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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 30, 2004
Marsh & McLennan Companies, Inc.
1166 Avenue of the Americas
New York, New York 10036
(212) 345-5000
Commission file number 1-5998
State of Incorporation: Delaware
I.R.S. Employer Identification No. 36-2668272
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . NO___.
As of July 31, 2004, there were outstanding 520,624,251 shares of common
stock, par value $1.00 per share, of the registrant.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Marsh & McLennan Companies, Inc. and its subsidiaries ("MMC") and their
representatives may from time to time make verbal or written statements
(including certain statements contained in this report and other MMC filings
with the Securities and Exchange Commission and in our reports to stockholders)
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 revenues, expenses,
earnings, cash flow, capital structure, pension funding, and the adverse
consequences arising from market-timing issues at Putnam, including fines and
restitution, as well as market and industry conditions, premium rates, financial
markets, interest rates, foreign exchange rates, contingencies, and matters
relating to MMC's operations and income taxes. Such forward-looking statements
are based on available current market and industry materials, experts' reports
and opinions, and long-term trends, as well as management's expectations
concerning future events impacting MMC. Forward-looking statements by their very
nature involve risks and uncertainties. Factors that may cause actual results to
differ materially from those contemplated by any forward-looking statements
contained herein include, in the case of MMC's risk and insurance services
business, changes in competitive conditions, movements in premium rate levels,
the continuation of difficult conditions for the transfer of commercial risk and
other changes in the global property and casualty insurance markets, natural
catastrophes, mergers between client organizations, and insurance or reinsurance
company insolvencies. Factors to be considered in the case of MMC's investment
management business include changes in worldwide and national equity and fixed
income markets, actual and relative investment performance, the level of sales
and redemptions, and the ability to maintain investment management and
administrative fees at historic levels; and with respect to all of MMC's
activities, the ability to successfully integrate acquired businesses, changes
in general worldwide and national economic conditions, the impact of terrorist
attacks, changes in the value of investments made in individual companies and
investment funds, fluctuations in foreign currencies, actions of competitors or
regulators, changes in interest rates or in the ability to access financial
markets, developments relating to claims, lawsuits and contingencies,
prospective and retrospective changes in the tax or accounting treatment of
MMC's operations, and the impact of tax and other legislation and regulation in
the jurisdictions in which MMC operates. In addition, there are risks and
uncertainties relating to MMC's ability to integrate Kroll's business
successfully and realize expected synergies; the continued strength of Kroll's
relationships with its employees, suppliers, and customers; and the accuracy of
the basis for the forecasts relating to Kroll's business.
Forward-looking statements speak only as of the date on which they are made, and
MMC undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which it is made or to reflect the
occurrence of unanticipated events. Please refer to Marsh & McLennan Companies'
2003 Annual Report on Form 10-K for "Information Concerning Forward-Looking
Statements," its reports on Form 8-K, and quarterly reports on Form 10-Q.
MMC is committed to providing timely and materially accurate information to the
investing public, consistent with our legal and regulatory obligations. To that
end, MMC and its operating companies use their websites to convey meaningful
information about their businesses, including the anticipated release of
quarterly financial results and the posting of updates of assets under
management at Putnam. Monthly updates of total assets under management at Putnam
will be posted to the MMC website the first business day following the end of
each month. Putnam posts mutual fund and performance data to its website
regularly. Assets for most Putnam retail mutual funds are posted approximately
two weeks after each month-end. Mutual fund net asset value (NAV) is posted
daily. Historical performance and Lipper rankings are also provided. Investors
can link to MMC and its operating company websites through www.mmc.com.
PART I, FINANCIAL INFORMATION
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------
(In millions, except per share figures) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Revenue:
Service revenue $2,964 $2,840 $6,141 $5,681
Investment income (loss) 72 25 105 36
- --------------------------------------------------------------------------------
Operating revenue 3,036 2,865 6,246 5,717
- --------------------------------------------------------------------------------
Expense
Compensation and benefits 1,596 1,475 3,231 2,853
Other operating expenses 808 791 1,610 1,548
- --------------------------------------------------------------------------------
Operating expenses 2,404 2,266 4,841 4,401
- --------------------------------------------------------------------------------
Operating income 632 599 1,405 1,316
Interest income 4 7 9 13
Interest expense (48) (46) (98) (89)
- --------------------------------------------------------------------------------
Income before income taxes
and minority interest 588 560 1,316 1,240
Income taxes 194 189 475 421
Minority interest, net of tax 5 6 6 11
- --------------------------------------------------------------------------------
Net income $ 389 $ 365 $ 835 $ 808
- --------------------------------------------------------------------------------
Basic net income per share $ .75 $ .68 $ 1.60 $ 1.51
- --------------------------------------------------------------------------------
Diluted net income per share $ .73 $ .66 $ 1.56 $ 1.47
- --------------------------------------------------------------------------------
Average number of shares outstanding-Basic 522 534 523 535
- --------------------------------------------------------------------------------
Average number of shares outstanding-Diluted 534 552 537 550
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
3
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
(In millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 399 $ 665
- --------------------------------------------------------------------------------
Receivables
Commissions and fees 2,556 2,388
Advanced premiums and claims 81 89
Other 352 342
- --------------------------------------------------------------------------------
2,989 2,819
Less-allowance for doubtful accounts
and cancellations (122) (116)
- --------------------------------------------------------------------------------
Net receivables 2,867 2,703
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Prepaid dealer commissions - current portion 110 150
Other current assets 349 383
- --------------------------------------------------------------------------------
Total current assets 3,725 3,901
Goodwill and intangible assets 5,938 5,797
Fixed assets, net 1,355 1,389
(net of accumulated depreciation and
amortization of $1,553 at June 30, 2004
and $1,448 at December 31, 2003)
Long-term investments 557 648
Prepaid dealer commissions 57 114
Prepaid pension 1,265 1,199
Other assets 1,887 2,005
- --------------------------------------------------------------------------------
$14,784 $15,053
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
4
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
(In millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 911 $ 447
Accounts payable and accrued liabilities 1,500 1,511
Accrued compensation and employee benefits 1,189 1,693
Accrued income taxes 394 272
Dividends payable 178 166
- --------------------------------------------------------------------------------
Total current liabilities 4,172 4,089
- --------------------------------------------------------------------------------
Fiduciary liabilities 4,493 4,228
Less - cash and investments held in
a fiduciary capacity (4,493) (4,228)
- --------------------------------------------------------------------------------
- -
Long-term debt 2,299 2,910
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Other liabilities 2,689 2,603
- --------------------------------------------------------------------------------
Commitments and contingencies
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value, authorized
6,000,000 shares, none issued - -
Common stock, $1 par value, authorized
800,000,000 shares, issued 560,641,640
shares at June 30, 2004 and December 31, 2003 561 561
Additional paid-in capital 1,295 1,301
Retained earnings 5,882 5,386
Accumulated other comprehensive loss (315) (279)
- --------------------------------------------------------------------------------
7,423 6,969
Less - treasury shares, at cost,
40,093,346 shares at June 30, 2004 and
33,905,497 shares at December 31, 2003 (1,799) (1,518)
- --------------------------------------------------------------------------------
Total stockholders' equity 5,624 5,451
- --------------------------------------------------------------------------------
$14,784 $15,053
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
5
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 2004 2003
(In millions of dollars)
- --------------------------------------------------------------------------------
Operating cash flows:
Net income $ 835 $808
Adjustments to reconcile net income to cash generated from
(used for) operations:
Depreciation of fixed assets, capitalized software
and other intangible assets 211 194
Provision for deferred income taxes 148 73
(Gains) losses on investments (105) (36)
Changes in assets and liabilities:
Net receivables (165) (189)
Prepaid dealer commissions 97 127
Other current assets 6 36
Other assets 83 (105)
Accounts payable and accrued liabilities 52 80
Accrued compensation and employee benefits (504) (297)
Accrued income taxes 111 298
Other liabilities (9) 17
Effect of exchange rate changes 9 50
- --------------------------------------------------------------------------------
Net cash generated from operations 769 1,056
- --------------------------------------------------------------------------------
Financing cash flows:
Net increase/(decrease) in commercial paper 402 (640)
Proceeds from issuance of debt 66 502
Other repayments of debt (609) (44)
Purchase of treasury shares (522) (492)
Issuance of common stock 223 253
Dividends paid (325) (301)
- --------------------------------------------------------------------------------
Net cash used for financing activities (765) (722)
- --------------------------------------------------------------------------------
Investing cash flows:
Capital expenditures (168) (240)
Proceeds from sales related to fixed assets
and capitalized software 5 9
Acquisitions (216) (101)
Other, net 117 42
- --------------------------------------------------------------------------------
Net cash used for investing activities (262) (290)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (8) 28
- --------------------------------------------------------------------------------
(Decrease)/Increase in cash & cash equivalents (266) 72
Cash & cash equivalents at beginning of period 665 546
- --------------------------------------------------------------------------------
Cash & cash equivalents at end of period $ 399 $ 618
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
6
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
--------------------
MMC, a professional services firm, is organized based on the different services
that it offers. Under this organization structure, MMC operates in three
principal business segments: risk and insurance services, investment management
and consulting. The risk and insurance services segment provides risk management
and insurance broking, reinsurance broking and insurance program management
services for businesses, public entities, insurance companies, associations,
professional services organizations and private clients. It also provides
services principally in connection with originating, structuring and managing
insurance, financial services and other industry-focused investments. The
investment management segment primarily provides securities investment advisory
and management services and administrative services for a group of publicly held
investment companies and institutional accounts. The consulting segment provides
advice and services to the managements of organizations primarily in the areas
of retirement services, human capital, health care and group benefit programs,
management consulting, organizational change and organizational design, economic
consulting and corporate identity.
2. Principles of Consolidation
---------------------------
The consolidated financial statements included herein have been prepared by MMC
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America, have been omitted pursuant to such rules and
regulations, although MMC believes that the disclosures are adequate to make the
information presented not misleading. These consolidated financial statements
should be read in conjunction with the financial statements and the notes
thereto included in MMC's latest Annual Report on Form 10-K.
The financial information contained herein reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
of operations for the six-month periods ended June 30, 2004 and 2003. Certain
reclassifications have been made to the prior year amounts to conform to the
current year presentation.
