows fall below the related carrying values, an impairment loss should be recognized being the shortfall of the discounted future cash flows against the related carrying values. Goodwill which is not related to long-lived assets (so-called enterprise goodwill) continues to be assessed for impairment in accordance with APB No. 17 Intangible assets. Management reviews the carrying value of enterprise goodwill for impairment on an annual basis by reference to the discounted cash flows expected to be derived from the relevant businesses. Considerable judgement is necessary in estimating future cash flows. Actual cash flows could differ significantly from such estimates. During the year ended December 31, 1997, no adjustments were necessary in respect of impairment of long-lived assets. RESTRUCTURING INITIATIVES Restructuring costs are incurred in relation to ongoing initiatives aimed at improving the group's efficiency and the integration of newly-acquired businesses. Such costs are principally personnel and property-related. Under US GAAP, the requirements for making provision for restructuring costs are more prescriptive than under UK GAAP. Accordingly, in 1997 adjustments have been made in respect of restructuring costs recognized during 1997 under UK GAAP which will be recognized in future years under US GAAP. SOFTWARE DEVELOPMENT COSTS Subject to certain conditions, the cost of software developed by the group for its own use may be capitalized under UK GAAP. Under US GAAP, such costs are expensed as incurred. CONTINGENT COMMISSIONS Contingent commissions represent income receivable from insurers based on the volume and/or profitability of business placed with them by the group. Under UK GAAP, contingent commissions are accrued for in the period to which they relate provided that they can be reasonably estimated. Under US GAAP, SFAS No. 5, Accounting for Contingencies, effectively precludes accrual for contingent commissions which are based on the profitability of business placed or are both volume and profit-based (so-called hybrid arrangements). Accordingly, the group records income from profit-based and hybrid arrangements on a cash-received basis under US GAAP. PENSIONS Under UK GAAP, the cost of providing defined benefit pension arrangements is expensed over the average expected service lives of eligible employees on the basis of a constant percentage of current and estimated future earnings. Under US GAAP, SFAS No. 87 Employers' Accounting for Pensions, requires that the cost is determined based on a comparison of the projected benefit obligation with the market value of the underlying plan assets and other unrecognized gains and losses assessed on an actuarial basis. Principally as a result of this difference in methodology, the group's US GAAP pension cost can be significantly different from that determined under UK GAAP and tends to be more sensitive to changing economic conditions. POST-EMPLOYMENT BENEFITS Post-employment benefits are all types of benefits provided to former or inactive employees after employment but before their retirement. In respect of the group, such benefits primarily relate to compensation for long-term sickness. Under UK GAAP, the cost of providing these benefits is recognized on a cash basis. Under US GAAP, SFAS No. 112, Employers' Accounting for Post-employment Benefits, requires that the expected cost of such benefits is accrued over the estimated average service lives of eligible employees. REVALUATION OF FORWARD EXCHANGE CONTRACTS As an element of its treasury management strategy, the group enters into forward exchange contracts and other financial instruments in respect of future income denominated in foreign currencies principally US dollars. Under UK GAAP, such instruments are regarded as hedges of future income and are not reflected in the group's financial statements. Under US GAAP, such instruments are regarded as anticipatory hedges and are revalued (or marked to market) at each accounting date. Any gain or loss arising on revaluation is recorded in operations. INVESTMENTS Under UK GAAP, fixed asset investments are stated at cost or amortized cost less provision for any permanent diminution in value. Current asset investments are stated at the lower of cost or amortized cost and net realizable value. Under US GAAP, the group complies with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, under which such investments are classified as available for sale and recorded at their fair values. Unrealized gains and losses are reflected in shareholders' equity (net of tax effects, if applicable). LEASES Certain property leases which are treated as operating leases under UK GAAP must be accounted for as capital leases under US GAAP. CONTINGENT CONSIDERATION Under UK GAAP, contingent consideration payable in respect of businesses acquired prior to January 1, 1995 is recognized when it becomes known. Contingent consideration payable in respect of businesses acquired on or after January 1, 1995 is estimated and provided for on completion. Under US GAAP, contingent consideration is recognized when it becomes known. Accordingly, the tabular reconciliations reflect an adjustment to shareholders' equity in respect of contingent consideration payable on businesses acquired on or after January 1, 1995. DIVIDENDS PROPOSED Under UK GAAP dividends are provided for in the accounting period to which they relate. Under US GAAP, dividends are not provided for until they are declared by the directors following approval by the shareholders. SHARE OPTION PLANS Under UK GAAP, the group does not recognize any cost in respect of options granted under its share option plans. Under US GAAP, the group accounts for its share option plans in accordance with APB No. 25, Accounting for Stock Issued to Employees. The group's share option plans are described in note 29. The Sharesave plans are non-compensatory under APB No. 25. The Executive plans are, however, compensatory under APB No. 25 and, in view of its performance condition, the 1995 Executive Share Option Scheme is accounted for as a variable plan. During the period under review, the compensation cost determined in respect of the Executive plans was not material to the group's net income and shareholders' equity. Information on the fair value of share options granted since January 1, 1995 is given in note 33. DEFERRED TAXATION Under UK GAAP, deferred taxation is accounted for using the liability method to the extent that it is considered probable that a liability or asset will crystallize in the foreseeable future. Under US GAAP, deferred taxation is provided on all temporary differences. Deferred tax assets are recognized to the extent that it is more likely than not that they will be realized. Where doubt exists as to whether a deferred tax asset will be realized, an appropriate valuation allowance is established. DISCONTINUED OPERATIONS For an operation to be categorized as discontinued under UK GAAP, its sale or termination must have a material effect on the nature and focus of the group's operations and represent a material reduction in its operating facilities. Under US GAAP, discontinued operations represent reportable segments which have been sold or terminated. Accordingly, the