Business Context and Reporting Period
Company: Marsh & McLennan Companies, Inc. (MMC)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2003
Business Overview: MMC is a global professional services firm operating through three primary segments: Risk and Insurance Services (Marsh, Guy Carpenter, Sedgwick), Investment Management (Putnam Investments), and Consulting (Mercer). The firm employs approximately 60,500 people worldwide.
Key Financial Metrics
Note: Specific consolidated revenue, net income, and cash flow figures for 2003 are incorporated by reference to the 2003 Annual Report and are not explicitly stated in the provided text. The following metrics are available from the filing text:
- Assets Under Management (Putnam): Approximately $240 billion as of December 31, 2003 (down from $251 billion in 2002). Average assets under management for 2003 were approximately $258 billion.
- Stock Price Range (2003): High of $54.97; Low of $38.27 (restated for a 2002 stock dividend).
- Equity Compensation: As of December 31, 2003, there were 89,315,072 shares subject to outstanding options with a weighted-average exercise price of $42.30. Approximately 111.3 million shares remained available for future issuance.
- Allowance for Doubtful Accounts: Ended the year at $116 million (2003), compared to $124 million (2002).
- Real Estate: MMC owns a 69% condominium interest in its New York headquarters with a $200 million nonrecourse mortgage due in 2009 at 9.8% interest.
Material Changes and Operational Highlights
- Putnam Assets: Assets under management declined by approximately $11 billion year-over-year, attributed to market fluctuations and redemptions related to regulatory proceedings.
- Regulatory Costs: In the fourth quarter of 2003, Putnam recorded net costs of $24 million related to SEC and Massachusetts regulatory proceedings regarding market timing activities. This included estimated restitution, compliance, legal, and communication expenses.
- Stock Repurchases: MMC repurchased 26.1 million shares of common stock during 2003.
- Management Changes: Charles E. Haldeman was named President and CEO of Putnam Investments in November 2003, succeeding Lawrence J. Lasser, who initiated an arbitration proceeding regarding his employment arrangements.
- Accounting Change: The Company changed its method of accounting for goodwill amortization to conform to Statement of Financial Accounting Standards No. 142.
Guidance, Risks, and Contingencies
Legal and Regulatory Proceedings:
- SEC and State Actions: The SEC and Massachusetts Secretary of the Commonwealth have commenced proceedings against Putnam regarding excessive short-term trading (market timing) by employees. Putnam has agreed to remedial actions, independent oversight, and restitution to funds. Civil monetary penalties remain undetermined.
- Securities Litigation: As of March 4, 2004, MMC and Putnam faced approximately 70 civil actions (class actions, derivative suits, and individual complaints) alleging damages from market timing activities. Many federal cases were transferred to the District of Maryland for coordinated pretrial proceedings.
- ERISA Litigation: Three class actions allege that MMC and Putnam breached fiduciary duties by investing employee benefit plans in MMC stock and Putnam funds despite knowledge of market timing issues.
- Employment Dispute: Former Putnam CEO Lawrence J. Lasser has initiated arbitration regarding compensation.
Management Commentary on Risks:
- Management states it is unable to estimate the impact of the ongoing legal proceedings on consolidated results or financial position, though liabilities could be material to operating results in a particular period.
- Putnam's competitive position was adversely affected in the fourth quarter of 2003 by the market timing scandal, with management committed to restoring the firm's reputation.
- Forward-looking statements are subject to risks including changes in premium rates, insurance market conditions, global economic conditions, and the outcome of the September 11, 2001 attack recoveries.
Investor Verification Checklist
- Regulatory Penalties: Verify the final amount of civil monetary penalties imposed by the SEC and Massachusetts authorities, as these were undetermined at the time of filing.
- Litigation Exposure: Monitor the status of the 70+ securities class actions and ERISA lawsuits to assess potential restitution and damage awards.
- Putnam Asset Flows: Track net inflows/outflows at Putnam Investments to gauge the long-term impact of the market timing scandal on revenue stability.
- Executive Arbitration: Review the outcome of the arbitration between MMC and former CEO Lawrence J. Lasser for potential financial liability.
- Goodwill Accounting: Confirm the impact of the transition to SFAS No. 142 on future earnings and balance sheet presentation.