The caption "Investment income (loss)" in the consolidated statements of income
comprises realized and unrealized gains and losses from investments recognized
in current earnings. It includes other than temporary declines in the value of
available for sale securities, the change in value of trading securities and the
change in value of MMC's holdings in certain private equity funds. MMC's
investments may include seed shares for funds, direct investments in insurance,
consulting or investment management companies and investments in private equity
funds.
7
3. Fiduciary Assets and Liabilities
--------------------------------
In its capacity as an insurance broker or agent, MMC collects premiums from
insureds and, after deducting its commissions, remits the premiums to the
respective insurance underwriters. MMC also collects claims or refunds from
underwriters on behalf of insureds. Unremitted insurance premiums and claims are
held in a fiduciary capacity. Interest income on these fiduciary funds, included
in service revenue, amounted to $59 million and $61 million for the six-month
periods ended June 30, 2004 and 2003, respectively. Since fiduciary assets are
not available for corporate use, they are shown in the balance sheet as an
offset to fiduciary liabilities.
Net uncollected premiums and claims and the related payables amounted to $11.3
billion at June 30, 2004 and $11.5 billion at December 31, 2003, respectively.
MMC is not a principal to the contracts under which the right to receive
premiums or the right to receive reimbursement of insured losses arises. Net
uncollected premiums and claims and the related payables are, therefore, not
assets and liabilities of MMC and are not included in the accompanying
Consolidated Balance Sheets.
4. Per Share Data
--------------
Basic net income per share is calculated by dividing net income by the weighted
average number of shares of MMC's common stock outstanding. Diluted net income
per share is calculated by reducing net income for the potential minority
interest associated with unvested shares granted under the Putnam Equity
Partnership Plan and adding back dividend equivalent expense related to common
stock equivalents. This result is then divided by the weighted average common
shares outstanding, which have been adjusted for the dilutive effect of
potentially issuable common shares.
The following reconciles net income to net income for diluted earnings per share
and basic weighted average common shares outstanding to diluted weighted average
common shares outstanding for the three- and six-month periods ended June 30,
2004 and 2003.
- ----------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(In millions) June 30, June 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------
Net income $389 $ 365 $835 $ 808
Increase for dividend equivalent expense
related to common stock equivalents net of
potential minority interest associated with the
Putnam Class B Common Shares - - 1 -
- ----------------------------------------------------------------------------------------------------
Net income for diluted earnings per share $389 $365 $836 $808
- ----------------------------------------------------------------------------------------------------
Basic weighted average common shares outstanding 522 534 523 535
Dilutive effect of potentially issuable common shares 12 18 14 15
- ----------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 534 552 537 550
- ----------------------------------------------------------------------------------------------------
Average stock price used to calculate
common stock equivalents $44.54 $48.81 $46.09 $45.93
- ----------------------------------------------------------------------------------------------------
8
5. Supplemental Disclosure to the Consolidated Statements of Cash Flows
--------------------------------------------------------------------
The following schedule provides additional information concerning interest and
income taxes paid for the six-month periods ended June 30, 2004 and 2003.
- --------------------------------------------------------------------------------
(In millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
Interest paid $100 $81
Income taxes paid $166 $41
6. Comprehensive Income
--------------------
The components of comprehensive income for the six-month periods ended June 30,
2004 and 2003 are as follows:
- --------------------------------------------------------------------------------
(In millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
Foreign currency translation adjustments $ (6) $172
Unrealized investment holding gains,
net of income taxes 7 26
Less: Reclassification adjustment for realized gains (36) (7)
included in net income, net of income taxes
Deferred loss on cash flow hedges, (1) (3)
net of income taxes
- --------------------------------------------------------------------------------
Other comprehensive (loss)/income (36) 188
Net income 835 808
- --------------------------------------------------------------------------------
Comprehensive income $799 $996
- --------------------------------------------------------------------------------
7. Acquisitions
------------
In July 2004, MMC acquired Kroll Inc.("Kroll"), the world's leading risk
mitigation services firm in an all-cash $1.9 billion transaction in which Kroll
shareholders received $37 for each outstanding share of Kroll common stock
owned. The acquisition of Kroll will broaden and deepen the capabilities of
MMC's fast-growing risk consulting and advisory businesses by adding services
which clients need to reduce the impact of an adverse event. It expands MMC's
capacity in several important sectors that complement existing businesses, such
as corporate restructuring, business intelligence and investigations, security
services, employee screening, and electronic evidence and litigation support.
The purchase price allocation for the Kroll acquisition is expected to be
completed by the end of 2004. The information contained in this Form 10-Q
reflects the business and operations of MMC, without giving effect to the Kroll
acquisition.
In January 2004, MMC acquired Synhrgy HR Technologies, a leading provider of
human resource technology and outsourcing services to Fortune 1000 companies,
for a total cost of $115 million. Substantially all former employees of Synhrgy
are now employees of MMC. Approximately $7 million of the purchase consideration
is subject to continued employment of the selling shareholders and is being
recorded as compensation expense over three years. In addition, MMC acquired the
Australia and New Zealand operations of Heath Lambert for $53 million in cash in
March of 2004. The purchase consideration allocations resulted in acquired
goodwill of $141 million in 2004.
In April 2003, MMC acquired Oliver, Wyman & Company ("OWC") for $265 million
comprising $159 million in cash, which will be paid over 4 years, and $106
million in MMC stock. Substantially all former employees of OWC are now
employees of MMC. Approximately $35 million of the purchase consideration is
subject to continued employment of the selling shareholders and is being
recorded as compensation expense over four years.
9
8. Goodwill and Other Intangibles
------------------------------
Changes in the carrying amount of goodwill for the six-month period ended June
30, 2004, are as follows:
--------------------------------------------------------------
(In millions of dollars) 2004
--------------------------------------------------------------
Balance as of January 1, $5,533
Goodwill acquired 141
Other adjustments (primarily foreign exchange) (19)
--------------------------------------------------------------
Balance as of June 30, $5,655
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The goodwill balance at June 30, 2004 and December 31, 2003 includes
approximately $119 million and $121 million, respectively, of equity method
goodwill.
Amortized intangible assets consist of the cost of client lists, client
relationships and trade names acquired, and the rights to future revenue streams
from certain existing private equity funds. MMC has no intangible assets with
indefinite lives. The gross cost and accumulated amortization by major
intangible asset class is as follows:
- -----------------------------------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
----------------------------------------------------------------------
Net Net
Gross Accumulated Carrying Gross Accumulated Carrying
(In millions of dollars) Cost Amortization Amount Cost Amortization Amount
- -----------------------------------------------------------------------------------------------------------
Customer and marketing related $261 $ 86 $175 $222 $ 74 $148
Future revenue streams related to
existing private equity funds 198 100 98 199 92 107
- -----------------------------------------------------------------------------------------------------------
Total amortized intangibles $459 $186 $273 $421 $166 $255
- -----------------------------------------------------------------------------------------------------------
Aggregate amortization expense for the six months ended June 30, 2004 and 2003
was $20 million and the estimated future aggregate amortization expense is as
follows:
- --------------------------------------------------------------------------------
For the Years
Ending December 31, Estimated
(In millions of dollars) Expense
- --------------------------------------------------------------------------------
2004 $42
2005 $41
2006 $38
2007 $35
2008 $33
- --------------------------------------------------------------------------------
10
9. Stock Benefit Plans
-------------------
MMC has stock-based benefit plans under which employees are awarded grants of
restricted stock, stock options and other forms of awards. As provided under
SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") MMC has
elected to continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has provided the required additional pro forma
disclosures.
Pro Forma Information: In accordance with the intrinsic value method allowed by
APB 25, no compensation cost has been recognized in the Consolidated Statements
of Income for MMC's stock option and stock purchase plans and the stock options
awarded under the Putnam Investments Equity Partnership Plan. If compensation
cost for MMC's stock-based compensation plans had been determined consistent
with the fair value method prescribed by SFAS No. 123, MMC's net income and net
income per share for the three- and six-month periods ended June 30, 2004 and
2003 would have been reduced to the pro forma amounts indicated in the table
below.
- -----------------------------------------------------------------------------------------------------------
(In millions of dollars, except per share figures) Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------
Net Income:
As reported $389 $365 $835 $808
Adjustment for fair value method, net of tax (35) (41) (84) (88)
- -----------------------------------------------------------------------------------------------------------
Pro forma net income $354 $324 $751 $720
- -----------------------------------------------------------------------------------------------------------
Net Income Per Share:
Basic:
As reported $ .75 $ .68 $1.60 $1.51
Pro forma $ .68 $ .61 $1.44 $1.35
Diluted:
As reported $ .73 $ .66 $1.56 $1.47
Pro forma $ .66 $ .59 $1.40 $1.32
- -----------------------------------------------------------------------------------------------------------
The pro forma information reflected above includes stock options issued under
MMC Incentive and Stock Award plans and the Putnam Investments Equity
Partnership Plan and stock issued under MMC stock purchase plans. MMC stock
purchase plans allow eligible employees to purchase MMC shares at prices not
less than 85% of the lesser of the fair market value of the stock at the
beginning or end of the offering period. The stock purchase plans represent
approximately 20% of the adjustment from applying the fair value method in 2004
and 2003.
The majority of option grants under the stock benefit plans are made in the
first quarter of each year. MMC granted 9.1 million and 15.9 million options in
the six months ended June 30, 2004 and 2003, respectively. A total of 17.2
million options were granted in the year ended December 31, 2003.
The estimated fair value of options granted was calculated using the
Black-Scholes option pricing valuation model. The weighted average assumptions
used in the valuation models are evaluated and revised, as necessary, to reflect
market conditions and experience.
11
10. Retirement Benefits
-------------------
MMC maintains qualified and non-qualified defined benefit pension plans for its
U.S. and non-U.S. eligible employees. MMC's policy for funding its tax qualified
defined benefit retirement plans is to contribute amounts at least sufficient to
meet the funding requirements set forth in the U.S. and international law.