group's insurance underwriting subsidiaries in run off are regarded as discontinued operations under US GAAP but are not regarded as discontinued operations under UK GAAP. NET INCOME AND SHAREHOLDERS' EQUITY RECONCILIATION STATEMENTS The effect on the group's net income and shareholders' equity of applying the significant differences between UK GAAP and US GAAP is summarized in the tabular reconciliation statements set out below. NET INCOME YEAR ENDED DECEMBER 31, 1997 (pound)m - ---------------------------------------------------------------------------- EARNINGS REPORTED UNDER UK GAAP 70.4 Adjustments: Amortization of goodwill and identifiable intangible assets (13.3) Restructuring initiatives 5.8 Contingent commissions (0.7) Pensions 1.0 Post-employment benefits 0.2 Revaluation of forward exchange contracts (2.5) Leases 0.8 Other items 0.5 Deferred taxation (10.1) ---------- NET INCOME IN ACCORDANCE WITH US GAAP 52.1 ========== Analysis of net income in accordance with US GAAP - -- Continuing operations 50.9 - -- Discontinued operations 1.2 ---------- 52.1 ========== EARNINGS PER SHARE Reported under UK GAAP 12.8p ---------- In accordance with US GAAP: Basic 9.5p Diluted 9.4p ---------- Earnings per share attributable to discontinued operations were not material during the period under review. With effect from 1 January 1997, the group adopted FAS 128, Earnings per share. Earnings per share calculations in accordance with US GAAP are set out in note 33. Additional information on earnings per share is set out in note 34. SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997 (pound)m - ---------------------------------------------------------------------------- SHAREHOLDERS' FUNDS REPORTED UNDER UK GAAP 199.8 Adjustments: Goodwill and identifiable intangible assets 218.8 Restructuring initiatives 5.0 Contingent commissions (10.5) Pensions 8.5 Post-employment benefits (3.3) Revaluation of forward exchange contracts 0.9 Investments 1.2 Leases (4.1) Contingent consideration 12.3 Dividends proposed 22.2 Other (0.3) Deferred taxation 24.9 Deferred taxation on US GAAP adjustments (9.4) ----------- SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP 466.0 =========== Analysis of shareholders' equity in accordance with US GAAP - -- Continuing operations 425.7 - -- Discontinued operations 40.3 ----------- 466.0 =========== STATEMENTS OF CASH FLOWS During 1997, the group adopted FRS No. 1 (Revised), Cash flow statements, as the basis for preparing its consolidated statements of cash flows under UK GAAP. An explanation of the changes introduced by FRS No. 1 (Revised) is given in note 1 to these financial statements. Under US GAAP, the group follows SFAS No. 95, Statement of Cash Flows, which differs from FRS No. 1 (Revised) in the following respects: (a) Under FRS No. 1 (Revised), cash flows are presented for operating activities, returns on investments and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, dividends, management of liquid resources and financing. SFAS No. 95 requires cash flows to be analyzed between those resulting from operating, investing and financing activities. (b) Under FRS No. 1 (Revised), the statement of cash flows shows the movement in "pure cash" which comprises cash in hand, deposits repayable on demand, less overdrafts. Under SFAS No. 95, the statement of cash flows shows the movement in cash and cash equivalents which differs from the movement in "pure cash" in the following respects: (i) overdrafts are excluded; (ii) investments which were within three months of maturity when acquired are included; and (iii)cash, deposits and investments held in a fiduciary capacity are excluded. For illustrative purposes, summary consolidated statements of cash flows under US GAAP are set out below: YEAR ENDED DECEMBER 31, 1997 (pound)m - ---------------------------------------------------------------------------- Cash inflow from operating activities 71.6 Cash outflow from investing activities (21.8) Cash outflow from financing activities (73.5) ----------- Net increase in cash and cash equivalents under US GAAP (23.7) Effect of exchange rate changes (1.4) Cash and cash equivalents under US GAAP at January 1, 129.5 ----------- Cash and cash equivalents under US GAAP at December 31, 104.4 Less: Overdrafts (0.5) Less: Investments within three months of maturity when acquired (270.1) Add: Cash and deposits held in a fiduciary capacity 336.2 ----------- Cash and overdrafts under UK GAAP at December 31, 170.0 =========== RECENT ACCOUNTING PRONOUNCEMENTS a) UK GAAP GOODWILL AND INTANGIBLE ASSETS During 1997, the Accounting Standards Board (ASB) published FRS No. 10, Goodwill and intangible assets, which requires that goodwill arising on acquisitions recognized during accounting periods ending on or after December 23, 1998 must be capitalized and amortized over its useful economic life. Accordingly, the treatment of goodwill under UK GAAP will in future be broadly similar to its treatment under US GAAP. Nevertheless, management expects that the tabular reconciliations will continue to reflect goodwill-related adjustments because FRS No. 10 need not be applied retrospectively to goodwill written-off to reserves in previous years and there will continue to be differences between the bases of calculating goodwill (for example, in relation to fair valuation and the criteria for accounting for business combinations as pooling of interests). ASSOCIATES AND JOINT VENTURES In November 1997, the ASB published FRS No. 9, Associates and joint ventures, which restricts the circumstances in which equity accounting can be applied and provides, for the first time under UK GAAP, detailed rules for accounting for joint ventures. It also changes the presentation of the group's share of the results of associates and joint ventures and introduces additional disclosure requirements. FRS No. 9 applies to accounting periods beginning on or after June 23, 1998. Management does not expect that adoption of FRS No. 9 will have a material impact on the group's results or financial position. b) US GAAP DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS In February 1997, the SEC issued FRR No. 48 which requires certain additional disclosures in relation to derivatives and other financial instruments designed to help users of financial statements to assess the market risks to which registrants are exposed and understand how those risks are managed. In response to this pronouncement, management has enhanced the disclosure of the group's accounting policy in relation to derivatives presented in note 1 to these consolidated financial statements. For accounting periods ending after June 15, 1998, management will be required to provide additional qualitative and quantitative information about the market risks inherent in derivatives and other financial instruments in "Management's discussion and analysis." The Financial Accounting Standards Board (FASB) is developing a new accounting standard on derivatives and hedging activities. It is expected that the standard will require all derivatives to be measured at fair value and recognized on the balance sheet as assets or liabilities. It is expected that net income will be affected only by changes in the fair values of