The components of the net periodic benefit cost (income) for defined benefit and
other postretirement plans are as follows:
Combined U.S. and significant non-U.S. Plans
- --------------------------------------------------------------------------------
For the Three Months Ended June 30, Pension Benefits Postretirement Benefits
------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Service cost $ 59 $ 47 $ 2 $ 2
Interest cost 105 90 6 5
Expected return on plan assets (152) (136) - -
Amortization of prior service credit (9) (9) - -
Amortization of transition asset (1) (1) - -
Recognized actuarial loss 25 6 1 1
- --------------------------------------------------------------------------------
Net Periodic Benefit Cost (Income) 27 (3) 9 8
- --------------------------------------------------------------------------------
Settlement loss - - - -
Special termination benefits - 1 - -
- --------------------------------------------------------------------------------
Total Expense (Income) $ 27 $ (2) $ 9 $ 8
- --------------------------------------------------------------------------------
Combined U.S. and significant non-U.S. Plans
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, Pension Benefits Postretirement Benefits
-------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Service cost $116 $ 94 $ 6 $ 5
Interest cost 210 179 10 10
Expected return on plan assets (308) (270) - -
Amortization of prior service credit (19) (19) (1) (1)
Amortization of transition asset (2) (2) - -
Recognized actuarial loss 45 13 3 2
- --------------------------------------------------------------------------------
Net Periodic Benefit Cost (Income) 42 (5) 18 16
- --------------------------------------------------------------------------------
Settlement loss 1 - - -
Special termination benefits 1 2 - -
- --------------------------------------------------------------------------------
Total Expense (Income) $ 44 $ (3) $18 $16
- --------------------------------------------------------------------------------
12
U.S. Plans only
- --------------------------------------------------------------------------------
For the Three Months Ended June 30, Pension Benefits Postretirement Benefits
------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Service cost $ 21 $ 16 $ 2 $ 2
Interest cost 42 38 5 4
Expected return on plan assets (57) (57) - -
Amortization of prior service credit (9) (9) - -
Amortization of transition asset (1) (1) - -
Recognized actuarial loss 14 4 1 1
- --------------------------------------------------------------------------------
Net Periodic Benefit Cost (Income) $ 10 $ (9) $ 8 $ 7
- --------------------------------------------------------------------------------
U.S. Plans only
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, Pension Benefits Postretirement Benefits
------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Service cost $ 39 $ 33 $ 5 $ 4
Interest cost 82 76 9 9
Expected return on plan assets (115) (114) - -
Amortization of prior service credit (19) (19) (1) (1)
Amortization of transition asset (2) (2) - -
Recognized actuarial loss 23 9 3 2
- --------------------------------------------------------------------------------
Net Periodic Benefit Cost (Income) $ 8 $ (17) $ 16 $ 14
- --------------------------------------------------------------------------------
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("Act") became law. As MMC has not yet concluded whether the
benefits provided by its plans are actuarially equivalent to Medicare Part D
under the act, the measures of the Accumulated Postretirement Benefit Obligation
and net periodic benefit cost do not reflect any amount associated with the
subsidy. MMC expects to complete its assessment of this issue and reflect any
changes in the third quarter of 2004. The issued guidance under FAS 106-2 could
require MMC to change previously reported information.
13
Significant non-U.S. Plans only
- --------------------------------------------------------------------------------
For the Three Months Ended June 30, Pension Benefits Postretirement Benefits
-------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Service cost $ 38 $ 31 $ - $ -
Interest cost 63 52 1 1
Expected return on plan assets (95) (79) - -
Recognized actuarial loss 11 2 - -
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 17 $ 6 $ 1 $ 1
- --------------------------------------------------------------------------------
Settlement loss - - - -
Special termination benefits - 1 - -
- --------------------------------------------------------------------------------
Total Expense $ 17 $ 7 $ 1 $ 1
- --------------------------------------------------------------------------------
Significant non-U.S. Plans only
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, Pension Benefits Postretirement Benefits
-------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Service cost $ 77 $ 61 $ 1 $ 1
Interest cost 128 103 1 1
Expected return on plan assets (193) (156) - -
Recognized actuarial loss 22 4 - -
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 34 $ 12 $ 2 $ 2
- --------------------------------------------------------------------------------
Settlement loss 1 - - -
Special termination benefits 1 2 - -
- --------------------------------------------------------------------------------
Total Expense $ 36 $ 14 $ 2 $ 2
- --------------------------------------------------------------------------------
The weighted average actuarial assumptions utilized to calculate the net
periodic benefit costs for the U.S. and significant non-U.S. defined benefit
plans are as follows:
Combined U.S. and significant non-U.S. Plans
- --------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------------------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Weighted average assumptions:
Expected return on plan assets 8.5% 8.5% - -
Discount rate 5.8% 6.1% 6.3% 6.6%
Rate of compensation increase 3.7% 3.8% - -
- --------------------------------------------------------------------------------
14
11. Long-term Debt
--------------
MMC repaid $600 million of long-term debt that matured in June, 2004 by issuing
commercial paper.
In June 2004, MMC renegotiated a $1.4 billion revolving credit facility that
expired that month. Under the terms of the renegotiated agreement the facility
was split into two tranches; $700 million which expires in June 2005 and $700
million which expires in June 2009. In addition, MMC maintains a $1.0 billion
revolving credit facility established in June 2002 which expires in June 2007.
These facilities support MMC's commercial paper borrowings.
In July 2004 MMC purchased Kroll, Inc. in an all-cash transaction totaling
approximately $1.9 billion. The purchase was initially funded with commercial
paper borrowings. To support these borrowings, MMC negotiated a new $1.5
billion, one-year revolving credit facility.
Following the acquisition, MMC issued $650 million of 5.375% Senior Notes due
2014 and $500 million of Floating Rate Notes due 2007. The proceeds from these
notes were used to repay a portion of the commercial paper borrowings that had
funded the Kroll purchase. Under the terms of the agreement of the
above-mentioned credit facility, the amount of the facility was reduced by the
proceeds from the issuance of the Senior Notes and Floating Rate Notes of
approximately $1.15 billion. The new revolving credit facility now totals $355
million. No amounts were outstanding under any of the facilities as of June 30,
2004.
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033. In
February 2003, MMC issued $250 million of 3.625% Senior Notes due in 2008 and
$250 million of 4.85% Senior Notes due in 2013 (the "2003 Notes"). The net
proceeds from the 2003 Notes were used to pay down commercial paper borrowings.
12. Common Stock
------------
During the second quarter of 2004, MMC repurchased shares of its common stock
for treasury as well as to meet requirements for issuance of shares for its
various stock, compensation and benefit programs. During the second quarter of
2004, MMC repurchased 4 million shares for total consideration of $180 million
and repurchased 11 million shares for $510 million for the six months ended June
30, 2004. Share repurchases are recorded on a trade date basis.
MMC repurchases shares subject to market conditions, including from time to time
pursuant to the terms of a 10b5-1 plan. A 10b5-1 plan allows a company to
purchase shares during a blackout period, provided the company communicates its
share purchase instructions to the broker prior to the blackout period, pursuant
to a written plan that may not be changed. Approximately 1.3 million of the
shares repurchased in 2004 were made under the 10b5-1 plan. Share purchases are
expected to be limited for the remainder of 2004.
15
13. Claims, Lawsuits and Other Contingencies
----------------------------------------
Putnam Matters
--------------
Regulatory Matters.
- --------------------
On October 28, 2003, the Securities and Exchange Commission ("SEC") commenced a
civil administrative and cease and desist proceeding against Putnam under the
Investment Advisors Act of 1940 and the Investment Company Act of 1940. On
November 13, 2003, pursuant to an agreement with Putnam, the SEC entered an
order that made findings of certain facts, which Putnam neither admitted nor
denied, and concluded that Putnam violated the Investment Advisors Act of 1940
and the Investment Company Act of 1940. The order imposed partial relief,
including final censure, remedial undertakings, and a cease and desist order.
The SEC's order found that since 1998 at least six Putnam investment management
professionals engaged in excessive short-term trading of Putnam mutual funds in
their personal accounts. The order also found that four of these employees
engaged in trading in funds over which they had investment decision making
responsibilities and access to non-public information regarding their funds'
portfolios. The SEC further found that Putnam failed to disclose this
potentially self-dealing securities trading to the boards or shareholders of the
mutual funds it manages, failed to take adequate steps to detect and deter such
trading activity through internal controls and failed in its supervision of
these investment management professionals. Under the terms of the order, Putnam
has agreed to a number of remedial actions, including new employee trading
restrictions, enhanced employee trading compliance, determination by an
independent assessment consultant of the amount of restitution to be made by
Putnam for losses attributable to excessive short-term trading and market timing
trading activity by Putnam employees, the retention of an independent compliance
consultant, the undertaking of periodic compliance reviews, and certification of
compliance with the SEC. On April 8, 2004, Putnam entered into a final
settlement of those charges under which Putnam is required to pay $5 million in
disgorgement plus a civil monetary penalty of $50 million, with any excess
amount of restitution required to be set off against the civil monetary penalty
(up to an additional $5 million). These amounts are to be distributed in
accordance with the process established under the November 13, 2003 and April 8,
2004 SEC orders. In the event that the independent assessment consultant
determines that the amount of restitution required by the November 13, 2003
order is more than $10 million, Putnam will also be responsible for paying any
such excess amount.
On October 28, 2003, the Massachusetts Secretary of the Commonwealth
("Massachusetts Securities Division") commenced a civil administrative
proceeding against Putnam and two of its employees alleging violations of the
state's securities law anti-fraud provisions. On April 8, 2004, simultaneously
and in conjunction with the settlement of the above-referenced SEC proceeding,
the Massachusetts Securities Division entered a Consent Order in final
settlement of those charges. That Consent Order included a cease and desist
order, and requires Putnam to pay $5 million in restitution and an
administrative fine of $50 million, with any excess amount of restitution
required to be set off against the administrative fine (up to an additional $10
million, with Putnam responsible for paying any further excess amount). The
restitution called for by the Consent Order will be determined and distributed
by the same independent assessment consultant appointed pursuant to the November
13, 2003 and April 8, 2004 SEC orders. The Trustees may separately seek
additional amounts to assure that full restitution is made to Putnam fund
shareholders.
In a separate action, the SEC is seeking an injunction against two of the six
investment management employees. All six are no longer employed by Putnam.
16
Additionally, Putnam has received document subpoenas and/or requests for
information from the United States Attorney in Boston, the Florida Department of
Financial Services, the Office of the Attorney General for the State of New
York, Offices of the Secretary of State and the State Auditor for the State of
West Virginia, the Vermont Securities Division, the NASD and the Boston office
of the U.S. Department of Labor inquiring into, among other things, matters that
are the subject of the SEC and Massachusetts actions.
Putnam has also received document subpoenas from the Massachusetts Securities
Division, the Office of the Attorney General for the State of New York, and the
SEC relating to plan expense reimbursement agreements between Putnam and certain
multiemployer deferred compensation plans which are Putnam clients, and also
relating to Putnam's relationships with consultants retained by multiemployer
deferred compensation plans. The Massachusetts Securities Division has taken
testimony from a number of Putnam employees relating to the same matters.
Putnam has also received subpoenas from the SEC's Philadelphia office, seeking
documents and information relating to Putnam's directed brokerage practices and
trading practices and the SEC has interviewed, and taken testimony from, a
number of Putnam employees relating to revenue sharing practices and trading
practices. In addition, Putnam has received a request for information from the
SEC's Chicago office and the NASD regarding revenue sharing arrangements.
Putnam has also received requests for information from the SEC's Boston office,
the Massachusetts Securities Division and the Department of Labor relating to
the administration of certain 401(K) plans by Putnam Fiduciary Trust Company.
The first matter involved the correction of operational errors with respect to a
401(K) client's investment in certain Putnam Funds. The second matter involved
the payment of certain Putnam corporate expenses for consulting services.
Putnam is fully cooperating with the regulatory authorities.
"Market-Timing" Securities Litigation.
- ---------------------------------------
As of July 20, 2004, MMC and Putnam have received complaints in over 70 civil
actions based on allegations of "market-timing" activities. These actions have
been filed in courts in New York, Massachusetts, California, Illinois,
Connecticut, Delaware, Vermont, Kansas, and North Carolina. Most of the actions
have been transferred, along with others against other mutual fund complexes, to
the United States District Court for the District of Maryland for coordinated or
consolidated pretrial proceedings. In most of the federal cases, either by
agreement of the parties or order of the court, MMC and Putnam are not required
to respond to the complaints until after plaintiffs have filed amended
complaints in the consolidated actions.
17
The civil actions include:
o Purported securities class actions (the "MMC Class Action Complaints") have
been filed in United States District Court for the Southern District of New York
on behalf of a class of purchasers of MMC stock during the period from January
2000 to November 2003. The MMC Class Action Complaints allege, among other
things, that MMC failed to disclose certain market-timing activities at Putnam
which, when disclosed, resulted in a drop in the market price of MMC's shares.
The MMC Class Action Complaints also name as defendants certain current or
former officers and directors of MMC. The MMC Class Action Complaints assert
claims under Sections 10(b) and 20(a) of the Exchange Act.
o Purported shareholder derivative actions have been filed against members of
MMC's Board of Directors, and MMC as a nominal defendant in courts in state and
federal courts in New York City. In these actions, the plaintiffs purport to
state common law claims based on, among other things, the Board's alleged
failure to prevent the alleged market timing from occurring.
o MMC and/or Putnam have been named in over fifty additional actions brought by
investors in Putnam funds claiming damages to themselves or the Putnam funds as
a result of various market-timing activities. These actions have been brought
either individually (the "Individual Complaints"), derivatively (the "Putnam
Derivative Complaints"), or on behalf of a putative class (the "Putnam Class
Action Complaints"). The Individual Complaints, the Putnam Class Action
Complaints (which also name as defendants certain Putnam funds and certain
Putnam employees) and the Putnam Derivative Action Complaints (which also name
as defendants certain Putnam officers and employees and certain trustees of the
Putnam funds), allege violations of the federal securities and investment
advisory laws and state law. At this time, several of these cases are pending in
various state courts. Putnam has also been named as a defendant in one suit in
its capacity as a sub-advisor to a non-Putnam fund.
o MMC, Putnam, and various of their officers, directors and employees have been
named as defendants in three purported class actions asserting claims under
ERISA (the "ERISA Actions"). The ERISA Actions, which have been brought by
participants in MMC's Stock Investment Plan and Putnam's Profit Sharing
Retirement Plan (collectively, the "Plans"), allege, among other things, that,
in view of the market-timing trading activity that was allegedly allowed to
occur at Putnam, the defendants knew or should have known that the investment of
the Plans' funds in MMC's stock and Putnam's mutual fund shares was imprudent
and that the defendants breached their fiduciary duties to the Plans'
participants in making these investments. The three ERISA Actions were filed in
federal court for the Southern District of New York.
Putnam has agreed to indemnify the Putnam funds for any liabilities arising from
market-timing activities, including those that could arise in the securities
litigations, and MMC has agreed to guarantee Putnam's obligations in that
regard.
18
Other Putnam Litigation.
- -------------------------
Putnam Investment Management, LLC and Putnam Retail Management Limited
Partnership have been sued in the United States District Court for the District
of Massachusetts for alleged violations of Section 36(b) of the Investment
Company Act of 1940 through the receipt of purportedly excessive advisory and
distribution fees paid by the mutual funds in which plaintiffs purportedly owned
shares. Plaintiffs seek, among other things, to recover the compensation paid to
defendants by the funds for one year prior to the filing of the complaint,
rescission of the management and distribution agreements between defendants and
the funds, and a prospective reduction in fees.
The complaints in the above-referenced Putnam matters seek monetary damages and
other forms of relief. At the present time, MMC's management is unable to
estimate the impact that the outcome of the foregoing proceedings may have on
MMC's consolidated results of operations or financial position or cash flows.
Employment Dispute
- ------------------
On June 9, 2004, MMC reached a final settlement of the previously disclosed
arbitration proceeding with Lawrence J. Lasser, former president and chief
executive officer of Putnam. The settlement represents approximately $25 million
less than the company had accrued for Mr. Lasser in prior years.
Pursuant to the agreement, Mr. Lasser received a cash payment in full settlement
of all outstanding issues related to his employment, compensation, and departure
from the company. This cash payment represents the release of fully vested
amounts previously awarded to Mr. Lasser over the past decade ($55 million) and
a portion (approximately $23 million) of amounts previously awarded but not
fully vested.
Other Matters
- -------------
MMC and its subsidiaries are subject to various other claims, lawsuits and
proceedings consisting principally of alleged errors and omissions in connection
with the placement of insurance or reinsurance and in rendering investment and
consulting services. Some of these matters seek damages, including punitive
damages, in amounts that could, if assessed, be significant. Insurance coverage
applicable to such matters includes elements of both risk retention and risk
transfer.
As part of the combination with Sedgwick, MMC acquired several insurance
underwriting businesses that were already in run-off, including River Thames
Insurance Company Limited ("River Thames"), which was sold in 2001. Sedgwick
guaranteed payment of claims on certain policies underwritten through the
Institute of London Underwriters by River Thames ("ILU Guarantee"). The policies
covered by the ILU Guarantee are reinsured up to 40 million British Pounds by a
related party of River Thames. Payment of claims under the reinsurance agreement
is collateralized by segregated assets held in a trust. As of June 30, 2004, the
reinsurance coverage exceeded the best estimate of the projected liability of
the policies covered by the ILU Guarantee. To the extent River Thames or the
reinsurer is unable to meet their obligations under those policies, a claimant
may seek to recover from MMC under the guarantee.
Although the ultimate outcome of these other matters cannot be ascertained and
liabilities in indeterminate amounts may be imposed on MMC and its subsidiaries,
on the basis of present information, it is the opinion of MMC's management that
the disposition or ultimate determination of these claims, lawsuits or
proceedings should not have a material adverse effect on MMC's consolidated
financial position or cash flows, but may be material to MMC's operating results
in any particular period.
Other Industry Inquiries
- ------------------------
The New York Attorney General has issued subpoenas to numerous insurance brokers
related to an inquiry into market service agreements and other similar
agreements which compensate brokers for distribution and other services provided
to insurance carriers. The Company has received such a subpoena and is
cooperating fully in the investigation.
The SEC is examining the practices, compensation arrangements and disclosures of
consultants that provide services to sponsors of pension plans or other market
participants, including among other things, practices with respect to advice
regarding the selection of investment advisors to manage plan assets. Mercer
Investment Consulting, Inc. has received requests for information from the SEC
in connection with this examination and is fully cooperating.
19
14. Variable Interest Entities
- -------------------------------
MMC through Putnam, manages $3.7 billion in the form of Collateralized Debt
Obligations ("CDO") and Collateralized Bond Obligations ("CBO"). Separate
limited liability companies were established to issue the notes and to hold the
underlying collateral, which consists of high-yield bonds and other securities.
Putnam serves as the collateral manager for the CDOs and CBOs. The maximum loss
exposure related to the CDOs and CBOs is limited to Putnam's investment totaling
$7.7 million, reflected in Long-term investments in the Consolidated Balance
Sheets at June 30, 2004. MMC has concluded it is not the primary beneficiary of
these structures under FIN 46 "Consolidation of Variable Interest Entities."
15. Segment Information
-------------------
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which is
after deductions for directly related expenses and minority interest but before
corporate expenses, charges, credits or insurance recoveries related to
September 11, 2001, and charges or credits related to integration and
restructuring reserves. The accounting policies of the segments are the same as
those used for the consolidated financial statements.
Selected information about MMC's operating segments for the six-month periods
ended June 30, 2004 and 2003 follow:
- --------------------------------------------------------------------------------
Segment Operating
(In millions of dollars) Revenue Income
- --------------------------------------------------------------------------------
2004
Risk and Insurance Services $3,811(a) $1,092
Investment Management 907 69
Consulting 1,528 202
- --------------------------------------------------------------------------------
$6,246 $1,363
- --------------------------------------------------------------------------------
2003
Risk and Insurance Services $3,453(a) $ 963
Investment Management 940 228
Consulting 1,324 182
- --------------------------------------------------------------------------------
$5,717 $1,373
- --------------------------------------------------------------------------------
(a) Includes interest income on fiduciary funds ($59 million in 2004 and $61
million in 2003).
20
A reconciliation of the total segment operating income to income before income
taxes and minority interest in the consolidated financial statements is as
follows:
- --------------------------------------------------------------------------------
(In millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
Total segment operating income $1,363 $1,373
Corporate income/(expense) 36 (68)
Reclassification of minority interest 6 11
- --------------------------------------------------------------------------------
Operating income 1,405 1,316
Interest income 9 13
Interest expense (98) (89)
- --------------------------------------------------------------------------------
Total income before income taxes and
minority interest $1,316 $1,240
- --------------------------------------------------------------------------------
During the first quarter of 2004, MMC reached final settlement for insured
losses totaling $278 million related to the World Trade Center. The replacement
value of assets exceeded the book value by $105 million, which was recorded as a
reduction of Corporate operating expenses.