derivatives that are not designated as hedges. It is expected that the standard will apply to accounting periods beginning after June 15, 1999. It is not yet possible for management to assess its financial effect. COMPREHENSIVE INCOME Comprehensive income represents all changes in shareholders' equity during an accounting period other than those arising from investments by and/or distributions to shareholders. In June 1997, the FASB published SFAS No. 130, Reporting Comprehensive Income, which requires that a statement of comprehensive income is included in financial statements prepared in accordance with US GAAP. SFAS No. 130 applies to accounting periods beginning after December 15, 1997. The group already provides the required information under UK GAAP. SEGMENTAL INFORMATION Segmental information is currently reported on two bases: by industry and by geographic area. In June 1997, the FASB published SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which will replace the industry-based disclosures with segmental information based on the group's internal management reporting structures. In addition, SFAS No. 131 requires segmental information by geographic area and by type of products and services, and information on major customers. SFAS No. 131 applies to accounting periods beginning after December 15, 1997. PENSIONS AND OTHER POST-RETIREMENT BENEFITS In February 1998, the FASB published SFAS No. 132, Employer's disclosures about Pensions and Other Postretirement Benefits. It does not address recognition or measurement issues but improves and standardizes the disclosure requirements in respect of pensions and other post-retirement benefits. SFAS No. 132 applies to accounting periods beginning after December 15, 1997. 33 DISCLOSURES RELATING TO INFORMATION PRESENTED IN ACCORDANCE WITH US GAAP INTANGIBLE ASSETS Intangible assets comprise the following: 1997 (pound)m - ---------------------------------------------------------------------------- Goodwill 247.5 Identifiable intangibles 104.6 ----------- 352.1 Less: Accumulated amortization (133.3) ----------- 218.8 =========== INVESTMENTS The group has classified all of its investments in debt and equity securities as "available for sale" under SFAS No. 115. The costs and fair values of the group's investments were as follows:
COST OR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE AT DECEMBER 31, 1997 (pound)m (pound)m (pound)m (pound)m - -------------------- ----------- ----------- ------------ --------- Debt securities: UK government 5.1 -- -- 5.1 US government 31.5 1.1 (0.1) 32.5 Other government and public bodies 107.7 0.2 (0.2) 107.7 Corporate 98.3 -- (0.2) 98.1 Other issuers 4.8 0.1 -- 4.9 ----------- ----------- ------------ -------- 247.4 1.4 (0.5) 248.3 Equity securities 2.9 0.3 -- 3.2 ----------- ----------- ------------ -------- 250.3 1.7 (0.5) 251.5 =========== =========== ============ ========
The contractual maturities of debt securities held at December 31, 1997 are set out below: 1997 ---------------------- COST OR AMORTIZED COST FAIR VALUE (pound)m (pound)m ---------- ---------- Within one year 103.6 104.8 Between one and five years 129.2 129.0 Between five and ten years 14.6 14.5 ---------- ---------- 247.4 248.3 ========== ========== Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations prior to the contractual maturity date. Disposals of debt securities during the year ended December 31, 1997 did not give rise to significant realized gains and losses. FAIR VALUES OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of financial instruments held by the group both on and off-balance sheet. The carrying values and fair values of the material financial instruments held by the group were as follows: 1997 ---------------------- CARRYING FAIR VALUE VALUE (Pound)m (pound)m ---------- ---------- Assets: Cash and deposits 538.8 538.8 Current asset investments - --Listed 60.1 60.4 - --Unlisted 36.1 37.1 Fixed asset investments - --Listed 116.2 116.2 - --Unlisted 37.9 37.8 Liabilities: Bank loans and overdrafts 28.5 28.5 7.68% Senior Loan Notes 2006 36.2 36.5 7.25% Convertible Bonds 2008 41.5 41.5 Off-balance sheet instruments: Forward exchange contracts -- 0.9 Interest rate agreements -- 2.3 ---------- ---------- In establishing its fair value disclosures for financial instruments, the group has adopted the following methods and assumptions: i) the carrying value of cash and deposits approximates to the fair value; ii) the fair values of listed and unlisted investments are based on quoted market prices, where available, or on a reasonable estimate of market value based on the quoted market prices of similar financial instruments; iii) the carrying value of bank loans and overdrafts approximates to the fair value; iv) the fair value of the 7.68% Senior Loan Notes 2006 is based on discounted cash flows; v) the fair value of the 7.25% Convertible Bonds 2008 represents the quoted market price; vi) the fair values of forward exchange contracts are based on market rates; and vii) the fair values of interest rate agreements are based on discounted cash flows. DERIVATIVES As explained in note 1, the group uses derivatives to manage its exposure to market risks arising from changes in foreign exchange rates and interest rates. Information on the significant hedging arrangements outstanding at December 31, 1997 is provided below. a) FORWARD EXCHANGE CONTRACTS The group had outstanding forward exchange contracts, including those to sell US dollars for sterling, for underlying principal amounts of (pound)64.7m at December 31, 1997. Forward exchange contracts to sell US dollars for sterling in place at December 31, 1997 were as follows: 1997 -------------------- AVERAGE PRINCIPAL RATE MATURITY (pound)m (pound)m - ------------------------------------------------------------- --------- 1998 44.4 1.59 1999 8.4 1.55 2000 1.2 1.57 --------- --------- 54.0 --------- b) INTEREST RATE AGREEMENTS Underlying notional principal amounts of such contracts outstanding, their termination dates and, where determinable, applicable interest rates were as follows:
INTEREST RATES ------------------------------------------- AT DECEMBER 31, 1997 NOTIONAL FIXED VARIABLE FIXED VARIABLE PRINCIPAL TERMINATION RECEIVABLE PAYABLE PAYABLE PAYABLE CURRENCY MILLIONS DATES % % % % - ------------------------------------------------------------------------------------------------ US dollar 490 1998 - 2001 5.94--7.87 5.81--6.00 -- -- Sterling 120 1998 - 2001 7.00--7.73 7.38--7.81 -- -- Sterling 20 1998 -- -- 7.16 7.07 German mark 90 1998 - 1999 4.12--4.55 -- -- -- ---------- ----------- ---------- ---------- --------- -------