Operating segment revenue by product for the six-month periods ended June 30,
2004 and 2003 is as follows:
- --------------------------------------------------------------------------------
(In millions of dollars) 2004 2003
- --------------------------------------------------------------------------------
Risk & Insurance Services
Risk Management and Insurance Broking $2,849 $2,589
Reinsurance Broking and Services 482 437
Related Insurance Services 480 427
- --------------------------------------------------------------------------------
Total Risk & Insurance Services 3,811 3,453
- --------------------------------------------------------------------------------
Investment Management 907 940
- --------------------------------------------------------------------------------
Consulting
Retirement Services 689 606
Management and Organizational Change 275 198
Health Care & Group Benefits 211 201
Human Capital 197 181
Economic 81 71
- --------------------------------------------------------------------------------
1,453 1,257
Reimbursed Expenses 75 67
- --------------------------------------------------------------------------------
Total Consulting 1,528 1,324
- --------------------------------------------------------------------------------
Total $6,246 $5,717
- --------------------------------------------------------------------------------
21
Marsh & McLennan Companies, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Second Quarter and Six Months Ended June 30, 2004
General
Marsh & McLennan Companies, Inc. and Subsidiaries ("MMC") is a professional
services firm. MMC subsidiaries include Marsh Inc. ("Marsh"), the world's
largest risk and insurance services firm; Putnam Investments ("Putnam"), one of
the largest investment management companies in the United States; and Mercer
Inc. ("Mercer"), a major global provider of consulting services. Approximately
60,000 employees worldwide provide analysis, advice and transactional
capabilities to clients in over 100 countries.
MMC operates in three principal business segments based on the services
provided. Segment performance is evaluated based on operating income, which is
after deductions for directly related expenses and minority interest but before
corporate expenses, charges, credits or insurance recoveries related to
September 11, 2001, and charges or credits related to integration and
restructuring reserves.
For a description of critical accounting policies, including those which involve
significant management judgment, see Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 1 to the consolidated
financial statements in MMC's Annual Report on Form 10-K ("2003 10-K") for the
year ended December 31, 2003.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain statements relating to future results which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. See "Information Concerning Forward-Looking
Statements" on page two of this filing. This Form 10-Q should be read in
conjunction with the 2003 10-K.
The consolidated results of operations follow:
- --------------------------------------------------------------------------------
Second Quarter Six Months
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Revenue:
Service Revenue $2,964 $2,840 $6,141 $5,681
Investment Income (Loss) 72 25 105 36
- --------------------------------------------------------------------------------
Operating Revenue 3,036 2,865 6,246 5,717
- --------------------------------------------------------------------------------
Expense:
Compensation and Benefits 1,596 1,475 3,231 2,853
Other Operating Expenses 808 791 1,610 1,548
- --------------------------------------------------------------------------------
Operating Expenses 2,404 2,266 4,841 4,401
- --------------------------------------------------------------------------------
Operating Income $ 632 $ 599 $1,405 $1,316
- --------------------------------------------------------------------------------
Operating Income Margin 20.8% 20.9% 22.5% 23.0%
- --------------------------------------------------------------------------------
Diluted Earnings per Share $ .73 $ .66 $ 1.56 $ 1.47
- --------------------------------------------------------------------------------
22
An analysis of MMC's operating revenue by segment, and the impact of foreign
currency translation, acquisitions and dispositions is as follows:
- -------------------------------------------------------------------------------------------------------------------
Components of Revenue Change
--------------------------------------
Three Months Ended % Change Acquisitions/
June 30, GAAP Underlying Dispositions Currency
(In millions, except percentage figures) 2004 2003 Revenue Revenue (a) Impact Impact
- -------------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $1,363 $1,269 7% 3% 1% 3%
Reinsurance Broking and Services 207 194 7% 4% - 3%
Related Insurance Services (b) 247 217 13% 13% - -
- -------------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services (c) 1,817 1,680 8% 5% - 3%
- -------------------------------------------------------------------------------------------------------------------
Investment Management 446 495 (10)% (10)% - -
- -------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services (c) 339 309 10% - 5% 5%
Management and Organizational Change 141 117 21% 15% 2% 4%
Health Care and Group Benefits (c) 111 103 7% 7% - -
Human Capital 103 92 11% 4% - 7%
Economic 39 34 16% 14% - 2%
- -------------------------------------------------------------------------------------------------------------------
733 655 12% 5% 3% 4%
Reimbursed Expenses 40 35
- -------------------------------------------------------------------------------------------------------------------
Total Consulting 773 690 12% 5% 3% 4%
- -------------------------------------------------------------------------------------------------------------------
Total Revenue $3,036 $2,865 6% 2% 1% 3%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Components of Revenue Change
--------------------------------------
Six Months Ended % Change Acquisitions/
June 30, GAAP Underlying Dispositions Currency
(In millions, except percentage figures) 2004 2003 Revenue Revenue (a) Impact Impact
- -------------------------------------------------------------------------------------------------------------------
Risk and Insurance Services
Risk Management and Insurance Broking $2,849 $2,589 10% 5% 1% 4%
Reinsurance Broking and Services 482 437 10% 7% - 3%
Related Insurance Services (b) 480 427 12% 12% - -
- -------------------------------------------------------------------------------------------------------------------
Total Risk and Insurance Services (c) 3,811 3,453 10% 6% - 4%
- -------------------------------------------------------------------------------------------------------------------
Investment Management 907 940 (3)% (3)% - -
- -------------------------------------------------------------------------------------------------------------------
Consulting
Retirement Services (c) 689 606 14% - 6% 8%
Management and Organizational Change 275 198 39% 10% 24% 5%
Health Care and Group Benefits (c) 211 201 5% 2% - 3%
Human Capital 197 181 9% 2% - 7%
Economic 81 71 14% 11% - 3%
- -------------------------------------------------------------------------------------------------------------------
1,453 1,257 15% 3% 6% 6%
Reimbursed Expenses 75 67
- -------------------------------------------------------------------------------------------------------------------
Total Consulting 1,528 1,324 15% 3% 6% 6%
- -------------------------------------------------------------------------------------------------------------------
Total Revenue $6,246 $5,717 9% 4% 1% 4%
- -------------------------------------------------------------------------------------------------------------------
(a) Underlying basis measures the change in revenue before the impact of
acquisitions and dispositions using constant currency exchange rates.
(b) Includes U.S. affinity, claims management, wholesale broking, underwriting
management and MMC Capital businesses.
(c) Certain reclassifications have been made to prior year amounts to conform
with current presentation.
23
Revenue, derived mainly from commissions and fees, increased 6% from the second
quarter of 2003. The increase in revenue was due to underlying revenue growth in
the risk and insurance and consulting segments, partially offset by a decline in
investment management, and the impact of foreign exchange and acquisitions.
Revenue increased 2% on an underlying basis, which measures the change in
revenue before the impact of acquisitions and dispositions and using constant
currency exchange rates.
Revenue growth on an underlying basis in the risk and insurance services segment
was 5% in the second quarter of 2004, reflecting growth in insurance broking,
reinsurance broking and related insurance services. The performance reflects a
softening insurance market, with declines in commercial insurance rates.
Consulting revenue on an underlying basis grew 5%. Higher demand for management
advice generated an increase in management and organizational change consulting.
Acquisitions contributed 3% to the revenue growth of consulting largely
reflecting the acquisition of Synhrgy HR Technologies. Revenue decreased 10% in
the investment management segment due to a decline in the amount of assets under
management on which fees are earned, partially offset by higher investment
income. Average assets under management declined 17% in the second quarter
compared with 2003.
Revenue in the first six months of 2004 increased 9% from the same period last
year, 4% on an underlying basis. Underlying revenue grew 6% in the risk and
insurance services segment during the first six months of the year, due to
continued growth in insurance broking, reinsurance broking and related insurance
services. Consulting revenue grew 3% on an underlying basis and acquisitions
increased revenue by 6%. Revenue decreased 3% in the investment management
segment due to lower fees resulting from the decline in assets under management,
partially offset by higher investment income related to the sale of Putnam's
interest in its Italian joint venture and related securities.
Operating expenses increased 6% in the second quarter of 2004, 2% on an
underlying basis. The increase in expenses results from an 8% increase in
compensation and benefits costs, as benefit costs increased 22%, reflecting
higher pension costs. All other expenses increased 2%. Severance costs related
to streamlining management and repositioning Putnam were offset by a credit to
compensation expense related to the settlement with Putnam's former chief
executive officer (see Note 13 of the Consolidated Financial Statements).
Operating expenses increased 10% in the first six months of 2004, 4% on an
underlying basis. The increase in underlying expenses reflects higher
compensation and benefits costs which includes severance and increased pension
costs, higher facility expenses, and costs related to regulatory issues. These
increases were partially offset by a decrease in amortization expense for
prepaid dealer commissions and a credit to compensation expense related to the
settlement with Putnam's former chief executive officer. Expenses in 2004 also
include regulatory fines of $100 million related to Putnam's settlement
agreements with the Securities and Exchange Commission ("SEC") and the Office of
the Secretary of the Commonwealth of Massachusetts, and a credit of $105 million
from the final settlement with insurers for claims related to the September 11,
2001 attack on the World Trade Center ("WTC"). Based on the most recent
estimates, pension expense is expected to increase by approximately $90 million
for the full year, half of which has been included in the six months results.
24
Risk and Insurance Services
- --------------------------------------------------------------------------------
Second Quarter Six Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Revenue $1,817 $1,680 $3,811 $ 3,453
Expense 1,362 1,277 2,719 2,490
- --------------------------------------------------------------------------------
Operating Income $ 455 $ 403 $1,092 $ 963
- --------------------------------------------------------------------------------
Operating Income Margin 25.0% 24.0% 28.7% 27.9%
- --------------------------------------------------------------------------------
Revenue
- -------
Revenue for the risk and insurance services segment grew 8% over the second
quarter of 2003, 5% on an underlying basis. In the second quarter, underlying
revenue grew 3% in risk management and insurance broking, primarily due to
growth in Europe and other international geographies. Business activity in the
United States was stronger for middle market than risk management. Acquisitions,
including the Australia and New Zealand operations of Heath Lambert and Brady &
Company, Inc. contributed 1% to revenue growth. Reinsurance broking and services
grew 4% on an underlying basis primarily resulting from higher new business.
Related insurance services revenue grew 13%, primarily due to increases in the
claims management business and MMC Capital.
Revenue for the first six months of 2004 grew 10% over the same period of 2003,
6% on an underlying basis, reflecting a higher volume of business. Underlying
revenues grew 5% in risk management and insurance broking, driven by growth in
Europe and other international geographies. Reinsurance broking and services
grew 7% on an underlying basis primarily resulting from new business, and
related insurance services grew 12% primarily due to growth in claims management
and MMC Capital.