CONCENTRATION OF CREDIT RISK At December 31, 1997, the group did not consider there to be any significant concentration of credit risk. Potential concentrations of credit risk to the group comprise principally cash and short-term deposits, investments and insurance broking receivables. The group places cash and short-term deposits with a range of banks and financial institutions and controls its exposure to any one counterparty. The group's investments comprise a broad range of highly-rated financial instruments issued principally in the UK and the US. Concentration of credit risk with respect to insurance broking receivables is limited due to the large number of clients and underwriters with which the group conducts business and their dispersion across many different industries and/or geographic locations. As part of its on-going control procedures, the group monitors both the credit worthiness of its clients and underwriters with whom business is placed on behalf of clients. PENSIONS The group's principal defined benefit pension plans are in the UK and the US. Pension costs for these plans computed in accordance with SFAS No. 87, Employers' Accounting for Pensions, were as follows: a) UK PLAN YEAR ENDED DECEMBER 31, 1997 (pound)m - ---------------------------------------------------------------------------- Cost of benefits earned during the period (or service cost) 25.0 Interest cost on projected benefit obligation 44.6 Return on plan assets (56.2) Net amortization and deferral (3.2) ----------- Pension cost under US GAAP 10.2 =========== b) US PLAN YEAR ENDED DECEMBER 31, 1997 (pound)m - ---------------------------------------------------------------------------- Cost of benefits earned during the period (or service cost) 7.7 Interest cost on projected benefit obligation 12.5 Return on plan assets (37.9) Net amortization and deferral 20.9 ----------- Pension cost under US GAAP 3.2 =========== The funded status of the above plans determined in accordance with SFAS No. 87 was as follows:
1997 ---------------------- UK PLAN US PLAN (pound)m (pound)m - ---------------------------------------------------------------------------------- Fair value of plan assets 710.1 213.4 Less: Accumulated benefit obligation (625.0) (146.0) Additional benefits based on estimated future salary levels (30.3) (27.6) ---------- --------- Projected benefit obligation (655.3) (173.6) ---------- --------- Plan assets in excess of projected benefit obligation 54.8 39.8 Amounts available to increase/(reduce) future pension costs: Unrecognized net (gain)/loss at transition (9.2) 0.4 Unrecognized net experience gain (39.6) (54.7) Unrecognized prior service costs 18.4 2.5 Minimum pension liability adjustment -- (2.3) ---------- ----------- Prepaid/(accrued) pension cost under US GAAP 24.4 (14.3) ========== =========== Vested benefit obligation 625.0 142.9 ---------- -----------
Plan benefits are based on length of service and final salary. Plan assets are principally equity and fixed interest securities. Actuarial computations are based on the projected unit method. The principal assumptions used in computing the group's pension costs under US GAAP, which were determined at January 1, 1997, were: UK US PER ANNUM PER ANNUM - ---------------------------------------------------------------------------- Investment return 8.5% 8% to 9% Discount rate 7.5% 8% Salary inflation (excluding the salary scale) 5.25% 5% ========== =========== OTHER POST-RETIREMENT BENEFITS The cost of post-retirement benefits other than pensions computed in accordance with SFAS No. 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions, was as follows: YEAR ENDED DECEMBER 31, 1997 (pound)m - --------------------------------------------------------------------------- Interest on accumulated benefit obligation 1.3 Net amortization and deferral 0.1 ----------- 1.4 =========== The plans are unfunded. The benefit obligation determined in accordance with SFAS No. 106 was as follows: 1997 (pound)m ----------- Accumulated benefit obligation 16.4 Amounts available to increase future costs: Unrecognized net experience gain (1.8) ----------- 14.6 =========== The principal assumptions made in the actuarial assessment of the cost of other post-retirement benefits, which were determined at January 1, 1997, were: PER ANNUM - ----------------------------------------------------------------------- Medical cost inflation 7% to 10% Discount rate 8% DEFERRED TAXATION Deferred taxation assets/(liabilities) on the full provision basis under US GAAP: AT DECEMBER 31, 1997 ----------------------------------- FULL VALUATION PROVISION ALLOWANCE NET (pound)m (pound)M (pound)m - ---------------------------------------------------------------------------- Accelerated tax depreciation 0.5 -- 0.5 Short-term timing differences 11.8 (2.9) 8.9 Potential remittance of retained earnings of overseas companies (8.0) -- (8.0) Pensions and similar obligations 17.0 -- 17.0 Restructuring provisions 4.9 -- 4.9 Advance Corporation Tax recoverable 0.6 -- 0.6 Overseas intangibles (note 10) 13.9 -- 13.9 ----------- ---------- ----------- 40.7 (2.9) 37.8 =========== ========== =========== A valuation allowance is provided to reduce the deferred tax asset to a level which, more likely than not, will be realized, based on available evidence including historical and projected operating results, estimated reversals of temporary differences and tax-planning strategies. Management projects the expected reversal of the timing differences giving rise to the deferred tax assets and assesses whether there are likely to be sufficient taxable profits in the year in which they reverse, or the relevant carry forward period, against which the deduction arising on reversal may be set. To the extent that such profits are insufficient, taxable income in prior years, against which the deductions arising could be set, is taken into account. In making this assessment, future tax-planning strategies are taken into account only if they are considered to be feasible and are more likely than not to be implemented. When SFAS No. 109, Accounting for Income Taxes, became effective in 1993, it was necessary to establish valuation allowances in respect of unutilized ACT which, although available to carry forward for recovery against future UK tax liabilities, was considered unlikely to be utilized in the foreseeable future and deferred tax assets arising in the group's US subsidiaries which, at that time, had only recently recovered from a period in which it made losses. In subsequent years it has been possible to reduce these valuation allowances for the following reasons: (i) in 1995, the group implemented its foreign income dividend (FID) strategy enabling it both to avoid incurring further unutilized ACT and to utilize ACT brought forward against current year tax liabilities; and (ii) the performance of the group's US operation has enabled management to adopt an increasingly favorable expectation of its future profitability. EARNINGS PER SHARE Basic and diluted earnings per share in accordance with US GAAP are calculated as follows: YEAR ENDED DECEMBER 31, 1997 --------------------------------- NET INCOME SHARES EARNINGS (pound)m MIllIONS PER SHARE - ------------------------------------------------------------------------------ Basic 52.1 549.5 9.48p Effect of potentially dilutive securities: Share options -- 2.5 (0.04)p 7.25% Convertible Bonds 2008 2.1 22.7 (0.01)p -------------------------------- 2.1 25.2 (0.05)p -------------------------------- Diluted 54.2 574.7 9.43p -------------------------------- The weighted average number of share options outstanding during the year but not included in the calculation of diluted earnings per share because their exercise prices exceeded the average market price of the company's shares during the year was 22.2m in 1997. SHARE OPTION PLANS A description of the group's share option plans, an analysis of the number and exercise prices of options outstanding and other relevant information is given in note 29. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based Compensation, which permits disclosure of the cost to the group of share options granted to employees on or after January 1, 1995 based on the fair value of the options on the date on which they were granted. Had the group accounted for share options granted since January 1, 1995 in accordance with SFAS No. 123, net income under US GAAP would have been reduced by (pound)0.9m in 1997. Such adjustments are unlikely to be indicative of the effect of share option plans on future pro-forma net income because they do not take into account any cost associated with share options granted before January 1, 1995. In calculating the above pro-forma adjustments the fair value of options granted was assessed using the Black-Scholes option-pricing model. No options were granted in 1997. 34 ADDITIONAL INFORMATION ON EARNINGS PER SHARE In management's opinion, basic earnings per share before interest payable, taxation, and amortization of goodwill and identifiable intangible assets (EBITA) provides a more meaningful indicator of the group's trading performance than the measures of earnings per share shown in note 32. EBITA per share is calculated as follows: YEAR ENDED DECEMBER 31, 1997 (pound)m ----------- Net income in accordance with US GAAP 52.1 Adjustments: Interest payable 10.2 Taxation - --In accordance with UK GAAP 28.3 - --US GAAP adjustments 10.1 ----------- 38.4 Amortization of goodwill and identifiable intangible assets 13.3 ----------- EBITA 114.0 =========== Average number of shares in issue 549.5 ----------- EBITA per share 20.75p ----------- It should be noted that EBITA as defined above may not be comparable with similarly-titled measures reported by other companies as it is not defined under either UK GAAP or US GAAP. 35 SUBSEQUENT EVENT In October 1994, the Securities and Investments Board (SIB), issued its report Pension Transfers and Opt Outs, Review of Past Business. Its objective was to secure compensation for individuals who, between April 29, 1988 (the effective date of regulation under the Financial Services Act 1986) and June 30, 1994 (when new guidance on pension transfers and opt outs came into force), were wrongly advised to transfer benefits from, or opt out of, an occupational pension plan and enter into a personal pension plan and have thereby suffered actual or potential loss. During the period under review, such business was undertaken by the Noble Lowndes group, largely prior to its acquisition by Sedgwick in September 1993, and by Sedgwick Consulting Group, the group's employee benefits operation at the time. Based on criteria and procedures set out in the SIB's report, the group is required to conduct a review of this business and to determine the compensation which should be paid to clients. The SIB required the review to be conducted only on priority cases; in particular, those who transferred from an occupational pension plan and have since died or retired or are now nearing retirement and those who opted out of an occupational plan and are now over 35 years old. Sedgwick has satisfied the interim targets set by the regulator and expects to complete this review by December 31, 1998. On March 12, 1998, the FSA and the PIA issued a consultation document on the review of individuals not considered to be priority cases. This further review will focus on younger investors; typically those who are still more than 15 years away from retirement. The consultation document envisages that clients falling within this category will be contacted by the relevant entity and that the FSA will concurrently conduct a publicity campaign to alert clients to their right to request a review. The consultation document contains an indication that the extension of the review will give rise to a material increase in the total estimated cost to the pensions industry. Some market commentators believe that the additional cost could be significantly higher than that indicated by the consultation document. Management believes Sedgwick has very few pension opt outs but does have some 25,000 pension transfers to review. Management has conducted an initial review of the impact on the group's financial position taking into account the assumptions contained in the consultation document and the changes in the long-term interest rate assumptions, set by the PIA, which are increasing the cost of compensating clients for the losses they have suffered. Management is currently unable to give a reliable estimate of the potential range of loss but, based on the upper limit of the range for calculating compensation set out in the consultation document and assuming full recoveries against the group's insurers, it is expected that there would be an additional cost to the group of not less than (pound)35 million. The potential exists, however, for this estimate to be materially exceeded if the assumptions set out in the consultation document or long-term interest rate assumptions turn out to be too conservative. Additional costs arising from the review will be recognized as an exceptional item during 1998. 36 UK COMPANIES ACT The consolidated financial statements and notes to the financial statements do not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985 (as amended) insofar as such accounts have to comply with the disclosure and other provisions of that Act. Certain reclassifications and changes in presentation and disclosure have been made to the group's statutory accounts in order to conform more closely with the accounting presentation and disclosure requirements applicable in the US. Statutory accounts for the year ended December 31, 1997, on which the auditors expressed unqualified opinions, have been delivered to the Registrar of Companies for England and Wales. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT MOVEMENT MOVEMENT BEGINNING CHARGED CHARGED TO BALANCE AT OF TO OTHER END OF PERIOD INCOME ACCOUNTS DEDUCTIONS PERIOD (pound)m (pound)m (pound)m (pound)m (pound)m - ---------------------------------------------------------------------------------------------- Year ended December 31, 1997 Provision for bad and doubtful debts 32.7 (0.5) 0.9 (0.7) 32.4 ---------- --------- ---------- --------- ----------
EX-99 4 EXHIBIT 99.2 - UNAUDITED FINANCIAL STATEMENTS OF SEDGWICK EXHIBIT 99.2 UNAUDITED INTERIM RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 SEDGWICK GROUP PLC UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Nine months ended September 30, 1998