Expense
- -------
Risk and insurance services expenses increased 7% over the second quarter of
2003, 3% on an underlying basis. The increase in underlying expense is primarily
due to higher benefits costs, including pension expense. For the six months,
operating expenses increased 9% over 2003, 4% on an underlying basis. The
increase in underlying expenses is due to higher compensation and benefits
costs.
Acquisition
- -----------
In July 2004, MMC acquired Kroll, Inc., the world's leading provider of risk
mitigation services. The combination of Marsh and Kroll expands MMC's
capabilities to assist clients in managing the total cost of risk. The total
cost of the acquisition was $1.9 billion and the impact on EPS is expected to be
neutral for the remainder of 2004.
Investment Management
- --------------------------------------------------------------------------------
Second Quarter Six Months
- -------------------------------------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Revenue $446 $495 $907 $940
Expense 351 370 838 712
- --------------------------------------------------------------------------------
Operating Income $ 95 $125 $ 69 $228
- --------------------------------------------------------------------------------
Operating Income Margin 21.3% 25.3% 7.6% 24.3%
- --------------------------------------------------------------------------------
25
Revenue
- -------
Putnam's revenue decreased 10% in the second quarter of 2004 reflecting a
decrease in fees due to a decline in assets under management. This decrease was
partially offset by a $38 million investment gain from the sale of Putnam's
interest in its Italian joint venture and related securities. Assets under
management averaged $216 billion in the second quarter of 2004, a 17% decline
from the $260 billion managed in the second quarter of 2003. Assets under
management aggregated $213 billion at June 30, 2004 compared with $267 billion
at June 30, 2003 and $240 billion at December 31, 2003. The change from December
31, 2003 results primarily from net redemptions of $30 billion, partially offset
by an increase in equity market levels.
Putnam's revenue declined 3% in the first six months of 2004 compared to the
same period in 2003. The decrease is primarily driven by lower fees due to a
decline in assets under management, partially offset by higher investment gains.
At the end of the second quarter, assets held in equity securities represented
70% of assets under management, compared with 74% at June 30, 2003, while
investments in fixed income products represented 30%, compared with 26% at June
30, 2003.
Quarter-end and average assets under management are presented below:
- --------------------------------------------------------------------------------
(In billions of dollars) 2004 2003
- --------------------------------------------------------------------------------
Mutual Funds:
Growth Equity $ 41 $ 48
Value Equity 41 42
Blend Equity 28 35
Fixed Income 38 46
- --------------------------------------------------------------------------------
148 171
- --------------------------------------------------------------------------------
Institutional:
Equity 39 72
Fixed Income 26 24
- --------------------------------------------------------------------------------
65 96
- --------------------------------------------------------------------------------
Quarter-end Assets $213 $267
- --------------------------------------------------------------------------------
Assets from Non-US Investors $ 36 $ 37
- --------------------------------------------------------------------------------
Average Assets $216 $260
- --------------------------------------------------------------------------------
Components of quarter-to-date change in ending assets under management
- --------------------------------------------------------------------------------
New Sales/(Redemptions)including Dividends Reinvested $(12.2) $(3.0)
- --------------------------------------------------------------------------------
Impact of Market/Performance ( 1.4) 29.1
- --------------------------------------------------------------------------------
The categories of mutual fund assets reflect style designations aligned with
each fund's prospectus. All prior year amounts have been reclassified to conform
with the current investment mandate for each product.
26
Assets under management and revenue levels are particularly affected by
fluctuations in domestic and international stock and bond market prices, the
composition of assets under management and by the level of investments and
withdrawals for current and new fund shareholders and clients. Items affecting
revenue also include, but are not limited to, actual and relative investment
performance, service to clients, the development and marketing of new investment
products, the relative attractiveness of the investment style under prevailing
market conditions, changes in the investment patterns of clients and the ability
to maintain investment management and administrative fees at historic levels.
Future revenue may be adversely affected by continued net redemptions and by
limits on fund expense ratios and front end sales charges. Revenue levels are
sensitive to all of the factors above, but in particular, to significant changes
in stock and bond market valuations and net flows into or out of Putnam's funds.
Expense
- -------
Putnam's expenses decreased 5% in the second quarter of 2004 from the same
period of 2003. The decrease was primarily due to a decline in amortization
expense for prepaid dealer commissions along with lower compensation costs.
Other notable items impacting the quarter were: a credit of $25 million
associated with the settlement with Putnam's former chief executive officer (see
Employment Dispute, Note 13 of the Consolidated Financial Statements); offset by
$27 million of incremental severance costs, and $34 million of costs related to
regulatory issues and repositioning Putnam, including legal, audit and
communications expenses.
Expenses for the six months ended June 30, 2004 increased 18% from the same
period in 2003. Expenses in 2004 include a $100 million charge for Putnam's
regulatory settlements with the SEC and the Secretary of the Commonwealth of the
State of Massachusetts. Other significant items recorded in 2004 were severance
of $52 million and incremental costs related to regulatory issues and
repositioning Putnam, including legal and audit costs of $28 million,
communications costs of $16 million and $5 million of other costs. These
increases were partially offset by a decrease in amortization expense for
prepaid dealer commissions and a $25 million credit to compensation expense
associated with the settlement with Putnam's former chief executive officer.
Acquisition
- -----------
In July 2004, Putnam acquired an additional 30% of Pan Agora Asset Management,
bringing its total interest to an 80% voting majority. Pan Agora offers enhanced
index and structured products. This transaction will increase Putnam's assets
under management by approximately $8 billion.
Consulting
- --------------------------------------------------------------------------------
Second Quarter Six Months
- --------------------------------------------------------------------------------
(In millions of dollars) 2004 2003 2004 2003
- --------------------------------------------------------------------------------
Revenue $773 $ 690 $1,528 $1,324
Expense 660 591 1,326 1,142
- --------------------------------------------------------------------------------
Operating Income $113 $ 99 $ 202 $ 182
- --------------------------------------------------------------------------------
Operating Income Margin 14.6% 14.3% 13.2% 13.7%
- --------------------------------------------------------------------------------
27
Revenue
- -------
Consulting revenue in the second quarter of 2004 increased 12% over the same
period in 2003 with strong growth in human resource practices in Europe and Asia
and in management and economic consulting. Underlying revenue increased 5% due
to the higher demand for consulting services resulting from improving economic
conditions, with acquisitions adding another 3%. On an underlying basis,
management and organization change grew 15%, economic consulting grew 14%,
health care and group benefits grew 7%. Underlying revenue in retirement
services was flat.
Consulting revenue for the first six months of 2004 increased 15% over the same
period in 2003. Acquisitions, which accounted for 6% of the revenue growth in
2004, include Oliver, Wyman & Company which closed on April 1, 2003 and Synhrgy
HR Technologies which closed in January, 2004. On an underlying basis, revenue
increased 3%. Underlying revenue grew 11% in economic consulting, 10% in
management and organizational change, and 2% in both the health care & group
benefits and human capital practices. Underlying revenue in retirement services
was flat.
Expense
- -------
Consulting expenses increased 12% in the second quarter of 2004 compared to 2003
primarily due to the impact of foreign exchange and acquisitions. On an
underlying basis, expenses increased 4% due to increased benefits costs,
primarily pension costs. For the six months, expenses increased 16% over 2003,
3% on an underlying basis.
Corporate Expenses
Corporate expenses grew 2% in the second quarter of 2004 compared to the same
period last year. Corporate expenses for the six months ended June 30, 2004
include the impact of the final settlement for insured losses related to the
WTC. The replacement value of the assets exceeded their book value by $105
million which was recorded in the first quarter as a reduction of other
operating expenses.
Interest
Interest income earned on corporate funds amounted to $4 million in the second
quarter of 2004, a decrease of $3 million from the second quarter of 2003.
Interest expense of $48 million in 2004 increased from $46 million in the second
quarter of 2003 due to an increase in the average outstanding debt. Interest
income on corporate funds amounted to $9 million in the first six months of
2004, a $4 million decrease from the same period in 2003. Interest expense of
$98 million increased from $89 million in the same period of 2003 due to an
increase in the average outstanding debt and the average interest rates on
outstanding debt in 2004. The increase in average interest rates results from
the conversion of $800 million of the company's debt from floating to fixed
rates in 2003.
Income Taxes
MMC's consolidated effective tax rate was 33% of income before income taxes and
minority interest in the second quarter of 2004 compared with 34% in the second
quarter of 2003. The effective tax rate of 36.1% for the six months of 2004
includes the impact of Putnam's non-deductible settlement payments of $100
million and a 40% tax rate on the WTC settlement gain of $105 million. The
effective tax rate applicable to ongoing operating income was 33%, which is
expected to increase by approximately one half of one percent after the
acquisition of Kroll.
Liquidity and Capital Resources
MMC anticipates that funds generated from operations will be sufficient to meet
its foreseeable recurring operating cash requirements as well as to fund
dividends and capital expenditures. MMC's ability to generate cash flow from
operations is subject to the business risks inherent in each operating segment.
Cash and cash equivalents reported in the Consolidated Balance Sheets include
amounts held to satisfy global working capital, capital adequacy and regulatory
requirements. MMC continually monitors its expected and actual cash flows to
determine the most advantageous use of its near term cash flows among
alternatives including dividends, investments, acquisitions, funding
alternatives for its pension plans and share repurchases.
28
Operating Cash Flows
- --------------------
MMC generated $769 million of cash from operations for the period ended June 30,
2004 compared with $1.1 billion for the same period in 2003. These amounts
reflect the net income earned by MMC during those periods adjusted for non-cash
charges and changes in working capital which relate, primarily, to the timing of
payments or receipts of accrued liabilities assets or receipts of assets. The
decrease in cash generated from operations compared with the prior year results
primarily from higher tax payments in 2004, a higher amount of investment gains,
which are included in investing cash flows, as well as normal fluctuations in
the timing of payments and receipts of various working capital items. The
increase in 2004 of cash outflows related to deferred compensation plans was
largely offset by cash generated from the liquidation of assets related to these
plans included in the change in other assets in the consolidated statements of
cash flows.
Financing Cash Flows
- --------------------
Net cash used for financing activities was $765 million for this period compared
to a use of $722 million in the same period last year. Cash used for financing
activities includes an increase in commercial paper borrowing offset by the
repayment in June 2004 of $600 million of maturing long term debt.