BEFORE EXCEPTIONAL EXCEPTIONAL ITEMS TOTAL TOTAL ITEMS (NOTE 2) 1998 1997 1998 ----------- ----------- ---------- ---------- ---------- (pound)m (pound)m (pound)m (pound)m US $m* REVENUE Brokerage and Fees.................... 694.2 -- 694.2 677.2 1,145.4 Interest and investment income........ 34.1 -- 34.1 31.9 56.3 ---------- ---------- ---------- ---------- --------- 728.3 -- 728.3 709.1 1,201.7 EXPENSES.............................. (644.2) (121.4) (765.6) (623.5) (1,263.2) ---------- ---------- ---------- ---------- --------- Operating profit/(loss)............... 84.1 (121.4) (37.3) 85.6 (61.5) Share of profits of associated undertakings........................ 3.5 -- 3.5 3.1 5.8 Interest payable...................... (8.4) -- (8.4) (7.0) (13.9) Profit on disposal of businesses...... -- 9.4 9.4 -- 15.5 Cessation of insurance underwriting... -- -- -- 0.3 -- ---------- ---------- ---------- ---------- --------- PROFIT/(LOSS) BEFORE TAXATION......... 79.2 (112.0) (32.8) 82.0 (54.1) Taxation.............................. (22.2) 25.7 3.5 (24.6) 5.8 ---------- ---------- ---------- ---------- --------- PROFIT/(LOSS) AFTER TAXATION.......... 57.0 (86.3) (29.3) 57.4 (48.3) Minority interests.................... 1.9 -- 1.9 (0.3) 3.1 ---------- ---------- ---------- ---------- --------- EARNINGS/(LOSS)....................... 58.9 (86.3) (27.4) 57.1 (45.2) ---------- ---------- DIVIDEND.............................. (16.7) (16.4) (27.5) ---------- ---------- --------- RETAINED EARNINGS/(LOSS).............. (44.1) 40.7 (72.7) ---------- ---------- --------- EARNINGS/(LOSS) PER SHARE Before exceptional items.............. 10.6p 10.4p 17.5c ---------- ---------- --------- After exceptional items............... (4.9)p 10.4p (8.1)c ---------- ---------- --------- DIVIDEND PER SHARE.................... 3.0p 3.0p 5.0c ---------- ---------- --------- Average number of shares in issue (millions)............................ 554.1 548.4 --
These results should be read in conjunction with the notes. * For illustration only, the unaudited consolidated statement of income for the nine months ended September 30, 1998 shown above in US dollars has been translated at the average rate of pound1 = US$1.65 and not the convenience translation rate which would be pound1 = US$1.70 at September 30, 1998. The average rate has been used for the purposes of providing pro forma results set out in Exhibit 99.3. A summary of the significant adjustments that would be required to restate net income for the nine months ended September 30, 1998 in accordance with US GAAP is set out under "Additional information for US investors." UNAUDITED CONSOLIDATED BALANCE SHEET As at September 30, 1998 1998 1998 -------- ------- (pound)m US $m* ASSETS EMPLOYED FIXED ASSETS Tangible assets...................................... 209.5 356.2 Associated undertakings.............................. 16.9 28.7 Assets backing retirement contracts.................. 431.7 733.9 Investments.......................................... 205.0 348.5 -------- ------- 863.1 1,467.3 -------- ------- CURRENT ASSETS Debtors.............................................. 2,780.1 4,726.2 Reinsurers' share of technical provisions............ 151.7 257.9 Investments.......................................... 83.0 141.1 Cash and deposits.................................... 502.8 854.7 -------- ------- 3,517.6 5,979.9 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR....... (3,160.1) (5,372.2) -------- ------- NET CURRENT ASSETS................................... 357.5 607.7 -------- ------- TOTAL ASSETS LESS CURRENT LIABILITIES................ 1,220.6 2,075.0 -------- ------- CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Borrowings Loans and other borrowings........................... (84.1) (142.9) 7.25% Convertible Bonds 2008......................... (41.5) (70.5) -------- ------- (125.6) (213.4) Other liabilities.................................... (18.4) (31.3) -------- ------- (144.0) (244.7) PROVISIONS FOR LIABILITIES AND CHARGES Liabilities linked to retirement contracts........... (431.1) (732.9) Insurance technical provisions....................... (264.4) (449.5) Other provisions..................................... (231.3) 393.2 -------- ------- 149.8 254.7 -------- ------- FINANCED BY SHAREHOLDER'S FUNDS.................................. 151.7 257.9 MINORITY INTERESTS................................... (1.9) (3.2) -------- ------- NET CAPITAL EMPLOYED................................. 149.8 254.7 -------- ------- - ---------- The balance sheet should be read in conjunction with the notes. * For illustration only, the unaudited consolidated balance sheet at September 30, 1998 shown above in US dollars has been translated at the period end rate of pound1 = US$1.70. A summary of the significant adjustments that would be required to restate shareholders' equity at September 30, 1998 in accordance with US GAAP is set out under "Additional information for US investors." NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PREPARATION The results for the nine months ended September 30, 1998 have been prepared on the basis of the accounting policies set out in the 1997 annual report. No adjustments have been made to restate the results or the balance sheet to comply with generally accepted accounting principles in the United States of America (US GAAP). Additional information for US investors follows the notes. 2. EXCEPTIONAL ITEMS A. OPERATING EXCEPTIONAL ITEMS EXPENSES TAX EARNINGS -------- -------- -------- (pound)m (pound)m (pound)m Pension transfer review............ 115.0 (24.0) (91.0) Restructuring costs................ 6.4 (1.7) (4.7) -------- -------- -------- 121.4 (25.7) (95.7) -------- -------- -------- Restructuring costs relate to certain of the group's European operations. In 1997, there were no operating exceptional items. Pension transfer review costs are stated net of pound 54.0 million of expected recoveries from third parties. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS In October 1994, the Securities and Investments Board (SIB), now known as the Financial Services Authority (FSA), issued its report, Pension Transfers and Opt-Outs, Review of Past Business. Its objective was to secure redress for individuals who between April 29, 1988 and June 30, 1994 were wrongly advised to transfer benefits from, or opt-out of, an occupational pension plan and enter into a personal pension plan, and have thereby suffered actual or potential loss. Based on criteria and procedures set out in the SIB's report, Sedgwick is required to review pension transfer and opt-out business conducted during the relevant period and to determine whether redress should be made to clients. At that time, the review was required to be conducted only in respect of individuals considered by the SIB to be priority cases. Sedgwick has satisfied the interim targets set by the regulator in this review and expects the review to be completed by December 31, 1998. On March 12, 1998, the FSA and the Personal Investment Authority (PIA) issued a consultation document on the extension of the review to include non-priority cases. Based on Sedgwick's experience to date and with reference to the methodology contained in the consultation document, the directors have recognized an exceptional charge in the six months ended June 30, 1998 of (pound)80m and an additional exceptional charge of (pound)35.0m during the third quarter ended September 30, 1998, based on their best estimate of the cost to Sedgwick of completing pension review (assuming expected recoveries from third parties). It should be noted that the estimated cost of reviewing pensions may be subject to change due to factors which are beyond Sedgwick's control, such as future movements in long-term interest rates, equity markets, response rates, and