MMC periodically repurchases shares of its common stock for treasury as well as
to meet requirements for issuance of shares for its various stock compensation
and benefit programs. During the second quarter of 2004, MMC repurchased 4
million shares of its common stock at a cost of $180 million and repurchased 11
million shares for $510 million for the six months ended June 30, 2004. Share
repurchases are recorded on a trade date basis, but are reflected on a
settlement date basis in the Consolidated Statements of Cash Flows. Proceeds
from common stock issued pursuant to stock compensation and benefit plans was
$223 million in 2004, compared with $253 million in 2003. Currently, management
expects to use a significant portion of cash flows over the next six months to
pay down borrowings related to the Kroll acquisition. Share repurchases are
expected to be limited through the end of the year.
MMC paid dividends in the amount of approximately $162 million ($0.31 per share)
in the second quarter of 2004. Year to date, MMC has paid dividends of
approximately $325 million ($.62 per share) and raised its quarterly dividend
10%, to $0.34 per share, effective in the third quarter.
In June 2004, MMC renegotiated a $1.4 billion revolving credit facility that was
due to expire in that month. Under the terms of the renegotiated agreement, the
facility was split into two tranches, $700 million which expires in June 2005
and $700 million which expires in June 2009. In addition, MMC maintains a $1.0
billion revolving credit facility established in June 2002 which expires in June
2007. The facilities support MMC's commercial paper borrowings. No amounts were
outstanding under the facilities during the six months ended June 30, 2004.
In July 2004 MMC purchased Kroll, Inc. in an all-cash transaction totaling
approximately $1.9 billion. The purchase was initially funded with commercial
paper borrowings. To support these borrowings, MMC negotiated a new $1.5
billion, one-year revolving credit facility. Following the acquisition, MMC
issued $650 million of 5.375% Senior Notes due 2014 and $500 million of Floating
Rate Notes due 2007. The proceeds from these notes were used to repay the
commercial paper borrowings. Under the terms of the above-mentioned credit
facility, the amount of the facility was reduced by the proceeds from the notes
issued. That facility now totals $355 million. The financing activities used to
fund the purchase of Kroll did not affect cash flows for the six months ended
June 30, 2004.
29
In July 2003, MMC issued $300 million of 5.875% Senior Notes due in 2033. In
February 2003, MMC issued $250 million of 3.625% Senior Notes due in 2008 and
$250 million of 4.85% Senior Notes due in 2013 (the "2003 Notes"). The net
proceeds from the 2003 Notes were used to pay down commercial paper borrowings.
Investing Cash Flows
- --------------------
Cash used for investing activities amounted to $262 million in the first six
months of 2004 and $290 million for the same period in the prior year. The
primary use of cash in the first six months was for the acquisition of Synhrgy
HR Technologies and the Australia and New Zealand operations of Heath Lambert,
and payments of approximately $57 million for acquisitions completed in prior
years. Remaining cash payments of approximately $67 million related to
acquisitions completed in 2004 and 2003 are recorded in Other liabilities in the
Consolidated Balance Sheets at June 30, 2004.
MMC's additions to fixed assets and capitalized software, which amounted to $168
million in the first six months of 2004 and $240 million in the first six months
last year, primarily relate to computer equipment purchases and the refurbishing
and modernizing of office facilities and software development costs.
The sale of Putnam's interest in its Italian joint venture and related
securities along with sales of securities by MMC Capital, generated $113 million
during the first six months of 2004. Securities sales during the same period
last year generated $59 million. These sales are included in Other, net in the
Consolidated Statements of Cash Flows.
MMC has committed to potential future investments of approximately $696 million
in connection with various MMC Capital funds and other MMC investments.
Commitments of approximately $280 million relate to Trident III, a newly formed
private equity fund managed by MMC Capital. Approximately $29 million was
invested in the first six months of 2004. MMC expects to fund future
commitments, in part, with sales proceeds from existing investments.
Market Risk
Certain of MMC's revenues, expenses, assets and liabilities are exposed to the
impact of interest rate changes and fluctuations in foreign currency exchange
rates and equity markets.
Interest Rate Risk
MMC manages its net exposure to interest rate changes by utilizing a mixture of
variable and fixed rate borrowings to finance MMC's asset base. Interest rate
swaps are used on a limited basis to manage MMC's exposure to interest rate
movements on its cash and investments, as well as interest expense on
borrowings, and are only executed with counterparties of high creditworthiness.
Foreign Currency Risk
The translated values of revenue and expense from MMC's international risk and
insurance services and consulting operations are subject to fluctuations due to
changes in currency exchange rates. Forward contracts and options are
periodically utilized by MMC to limit foreign currency exchange rate exposure on
net income and cash flows for specific, clearly defined transactions arising in
the ordinary course of its business.
30
Equity Price Risk
MMC holds investments in both public and private companies as well as certain
private equity funds managed by MMC Capital, including Trident II. Publicly
traded investments of $401 million are classified as available for sale under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Non-publicly traded investments of $78 million and $330 million are
accounted for under APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock", using the cost method and the equity method,
respectively. Changes in value of trading securities are recognized in income
when they occur. The investments that are classified as available for sale or
that are not publicly traded are subject to risk of changes in market value,
which if determined to be other than temporary, could result in realized
impairment losses. MMC periodically reviews the carrying value of such
investments to determine if any valuation adjustments are appropriate under the
applicable accounting pronouncements.
Other
On June 9, 2004, MMC reached a final settlement of the previously disclosed
arbitration proceeding with Lawrence J. Lasser, former president and chief
executive officer of Putnam. The settlement represents approximately $25 million
less than the company had accrued for compensation expense for Mr. Lasser in
prior years. In addition, as further discussed in Note 13 to the Consolidated
Financial Statements, administrative proceedings and a number of lawsuits have
commenced against Putnam and MMC.
The insurance coverage for potential liability resulting from alleged errors and
omissions in the professional services provided by MMC, includes elements of
both risk retention and risk transfer. MMC believes it has adequately reserved
for the self-insurance portion of the contingencies. Payments related to the
respective self-insured layers are made as legal fees are incurred and claims
are resolved and generally extend over a considerable number of years. The
amounts paid in that regard vary in relation to the severity of the claims and
the number of claims active in any particular year. The long-term portion of
this liability is included in Other liabilities in the Consolidated Balance
Sheets.
31
Part I - Item 4. Controls & Procedures
- ---------------------------------------
a. Evaluation of Disclosure Controls and Procedures
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer
have concluded the Company's disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective
in timely alerting them to material information relating to the Company required
to be included in our reports filed under the Exchange Act.
b. Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
32
PART II. OTHER INFORMATION
--------------------------
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
INFORMATION REQUIRED FOR FORM 10-Q QUARTERLY REPORT
June 30, 2004
Item 1. Legal Proceedings.
Putnam Matters
--------------
Regulatory Matters.
--------------------
On October 28, 2003, the SEC commenced a civil administrative and cease and
desist proceeding against Putnam under the Investment Advisors Act of 1940 and
the Investment Company Act of 1940. On November 13, 2003, pursuant to an
agreement with Putnam, the SEC entered an order that made findings of certain
facts, which Putnam neither admitted nor denied, and concluded that Putnam
violated the Investment Advisors Act of 1940 and the Investment Company Act of
1940. The order imposed partial relief, including final censure, remedial
undertakings, and a cease and desist order. The SEC's order found that since
1998 at least six Putnam investment management professionals engaged in
excessive short-term trading of Putnam mutual funds in their personal accounts.
The order also found that four of these employees engaged in trading in funds
over which they had investment decision making responsibilities and access to
non-public information regarding their funds' portfolios. The SEC further found
that Putnam failed to disclose this potentially self-dealing securities trading
to the boards or shareholders of the mutual funds it manages, failed to take
adequate steps to detect and deter such trading activity through internal
controls and failed in its supervision of these investment management
professionals. Under the terms of the order, Putnam has agreed to a number of
remedial actions, including new employee trading restrictions, enhanced employee
trading compliance, determination by an independent assessment consultant of the
amount of restitution to be made by Putnam for losses attributable to excessive
short-term trading and market timing trading activity by Putnam employees, the
retention of an independent compliance consultant, the undertaking of periodic
compliance reviews, and certification of compliance with the SEC. On April 8,
2004, Putnam entered into a final settlement of those charges under which Putnam
is required to pay $5 million in disgorgement plus a civil monetary penalty of
$50 million, with any excess amount of restitution required to be set off
against the civil monetary penalty (up to an additional $5 million). These
amounts are to be distributed in accordance with the process established under
the November 13, 2003 and April 8, 2004 SEC orders. In the event that the
independent assessment consultant determines that the amount of restitution
required by the November 13, 2003 order is more than $10 million, Putnam will
also be responsible for paying any such excess amount.
On October 28, 2003, the Massachusetts Secretary of the Commonwealth
("Massachusetts Securities Division") commenced a civil administrative
proceeding against Putnam and two of its employees alleging violations of the
state's securities law anti-fraud provisions. On April 8, 2004, simultaneously
and in conjunction with the settlement of the above-referenced SEC proceeding,
the Massachusetts Securities Division entered a Consent Order in final
settlement of those charges. That Consent Order included a cease and desist
order, and requires Putnam to pay $5 million in restitution and an
administrative fine of $50 million, with any excess amount of restitution
required to be set off against the administrative fine (up to an additional $10
million, with Putnam responsible for paying any further excess amount). The
restitution called for by the Consent Order will be determined and distributed
by the same independent assessment consultant appointed pursuant to the November
13, 2003 and April 8, 2004 SEC orders. The Trustees may separately seek
additional amounts to assure that full restitution is made to Putnam fund
shareholders.
33
In a separate action, the SEC is seeking an injunction against two of the
six investment management employees. All six are no longer employed by Putnam.
Additionally, Putnam has received document subpoenas and/or requests for
information from the United States Attorney in Boston, the Florida Department of
Financial Services, the Office of the Attorney General for the State of New
York, Offices of the Secretary of State and the State Auditor for the State of
West Virginia, the Vermont Securities Division, the NASD and the Boston office
of the U.S. Department of Labor inquiring into, among other things, matters that
are the subject of the SEC and Massachusetts actions.