the precise scope and duration of the review. The "Final Statement of Policy and Final Guidance" has been recently published by the FSA of which certain issues remain under discussion. In view of the above uncertainties, the group has entered into insurance arrangements specifically to protect it up to (pound)37m in the estimated total cost of completing the review. The cost of this cover is included in the (pound)115.0m exceptional charge recognized in the nine months ended September 30, 1998. In addition, the group has an option to extend this cover at additional cost to give protection of a further (pound)25m. The cost of purchasing this option itself is also included in the exceptional charge. There still remain potential exposures relating to pension review which are excluded from the scope of this policy or may exceed its limits, but based on current information available, management believes that no further material adjustment is required to the provision made through September 30, 1998. B. PROFIT ON DISPOSAL OF BUSINESS In January 1998, the group sold its managing agencies based in The Netherlands for NLG 37 million ((pound)11.0 million) realising a profit on disposal of (pound)9.4 million. C. CESSATION OF INSURANCE UNDERWRITING Cessation of insurance underwriting represents the net amount recognized in respect of the group's insurance underwriting subsidiaries which are in run off. 3. NIKOLS SEDGWICK GROUP EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT AUDITORS In December 1998, Sedgwick disposed of its 49% interest in Nikols Sedgwick B.V. following the exercise of the call option by Securfin S.p.A and Securfin Altrida B.V. ADDITIONAL INFORMATION FOR US INVESTORS The results for the nine months ended September 30, 1998 have been prepared in accordance with UK GAAP. Estimates of the effect on the group's net income of applying the significant differences between UK GAAP and US GAAP are set out below. NET INCOME NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1998 1997 -------- -------- (pound)m (pound)m (LOSS)/EARNINGS REPORTED UNDER UK GAAP............... (27.4) 57.1 Adjustments: Amortization of goodwill and identifiable intangible assets.................................. (9.8) (9.1) Other items.......................................... (3.7) 1.1 Deferred taxation.................................... (4.0) (2.8) Deferred taxation on US GAAP adjustments............. 12.9 1.2 ------- ------- NET (LOSS)/INCOME IN ACCORDANCE WITH US GAAP......... (32.0) 47.5 ------- ------- (LOSS)/EARNINGS PER ADS* Reported under UK GAAP............................. (24.7)p 52.1p ------- ------- In accordance with US GAAP Basic.............................................. (28.9)p 43.3p Diluted**.......................................... (28.9)p 42.7p ------- ------- Comparative earnings per ADS figures under US GAAP have been restated in accordance with FAS 128, Earnings per share. - ---------- * Each American Depositary Security (ADS) represents five ordinary shares. ** Options exercisable under Sedgwick's share option schemes could dilute basic earnings per ADS. However, as the options have an anti-dilutive effect on net loss per ADS for the nine months ended September 30, 1998 as Sedgwick had a loss from continuing operations, diluted net loss per ADS is not presented. SHAREHOLDERS' EQUITY AT SEPTEMBER 30, 1998 --------------- (pound)m SHAREHOLDERS' FUNDS REPORTED UNDER UK GAAP.................... 151.7 Adjustments: Goodwill and identifiable intangible assets................... 211.7 Other items................................................... 4.2 Deferred taxation............................................. 20.5 Deferred taxation on US GAAP adjustments...................... 2.8 ------ SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP............... 390.9 ------ FORWARD-LOOKING STATEMENTS Forward-looking statements in this document are made pursuant to the safe-harbor provisions of the US Private Securities Litigation Reform Act of 1995. As a result of, among other things, interest and exchange rate changes, regulatory changes, and competition, actual results may differ materially from those anticipated by, or which may be assumed from, statements made in this document. EX-99 5 EXHIBIT 99.3 - CONDENSED COMBINED FINANCIAL STATEMENTS EXHIBIT 99.3 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined statements of income for the nine months ended September 30, 1998 and the year ended December 31, 1997 and the unaudited pro forma condensed combined balance sheet as of September 30, 1998 give effect to the acquisition of Sedgwick. The purchase method of accounting has been applied to the transaction. Accordingly, assets acquired and liabilities assumed have been reflected at their estimated fair values which, ultimately, will be subject to further refinement. The pro forma statements of income assume the acquisition occurred on January 1, 1997 and the pro forma balance sheet assumes the transaction occurred on September 30, 1998. The unaudited pro forma statements of income do not include potential cost savings that may be realized as a result of the acquisition or the effect of a special charge that is expected to include, among other items, the Registrant's cost (non-goodwill) related to severance arrangements, the closing of existing facilities and the issuance of certain deferred stock units. The Registrant has indicated that it anticipates ultimately achieving gross pretax cost savings in the range of $200 million per year, over a period of years. See "Information Concerning Forward-Looking Statements". 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 and reflect the Registrant's expectation that it will acquire 100% of Sedgwick's issued share capital and issued convertible bonds. 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 Quarterly Report on Form 10-Q for the nine months ended September 30, 1998 and Annual Report on Form 10-K for the year ended December 31, 1997 and the Sedgwick financial statements included in Exhibits 99.1 and 99.2 of this Form 8-K. MARSH & MCLENNAN COMPANIES, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (In millions, except per share figures)
Historical (1) -------------------------------- Marsh & McLennan Sedgwick Group, Pro Forma Pro Forma Companies, Inc. as adjusted (Adjustments) Combined ---------------- --------------- ------------ --------- Revenue $ 5,245 $1,214 $ $6,459 Expense 4,160 1,282 34 (b) 5,476 ------- ------ ----- ------ Operating Income (Loss) 1,085 (68) (34) 983 Interest, net (77) (4) (75)(c) (156) ------- ------ ----- ------ Income (Loss) Before Income Taxes 1,008 (72) (109) 827 Provision (Benefit) for Income Taxes 398 (19) (26)(d) 353 ------- ------ ----- ------ Net Income (Loss) $ 610 $ (53) $ (83) $ 474 ======= ====== ====== ====== Basic Net Income Per Share $ 2.38 $ 1.78 ======= ====== Diluted Net Income Per Share $ 2.28 $ 1.70 ======= ====== Average Number of Shares Outstanding - Basic 256 10 (e) 266 ======= ===== ====== Average Number of Shares Outstanding - Diluted 264 10 (e) 274 ======= ===== ====== (1) Sedgwick's net loss for the nine months ended September 30, 1998 includes a $16 million exceptional pretax gain and a $200 million exceptional pretax charge.