Putnam has also received document subpoenas from the Massachusetts
Securities Division, the Office of the Attorney General for the State of New
York, and the SEC relating to plan expense reimbursement agreements between
Putnam and certain multiemployer deferred compensation plans which are Putnam
clients, and also relating to Putnam's relationships with consultants retained
by multiemployer deferred compensation plans. The Massachusetts Securities
Division has taken testimony from a number of Putnam employees relating to the
same matters.
Putnam has also received subpoenas from the SEC's Philadelphia office,
seeking documents and information relating to Putnam's directed brokerage
practices and trading practices and the SEC has interviewed, and taken testimony
from, a number of Putnam employees relating to revenue sharing practices and
trading practices. In addition, Putnam has received a request for information
from the SEC's Chicago office and the NASD regarding revenue sharing
arrangements.
Putnam has also received requests for information from the SEC's Boston
Office,the Massachusetts Securities Division and the Department of Labor
relating to the administration of certain 401(k) plans by Putnam Fiduciary Trust
Company. The first matter involved the correction of operational errors with
respect to a 401(k) client's investment in certain Putnam Funds. The second
matter involved the payment of certain Putnam corporate expenses for consulting
services.
Putnam is fully cooperating with the regulatory authorities.
"Market-Timing" Securities Litigation.
----------------------------------------
As of July 20, 2004, MMC and Putnam have received complaints in over 70
civil actions based on allegations of "market-timing" activities. These actions
have been filed in courts in New York, Massachusetts, California, Illinois,
Connecticut, Delaware, Vermont, Kansas, and North Carolina. Most of the actions
have been transferred, along with others against other mutual fund complexes, to
the United States District Court for the District of Maryland for coordinated or
consolidated pretrial proceedings. In the federal cases, MMC and Putnam are not
required to respond to the complaints until after plaintiffs have filed amended
complaints in the consolidated actions.
34
The civil actions include:
o Purported securities class actions (the "MMC Class Action Complaints")
have been filed in United States District Court for the Southern District of New
York on behalf of a class of purchasers of MMC stock during the period from
January 2000 to November 2003. The MMC Class Action Complaints allege, among
other things, that MMC failed to disclose certain market-timing activities at
Putnam which, when disclosed, resulted in a drop in the market price of MMC's
shares. The MMC Class Action Complaints also name as defendants certain current
or former officers and directors of MMC. The MMC Class Action Complaints assert
claims under Sections 10(b) and 20(a) of the Exchange Act.
o Purported shareholder derivative actions have been filed against members
of MMC's Board of Directors, and MMC as a nominal defendant in courts in state
and federal courts in New York City. In these actions, the plaintiffs purport to
state common law claims based on, among other things, the Board's alleged
failure to prevent the alleged market timing from occurring.
o MMC and/or Putnam have been named in over fifty additional actions
brought by investors in Putnam funds claiming damages to themselves or the
Putnam funds as a result of various market-timing activities. These actions have
been brought either individually (the "Individual Complaints"), derivatively
(the "Putnam Derivative Complaints"), or on behalf of a putative class (the
"Putnam Class Action Complaints"). The Individual Complaints, the Putnam Class
Action Complaints (which also name as defendants certain Putnam funds and
certain Putnam employees) and the Putnam Derivative Action Complaints (which
also name as defendants certain Putnam officers and employees and certain
trustees of the Putnam funds), allege violations of the federal securities and
investment advisory laws and state law. At this time, several of these cases are
pending in various state courts. Putnam has also been named as a defendant in
one suit in its capacity as a sub-advisor to a non-Putnam fund.
o MMC, Putnam, and various of their officers, directors and employees have
been named as defendants in three purported class actions asserting claims under
ERISA (the "ERISA Actions"). The ERISA Actions, which have been brought by
participants in MMC's Stock Investment Plan and Putnam's Profit Sharing
Retirement Plan (collectively, the "Plans"), allege, among other things, that,
in view of the market-timing trading activity that was allegedly allowed to
occur at Putnam, the defendants knew or should have known that the investment of
the Plans' funds in MMC's stock and Putnam's mutual fund shares was imprudent
and that the defendants breached their fiduciary duties to the Plans'
participants in making these investments. The three ERISA Actions were filed in
federal court for the Southern District of New York.
Putnam has agreed to indemnify the Putnam funds for any liabilities arising
from market-timing activities, including those that could arise in the
securities litigations, and MMC has agreed to guarantee Putnam's obligations in
that regard.
35
Other Putnam Litigation.
--------------------------
Putnam Investment Management, LLC and Putnam Retail Management Limited
Partnership have been sued in the United States District Court for the District
of Massachusetts for alleged violations of Section 36(b) of the Investment
Company Act of 1940 through the receipt of purportedly excessive advisory and
distribution fees paid by the mutual funds in which plaintiffs purportedly owned
shares. Plaintiffs seek, among other things, to recover the compensation paid to
defendants by the funds for one year prior to the filing of the complaint,
rescission of the management and distribution agreements between defendants and
the funds, and a prospective reduction in fees.
The complaints in the above-referenced Putnam matters seek monetary damages
and other forms of relief. At the present time, MMC's management is unable to
estimate the impact that the outcome of the foregoing proceedings may have on
MMC's consolidated results of operations or financial position or cash flows.
Employment Dispute
------------------
On June 9, 2004, MMC reached a final settlement of the previously disclosed
arbitration proceeding with Lawrence J. Lasser, former president and chief
executive officer of Putnam. The settlement represents approximately $25 million
less than the company had accrued for compensation expense for Mr. Lasser in
prior years.
Pursuant to the agreement, Mr. Lasser received a cash payment in full
settlement of all outstanding issues related to his employment, compensation,
and departure from the company. This cash payment represents the release of
fully vested amounts previously awarded to Mr. Lasser over the past decade ($55
million) and a portion (approximately $23 million) of amounts previously awarded
but not fully vested.
Other Matters
-------------
MMC and its subsidiaries are subject to various other claims, lawsuits and
proceedings consisting principally of alleged errors and omissions in connection
with the placement of insurance or reinsurance and in rendering investment and
consulting services. Some of these matters seek damages, including punitive
damages, in amounts that could, if assessed, be significant. Insurance coverage
applicable to such matters includes elements of both risk retention and risk
transfer.
Although the ultimate outcome of these other matters cannot be ascertained
and liabilities in indeterminate amounts may be imposed on MMC and its
subsidiaries, on the basis of present information, it is the opinion of MMC's
management that the disposition or ultimate determination of these claims,
lawsuits or proceedings should not have a material adverse effect on MMC's
consolidated financial position or cash flows, but may be material to MMC's
operating results in any particular period.
Other Industry Inquiries
------------------------
The New York Attorney General has issued subpoenas to numerous insurance
brokers related to an inquiry into market service agreements and other similar
agreements which compensate brokers for distribution and other services provided
to insurance carriers. The Company has received such a subpoena and is
cooperating fully in the investigation.
The SEC is examining the practices, compensation arrangements and
disclosures of consultants that provide services to sponsors of pension plans or
other market participants, including among other things, practices with respect
to advice regarding the selection of investment advisors to manage plan assets.
Mercer Investment Consulting, Inc. has received requests for information from
the SEC in connection with this examination and is fully cooperating.
36
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
(e) The following table sets forth information regarding MMC's purchases of
its common stock on a monthly basis during the second quarter of 2004. Share
repurchases are recorded on a trade date basis.
Issuer Repurchases of Equity Securities
- -------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Number of Maximum Number of
Total Number of Average Price Paid Shares Purchased as Shares that May Yet
Shares Purchased per Share Part of Publicly Be Purchased Under
Announced Plans or the Plans or
Period Programs (1) Programs
- -------------------------------------------------------------------------------------------------------
April 1, 2004 - 901,800 $ 45.35 901,800 53,473,236
April 30, 2004
- -------------------------------------------------------------------------------------------------------
May 1, 2004 - 2,208,400 $ 43.86 2,208,400 51,264,836
May 31, 2004
- -------------------------------------------------------------------------------------------------------
June 1, 2004 - 955,200 $ 43.80 955,200 50,309,636
June 30, 2004
- -------------------------------------------------------------------------------------------------------
Total 4,065,400 $ 44.18 4,065,400 50,309,636
- -------------------------------------------------------------------------------------------------------
(1) As set forth in its public filings, MMC has engaged in an ongoing share
repurchase program. On March 18, 1999, MMC's board of directors authorized the
repurchase of up to 40 million shares of MMC's common stock and on May 18, 2000
the board further authorized the repurchase of up to an additional 88 million
shares. There is no expiration date specified under either of these
authorizations and MMC intends to repurchase its shares under each of these
authorizations in the future. MMC periodically purchases shares of its common
stock, in the open market or otherwise, subject to market conditions, for
treasury as well as to meet requirements for issuance of shares for its various
stock compensation and benefit programs.
37
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture, dated as of July 14, 2004, between MMC and The
Bank of New York, as Trustee.
4.2 First Supplemental Indenture, dated as of July 14, 2004,
between MMC and The Bank of New York, as Trustee.
10.1 Renewal of Consulting Agreement between A.J.C. Smith and MMC
dated as of June 21, 2004.
12.1 Statement Re: Computation of Ratio of Earnings to Fixed
Charges.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32. Section 1350 Certifications.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by MMC in the fiscal quarter
ended June 30, 2004:
o Current Report on Form 8-K dated April 8, 2004, reporting the
issuance of a press release by MMC's Putnam Investments subsidiary
confirming it had reached settlement agreements with the Securities
and Exchange Commission and the Office of the Secretary of the
Commonwealth of Massachusetts.
o Current Report on Form 8-K dated April 21, 2004, reporting MMC's
issuance of a press release announcing its unaudited first quarter
financial results.
o Two Current Reports on Form 8-K dated May 18, 2004, reporting the
issuance of a press release announcing MMC's acquisition of Kroll Inc.
and filing related agreements, a presentation to certain investors and
the transcript of a teleconference and audio webcast discussing the
announcement.
o Current Report on Form 8-K dated June 9, 2004, reporting the final
settlement of an arbitration proceeding with the former president and
chief executive officer of MMC's Putnam Investments subsidiary.
38
MARSH & McLENNAN COMPANIES, INC.
AND SUBSIDIARIES
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, MMC has
duly caused this report to be signed this 3rd day of August, 2004 on its behalf
by the undersigned, thereunto duly authorized and in the capacity indicated.
MARSH & McLENNAN COMPANIES, INC.
/s/ Sandra S. Wijnberg
---------------------------
Senior Vice President and
Chief Financial Officer
39