See accompanying notes to pro forma condensed combined financial statements. MARSH & MCLENNAN COMPANIES, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (In millions, except per share figures)
Historical (1) -------------------------------- Marsh & McLennan Sedgwick Group, Pro Forma Pro Forma Companies, Inc. as adjusted (Adjustments) Combined ---------------- --------------- ------------ --------- Revenue $6,009 $1,588 $ $7,597 Expense 5,264 1,436 46(b) 6,746 ------- ------- ------ ------- Operating Income (Loss) 745 152 (46) 851 Interest, net (83) (6) (100)(c) (189) ------- ------- ------ ------- Income (Loss) Before Income Taxes 662 146 (146) 662 Provision (Benefit) for Income Taxes 263 61 (35)(d) 289 ------- ------- ------ ------- Net Income (Loss) $ 399 $ 85 $ (111) $ 373 ======= ======= ====== ======= Basic Net Income Per Share $ 1.63 (2) $ 1.46 ======= ======= Diluted Net Income Per Share $ 1.59 (2) $ 1.43 ======= ======= Average Number of Shares Outstanding - Basic 245 (2) 10 (e) 255 ======= ====== ======= Average Number of Shares Outstanding - Diluted 251 (2) 10 (e) 261 ======= ====== =======
(1) Marsh & McLennan's expense includes special charges amounting to $297 million for the year ended December 31, 1997. (2) Restated to reflect the three-for-two stock split in the form of a stock distribution issued on June 26, 1998. See accompanying notes to pro forma condensed combined financial statements.
MARSH & MCLENNAN COMPANIES, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1998 (UNAUDITED) (In millions of dollars) Historical (1) -------------------------------- Marsh & McLennan Sedgwick Group, Pro Forma Pro Forma Companies, Inc. as adjusted (Adjustments) Combined ---------------- --------------- ------------ --------- Current Assets: Cash and cash equivalents $ 667 $ 340 $ - $ 1,007 ------- ------- ------ -------- Receivables 1,704 642 2,346 Less - allowance for doubtful accounts (68) (54) - (122) ------- ------- ------ -------- Net receivables 1,636 588 0 2,224 Other current assets 543 91 61(g) 695 ------- ------- ------ -------- Total current assets 2,846 1,019 61 3,926 ------- ------- ------ -------- Long-term securities 752 1,083 1,835 Fixed assets, net 934 373 (25)(g) 1,282 Intangible assets 2,822 360 1,840(h) 5,022 Other assets 1,374 70 149(g) 1,593 ------- ------- ------ -------- $ 8,728 $2,905 $2,025 $ 13,658 ======= ======= ====== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 480 $ 44 $ 200(i) $ 724 Accounts payable and accrued liabilities 1,880 309 150(g) 2,339 Accrued income taxes 354 47 401 ------- ------- ------ -------- Total current liabilities 2,714 400 350 3,464 ------- ------- ------ -------- Fiduciary liabilities 2,570 571 3,141 Less - cash and investments held in a fiduciary capacity (2,570) (571) (3,141) ------- ------- ------ -------- - - - - ------- ------- ------ -------- Long-term debt 1,280 235 1,386(i) 2,901 ------- ------- ------ -------- Other liabilities 1,157 1,605 425(g) 3,187 ------- ------- ------ -------- Commitments and contingencies - - - - Stockholders' equity: Preferred stock - - - - Common stock 261 91 (91)(j) 271 10 (j) Other stockholders' equity 3,490 574 (574)(j) 4,009 519 (j) ------- ------- ------ -------- 3,751 665 (136) 4,280 Less - treasury shares (174) (174) ------- ------- ------ -------- Total shareholders' equity 3,577 665 (136) 4,106 ------- ------- ------ -------- $8,728 $2,905 $2,025 $13,658 ======= ======= ====== ========
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 Sedgwick consolidated statements 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 and have been presented in accordance with U.S. Generally Accepted Accounting Principles. (See note 32 of the financial statements in Exhibit 99.1 and Additional information for US investors in Exhibit 99.2) Results for the year ended December 31, 1997 and the nine months ended September 30, 1998 have been translated at(pound) = US$1.64 and(pound) = US$1.65, respectively. (b) To reflect the incremental estimated annual goodwill amortization charge associated with the acquisition of Sedgwick (the "acquisition"). Goodwill is being amortized over a forty-year period. (c) To record the additional annual interest expense associated with the estimated incremental debt that is expected to be incurred by the Registrant as a result of the acquisition at an assumed interest rate of 6.31%. (d) To record the tax effect of the pro forma adjustments (exclusive of the goodwill amortization) at an assumed tax rate of 35%. (e) To reflect the estimated portion of the acquisition cost to be financed through equity. (f) Certain amounts included in the Sedgwick consolidated balance sheet have been reclassified to conform with the Registrant's financial statement presentation. In particular, fiduciary cash and investments of $571 million have been offset against the related liabilities and presented in the liability section of the balance sheet. In addition, receivables and payables for uncollected premiums and claims are presented in footnote disclosure in the Registrant's financial statements. The balance sheet has been translated at(pound) = US$1.70. (g) To reflect the impact of $600 million in assumed purchase related matters which are principally related to severance, duplicative real estate, adjustments of asset and liability balances under purchase accounting and transaction costs net of the related income tax impact of $210 million. This figure is subject to further refinement as the Registrant's management continues to review these purchase related matters. (h) Represents the net of the $2.1 billion acquisition consideration adjusted for the items described in Notes (g) and (j)(2). The preliminary allocation of the acquisition consideration to the underlying assets and liabilities of Sedgwick, 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. (i) To reflect the incremental debt assumed to be incurred to finance $1.6 billion of the acquisition. (j) To record the net adjustment required in stockholders' equity to reflect (1) the issuance of $0.5 billion of the Registrant's $1 par value common stock representing the estimated portion of the acquisition cost to be financed through equity and (2) the elimination of $0.7 billion of Sedgwick net assets. -----END PRIVACY-ENHANCED MESSAGE-----